« March 2010 | Main | May 2010 »

April 28, 2010

My Take on the Goldman Sachs Issue

If the SEC thinks that Goldman's position of effectively shorting the mortgage industry while at the same time selling mortgage packages into the market is bad, just wait until they put two and two together and realize that brokerages are selling treasuries to customers and taking proprietary trading short positions on those exact same treasuries.  Same deal, different security, but so very very much worse than anything we've seen so far.

Economists who analyze the mortgage crisis universally agree that the mortgage crisis was exacerbated by derivative downside bets.  I've got to wonder what they'll say when the sovereign debt issues facing the US and other mature economies take the same path as the housing bubble with the same consequences.


April 23, 2010

Porndogs at the SEC

In my book (section 'Pile New Rules On Top of Old Ones') I discuss the problem of dealing with the Wealth Shift issue of taking time at work to access porn on the internet.  Well, looks like even the SEC isn't immune....

Excepted from today's New York Daily News:

At the SEC, all they thought about was SEX.

The country's top financial watchdogs turned out to be horndogs who spent hours gawking at porn Web sites as the economy teetered on the brink, according to a memo released Thursday night.

The shocking findings include Securities and Exchange Commission senior staffers using government computers to browse for booty and an accountant who tried to access the raunchy sites 16,000 times in one month.

Their titillating pastime was discovered during 33 probes of employees looking at explicit images in the past five years, said the memo obtained by The Associated Press.

It says 31 of those probes occurred in the 2-1/2 years since the country's financial system nearly crashed.

The report was written by SEC Inspector General David Kotz in response to a request from Sen. Charles Grassley (R-Iowa).

Among the startling findings:

- A senior attorney at the SEC's Washington headquarters spent up to eight hours a day looking at and downloading pornography. When his government computer ran out of hard drive space, he burned the files to CDs or DVDs. He later agreed to resign.

- An accountant was blocked more than 16,000 times in a single month from visiting "sex" or "pornography" sites, but still managed to amass a collection of "very graphic" material by using Google to bypass the SEC's internal filter. He wound up with a 2-week suspension.

- Seventeen of the randy employees were "at a senior level" earning salaries of up to $222,418.

- The number of cases jumped from two in 2007 to 16 in 2008. The cracks in the financial system emerged in mid-2007 and spread into full-blown panic by the fall of 2008.

California Rep. Darrell Issa, the top Republican on the House Committee on Oversight and Government Reform, said it was "disturbing that high-ranking officials within the SEC were spending more time looking at porn than taking action to help stave off the events that put our nation's economy on the brink of collapse." An SEC spokesman declined to comment last night.



April 21, 2010

10 Rules for Succesful Day Trading

There is no such thing as wealth without work.  For those people who are willing to do the work, here are my 10 rules for successful day trading:


1)      Trade deliberately and with diversity.  Do your homework on the field of companies/commodities you might potentially trade on any given day and know precisely where you are both in the macro economic climate and also w/r/t the micro fundamentals of the companies you follow.  Religiously track the trading range for both the company itself and the sector in which it operates.  Plot a mental matrix for every stock you trade, with the X axis being the company’s historical share price and the y axis being where the company’s P/E falls relative to its closest peers in the sector.  Don’t day trade a company that plots high in the top right quadrant without a significant catalyst - move on to a different stock or sector, instead.  If you choose to trade a stock that derives its value from an underlying commodity (metals, mining, oil, etc) don’t buck the underlying commodity’s trend, but do pay close attention to trend turns and to macro-economic news that may possibly presage a turn in the stock itself.   Identify patterns (ex: Look how well precious metals trade the weeks the govt is trying to place 7, 10, and 30 year treasuries, oil in summer to July 4, and natural gas Nov-Feb.) and derivative trades (ex. When Boeing does well, TIE does even better.)      

2)      Don’t trade a dog no matter how tempting the volatility appears.  Stick with companies or commodities that have a great macro story in case you have to hold a company for a few extra days for the trade to pan out.  (ex. Which would you rather be stuck owning…Palm or Apple?) 

3)      Don’t short a bullish industry trend no matter how much you hate a particular company’s story.  (Ex. MGM is a dog with major fleas in the short run but it keeps going up anyway because of optimism about the sector.  Beware of short-term pairs trading because all too often in the short run the dog you are shorting appreciates faster than the solid company you are long) 

4)      Don’t get greedy.  Be willing to both arrive at the party a tad late and leave the party a tad early.  Set a daily profit target and be disciplined enough to sell when you reach your target.  (An aggressive but reasonable target is 1-2% a week.) 

5)      Trade cheaply through a reputable discount brokerage but keep a few positions at a prominent full-service brokerage house so you can have access to research (most specifically the daily upgrade and downgrade reports).    

6)      Limit your trading to your experience level.  If you are new to day trading, start out trading low-volatility large cap stocks and progress to more volatile stocks and commodities as you gain experience trading.

7)      Don’t leave the baby unattended.  Stay glued to either CNBC or Bloomberg as long as you have a position in place. 

8)      Trade ranges and targets, not news or hype.  Trade a run up to earnings but be out for the announcement itself, since the vast majority of stocks trade off in the wake of earnings announcements.  Don’t get suckered in to trading for the allure of bragging “rights” or for the adrenaline rush of being in for a sudden pop.

9)      Don’t trade on days where you don’t have a good feel for the temperament of the overall market.  Also, markets, like children, can have somewhat predictable (if temporary) moods.  Watch to see whether there isn’t an overall daily pattern to the index you are following and then act opposite to that pattern.  For example, right now the pattern seems to be to buy at the open, trade off into lunch and then pick back up again in the afternoon.  In this pattern you would want to be a buyer at 1:00 EST and a seller at the close or, if you’re brave, at the following days’ open.  The current trend also seems to be optimism at the beginning of the week and pessimism at the end, so pay attention to those kinds of trends, too.             

10)  Get a leg-up on the reactionary traders.  Be smart enough to look down the road a bit and see what’s on the horizon.  There is too much good information out there to not take advantage of it.   (MSN economic data calendar, earnings calendar, etc.)

April 20, 2010

Is Anything Really Different This Time?

In a word, yes.

The solution for every economic downturn of the past twenty years has been to borrow money to stimulate the economy.  Great idea, except for the fact that, when the going gets better, we forget to pay the money back.  One reason that politicians are acting a little freaky right now might very well be that they know there's no water left for another trip to the trough, despite the fact that there are millions of people waiting in line for a multi-trillion dollar drink.

Like who?

1) Retiring baby boomers.  Hey, I paid in, I expect to get my benefits.   

2) People displaced by technological advancement.  The paradox of technology is that it increases productivity and, therefore, is a root cause of permanently higher unemployment.  Extend my unemployment benefits, will ya?

3) Small businesses needing assistance.  Malls are out, except for socializing and previewing the merchandise.  Online is in.  Good for Amazon, Ebay, UPS and Fed-X.  Bad for small businesses.  Can I get a SBA loan?

4) People who need a mortgage.  Tighter conventional lending standards are bad for consumers, but much, much worse for Fannie Mae and Freddie Mac.  Guaranteed.







April 14, 2010

Shareholder loyalty? Think again.



NYSE Turnover

Holding Period



9 months



14 months



26 months



33 months



63 months



100 months

Source: NYSE Group Factbook.
Turnover = number of shares traded as a percentage of total shares outstanding.

April 10, 2010

Playing Games With America's Financial Security

Yesterday an article in the WSJ "exposed" the dirty little secret that the big banks are playing games with their equity ratios.  Really?  Are you shocked?  Really? 

Most of the time the big banks operate with as much leverage as they ever have, but at the end of each quarter, when they have to make their equity look decent, they sell their short-term investments, repay their short-term loans, and boost their equity for a day.

This is exactly what I am talking about when I say, create a rule and we clever financial people will find a way around it.  And you, stupid regulators, can't close the holes we made 5 years ago, much less the ones we made last week.

If you want to know the true state of affairs at a bank, look not at their balance sheets or income statements, but at their cash flow from operations.  Anyone can charge late fees, and over limit fees and high interest on carried balances, but can they collect it?  The revenue goes into the income statement and results in a paper profit, but the cash flow shows how little of those fees are really being collected.

We seem to have unlimited optimism when it comes to believing that we have recovered from the greatest meltdown since the Great Depression with nothing more than the scratch of temporary unemployment to show for it.

The truth is far from the sugar-coated balance sheets we will be seeing out of the banks this quarter.  The truth is that the banks are so desperate to run ahead of their mounting default rates that they are willing to play games with their liquidity to eek out a little extra trading profit.

The truth is that they haven't changed.  Not fundamentally.  And neither has anyone else.  

And it is going to all splash back on the federal government.  The wall that should exist between the public and private sectors have been completely shredded to the point where the taxpayer is on the hook for every loan and guarantee ever given, from mortgages to student loans to FDIC insurance to CDSs. 

And yet the big boys keep playing with fire.  And the big boys keep cashing out.  Want to know what's really going on?  Look at insider selling.  Look at how desperate the government is to find out which foreign countries are helping the big boys stash their cash.

Don't kid yourselves.  The rats have all built life rafts and private planes to get to them.  Like building nuclear weapons with the power to destroy the earth many time over, they have taken out a collective $650 trillion in derivative insurance* to help them sleep at night while they wait for the inevitable.

*the entire world is comprised of only $75 trillion in man-made assets, so good luck collecting....

And the Average Joes, who know they'll never escape, keep living on credit cards like there's no tomorrow. 

And the government?  Fiddle, Nero, fiddle.


Wealth Shift.  Wealth Shift.  Wealth Shift.  Round and round it goes.  Where it stops...