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Yesterday wasn't a day of weakness. It was called a day of profit taking by the media.
Joe
RRI-Fitch cuts Reliant rating to 'B' (RRI) By Tomi Kilgore
Fitch Ratings has lowered Reliant Resources' (RRI) the long-term debt rating to "B" from "BB," citing the electric utility's need to refinance $5.7 billion in bank debt and lease obligations. The debt rating service said the tightening bank credit environment for energy merchants "could frustrate Reliant Resources' efforts to complete its planned global bank refinancing. The company had indicated in the past that bankruptcy was an alternative if it was unable to extend its bank debt. The stock is edging up 7 cents to $2.58.
Amazing how they keep jacking up the market at any sign of weakness. I think the Fed doesn't want any signs of weakness going into Thanksgiving and will do whatever it takes to keep the momentum going to start the Christmas shopping season off on strong footing.
Joe
QQQ- Out for a dime loss. Treasuries being sold hard.
Joe
QQQ- short 27.83 daytrade. eom
*DJ AG Edwards Cuts Qualcomm To Hold From Buy >QCOM
Stunjamie, Thanks for the mortgage info. So nice of you to remember. Again I looked for it. I even did a search at the Reuter's web site and couldn't find it. MarketWatch had a mention but the link they gave for the story was bad.
10Q, Joe
The builders have been blessed with unseasonally good winter weather the last few years. I see forecast for a colder winter this year. The point I was making is that it may make it harder to meet comparable numbers. After all the builders have had ideal conditions to grow. Low interest rates, cheap materials and looser mortgage qualification standards with record low mortage rates. That in itself must certainly be getting close to a top as those conditions are subject to change to the detriment of the builders.
Joe
Correction. New home sales better than expected. From OI.
>>>In other economic news, the Commerce department reported that new
home sales fell about 4% in October to an annual rate of 1.01
million, which marks the third highest level ever reported.
Economists had forecasted a steeper falloff in new home sales of
just 980,000.
The 4% decline in October comes after September's new home sales
was revised higher to a more robust 1.05 million-unit rate from
the previously reported 1.02 million first reported. October's
new home sales showed the new home sales market remained strong
and 16% above year-ago levels.
The 4% decline in October was largely due to a 32% plunge in new
home sales in the Northeast, which followed a brisk pace of sales
in September. New home sales also experienced a drop in the
Midwest, down more than 17%. Gains for new home sales were found
in the West (+4.2%) and South (+1%).
Inventory to sales data showed that buyers might be closing in on
the seller's advantage seen in the past few years as new home
sales at the end of the month totaled at 335,000, the most for
one month since August 1996, while a month's supply of homes for
sale climbed back to a 4.1 reading after sinking to 3.8 in
September.
>>Try "lower" instead of "low". These numbers are quite high.<<<
Good point. What I meant was they came in low as to expectations. Think it is obvious that the numbers are still high.
Booming? You call those numbers "booming"? I think the market has boomed but I don't see any indication that new home sales are still in a trajectory pattern. I think there are many signs that thec industry is topping out. Low lumber prices, wall board plants being closed, new purchase mortgage apps waning- this is all happening with very low interest rates.
Joe
AMZN- Shorted this pig. Retail numbers were down last week. I expect the after Thanksgiving weekend sales will not look good also. Position trade. Over bought here and looking for a pullback technically and fundamentally.
http://stockcharts.com/def/servlet/SC.web?c=amzn,uu[l,a]daclyyay[dc][pc20!c50][vc60][iLb14!La12,26,9...
Joe
GFI- Long at 10.80. Tip toeing into some golds. Long GG also.
Joe
CELL- Very strong stock lately. Over bought but worthy of a look on a good pullback. Selling for about half of book. I think the fundamentals are fairly decent and represent a good value at this level. I also think they have run up well with some of the other trash out there so I think we could have a significant pullback. First mentioned about 3 weeks ago at less than 2.50. JMO.
http://stockcharts.com/def/servlet/SC.web?c=cell,uu[l,a]daclyyay[dc][pc20!c50][vc60][iLb14!La12,26,9...
Joe
MHK- Shorted near 60. New home sales came in low. Keep in mind existing home sales report home that were contracted to sell in the past couple of months. New home sales are more accurate to what is going on now as they are reported when the home is contracted to buy and not closed.
I think MHK is a good play on slower construction. If we have the anticipated harsh winter that could slow things even more.
Just a thought.
Heads up. New car sales for November out Monday. GM? AXL?
Joe
No Politics? Didn't see anything political. I was happy to see the post. Think that we all need to be alert that something is going to happen someday. Now would be very strategic time to hit the US. Scares the hell out of me. I think it relates to the market as I think it would be prudent to lighten up or be hedged going into the long weekend. Call it "terrorism insurance".
Joe
Chun-li, Thanks for providing this information while Federal reserve is away. I find this info interesting.
Joe
>>>pulled out when it fell from 2.15 to 1.75 last week on news that it might be bankrupt.<<<
The media picked that up out of RRI's 10Q in the boiler-plate cautionaries. Basically they said if the banks don't refinance their loans coming due they will have to file bankruptcy to protect their assets. About every energy company out there would nearly have to say the samething. Hell, back in October my business loan was up for renewal. Technically I would have had to file bankruptcy if my bank decided not to renew and called my loan. Of cousre I have an income stream and assets that the bank so a profitable loan to be made. RRI is in the same position. Good assts and a very good reoccuring income stream. They will be able to borrow the money in my opinion.
Another thing that may have effected the drop. RRI issued 240 million new shares less than two months ago after the spin off from CNP. I bet there are many weak hands holding those shares that jump quickly when bad news hits. With the nice rebound of those levels last week maybe there are fewer of those folks willing to let go so easily.
Joe
RRI- Good buy. Think it may pull back some when the market goes down. And, these energy companies are recently fair game for a negative headlines. RRI is the largest position I own. Bought a bunch of it between $1 and 1.70. If this one just goes to book value I'll make over a $ million. I think it can be up to book value by mid 2004.
I've mentioned here before and I'll say it again, I think this one has the best potential for share price appreciatiion of the whole bunch of merchant energy companies. The is the closest thing I have had as a LTBH in several years. In fact, it's the only stock that I'm not trading at the moment. Also have positions in TE, EP, CPN, MIR and MIR preferred trust.
Needless to say, I like RRI and I usually don't have much to say about longs. LOL!
>>>showing a big drop in CDWC in ah but have yet to see any news to account for it - any ideas?<<<
Tech Data (TECD): Trading near $31.00 in the extended session after closing at $33.27. The company announced earnings this afternoon that were in-line with expectations, but investors aren't taking kindly to the lowered guidance for the fourth-quarter. TECD now sees Q4 EPS in the $0.53-$0.58 range, whereas the consensus estimate was for $0.64. Of course given Wall Street's recent tendancy to ignore bad news it wouldn't be surprising to see shares finish with a gain on Tuesday.
>>The talk show house who is also a very smart real estate investor hadn't figured out that this was the beginning of the popping of the housing bubble,<<<
Sounds like John Adams. We talk occassionally. Doesn't see a housing bubble at all. He's as bullish on housing as Elaine Garzarelli is on stocks. I don't know where he thinks the incomes are going to come from to support higher and higher home prices. That said, I would have tought I would have been able to prove my point by now, but, indeed home prices continue to rise. Amazing!
Joe
DJ Two Qualcomm Presidents Sold 130,000 More Shares Friday
Pantmaker. Your profile shows you as a home builder. may I ask how business is in your area and any other thoughts you may have about the industry.
TIA, Joe
>>>Of course the market will get it right sooner or later as long as it keeps starting a new bull every 4 months. <<<
One big difference about this rally....I don't think they have marched out Abbey and here "super tanker" speech yet, have they? <VBG>
Joe
The US Muddles Through
While Europe Falls Behind
China and the Fall of the Dollar
Bear Market Rallies
Home Again, Home Again
A Word on Derivatives
By John Mauldin www.2000wave.com
Today we are going to look at the world economy, muse on why the
dollar is holding its own and when and why it will drop. Then I make
a few comments on the current stock market rally. Finally, in a
departure from the normal letter, I am going to close the regular e-
letter, but add a PS in the form of an essay on the risk of
derivatives for those who find the subject interesting.
The US Muddles Through
The world economy is clearly not healthy. Let's look at the US, and
then we will go around the world. The US economy grew at 3.1% for
the last quarter, which ahs been loudly trumpeted by the
cheerleaders on Wall Street. But digging down into the details, we
find that if you take out the explosive growth in automobile sales
caused by 0% financing, the growth was only 1.5%. The predictions
are for a weak holiday buying season. Car sales are now down.
Housing was down 11.4% in October, capacity utilization is almost
back down to recession lows and the trade deficit widens. Retail
store sales are slightly down.
Still, the economy is not likely to fall into outright recession for
the next few quarters. As I have maintained all year, this is a
period of slow growth. The Index of Leading Economic Indicators,
after falling for four months in a row, finally turned back up.
Unemployment claims dropped slightly this week. There are parts of
the economy that are doing just fine, and some businesses that are
having banner years. There is a lot of stimulus from the Fed and the
government, tax cuts last year and the likelihood of even more tax
cuts and stimulus in the future. Greenspan has not made his last
rate cut.
While some would argue that interest rate and tax cuts have not
helped, I would like to suggest another view. They have been
helpful, in much the same way that Advil will help a major hangover.
It serves to lessen the pain, but does not get rid of the problem.
The US and the world had a huge hangover from the stock market
bubble, and it is a wonder to me and many observers that we did not
have a major recession. We have certainly not dealt with all the
excesses. Something is holding the economy up, if ever so tenuously.
But given all the problems cited above, along with the huge trade
deficit, why would the dollar be holding up so well?
While Europe Falls Behind
The problem is that the rest of the world does not look good by
comparison. The London Financial Times notes that France grew at an
anemic 0.2% this last quarter. Germany and Italy grew at an only
slightly better 0.3%. Various authorities project that the fourth
quarter will be weaker. It is hard to picture a weaker quarter
without these countries falling into recession.
Goldman Sachs warned last week that 30% of the 118 German life
insurance companies could disappear within five years. The following
day, Fitch said 39 of 75 insurers it surveyed had "weak" capital
bases. Insiders say this may be the tip of the iceberg.
Germany is in open defiance of the European Union agreement on
deficits, planning to run government deficits in excess of 3% of
GDP. France is making rumblings. This does not bode well for peace
among the members of the European house.
The Central Bank of Europe has ignored calls to ease interest rates,
thus threatening to help push the continent into recession. Most
European countries have the same age demographic profile that Japan
does, and this is slowly creating a more deflationary prone
environment.
Japan is in an outright deflationary recession, and has been so for
some time. The Koizumi government is proposing either the 47th or
48th (I lose count) solution to the national banking crisis. This
one might fly, though, as it gives a lot more tax dollars to the
banks and big business, which is the Japanese model. Of course, it
will create even more government debt, which is not going to help
its credit rating, which was recently down-graded again (this time
by Fitch).
Thus, the three largest economies in the world are all weak at the
same time for the first time in history. There is no engine for
growth.
Given such an environment, who is to blame international investors
for being confused as to which weak sister deserves his money?
Which way will the dollar break? The following quote is from Andrew
Kashdan of Apogee Research:
"Stephen L. Jen and FatihYilmaz both agree with Morgan Stanley
colleague Stephen Roach that the U.S. dollar is overvalued. However,
in the grand scheme of things, it hasn't been clearly overpriced for
all that long, they say. By Yilmaz' reckoning, the dollar has only
been overvalued since the third quarter of 2000 based on cumulative
imbalances -- i.e., the U.S. net foreign asset position resulting
from its current account deficits. But both Jen and Yilmaz seem to
agree that the dollar will only decline once the U.S. and global
economies recover.
"In a weak economic environment, the pair points out, the U.S. tends
to receive 'fear-motivated capital flows.' And, in fact, because of
the 'hegemonic' status of the United States, the dollar 'will be
supported in periods of extreme greed or extreme fear, regardless of
valuation.' The problem will come when yields finally bottom,
according to Jen and Yilmaz. We would add that higher-than-expected
inflation, something that is obviously off the radar screen right
now, will only exacerbate the trend once it gets going.
"But the dollar's downfall could come even sooner than that.
Currency forecasting is always a dicey proposition, but there are
complications, including the consequences of a war with Iraq, that
may speed the process. For example, Yilmaz points out that 'the
reluctant support from the U.N., plus a lack of visibility on the
potential petrodollar flows, also works against the traditional 'war
premium' arguments." Jen, who expects the U.S. economy to double
dip, adds that "if I am wrong ... then [the recent dollar weakness]
we are witnessing could indeed be the beginning of a structural
correction." Either way, to put it bluntly, the dollar is screwed,
says Kashdan.
China and the Fall of the Dollar
My personal views? I continue to think the dollar will get weaker
against the euro, but slowly and over time. Japan has publicly
declared its intention to weaken its currency against the dollar,
and almost every Asian country has exhibited a willingness to
devalue their currency against the dollar in order to stay
competitive with each other and especially China.
The dollar may not significantly crack until China decides to let
their currency rise against the dollar. When do they do that? When
they think their internal structural problems are sufficiently dealt
with and they have the beginnings of a real consumer market within
China.
China is the key. One headline this week says that Japan is
increasingly moving its production to China. Mexico (I swear this is
true -- I couldn't make this up in my wildest dreams!) is actually
importing Mexican sombreros from China for the tourist trade. Every
nation feels forced to keep their currency competitive with China in
order to sell to the US.
With the huge trade surpluses China is currently running, at some
point in the future, they will decide they have enough US paper, and
want more dollars for their labor and goods. When they feel secure
in their international competitive advantage, they will pull away
from the fixed dollar link, and that will be the beginning of the
fall of the dollar that so many have predicted. Until then, the
dollar is likely to go sideways to down, with rallies from time to
time.
And yes, this is quite bullish for gold over the long term.
Bear Market Rallies
This is now the third time the S&P 500 has rallied by over 21% since
the beginning of the bear market in 2000. Each time, we are told
that the economy is turning and the stock market is leading the way,
predicting the turn-around in advance. The cheerleaders and the
stock market will be wrong for the third straight time. This
quarter's GDP growth is likely to be below 1%. Such anemia is not
the stuff of which roaring and long lasting bull markets are made.
While I noted above that Fed and government policy is appropriately
stimulative, it is also having trouble getting traction in the three
areas where such stimulus would normally have the most affect:
housing, consumer spending and business investment. Each of these
areas is not rising as they all have their own issues. It is hard,
in the case of housing and consumer spending, to get an increase
from a level which is already historically high. It is difficult to
get business to invest in more capacity when they have too much
capacity already. Thus, while stimulus policies (tax and rate cuts)
have historically resulted in significant growth, we languish, slip
sliding away down the slope of the last bubble. I agree with
Stephen Roach of Morgan Stanley who writes: "The model of the post-
bubble business cycle allows for precisely this type of muted
response to policy actions, as the authorities get increasingly
frustrated by 'pushing on a string.'"
Thus, those looking for the economy to bring forth a new bull market
will be disappointed, and the market will at some point resume its
downward lurch. The question for traders is, when is the next top?
Bear market rallies can evaporate quickly, or draw out for long
periods. There is no real pattern. Discerning the pattern and
reading the tape takes a seasoned pro. To that I defer to the genius
of Richard Russell. (www.dowtheoryletters.com)
The best stock market call I have made this year was to tell anyone
who wanted to trade bear market rallies to pony up $250 and
subscribe to Russell's now daily Dow Theory Letter. He has been the
blisteringly hot hand of late. He has been writing the letter for 44
years, has always been insightful (and usually right on target), and
never more so than in the last few years. This secular bear market
will have lots of opportunities to trade into a bear market rally
over the next few years. Russell is one of the analysts who has the
potential to recognize them as they happen.
Home Again, Home Again
It is good to be home again with my family and to start to catch up
on my work and writing. Those who get my free Accredited Investor E-
letter will get a new issue next week. It is being reviewed by the
legal types as I write. If you are an accredited investor (typically
a net worth of $1,000,000 or more), and would like to get my monthly
(more or less) letter on hedge funds and private offerings, you can
find out more about the letter by going to
www.accreditedinvestor.ws.)
Thanksgiving is next week, and it is one of my favorite days of the
year. I really look forward to my family getting together. And,
admittedly, the food is also fun. We all have much for which to be
thankful, and me more than most. This year, I will also get to spend
some time with friends over the weekend. All in all, this looks to
be a special Thanksgiving.
Following this letter is an essay on the issue of derivatives for
those interested in the topic. And thanks for all the comments on
last week's letter on retirement. I did read them all.
Your blessed beyond what he could ever hope to deserve analyst,
John Mauldin
John@2000wave.com
A Word on Derivatives
Much has been made of the fact of the British Bankers Association
recent report that the notional value of derivatives has increased
from $180 billion only five years ago to over $2 trillion today.
Some articles border on hysteria, warning of a spiraling implosion
of derivative debt obligations which will result in the collapse of
the world economy. As near as I can tell the argument rests on the
premise that the increase in derivatives in and of itself is bad and
the people using them are probably stupid or have some sinister
motive, or both.
Others wax eloquent about how the growth of these financial
instruments is going to take us into a new world where risks are
spread throughout the economy, thus promoting a new and safer world
where the cycle of bank losses which produce credit crunches and
recessions is forever banished.
We are going to briefly look at derivatives today because a basic
understanding of derivatives is essential to understanding how
modern world economies and global businesses work. My view is that
derivatives are wonderful things, but. There is always a but, it
seems. We will first look at why derivatives are good things, and
then examine the "but," coming to a conclusion on the dangers of
derivatives different than you will normally read.
First, what is a derivative? You can go to
www.margrabe.com/Dictionary.html and get the classic definition,
along with the definition of hundreds of various types of
derivatives. (This site also has a wealth of information on
derivatives and risk management, hedging and is a good place to go
to learn about these topics in a fun and understandable manner.)
derivative product or derivative(s)
A financial contract whose value depends on a risk factor, such as
* the price of a bond, commodity, currency, share, etc.
* a yield or rate of interest * an index of prices or yields
* weather data, such as inches of rainfall or heating-degree-days,
* insurance data, such as claims paid for a disastrous earthquake
or flood, etc.
In short, a derivative is a financial instrument whose value is
derived from something else. A stock option is a derivative. It is
not the stock itself. The value of the option is dependent on
(derived from) the value of the stock. Wheat futures used by farmers
to hedge their operations are derivatives. Exchange Traded Funds
(ETFs), which have only recently come in to existence, are
derivatives. When you buy a Spyder, which is a stock listed on the
AMEX and is basically an S&P 500 index fund, you are buying a
derivative.
You can now buy as an ETF almost any country stock index
immediately, rather than waiting to the close of the day to buy an
international mutual fund. (Can we say arbitrage potential, boys and
girls?)
If I want to sell my widgets in Europe, but don't want to take the
currency risk of taking euros in 6 months, I can do a swap with a
counter-party in Europe who wants euros and not dollars. Typically,
some intermediary (like an investment bank) will facilitate the
transaction for a small fee, guaranteeing payment in full.
If you buy a government TIPs bonds to hedge out inflation risk, you
are buying a derivative. If you hedge out your weather or earthquake
risk, somewhere there is a derivative.
One of the books which I highly recommend is Against The Gods by
Peter Bernstein. This exceptionally well written book tells the
fascinating story of how risk has been dealt with through the
centuries.
The growth and wealth of nations and commerce has always and
everywhere been accompanied by an increase in the ability of
businessmen to control risk. When men are able to control their
risk, they are ironically in a greater position to take risk.
It is hard to understand now, but any fourth grade student of math
who was shipped back to 10th century Europe would soon be rich. Back
then, there was no understanding of something as simple as the odds
on the roll of a dice. You could get the same bet on rolls with
substantially different potential outcomes. Risk and rewards were
determined by fate. The gods themselves determined who would win or
lose.
The development of mathematical and analytical tools to predict the
odds of certain events was a major factor in the growth of commerce.
For instance, let's say you are a ship merchant. Experience tells
you that 1 in every 10 of your ships will not come back. You also
know that you could have a period of bad luck where you lose three
ships in a row. If you bet 1/3 of your wealth on each ship, you
could lose everything if you had a run of bad luck. So you very
cautiously invest your capital, wanting to make sure you will be
able to stay in business.
But what if you could find a group of men willing to take the risk
of your ship returning? You could pay them a fee, and then not worry
about losing three ships in a row and being wiped out. Of course,
your profits on any one venture might be less, as you are paying for
insurance. But now you can confidently invest more in shipping,
knowing that even if three ships in a row do not come back, you will
still be in business. Your overall profits increase, and the entire
economy is better off.
That is exactly what happened in London. Edward Lloyd, who opened a
coffeehouse in London in 1687, began to compile data on risk,
shipping, ports and the conditions abroad, which was used by
investors to assess risk, buy ships, organize trade, etc. Of course,
it became Lloyd's of London. It was at the vortex of an explosion of
shipping and prosperity, and it grew because of an early form of
derivatives.
Without derivatives, insurance and risk management, it is impossible
to imagine a modern commercial society. These are crucial to our
economic health. The wheels of commerce and investment would grind
to a very slow pace if businesses and individuals could not control
risk or take risk.
Every one of a variety of Spyders, Webs, Oats, Cubs (created by Bear
Stearns), Steers (created by Merrill Lynch), Suns, strips, options,
futures, swaps, CMOs, CBOs, and a hundred other acronyms for a
contract which trades risk between two parties are fundamentally
necessary in our economic world.
Could we live without them? Of course, but then we can live without
a lot of things. But most people would be surprised at how much the
very food we eat, the clothes we wear and the goods we use depend
upon derivatives.
All of these types of derivative transaction are growing by leaps
and bounds. But the real growth explosion is in credit risk
derivatives. If you are a bank or a creditor, you can now buy credit
insurance on the loans you have made. That can be a good thing, as
banks lose less money and thus are more solvent after a recession
than normal. But........,
And now, after my breathless ode to the glories of derivatives, we
come to the dark side.
The problem with derivatives is that while one party is hedging his
risk, another party is taking a risk. Sometimes, as in the instance
of two groups swapping currency risk, this is benign. At other
times, if one party underestimates the nature of the risk, there can
be significant losses involved. Much of the losses of various
insurance firms and investment banks in recent months have been on
the sale of insurance risks on loans. Insurance companies and others
have sold such insurance, using models that they now find didn't
adequately address the risk.
Let's look at two spectacular instances of problems caused by
derivatives.
Roger Lowenstein wrote a great book called When Genius Failed about
the collapse of Long Term Capital Management. LTCM was run by the
smartest and brightest of financial minds: two Nobel winners and a
host of similar worthies. They specialized in "convergence" trading
on bonds, and clocked along making huge sums. They thought they were
diversified by investing in the debt of many countries. In fact,
they were making the same bet everywhere, and country
diversification did not help when the Russian debt default threw the
world into crisis. They were leveraged as much as 80 to 1, and even
small movements were disasters for them. Once wind of their
predicament hit the street, funds and traders on the other side of
the trade lined up to take advantage.
LTCM used derivatives to build up such a leveraged portfolio. They
would let no one look at their books. If an investment bank wanted
to see their total portfolio as a condition of doing business, they
said no. Since they were generating huge fees for these banks,
everyone assumed these smart people knew what they were doing and
continued to do business.
While each investment bank knew the exposure they had to LTCM, no
one had the total picture, which was staggering. No bank would have
done business with LTCM if they knew the true picture. The situation
did indeed threaten to collapse the world financial markets.
In the end, the New York US Federal Reserve Bank President had to
call the chairmen of the banks which had exposure to LTCM and say,
in effect, "Be in my office tomorrow morning. Don't send your
subordinates. Bring your checkbook." Disaster was averted, but the
various banks took some huge hits. There were a lot of very unhappy
bankers. Contrary to some reports, no tax dollars were used.
This pain brought about a new fetish for transparency from their
clients upon the part of banks. Investment banks now want to know
what the total exposure of a client is, and will walk away from
business if they cannot get it. It also helped spark an increase in
credit insurance, as more and more groups wanted to hedge their
exposure.
A second spectacular failure was Barings Bank. Here the stories
would have you believe a hundred year plus old bank was brought down
by a "rogue trader" named Nick Leeson. Leeson bet on yen futures,
and wiped out the total capital of one of the largest banks in the
world. ING came in, bought up the pieces, and the shareholders were
wiped out.
It is my contention that Barings was brought down by management
failure, and not by Leeson. They simply did not have proper risk
controls and they and their shareholders paid the price. Other banks
have taken note, and now more risk controls are in place.
And thus, my view on the topic is a derivative from the old mantra
of the gun control debate: "Guns don't kill people. People kill
people."
Therefore, we come to, "Derivatives don't cause financial disasters.
People (bad risk managers) do."
In every case of problems stemming from derivatives, someone lost
money. But that is the free market. No one would think of getting
rid of cars or planes because people die in them. Everyone works to
make them safer.
Getting rid of derivatives is not an option. While some call for
more government oversight, that is not going to be much help. The
real control on derivative problems is the threat of loss. The
example of LTMC and Barings woke up a lot of people.
Every time a hedge fund blows up, or a company goes bankrupt,
investors start to try and avoid those types of risk. The reality
today is that many hedge funds provide a lot more transparency than
do mutual funds. You don't know what your mutual fund is investing
in today, or what risks they are taking. You only see their
portfolios twice a year, and then long after the fact. You are
making an assumption that the management of those funds have risk
management controls, to keep a "rogue manager" from investing in
ways other than they agreed to in their prospectus.
For many hedge funds, clients demand to see their portfolios on a
regular, real-time basis. Investment banks, who have derivative
exposure to them, know where their money is. They do this because
they have been burned before. The pain of loss is a wonderful
stimulant for risk controls.
Could we have another situation like the LTCM debacle? Probably
not. We know about that one, and everyone is looking for it. Could
we have a problem that is equal in size and proportion, but
different in nature? Absolutely. I can almost guarantee it. (In
fact, if you want to hedge against such a risk, I have a derivative
for you.)
LTCM, left to itself, would have been a global disaster. It came
close to being a financial market meltdown. Each of the various
investment banks were fighting and jockeying to save themselves at
the expense of the others. It took the playground monitor (The New
York Fed) to get everyone together and point out that it was in
everyone's best interest to "play nice."
The point is that even in the face of one of the greatest potential
financial disaster in the last century, the markets and the system
worked. Most problems will be solved by one or more parties going
under. That is sad for them and for their shareholders, but it is
the nature of the beast. Some will be solved by some authority
stepping in to force a solution. Even then, there are winners and
losers. But that is the price one pays when you enter the game of
market risk. Without that element of risk, a free market economy is
not possible.
I find it ironic that some of the most vocal proponents of the free
market are those who most want to see the "derivatives problem"
brought under government control. The current explosion of credit
derivatives has already caused a great deal of loss for some groups,
and will undoubtedly cause more. Did the availability of credit
derivatives encourage some of the last credit bubbles? Absolutely.
Did it create an imbalance? Will it create losses? Of course. But
the reality is those losses are good. (Unless of course, they are
yours.) Those losses are the best "insurance" that the buying and
selling of credit derivatives will be more rational in the future. I
am sure some of the first few intrepid investors who sold shipping
insurance made mistakes. They went bankrupt, and others noted their
mistakes. That process made, and will continue to make, the world a
better place.
If Morgan or Goldman Sachs, or whatever bank is the problem bank du
jour, has too much of the wrong kind of derivative exposure (gold is
the current theme), they will lose money or go bankrupt. If they
managers of a company allow it to take more risk than their capital
should allow, they deserve to go belly up.
Long time readers know I worry about lot of things. The risk of
various blow-ups caused by derivatives is real, but I think the
results will be the same as past blow-ups. The world markets absorb
the shock and keep on going. The real economic and financial
problems in this world, which do worry me, are not the ones
represented by derivatives, but by major macro-economic and
demographic forces like deflation, trade deficits, retirement, bear
markets, etc.
In fact, it is the very nature of the risks that these forces
present that become the driving force for the growth of derivatives,
hedge funds and other risk adjusted investments, as businessmen and
investors seek for ways to lessen the risk of market exposure.
Rational men always and everywhere seek to minimize risk. History
shows that while there are those who do not do a good job of
analyzing risk, the large majority of business does a pretty god
job. The free market works, and that is why the world is richer at
the beginning of this century than at the last. That is why, in
spite of all the problems I continually write about, that I
fundamentally believe the world will be a better place 100 years
from now for the average man. The free market is a flawed system,
full of creative destruction, but better than any alternative.
I would argue that it is the proper use of financial derivatives
that will help businessmen and investors find safer, less risky
investment returns. Just like those early sea captains, the ability
to control risk will make for more wealth for us all. Yes, there
will be losses, but hopefully for the benefit of their shareholders,
those who are taking the risk have calculated the cost.
Copyright 2002 John Mauldin. All Rights Reserved
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Doug Noland writes another great essay this week. He talks about the Fed intervention in discussing one of the Fed's govenor's word's.
http://www.prudentbear.com/creditbubblebulletin.asp
Here is an exceprt that I found interesting.
>>>After promulgating dubious prescriptions for contemporary monetary management, Dr. Bernanke then commits a most atrocious act of historical revisionism by blaming the Great Depression on the “Bubble Poppers.” I kid you not.
From Dr. Bernanke: “The U.S. experience of the 1920s illustrates many of the points I have been making. As you know, the ‘Roaring Twenties’ was a prosperous decade, characterized by extensive innovation in technology and in business practices, rapid growth, American economic dominance, and general high spirits. Stock prices rose accordingly. As early as the mid-1920s, however, various policymakers and commentators expressed concern about the rapidly rising stock market and sought so-called corrective action by the Federal Reserve. The corrective action was not forthcoming, however. According to some authors, this was in large part because of the influence of Benjamin Strong, long-time Governor of the Federal Reserve Bank of New York and America’s pre-eminent central banker of that era. Strong resisted attempts to aim monetary policy at the stock market, arguing that raising interest rates sufficiently to slow the market would have highly adverse effects on the rest of the economy. ‘Some of our critics damn us vigorously and constantly for not tackling stock speculations,’ Strong wrote about the debate. ‘I am wondering what will be the consequences of such a policy if it is undertaken and who will assume responsibility for it.’ However, Strong died from tuberculosis early in 1928, and the Fed passed into the control of a coterie of aggressive bubble-poppers…”
“The correct interpretation of the 1920s, then, is not the popular one - that the stock market got overvalued, crashed, and caused a Great Depression. The true story is that monetary policy tried overzealously to stop the rise in stock prices. But the main effect of the tight monetary policy, as Benjamin Strong had predicted, was to slow the economy -both domestically and, through the workings of the gold standard, abroad… This interpretation of the events of the late 1920s is shared by the most knowledgeable students of the period, including Keynes, Friedman and Schwartz, and other leading scholars of both the Depression era and today… monetary policy had already turned exceptionally tight by late 1927… A small compensation for the enormous tragedy of the Great Depression is that we learned some valuable lessons about central banking. It would be a shame if those lessons were to be forgotten.”
This is stunning, misguided commentary. The harsh reality is that we learned absolutely the wrong lessons from the Great Depression, and I would suggest Dr. Bernanke and others go to the Mises.org website and order the recent compilation of Murray Rothbard’s writings, The History of Money and Banking in the US. It is wonderfully written, brilliant and exceedingly pertinent history (although the long introduction misses this critical point!). Diligent true students of this seminal period (and money and Credit generally) will have a very difficult time refuting Rothbard’s cogent and comprehensive analysis that the Depression was the consequence of years of inflationary policies, monetary mismanagement, and the Fed’s accommodation of rampant financial excess on Wall Street. It was a long road to unsound money, a dysfunctional Credit system, and perilous financial and economic Bubbles. “Exceptionally Tight” money no more caused the crash in 1929 than it did the bursting of the NASDAQ Bubble in 2000. Instead, there was a dilemma distressingly similar to today’s, with Bubbles only sustained by looser money and greater Credit and speculative excess. It is only a matter of when, at what cost, and under what circumstance Bubbles meet their inevitable fate. The “printing press,” Dr. Bernanke, is the problem and not the solution.
Again using Dr. Bernanke’s own words (but from our antithetical analytical framework): “In other words, the best way to get out of trouble is not to get into it in the first place.” Precisely! And that is what Dr. Richebacher has been preaching for years. Paraphrasing the good doctor, “There is no cure for a Bubble other than not letting it begin in the first place.” If the Wall Street darling Benjamin Strong would have acted responsibly to safeguard sound money and financial stability – thus thwarting financial and economic excess in the mid-twenties as things began running completely out of control - it is likely that financial collapse and depression could have been avoided. And applying Dr. Henry Kaufman’s quote regarding the Greenspan era: “The Fed missed its timing.” Well, Benjamin Strong bet the farm and lost. Greenspan has lost the ranch, although the “house” apprehensively consents to his gambling on his neighbors’ homesteads. Blaming the Great Depression on those that were rightly fearful of escalating dangerous financial and economic imbalances – those dreadful “Bubble Poppers” – is such a gross distortion of the facts and an injustice to sound economic analysis. Long live the Bubble Poppers!<<<<
GM- Took my short position home for the weekend. Went from a daytrade to a position trade. Couldn't get the fill I wanted.
Joe
Scam, scam, scam!. The market is becoming one big scam! Mom and pop Kettle will look at the market this weekend and decide to get back in. Little will they know the market is being manipulated by their government to entice them to "invest" only to be taken away Greenspan has his way.
Joe
>>they should be able to frontrun the intervention point and make a substantial profit.<<<
You mean like in helping someone like JPM or C get out of a financial problem while supporting the market at the sametime?? Who would have thunk! <VBG>
Joe
You got to read this-Autodesk slips on warning, but Piper Jaffray upgrades (ADSK) By Tomi Kilgore
Shares of Autodesk (ADSK) are slipping 58 cents, or 3.8 percent, to $14.63 after the design-software maker topped fiscal third quarter earning expectations, but warned that fourth-quarter results would fall short of forecasts. Meanwhile, Analyst C. Eugene Munster at USB Piper Jaffray upgraded the stock to "outperform" and raised his price target to $20 from $16, on the belief that it is "always darkest before dawn." Munster noted that 70 percent of the company's products are in the process of being upgraded. "Generally the troughs have been formed by downward estimate revisions entering a product cycle," Munster said in a note to clients. "We believe the events over the past three weeks...are characteristic of events that have historically caused such troughs."
Damn Tick just marches straight up. Greenspan has it in for the shorts. GM now up over 39. Think I'll try again soon. Wonder what is driving tech. INTC, CSCO, DELL, MSFT, AMAT all red. There, MSFT goes green.
Joe
GM- Short @ 38.35 for a daytrade. Edit: stopped out for a loss- Amazing market.
Joe
Would have liked to see treasuries participating more here. Right now they are just sitting on the fence. Would love to see them help fund some of the dark side's efforts.
Joe
[ADBE] ADOBE SYSTEMS CUT TO 'SELL' AT WR HAMBRECHT
I just love to see these "Sells" come through. Not so much that I'm bearish but more that it's good to see some analyst putting some "reality" in their upgrades/downgrades. At current valuation, probably more than 50% of corporations should be "sells" on valuation concerns alone. I think I read some place that they are up to 12% now. JMO.
Joe
Hmmm... looks like Joe six-pack still isn't buying the recovery. Until the funds can start ramping up inflows it's hard to see them as heavy buyers giving the market a foundation for continued strength.
>>>>>>>
U.S. stock funds witness outflows By Tomi Kilgore
Funds investing primarily in U.S. stocks witnessed outflows of $3.2 billion during the week ending Nov. 20, estimates Carl Wittnebert, director of research at Trim Tabs. The same funds took in $1.8 billion in new money the week before. In comparison, the S&P 500 Index ($SPX) rose 3.6 percent in the latest week after declining 4.5 percent the previous week. Meanwhile, bond funds had inflows of $2.4 billion for the second straight week, according to the mutual fund tracker.<<<<
PLAB- A porker semi that just filled a gap from last July. Looks to me that it is near time to stick a fork in this one and throw it on the grill. No position. On my watch list. Reports December 10th. Looks like it may be due for a goodwill impairment charge. 1.0 debt to equity ration. One concern- Has had some insider buys but they appear small and may be nothing more than lipstick on this pig.
http://stockcharts.com/def/servlet/SC.web?c=plab,uu[l,a]daclyyay[dc][pc20!c50][vc60][iLb14!La12,26,9...
GM- Another with good short potential IMO. What a pig it was today.
http://stockcharts.com/def/servlet/SC.web?c=gm,uu[l,a]daclyyay[dc][pc20!c50][vc60][iLb14!La12,26,9]&...
Anyway, here's my thinking. Most Novembers have earlier Thanksgivings. This year there is just one selling day after Thanksgiving to sell cars. I would imagine that in other years that week after Christmas with people being off work for part of those days would have been good selling days. This year we don't have those extra days off to go car shopping. The automakers report their numbers That Monday when we return from the holiday (I think). I think they will come in low as compared to last year and possibly to October. F looks like good short potential too. What do you all think?
Joe
>>I have some shorts that I hope to close tomorrow on a pull-back.<<
If we open down tomorrow I'm going to let my shorts run a little. As much as we have gone up in such a short time, we may get some good profit taking going into the weekend. I'm thinking that if I cover early I'll be leaving money on the table so I'm going to move my stops out a little and watch closely.
Joe
LEH- I may be jumping the gun but LEH looks like a tempting short to me from a fundamental viewpoint.
http://stockcharts.com/def/servlet/SC.web?c=leh,uu[l,a]daclyyay[dc][pc20!c50][vc60][iLb14!La12,26,9]...
Wouldn't be surprised if we don't see an island reversal after trading tomorrow.
Joe
This is OptionInvestor.com's take on the B2B. Looking at the futures they are taking it well.
>>Semiconductor - Book-to-Bill - New orders fell by -7.9% in October making it four consecutive monthly declines. It would have been even steeper but they revised downward the number from September from 0.80 from 0.84. Using the original number from last month of .84 and the headline number for October of .73 that would have been a -13% drop instead of the revised -7.9% drop. It is amazing how the magic numbers keep getting revised with each succeeding period. BTB, Jobless Claims, Nonfarm Payrolls. It almost looks like a conspiracy to let us down slowly by managing the numbers. That would be illegal so I am sure it is just a coincidence.
At .73 this is the lowest ratio in nearly a year. Every month the order inflow drops it pushes the tech recovery a month farther into the future. With a six-month lead time from order to delivery this means any possible recovery is well into 2003 "IF" orders picked up next month. Typically the holiday season is a low spot for manufacturers with forced holidays and mandatory plant closings to save money until orders pick up in the 1Q. This puts any recovery off until 3Q of 2003 at the earliest if historical trends continue. "IF" traders pick up on this report tomorrow the tech rally could be in trouble. However, since it is a "hope" rally anyway maybe they will consider this bad news another snack on the bull's buffet.
Whoa! I was looking for a small uptick in the B2B. Since it's a three month average and Aug and Sep were so bad, I Thought October would have a bit of a rise. Market should really take off tomorrow on this news. I'm sure the market will look at it as it just can't get any worse. LOL!
Thanks for posting.
Joe