Penny Stock Soldiers (OTC tradeable tickers)/Momentum Plays

[ThePennyDoctor]

Sorry I have not been posting - I had a really good week, but the plays were risky - such as NEWL - and not ones I thought I should suggest. Anyhow, below is a great article:

The Myth of 2008: FAS157, Not QE Or TARP
by valueplaysMay 29, 2014, 2:07 pm

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Those who have not been a reader for the past 7 years now may not know who “Davidson” is or why his commentary fills these pages so often. His post, at the height of the panic on March 6th 2009 (the day the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) bottomed) told readers he “I would be buying with cash hand over fist if I was not already in” and on March 19th said “The current market is an extraordinary buying opportunity!” proved both highly contrarian and highly accurate. Since then his contributions have soothed readers during short term volatility and provided a roadmap for rational thought.

FAS157 rule was responsible for exaggerating the relatively much smaller sub-prime issue

“Davidson” submits:

Brian Wesbury provided an excellent ‘look-back’ yesterday on his 2008 analysis that the Nov 2007 Mark-to-Market FAS157 rule was responsible for exaggerating the relatively much smaller sub-prime issue. It was during Congressional testimony March 2009 in which Chairman Bernanke said that FAS157 was causing misleading mark-downs of value at lending institutions and amplified fears in the financial system. Barney Frank ended the rule immediately. The equity markets found their bottom that day!!

What this says about markets is that they in truth represent a set of rules which we have implemented over time to ensure that fairness occurs. Rules are changed over time and the markets respond accordingly. If the basis for market pricing changes with our perceptions of which rules we should or not use, then market prices from one period to another are dependent on changing valuation perceptions. The rules are in constant flux as we perceive adjustments are required. FAS157 was one such rule. FAS157 came into effect Nov 2007 after the Enron debacle. We did not know how bad it would distort markets till it exaggerated the market correction in 2008-2009. Then we eliminated it. What does this say then about our use of mathematical analysis of markets?

Since the introduction of Modern Portfolio Analysis under Harry Markowitz in the 1950s, we have applied mathematical analysis to markets with a force of tsunamic proportion. Even with massive use of computing power applied no solution has been revealed where we avoid ‘Black Swans’. The reason for this is quite simple: Mathematical analysis of stock/bond markets does not work! The myriad number of CFAs, CFPs, MBAs and PhDs earned using the current academic based mathematical approach is misdirected. The answer to understanding markets is not found in mathematics, but found in behavioral observation and coming to an understanding that markets reflect human productivity under a set of ‘fairness rules’ which we change from time to time. This is precisely why mathematics cannot work to isolate a market solution.

· Prices are human value perceptions subject to man made rules!
· They are not and never will be mechanical measures of value.
· Math can never be applied to human value perceptions to predict accurate times and prices!
· Once one knows this, one becomes a better investor!
Add to all this the fact that there are various types of investors who basically fall into two categories, i.e. Value Investors and everyone else. It is the minority of Value Investors who truly know how to judge value. This is the basis for my SP500 Intrinsic Value Index. Everyone else is a market follower believing that the markets are ‘rational’. I hope we all understand that this is not so!! Markets are only rationally priced at the lows when those few Value Investors are buying. The rest of the investing world believes that some ‘Invisible Hand’ magically controls prices and these same investors believe that markets are “Efficient’, ‘Rational’ and therefore understandable through mathematical modeling.

Wesbury’s piece yesterday reveals just how subject markets are to our rules. He spotted this in 2008 as the crash was occurring. He was not alone in seeing this. He does write well about it in this piece and I encourage you to read it. This is why I give the type of advice I do. I obtain useful future insights through my review of market history.

I highly recommend that you read Wesbury’s The Myth of 2008 which is presented in its entirety below.
http://www.valuewalk.com/2014/05/myth-2008-fas157-qe-tarp/