Tuesday, June 30, 2009

Loose Change

People talking
And they're saying that you're leaving
So unhappy
With the way that you've been living
--John Waite

Let's briefly review why central planners cannot outperform free markets in setting prices and allocating resources.

Viewed through a static lens, planners have to start out by correctly determining proper price and allocation quantities. But all of the PhD brainpower in the world has yet to effectively model economies and markets. Moreover, globalization, derivatives, and other innovations have increased complexity, further restricting cognitive grasp of what is going on. Counting on 'experts' to correctly 'answer' the price and allocation questions ignores the cognitive limits of man.

Free markets, however, rely on the cumulative decisions of many economic actors. Much like the concept of the central limit theorem in statistics, the large number of individual decisions, while most would prove 'incorrect' by themselves, sum to provide an estimate much closer to the 'correct' price and allocation quantities.

The more significant issue is that economic systems constantly change, meaning that the 'correct' answer for the price and allocation questions is a moving target. Central planners have very low capacity to revise decisions on a frequent basis. Instead bureaucratic behavior is famously rigid and maladaptive to dynamic conditions. They can't adjust quickly enough.

The real beauty of markets lies not in their capacity for getting things right at any point in time (although they are likely to crush planners in this regard). No, the power of markets is their ability to adapt.

Markets are vastly superior to bureaucrats in adaptive capacity--a requirement when coping with economic systems that are constantly evolving.

Monday, June 29, 2009

Pharm Land

Here come old flattop he come grooving up slowly
He got joo-joo eyeball he one holy roller
He got hair down to his knee
Got to be a joker he just do what he please

I'm probably seeing more than what's really there (a.k.a. talking my book or confirmation bias), but I continue to dig how Merck (MRK) is trading. Months of sideways action, followed by a challenge of the long term downtrend line and 50 day MA.

Should it push thru and then surmount $30 (can you see that key resistance level above30?), then I would construe that as quite bullish.

Pharma's generally been a house of pain for the past couple of years. It's interesting that names in this sector are trading firmer in the teeth of all the health care reform chatter.

position in MRK

No Saving Required

Take that look of worry
I'm an ordinary man
They don't tell me nothing
So I find out what I can
--Phil Collins

The 20 year uptrend in US personal spending has been broken from a technical standpoint. This likely reflects a secular (read: long term) trend change in spending behavior.

Given our debt-laden condition, such a condition should be welcome as folks seek to deleverage.

Unfortunately, government officials don't appear to see it that way. Bureaucrats seem determined to offset individual thrift with unprecedented public spending.

Regardless of individual actions to the contrary, government wants to keep us in the poor house.

Sunday, June 28, 2009

Suburban Shrinkage

Vera Prescott: I hate all these trees. They soak up all the oxygen.
Brantley Foster: No, actually trees produce oxygen.
Vera Prescott: Who are you? Mr Wizard?
--The Secret of My Success

There is perhaps no greater factor that contributed to urban sprawl than cheap energy. Cheap gas made it feasible for folks to live way out in the stix and to commute 50 miles or more round trip to work. Moreover, low cost heating and cooling energy helped to facilitate the building of suburban McMansions.

My sense is that higher cost energy going forward will reverse the sprawl and drive social movement towards centralized, more efficient living. People will move back toward urban centers to reduce the cost of movement. Demand for smaller homes will rise.

Such a movement will be bearish for remote real estate and for SUV sized vehicles. It should be bullish for urban real estate and vehicles that facilitate local travel.

Social trends tend to overshoot. The last few decades have seen tremendous build out away from cities. More expensive energy may drive a secular trend in the other direction.

position in energy

Saturday, June 27, 2009

Cap and Pain

There's a room where the light won't find you
Holding hands while the walls come tumbling down
When they do I'll be right behind you
--Tears for Fears

The in-process energy bill is a prime example of the role of government ineptitude in driving lower standard of living over time. Should this bill become law, we can confidently forecast a number of things:

-->energy production costs will increase

-->consumer energy costs will go up, as producers pass costs along ('companies' don't pay taxes, people do)

-->domestic jobs will decrease (not increase) as operating costs go higher

-->capital will be misallocated toward projects with little commercial viability

-->domestic energy capacity will decline

-->dependence on foreign producers will increase

Although bureaucrats can be counted on to periodically foray into value-destroying initiatives, it's hard not to marvel at the timing of this particular bill. We're experiencing a slowdown on par with the Great Depression. Yet, on the table is legislation guaranteed to significantly drag down economic activity. The timing suggests either utter cluelessness or an agenda dark enough for me to bite my toungue (for now).

It's hard to see how this legislation is not bullish for energy commodities. While firms may see their profits compromised by the new rules, supply destruction of the underlying commodities seems an obvious outcome.

Should it become more apparent to me that this bill will pass the Senate, I'll be increasing my position in the energy commodity space.

position in energy

Thursday, June 25, 2009

Grand Illusion

But someday soon we'll start to ponder
What on earth is this spell we're under
We made the grade and still we wonder
Who the hell we are

Anyone with eyes can see that most econometric series maintained by the government are biased in their data collection and/or reporting methods.

Even some of the mainstream media are noting problems.

The ramifications? GDP and its growth: lower than reported. Unemployment: higher than reported. Consumer prices and their increase: higher than reported.

If you're receiving social security or holding TIPs, your increases and coupons are less than they should be.

A nice site that tries to adjust for government manipulation of the data is John Williams' SGS site.

Always be skeptical of data collection methodology and values--particularly if generated by government.

Wednesday, June 24, 2009

Terror Trade

It brings you down
It's like a war
Who pays the price
If you want more

What factors support terrorism in a country or region? Here are four that are not necessarily independent of one another:

1) Low education. Those who are less educated think less critically and are more prone to accept in an uncontested manner the one sided claims that terrorists spew.

2) Economic hardship. Out of desperation or perhaps envy, people who suffer economic hardship are more apt to view those who are economically better off as valid terrorist targets.

3) Culture/religion. Cultural or religious beliefs may prompt individuals to view terrorist causes as righteous.

4) Information assymetry. Individuals who are denied, or who do not have access to, information may draw faulty conclusions as they lack data necessary to form complete pictures.

Given these factors, we can propose certain economic, geopolitical environments as more likely to foster terrorist behavior. For instance, centrally planned economies tend to lower standard of living and promote economic hardship. Dictatorships tend to restrict information flow and education levels.

Using the current Iran situation as an example, a typical early step in action against countries that sponsor terrorism is the economic sanction. But restricting trade seems likely to increase the intensity of terrorist factors. Standard of living declines, pro-terrorist cultural and religious beliefs strengthen, and dictators play off the 'evil' nature of those participating in the embargo.

Concerned about the intensity of terrorist activity in a country or region? Trade freely with them and watch terrorist tendencies retreat.

Tuesday, June 23, 2009

The Show Goes On

What's the long face, what's all the crying for
Didn't you expect it, when you opened your door
--Bruce Hornsby & The Range

Some commentators are beginning to worry that the market's technical picture is rapidly turning dark. Could be, although perusing charts of major indexes doesn't suggest too much concern yet.

Bulls will offer that this is simple backing and filling. After all, markets don't head up or down in a straight line.

Bears counter that prices are failing at major moving averages. Moreover, formerly bullish head-and-shoulders patterns evident on many charts are now being dis-confirmed.

I myself am not doing anything new at this juncture. Just watchin' the show.

no positions

Under Study

Dr Peter Venkman: "Ray, pretend for a moment that I don't know anything about metallurgy, engineering, or physics, and just tell me what the hell is going on."
Dr Ray Stantz: "You never studied."

So Barney Frank & Co are urging Fannie (FNM) and Freddie (FRE) to loosen lending requirements. Should this occur, then another key factor (in addition to cheap credit supply from the Fed) that drove the previous wave of this credit crisis would be back in play.

It's hard for me to conclude that this means that our congressfolk haven't learned. It's easier for me to conclude that this suggests that our congressfolk hope that we haven't learned.

no positions

Monday, June 22, 2009

The Second Hand Unwinds

Sometimes you picture me
I'm walking too far ahead
You're calling to me
I can't hear what you've said
--Cyndi Lauper

The video near the top of this page offers a decent description of the inflation vs deflation duel currently underway. To be sure, Mandel and Coy missed the lead up to our current problem by a country mile, so their credibility isn't all that great.

But the argument that increased money and credit supply by the Fed et al is being offset by a decrease in money and credit demand among individuals interested in saving and paying down debt is reasonable.

However, their 'bottom line' on what the Fed and policymakers should do about this situation--i.e., stay the course, create all the stimulus we need, and avoid deflation at all costs--is wrongheaded. Deflation is simply the market's response to wring out inflationary excesses. A cleansing process.

Morever, expecting the Fed et al to retract excess stimulus once things 'turn around' is pure folly. Bureaucrats chronically lag reaction-prompting stimuli.

Analog Cabin

We are matching spark and flame
Caught in endless repetition
Life for life we'll be the same
I must leave before you burn me
--The Fixx

Interesting comparative analysis of where we stand versus the Great Depression. Using industrial production, exports, or equity valuations, our current situation is very comparable to Depressionary metrics.

The 'good news,' according to the analysts, is that policy responses have been quicker and more extreme this time around.

I'm wondering whether this doesn't suggest that we're merely digging a deeper hole to crawl out of...

Sunday, June 21, 2009

Bally Table King

I leave a trail of rooted people
Mesmerized by just the sight
The few I touch are now disciples
Love as one I am the light
--The Who

For those who support the Obama administration's stimulus plan and associated economic agenda, can you explain precisely why these plans make reasonable sense?

If your response to this question is along one of these lines:

a) "Not right here and now, but I have complete confidence that the Obama team knows what they're doing."

b) "Because President Obama and his experts say that it will work."

c) You head to the web to do research that will help you craft a response.

then your behavior is consistent with 'threat ridgity theory.' Essentially, when faced with a threat, humans tend to review fewer information alternatives and centralize decision-making authority.

Hey, what's wrong with c) you might ask? Well, you're supporting a course of action without knowing why. You've put the cart before the horse.

Of course, your response might also reflect political bias.

Either way, you're abdicating responsibility to you and to others for thinking critically.

Before choosing a side, make sure your choice is well reasoned.

Friday, June 19, 2009

West Wing Endnotes

Sometimes you're better off dead
There's a gun in your hand and it's pointed at your head
You think you're mad, too unstable
Kicking in chairs and knocking down tables

--Pet Shop Boys

A government-written White Paper proposes causes and effects of the financial crisis. Naturally, no root causes related to government agencies or regulation were noted.

Mr P is not so generous. He correctly notes the centrality of the Fed and GSEs to our problems.

The administration seeks to levy more autonomy on the Fed. Like Mr P, I believe we'll surely rue the day we do this if/when.

Thursday, June 18, 2009

Flower in the Desert

I've never seen you look like this without a reason
Another promise fallen through
Another season passes by you
I never took the smile away from anybody's face
And that's a desperate way to look
For someone who is still a child
--Big Country

Responding to the administration's plan for financial regulation, Ron Paul continues to be a solitary voice in the wilderness. Pundits and bureaucrats continue to portray him as an alien from Mars.

But he won't back down.

The same indomitable spirit that led our original break to freedom over 200 yrs ago.

Wednesday, June 17, 2009

Test Pattern

We can take that tonight
We can make them, that's right
We can break them tonight
Don't misunderstand

Just finished grading some exams so I suppose I'm in an evaluative mood. Let's briefly consider two problems President Obama is dealing with.

Iran Election Strife. Folks, particularly those on the Right, are criticizing Obama for not getting more involved in this issue. Folks have been disenfranchised, they argue. They deserve democracy, freedom, etc. Not to mention Iran's nuke wildcard. Sorry, but this is not our concern. We've allocated too much time and resources in the past meddling in the sovereign concerns of others. It's not our place to impose our belief system on others. Besides, we can't afford it. Correct answer, Mr President. Stay out of the way.

Banking Reg Increase. Per the President: "An absence of oversight engendered systematic, and systemic, abuse. This is just wrongheaded. Free, unregulated markets are hardly to blame for our problems; few of us have experienced truly free markets in our lifetimes. Rather, it can be readily argued that the presence of regs and oversight in the system fostered systemic abuse (via moral hazard, etc). The outcome of increased government control over this industry is destined to be reduced innovation and, ultimately, lower standard of living. Incorrect answer, Mr President. Get out of the way.

These two responses point out a glaring inconsistency in the operating philosophy of the modern day Left: Let's not meddle in the conflicts of others (it's not the U.S. government's place to intervene in other people's business) but let's meddle extensively in the affairs of our own people (it is the U.S. government's place to intervene in the our own people's business).

On the other side of the political spectrum, the operating philosophy of the modern day Right tends to be generally inconsistent in the reverse direction (heavy government intervention abroad, light at home).

So, one right and one wrong. If you're a hitter, you're batting .500 and destined for the Hall of Fame. But if you're a student writing the exam I just graded, 50% would earn you low score in the class.

More Cowbell

"For all of my career, I've been trying to catch people after they do something horrible. For once in my life, I'd like to catch somebody BEFORE they do something horrible, all right? Can you understand that?"
--Doug Carlin (Deja Vu)

This FDR friendly propaganda film from 76 years ago could easily be re-run today. This stuff targets the threat-rigidity tendencies of the masses. Which is why drivel like this is often taken seriously rather than being laughed out of the room.

Simply put, when livelihoods are threatened, people tend to not think clearly, and can be led to think and do the wrong things.

The way around this is to avoid groupthink. Practice sound individual thought process (a.k.a. critical thinking) and personal responsibility.

Tuesday, June 16, 2009

Commodity Oddities

"We are commodities brokers, William. Now, what are commodities? Commodities are agricultural products. Like coffee that you had for breakfast. Wheat, which is used to make bread. Pork bellies, which is used to make bacon, which you might find in a bacon and lettuce and tomato sandwich."
--Randolph Duke (Trading Places)

Coupla things on the commodity front. Interesting article on potential for wheat supply shortages and the key drivers. About a week ago I initiated a position in the Powershares DB Ag fund (DBA) and info like this raises my conviction level (and buying behavior) a notch or two.

Here's perspective on the nutty price action in the natty gas ETFs. It's stuff like this that keeps me in manic depressive mode w.r.t. commodity investing. The fact is that most commodity investment vehicles are derivatives and are subject to tracking error (particularly single commodity funds) and/or counterparty risk. It tempts me to post my GAZ position for sale after a nice little 5% move.

positions in DBA, GAZ

Monday, June 15, 2009

'Everyone Is' Syndrome

I bought a ticket to the world
But now I've come back again
Why do I find it hard to write the next line
When I want the truth to be said
--Spandau Ballet

"Everyone is bullish right now." "Everyone is short the market currently." I frequently hear myself uttering such sweeping claims. As such, I suffer from 'Everyone Is' syndrome.

Everyone Is syndrome is wrongheaded, of course. Markets could not function if bullish and bearish views did not co-exist. If everyone was indeed bullish on Bank of America (BAC), Exxon Mobil (XOM), or Procter & Gamble (PG), for instance, then who are the folks on the sell side of the tens of millions of shares traded daily in these securities?

At least two factors drive my Everyone Is tendencies.

Confirmation bias. People generally prefer information that confirms their view of the world. Recently I've become bullish on big pharma stocks such as Merck (MRK) and Pfizer (PFE). As such, I'm attracted to arguments that support the bull case. And I tend to dismiss arguments that support the bear case for pharma names.

Not thinking probabilistically. People possess a general inclination for thinking in terms of 'all or none.' Currently, few market-related debates are louder than the inflation vs deflation macro debate. Like many, I've crafted a view of where the macro picture is headed. However, I tend to focus on a single picture of what I think will happen rather than on various scenarios that may happen. As such, I'm ignoring the spectrum of possibilities in favor of one potential outcome. I'm thinking deterministically rather than probabilistically.

While Minyanville has strengthened my financial decision-making processes in more ways than I can count, the 'Ville's core mantra of 'seeing both sides of the trade' has been a spectacular tool for helping me keep my Everyone Is faults in check.

This may sound silly but I try to take time out each morning to remind myself that for every buyer, there is a seller, and that I'd be better off if I endeavored to understand both perspectives. I've found that by ritualizing this little exercise, I'm more prone to think critically across the spectrum of chance, and to suppress my chronic condition of Everyone Is syndrome.

position in MRK, PFE

Sunday, June 14, 2009

Half Past Dead

Special Agent Neely: "I want to congratulate you. You just made number four on the most wanted list."
Nico Toscani: "Number four? I wanna be number one."
Special Agent Neely: "The day is young."

--Above the Law

So G-8 leaders have initiated discussion on removing the $trillions of economic stimulus injected over the past year or so. A coupla thoughts come to mind. This is likely just the 'open mouth committtee' at work trying to talk down inflation expectations. People get a little freaky about the value of currencies when governments print money as fast as they can click a mouse.

When it does come time to act, history suggests that bureaucrats will either a) be way late in turning off the spigot, or b) won't act at all.

Think of the current state of financial markets/economies as a brain dead patient and the stimulus as life support. Stimulus is the only thing keeping the patient going. Turn it off, and the patient succumbs.

As in nature, life support only prolongs the inevitable--the patient will ultimately succumb. But not before a ton of resources are allocated toward prolonging the inevitable.

Bureaucrats don't possess the political will to sever the economic life support.

Saturday, June 13, 2009

Mood Swings

I'm just a wandering on the face of this earth
Meeting so many people
Who are trying to be free
--Moody Blues

Although most folks define inflation in terms of rising prices, the classic definition of inflation is expansion in the quantity of money and credit.

To realize inflation, economies need a mechanism for creating more money and credit supply. In modern economies, that mechanism is primarily the central bank. Central banks, such as our Federal Reserve, are empowered to create money and credit by fiat. Due to political influence, this empowerment is certain to lead to propensity for generating excessive supply over time.

While money printing machines are necessary, supply alone is not sufficient to create inflation.

Demand is also required. People must be willing to take risk. Because modern monetary systems are structured around the pyramiding effect of credit, economic actors need to be willing to borrow in order for monetary quantities to appreciably expand. If folks aren't willing to take on additional debt, then significant inflation can't occur.

So what's happening currently? The money printers are certainly doing their part, as bureaucrats around the world are creating $trillions in potential supply.

But borrowers aren't jumping on board with the same reckless abandon. Instead, they're showing proclivity for saving and paying down existing debt. Money velocity is slowing dramatically.

Should this risk averse behavior relate to a secular change in social mood, then one has to wonder whether bureaucrats aren't essentially pushing on a string in attempts to inflate the monetary system.

If this turns out to be true, then do bureaucrats basically pack it in and accept a secular deflationary context? Or do they pursue innovative ways to circumvent the broken credit machine?

Friday, June 12, 2009

Four Year Finish Line

"I find I'm so excited, I can barely sit still or hold a thought in my head. I think it's the excitement only a free man can feel, a free man at the start of a long journey whose conclusion is uncertain. I hope I can make it across the border."
--Ellis Boyd 'Red' Redding (Shawshank Redemption)

Made my first mortgage payment on the new house today. I laid down a decent sized down payment (by today's standards anyway) and wound up financing about 60% of the purchase price. The loan was a 15 yr fixed @ 4 5/8%.

Before I made my first payment, the originator already sold the mortgage to Citi. I'm glad, because Citi's site was easy to configure for electronic payments.

Although my interest rate is low, I feel the need to chunk down this debt (the only debt I'm carrying, in fact). I'm doing 2x+ monthly payments right out of the gate. I also hope to make a couple of lump sum principal only payments--one before year end and another early next yr.

Mortgage payment schedules carry a interest-heavy front end, so you can save dramatically on interest expense by retiring extra principal early in the loan's life.

My goal is to pay this mortgage off 4 yrs from now--that would be June, 2013. Should I be fortunate enough to do so, I should save about $60K in interest expense. God willing, I'll also be permanently debt free at that point.

I know, the best laid plans...But let's see what happens.

Thursday, June 11, 2009

Box of Houses

Only shadows ahead barely clearing the roof
Get to know the feeling of liberation and relief

--Crowded House

A couple months back I locked in a 15 yr fixed mortgage at 4.625%. Today's 15 yr fixed quote on bankrate.com is nearly 5.4%. Nearly 80 bips higher and at 6 month highs.

Certainly a headwind for any recovery in the housing sector.

After some tough auctions this wk, yields on the 10 yr are just south of 4%.

Looks like the Fed needs to hoover up more bonds. Ooops, the soft USD may be sensing such.

Once again, the set up demonstrates a key problem with trying to print your way out of a debt problem.

Wednesday, June 10, 2009

House Arrest

"Well, I guess the gentlemen are in a pretty tall hurry to get me out of here. The way the evidence has piled up against me, I can't say I blame them much. And I'm quite willing to go, sir, when they vote it that way - but before that happens I've got a few things I want to say to this body. I tried to say them once before, and I got stopped colder than a mackerel. Well, I'd like to get them said this time, sir. And as a matter of fact, I'm not going to leave this body until I do get them said."
--Jefferson Smith (Mr Smith Goes to Washington)

A few months back Congressman Ron Paul introduced HR 1207, a bill designed to bring more transparency to the Federal Reserve. The bill has gained sponsorship in the house and as of today as 207 supporters. 218 yes votes are needed to pass the House.

The traction gained by this bill has to have Fed heads, and bureaucrats who depend on the Fed (i.e., friends of Big Gov't and Big Business), shaking in their boots. There is reasonable doubt whether the Fed could survive an audit.

I can't imagine that a Fed audit would happen without significant government interference--even if this bill became law.

But should the impossible occur, and actions from this bill lead to the dismantling of the Fed, then we would be well on our way to regaining long term economic and social health in our nation.

So keep an half an eye on HR 1207. Should it get past the House, we may witness drama in the Senate that Mr Smith would be proud of.

Tuesday, June 9, 2009

Guided Tour

Sweet dreams are made of this
Who am I to disagree
I've traveled the world
And the seven seas

Everybody's looking for something

While visiting my sister's blog, I clicked thru to the blog for this website. In my view, the global warming (now relabeled 'climate change') movement bears the signs of many popular herd-like social movements with questionable grounding in valid science. That said, I like the approach that the Good Guide folks are taking.

Why? Because it seems to be market driven. Currently, there is clearly demand for more information on how/where/by whom products are put together. And GG is seeking to satisfy this demand.

Should demand for this information persist, it is likely that producers will adjust their processes to provide more of this information on their own, and to produce according to customer wants in this area. Some producers, of course, are doing this already.

However, should the government at some point get involved in this initiative and begin dictating what information must be provided to 'protect' consumers (a la the dietary info requirements on food labels) or how products must be produced to 'protect' the planet, then the value of this information will fall apart and we'll be worse off.

In free markets, producers get their signals from consumers. In controlled markets, buyers' signals are squelched by government interference.

Although historical behavior counts me cautious, let's hope this initiative remains untouched by bureaucrats so that its true value can emerge.

Monday, June 8, 2009

It's Only Natural

When it feels like the world is on your shoulders
And all of the madmen has got you going crazy
It's time to get out, step out into the street
Where all of the action is right there at your feet

I've felt a bit naked after taking off all commodity positions over the past month. Of course, their continued ramp higher prolly has something to do with that.

To regain some commodity exposure, I've taken a starter position in natural gas. Being long natty gas has been a house of pain over the past yr or so. Prices have been crushed, as near term supply is swamping demand as new liquid-based sources have been initiated.

But gas is currently selling under $4 per million BTUs (multi-yr lows), and I'm not sure I've heard more bearish tones to this material since I began following it a few yrs back. Technically speaking, it appears that the nasty downtrend is giving way to some basing action.

As such, I like the risk reward here, and hope to use price to my advantage to build a more significant position.

position in natural gas

Sunday, June 7, 2009

Paying Up

Doyle Lonnegan: "You're boss is quite a card player, Mr Kelly. How does he do it?"
Johnny Hooker: "He cheats."
--The Sting

People viewed Friday's payroll numbers with optimism as the bottom line job losses number was less than expected. The data collection and analysis process behind this series is so tortured that it is mostly meaningless.

According to the BLS release, employment fell by 'only' 345,000 (over half a million was expected). However, the infamous 'birth/death' model added a hypothetical 200k+ jobs into that estimate.

The official unemployment rate upticked to 9.4%, a high water mark thus far for this recession. My sense is that this number is headed significantly higher despite all attempts to massage it lower.

During the Depressionary 30s the unemployement rate hovered at 20% for much of the decade. The official unemployment rate number today is not determined in the same way we did it then. For example, we do not include 'discouraged workers' (those who are not actively seeking employment today altho they are qualified.

Were we to add all those omissions back into the series today, folks would be surprised how much worse the data would look. Of course, this is the reason why we don't do it.

Before this period is over, we may see 'old way' unemployment at or above 20%. We're closer now than you might think.

Thursday, June 4, 2009

Short Spectrum

"You've got to know the rules before you can break 'em. Otherwise it's no fun."
--Sonny Crockett (Miami Vice)

There's increasing banter about perma-bears and that 'nearly everyone is bearish.' Could be, but whenever I hear someone utter 'Everyone is ___' I think two words: confirmation bias.

Better to think in terms of a distribution of sentiment and the spectrum of behavior across it. After all, each time a share of stock changes hands, by definition, one party is bullish and the other side is bearish. The trick is to understand changes in the distribution of bulls and bears.

Along those lines I wanted to note this chart showing NASDAQ short interest at multi-year lows. Other indices indicate a similar decline in short side operations. The contrarian in me wants to say that this is bearish (general sentiment is usually wrong, less fuel for squeezage, etc.).

Then again, note that short interest rose with higher market prices and then declined with the general market break, suggesting short interest as a coincident rather than contrarian indicator. Add to that anecdotal evidence that many 'famous' bears such as Jim Rogers and Fleck are currently not short, and it makes you wonder just what what all of this suggests in terms of sentiment and future market direction.

For me, this means staying on the sidelines and waiting for clearer opportunities on either side--long or short.

no positions

Wednesday, June 3, 2009

The Future is Now

Hey kids, plug into the faithless
Maybe they're blinded
But Bennie makes them ageless
--Elton John

While speaking to the House Budget Committee today, Fed Chair Bernanke declared that, "The Federal Reserve will not monetize the debt.

In permitting such a statement to pass uncontested, perhaps the HBC does not comprehend the definition of debt monetization.

Or perhaps it's hard to recognize an activity when it's already being done on a massive scale.

Tuesday, June 2, 2009

Time Tunnel

"Don't worry. As long as you hit that wire with the connecting hook at precisely 88mph the instant the lightning strikes the tower, everything will be fine."
--Dr Emmett Brown (Back to the Future)

Wanted to post the cartoon from the 1934 Chicago Tribune cartoon appearing in Pep's missive for future reference.

I do marvel at the cycle of history. Also strengthens my resolve to study more Thirties this summer.

Dragon Tales

Diane Court: "Nobody thinks it will work, do they?"
Lloyd Dobler: "No. You've just described every great success story."
--Say Anything

Minyanville professor Kevin Depew offers another data point that supports the aforementioned hypothesis of 'near term deflation followed by significant inflation.'

Pep appears to sense that the influence of the deflationary phase may begin to lose its steam by Q4 this year. While certainly plausible, I wonder whether it'll take more time to kill of debt to the point where we're ready for a truly secular shift in things. The Japan situation comes to mind.

Of course, I may just be feeding Morton's Demon.

Monday, June 1, 2009

Broken Arrow

Come out of things unsaid
Shoot an apple off my head
And a trouble that can't be named
A tiger's waiting to be tamed

As a postscript to the previous couple of missives, John Hussman nicely lays out the current macro issues that markets face. Note also that although he expects serious inflation over time, his proposed time frame is 5-10 years from now. Meanwhile, he suspects more downside related to the debt-financed 'expansion,' which seems to me deflationary.

Nearer term deflation followed by prolonged major inflation. That's a forecast that fits my views-in-progress pretty well right now.

Dr John's 'Erase the arrows' story also well reflects the current state of the economic academy.

Shakedown Cruise

It was thirty days around the horn
The captain says it's a thirty-five more
The moon looks mean and the crew ain't staying
There's gonna be some blood
Is what they're all saying
--Jay Ferguson

Purty pattern in the major indices lends further credence to the notion that this move higher could persist. The move today creased thru the 200 day moving average. Resistance resides above at SPX 1000 and 1150.

Meanwhile, fear of missing is on the rise.

Is my nonsensical vision of a rally thru summer still intact? Yep. As of yet, have I added any incremental exposure to express this view? Nope, but I might given the right setup.

But make no mistake, I believe this move, however long in duration, will ultimately end in tears.

no position