RISK MANAGEMENT ISN’T GOING OUT OF STYLE
by ilene - December 6th, 2010 9:19 pm
Courtesy of The Pragmatic Capitalist
It’s interesting how risk appetite’s have changed so dramatically in the last two years. Why is this interesting? Because, when you look under the hood at the Global economy you’ll notice that the problems that caused the car to veer off the road are all still in place. Nothing has really changed. We still have the same global imbalances that caused the crisis. The Chinese are still causing imbalances within their economy via a flawed currency peg. The single currency system with the Euro is still causing imbalances throughout much of Europe. And the financialization of the US economy is continuing along its merry way.
But, from an investor’s perspective there has been a distinct “risk on” trade in place. This is not surprising because asset prices are rising and the economy really is improving, however, you probably would have felt the same exact way in 2006 or in 1998 when everything appeared just fine. The truth was, risk management was probably more important at these two points in history than ever. John Hussman elaborated on this in his most recent letter:
“I recognize that investors are eager to move on to the thesis of sustained economic recovery, with no need for any risk management at all. However, it appears unwise for investors to rest their financial security on faith in a recovery that relies on the government running a deficit of 8.5% of GDP, simply to keep the existing 6.3% gap between actual and potential GDP from widening further. It appears equally unwise to rely on Fed purchases of Treasury bonds to sustain ever greater exposure of investors to risk, when the creation of financial bubbles does nothing to increase the underlying cash flows deliverable by the securities that are increasing in price.”
This sort of herd mentality might make the entire herd feel a bit more safe. The only problem is, the issues that caused this crisis to begin with are still stalking the herd. They’ll catch up with it sooner or later. It might happen in the next few weeks, months, years or even decade. No one can be sure exactly when, but they will catch up with it. And when they do the herd will disperse in panic and once again investors will have wished they’d been more aware of the potential…
Facebook
Twitter
LinkedIn 
del.icio.us
DiggThe Whites of Their Eyes
by ilene - November 4th, 2010 7:31 pm
Strategies for Junior Mining Investors: The Whites of Their Eyes
Courtesy of Louis James, Senior Editor, Casey’s International Speculator
“Don’t fire until you see the whites of their eyes.”
Most Americans were taught in school that William Prescott, commander of the colonial forces on Bunker Hill, gave this order to his men on the morning of June 17, 1775, just before the British attacked them.
Some may even remember that while the British took the hills, they did so at such great cost, it wasn’t much of a victory. The American forces repelled the British twice and were finally overwhelmed when they ran out of ammunition – an outcome that obviously concerned Prescott and provoked his order to conserve ammunition. It was vital to use each shot as effectively as possible.
I think of this often when contemplating investing, because I sometimes feel an urge to get all of my investment cash deployed NOW. I might miss the next big uptick! And even if not, modest double-digit gains are still better than money sitting in the bank. This urge gets strong when the market gets hot, as it has been over the past months – look at all the gains I missed!
But the best speculations, as Doug Casey likes to remind us, are when the perfect pitch comes sailing across home plate, cheap and with great upside. There are no called strikes, so it only makes sense to wait and swing only when it’d be hard to miss, hard to get hurt, and there’s clear out-of-the-ballpark potential.
- Key Point: Missing out on a winning pick may wound pride, but it doesn’t cost any cash. Placing hasty bets can cost dearly on both accounts.
Or, as Doug also likes to say, you can’t kiss all the girls. Nor should you try; the consequences in real life of attempting to kiss every girl you meet would be… nasty, brutish, and short.
Returning to my original metaphor, I don’t want to pull the trigger on a deal until I see the whites of their eyes – i.e., until everything is lined up for maximum effectiveness.
Or, as I’ve put it before: “Buy Low, Sell High” is a much better strategy than “Buy High, Sell Higher.”
Strategy vs. Tactics for Speculators
Speaking of military metaphors, I frequently refer to strategy and tactics in my writing. Last June, I gave a talk on strategy…
A Keynesian Theory of Mind
by ilene - September 2nd, 2010 9:07 pm
This is an interesting article but yet I have to disagree with at least part of the premise--that impairment of the "theory of mind" is very specific/sensitive measure for Autism. I also have serious doubts about Asperger’s being on a continuum with Classical Autism — I think these two conditions are quite distinct. I haven’t reviewed the literature in a long time, so please let me know if you know studies disproving my admittedly subjective opinion. – Ilene
A Keynesian Theory of Mind
Courtesy of Tim at The Psy-Fi Blog
The Mental Cell of Autism
Autism is one the crueller tricks that nature plays on human beings, leaving sufferers isolated, incapable of making social connections and effectively trapped within their own heads. Although the causes aren’t fully understood some of the consequences are, and chief among these is the inability of sufferers to take on the perspective of others. This failure to develop a so-called theory of mind means they simply can’t understand the needs and motivations of other people.
According to John Maynard Keynes a proper theory of mind is just what an investor needs to keep one step ahead of the crowd, although others feel that Keynes’ approach to investing is tantamount to chasing returns all the way to poverty. It raises the question, though, as to how much a person’s genetic makeup determines the type of investor they are. Are effective value investors really just socially inept wallflowers or simply extremely focused individuals?
A Theory of Mind
It’s become clear that autism isn’t a straightforward condition. Although extreme autism is utterly disabling and sufferers can’t live a normal life or even look after themselves there is a spectrum along which we’re all spread out. Improved diagnosis methods have shown that many people have mild forms of the problem, usually referenced as Asperger’s syndrome. Such people prefer to be solitary and are generally fairly rubbish socially. [I would say "different," without hints of negativity. - Ilene]
To explain this the concept of “theory of mind” has been developed by Simon Baron-Cohen who describes it as:
“… being able to infer the full range of mental states (beliefs, desires, intentions, imaginations, emotions, etc) that cause action. In brief, having a theory of mind is to be able to reflect on the contents of one’s own and other’s minds”.
In short, it’s the ability to…
Lack Of Stock Dispersion Hits All Time Record
by ilene - August 11th, 2010 12:34 pm
Lack Of Stock Dispersion Hits All Time Record As Most Stocks Now Trade As One
Courtesy of Tyler Durden
Fundamental analysis is no longer relevant as Alpha has just done one more revolution in its grave: today 1 Year Implied Correlation hit a new all time record, at 79.84 (out of 100 maximum possible), meaning the inverse of the metric, stock dispersion, or the measurement of the variation in individual stock prices, or broadly speaking alpha, is now completely irrelevant. As we have been saying for a year, "investing" is now all about a levered beta bet, using the maximum possible leverage, and sacrifices to Moloch, that the market does not turn before price targets are hit. At this rate we anticipate the next broad or acute selloff will take us to 100 in implied correlation, at which point there will be no benefit whatsoever to trading individual stocks: the entire market will be one big ETF.
As a clarification: the data comes from the CBOE S&P 500 Implied Correlation Index is a widely disseminated, market-based estimate of the average correlation of the stocks that comprise the S&P 500 Index. Using SPX options prices, together with the prices of options on the 50 largest stocks in the SPX. Tied to January 2011 Option Maturities.
h/t Credit Trader
Jim Rogers Calls CNBC Bullsh*t On CNBC
by ilene - July 30th, 2010 2:09 am
Jim Rogers Calls CNBC Bullsh*t On CNBC
Courtesy of Jr. Deputy Accountant
No seriously.
"It is PR, they got the stocks up, that’s the whole purpose of PR, make the stocks go higher. That’s what CNBC and many many PR agencies are all about."
Put on Your Party Hats – It’s Time to Party for Another Decade!
by Chart School - July 1st, 2010 5:13 pm
Mish is a picture of optimism compared to Robert Prechter (of Elliott Wave Fame). Robert Prechter is wrong, instead of dropping to 1,000, the Dow may only drop to 5,000, and even that may be too pessimistic in Mish’s eyes. - Ilene
Put on Your Party Hats – It’s Time to Party for Another Decade!
Courtesy of Mish
I don’t know about you but I am psyched. The prospects of an ongoing party for another decade are extremely good as the following chart shows.
Dow Jones Industrial Average – 1999 to Present
click on chart for sharper image
Market participants put on their party hats and started cheering in 1999 when the DOW crossed 10,000 for the first time. They have been cheering pretty much nonstop ever since.
Admittedly there was a bit of a party lag between early 2005 and late 2008 but the party hats have been working overtime since mid-2008 as shown below.
Dow Jones Industrial Average – October 2010 to Present
click on chart for sharper image
Lost Decades Comparison
Please bear in mind that some pessimists liken the above behavior to a period of stunning underperformance of the Japanese Nikkei Index over the last two decades.
Japan’s Two Lost Decades
click on chart for sharper image
The Perpetually Optimistic Mish
Being the ever-optimist that I am, I want to quickly point out that while Japan essentially went straight down over two decades, the US by comparison has put in stunning outperformance by going nowhere.
Indeed, the Dow Jones Index is remarkably sitting exactly where it was in April of 1999, over 10 years ago while the Nikkei over the same timeframe fell by about 50%.
Optimists such as myself have only one thing to say: Hallelujah!
Meanwhile doom and gloomers like Robert Prechter think the Dow will fall to 1,000.
To that I say "Poppycock" (pretty harsh language indeed for those who know me well).
By my optimistic comparison, I think the Dow’s downside is 5,000. That is a stunning 400% more optimistic appraisal of the current state of affairs than Prechter.
Furthermore, I freely admit that the DOW, instead of dropping, just may meander around 10,000 for another decade.
Wow. Except for public pension plan assumptions, imagine the parties we can have over that!
DAVID ROSENBERG: IS DOW 5,000 REALLY POSSIBLE?
by ilene - June 26th, 2010 4:53 pm
DAVID ROSENBERG: IS DOW 5,000 REALLY POSSIBLE?
Courtesy of The Pragmatic Capitalist
Some deep thoughts from David Rosenberg on the likelihood of a secular bear market and potential new lows:
Well, well, so much for consensus views. Like the one we woke up to on Monday morning recommending that bonds be sold and equities be bought on the news of China’s “peg” decision. As we said on Monday, did the 20%-plus yuan appreciation from 2005 to 2008 really alter the investment landscape all that much? It looks like Mr. Market is coming around to the view that all China managed to really accomplish was to shift the focus away from its rigid FX policy to Germany’s rigid approach towards fiscal stimulus.
What is becoming clearer, especially after the latest reports on housing starts, permits, resales and builder sentiment surveys, is that housing is already double dipping in the U.S. The MBA statistics just came out for the week of June 18 and the new purchase index fell 1.2% – down 36.5% from year-ago levels and that year-ago level itself was down 22% from its year-ago level. Capish, paisan? So far, June is averaging 14.5% below May’s level and May was crushed 18% sequentially, so do not expect what is likely to be an ugly new home sales report for May today to be just a one-month wonder. Meanwhile, the widespread view out of the economics community is that we will see at least 3% growth in the second half of the year: fat chance of that. What is fascinating is how the ECRI, which was celebrated by Wall Street research houses a year ago, is being maligned today for acting as an impostor — not the indicator it is advertised to be because it gets re-jigged to fit the cycle.
From our lens, there is nothing wrong in trying to improve the predictive abilities of these leading indicators. Still — it is a comment on how Wall Street researchers are incentivized to be bullish because nobody we know criticized the ECRI as it bounced off the lows (not least of which our debating pal, James Grant). For a truly wonderful critique of the ballyhooed report that was released yesterday basically accusing the ECRI index as fitting the data points to the cycle
…
Rosenberg On Reality Vs Propaganda, a Realistic Outlook, and Capital Allocation
by ilene - June 17th, 2010 12:38 pm
Rosenberg On Reality Vs Propaganda, A Realistic Outlook, And Capital Allocation
Courtesy of Zero Hedge, Tyler Durden
Some terrific insight from Rosie on the future:
THE OUTLOOK IS ONE OF…
- Deflation: own income-generating securities, which include dividend yield and dividend growth.
- Corporate balance sheet strength and liquidity: own corporate bonds with liquidity, marginal refinancing needs and stable cash flows.
- Intense volatility: invest in classic hedge funds — true long-short strategies that preserve capital and minimize fluctuations in the portfolio.
- Ongoing sovereign credit concerns and recurring rounds of currency depreciation: ensure the portfolio has a core holding in precious metals (gold and silver). These are effective hedges against lingering concerns over the stability of the global monetary system.
I realize that I am viewed as a perma-bear, but it’s my forecast that is bearish, not my personality. I’m bullish on my kids. I’m bullish on my friends — the few I have. I’m bullish on the New York Yankees — please don’t hold it against me. And I’m bullish on my firm. Look — if I really believed that cash was where investors should be, I’d be working at a bank, not a wealth management firm.
… On the present:
Double-dip risks in the U.S. have risen substantially in the past two months. While the “back end” of the economy is still performing well, as we saw in the May industrial production report, this lags the cycle. The “front end” leads the cycle and by that we mean the key guts of final sales — the consumer and housing.We have already endured two soft retail sales reports in a row and now the weekly chain-store data for June are pointing to subpar activity. The housing sector is going back into the tank — there is no question about it. Bank credit is back in freefall. The recovery in consumer sentiment leaves it at levels that in the past were consistent with outright recessions. By our estimates, the diffusion index on the Conference Board’s leading economic indicator (LEI) in May came in at a disconcerting 40% for the second month in a row. Jobless claims are one of the 10 components of the LEI and last year’s improvement not only stalled out completely, but at around 460k is consistent with stagnant to negative jobs growth. And exports, which had been a
…
Betting Does Not Equal Investing
by ilene - June 9th, 2010 6:06 pm
Lesson: While hatred may FEEL good, it’s not the best premise for a winning investment strategy. – Ilene
Betting Does Not Equal Investing
Courtesy of Jake at Econompic Data
According to Dilbert creator Scott Adams (via an interesting WSJ piece ‘Betting on the Bad Guys’):
When I heard that BP was destroying a big portion of Earth, with no serious discussion of cutting their dividend, I had two thoughts: 1) I hate them, and 2) This would be an excellent time to buy their stock. And so I did. Although I should have waited a week.
People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How’s it feel to be a disgruntled victim?
On April 20, 2010, a semi-submersible exploratory offshore drilling rig in the Gulf of Mexico exploded after a blowout and sank two days later, killing eleven people and causing a massive oil spill threatening the coast of Louisiana, Mississippi, Alabama, Texas, and Florida.
It is very possible they are, but I can also see a situation where things get much worse in the gulf and for BP, which brings me to my next point. Buying purely out of hatred is 100% not an investment decision, but rather (as the title of his article says) betting. I personally love betting, but I keep that to non-investment related matters (anyone think the Celtics are winning the series?).
But don’t say Scott didn’t warn you:
This would be a good time to remind you not to make investment decisions based on the wisdom of cartoonists.
And this:
Again, I remind you to ignore me.
Source: Yahoo
Marc Faber’s Must Watch 2010 Presentation
by ilene - June 7th, 2010 10:46 pm
Courtesy of Tyler Durden
As someone once said, the only man who can tell a room full of people they are doomed and get a standing ovation, Marc Faber, gives a terrific hour long presentation to the Mises Circle in Manhattan on May 22, discussing the economy, interest rates, markets, why having massive output gaps (see previous post for Bernanke’s most recent dose of lunacy on the matter) and hyperinflation can easily coexist, why the Fed will never again implement tight monetary policy, why Greenspan is a senile self-contradictor, why Paul Krugman is a broken and scratched record, and the fact that pretty much nothing matters and we are all going to hell. Little new here for long-term economic skeptics, but a must watch for all neophytes who are still grasping with some of the more confounding concepts of our dead-end Keynesian catastrophe and not only why the world can not get out of the current calamity absent a global debt repudiation, but why gold is the asset to own, even though one must not be dogmatic and shift from asset class to asset class in times of tremendous currency devaluation (i.e., such as right now). 2010′s must watch Marc Faber presentation.
One thing we disagree with Mr. Faber on, is that Asian banks did not buy CDOs during the housing bubble – this is patently wrong. As a detailed perusal through the Goldman discovery will confirm, Goldman looked increasingly eastward, first to Europe, and then to Korea, Japan and Taiwan, when finding the dumbest money around to invest in monstrosities such as Timberwolf, Abacus and others. If Mr. Faber is investing based on the assumption that Asian banks are free of this relic of the credit boom, we urge him to promptly reevaluate his investment thesis as he will certainly lose money here.
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(
