Deduced Reckoning

June 30, 2009

Bearish signals

Filed under: Investing — bandsma @ 4:00 pm

A few data points that indicate the market has topped out:

  1. Equity issuances at a record high
  2. Highest correlation between markets on record
  3. Global trade continues to decline

June 26, 2009

New Trades

Filed under: Investing — bandsma @ 12:22 pm

SHORT OIL

Rarely do I follow investment advice that I hear on TV or the radio. The format and the target audience just does not allow for good indepth research. Plus any analyst who is good at their job does not need to pander to the mom-and-pop retail investor crowd to earn their salt. For the first time ever I am actually going to put on a trade based off of an interview with Stephen Short of the Short Report (I believe this is what they said his name and affiliation was but I can’t find anything on the web) I heard this morning on Bloomberg Radio.

Three things he said that made sense to me:

  1. Oil has moved three standard deviations away from natural gas.
  2. Oil is moving primarily as an inflation hedge by Wall Street.
  3. Oil inventories are at a historically high level.

Prices are supposed to manage supply and demand. Higher prices signal producers to produce more and consumers to consume less. Consumers are consuming less and at this price level it continues to make sense for producers to continue to produce. So as a result inventories continue to go up.

Eventually the supply-demand fundamentals will take over as a key price driver as inflation will not appear anytime soon. Such a controversial call on inflation requires a more direct, detailed argument to back up the claim. I will put together a longer piece on inflation in the coming days but for now sufficed to say that money supply growth does eventually lead to inflation but currently the mechanisms that drive that equation are not functioning. And I am seeing no signs that they will start to do so any time soon.

Eventually those buying oil as an inflation hedge will tire of the trade as it fails to come true . Therefore I am buying the Proshares double short oil ETF (NYSE: DTO).

 

DU PONT

So if I’m so negative on the market that I’m shorting the S&P 500 and Oil why am I buying anything? Because my shorts are near term calls on the market. I see I.E. du Pont de Nemours and Companyas a longer-term call on emerging sciences like bio-tech and nano-tech. Like most of you I had considered DuPont a tired old industrial commodities company but I have been coming across the company name more and more in technical journals. After looking at DuPont’s R&D pipeline I started to realize DuPont is a cheap stock with a strong balance sheet and very good existing defendable business lines that could eventually see a very strong growth spurt if even a small number of it’s current R&D projects evolve into commercially viable products.

One of DuPont’s products that I am excited about right now is active matrix organic light emitting diodes (AMOLED). Without getting too technical,  AMOLEDs are growing to be the preferred display technology because they are smaller, lighter, less power hungry and most importantly – cheaper. AMOLEDs are showing up more and more in smartphones, which have been one of the few bright spots in the current weak economy. The second half of this year will see a whole slew of new smartphones which will be using this technology. Eventually we will start to see them in netbooks, notebooks and over time, televisions.

I expect that we will see more and more good things like this from DuPont over time. In the mean time while you wait for your free option to monetize DuPont will pay you a 6.6% dividend yield. Not a bad return in these volatile times.

I am putting a long-term buy on I.E. du Pont de Nemours and Company (NYSE: DD).

China calls for world reserve currency

Filed under: Economics, Money Supply — bandsma @ 8:51 am

Sorry China but it just isn’t going to happen unless the US backs it up, and why would we? Being the world’s reserve currency gives you a lot of flexibility to manage your own domestic economy.

Here’s a better idea China – stop buying US debt. But that isn’t going to happen because it means the renminbi will appreciate, China’s export surplus will start to decline and Chinese firms will have to lay people off. Higher unemployment, with little social safety net, leads to unrest and this is the number one concern for the communist government. The recent political history of China is one of riots and revolts from a disaffected population leading to a new government, including the communist government. The politicians understand this equation which is why they are looking for a way to further game the system rather than cut their growth via export strategy.

June 18, 2009

Want to feel like you’ve wasted your life?

Filed under: Evolution of Technology, Investing, TED Talks — bandsma @ 12:27 pm

Watch this TED Talk with Catherine Mohr and then read the speaker’s Bio on LinkedIn. I can’t remember seeing a TED Talk where the speaker got such a rousing standing ovation.

I now have a huge inferiority complex.

But at least I can buy a little bit of her genius: ISRG

June 17, 2009

Financial markets, to regulate or not

Filed under: Economics — bandsma @ 4:18 pm

I was listening to a interview of Ron Paul today on Bloomberg discussing Obama’s announcement regarding a new financial market regualtory regime. It struck me as he was arguing against regulating financial markets at all that it is akin to arguing against medical intervention and allowing natural selection to take it’s course and cull the weaker members of our population lest it weaken the population as a whole. It sounds like a plausible idea in theory but not so practical or moral in reality. I’ve done a lot of reading on financial history and pre-Federal Reserve days is not something I’d like to see us go back to.

Using the medical analogy for central bank intervention and monetary policy we are probably at the point where we are moving past bloodletting but certainly no where near the equivalent of modern medicine. Just because we don’t have it quite right yet doesn’t mean that we won’t eventually get there nor should we give up the goal of making a more stable economic system.

June 11, 2009

The most popular econ/finance blogs

Filed under: Uncategorized — bandsma @ 4:37 pm

How am I going to compete? Apparently the #1 and #2 blogs in the economics or finance space are Calculated Risk and Mish’s Global Economic Trends respectively. Calculated Risk is pretty good with lots of great data but as the author is retired I just can’t compete with content quantity. Mish was started by a out-of-work IT guy. WTF?!?! Though to his credit he does pretty well for his level of experience. But judging from the comments at both which tend to start with – “First” – I hope I do not attract this kind of crowd anyway. I hope that I can attract the kind of crowd that thinks reading textbooks on a Saturday night is fun, despite not currently taking any classes.

The first stage though is to get any readers at all. My daily peak so far was 10 page views. I can’t even seem to get family members to consistantly visit. Maybe I need to spice things up a bit and post Maxim-like photos of semi-naked women between my bits on economic policy and market performance. For any of my dozen or so irregular readers I am open to suggestions.

Milton Friedman optomistic on the US economy end of 2005

Filed under: Economics, The Great Unwind — bandsma @ 4:09 pm

Perusing the Charlie Rose archives I came across this little gem of an interview of Milton Friedman from December 2005. I have a great deal of respect for Dr. Friedman but his praise of the US economy and downplaying of the impact of the rising US debt levels at that time stands in stark contrast to the eventual outcome.

Though I’m open to further discussion, I’m currently not in the camp that lays too much of the blame of the current economic crisis at the foot of Greenspan or the Fed.  Some cite the interest rate policies of the Fed under Greenspan as creating an easy money fueled expansion. But the Fed only has moderate control on short-term rates. The  short-term rates that the Fed controls had been trending up until the later half of 2007.  But longer-term rates which the Fed has almost no control over had been trending down over the same period, which is more a reflection of the supply and demand of capital and the global savings glut which has been primarily fueled by the monetary policies of Asian countries. If the Fed was printing too much money we should have seen interest rates going up as lenders would want to be compensated for the impact of inflation.

If you really want to argue that Fed policies contributed to our current calamity you have to start from the point were the growth of debt in the US really started to break out which was in October 1982 when Volcker “temporarily” shifted Fed policy away from targeting money supply growth to targeting short-term interest rates, but for some reason the Fed never went back.

There is a lot of things that could be said about some of Friedman’s comments here but one thing is for certain is that Friedman’s main weakness is that he errs on the side of optimism. The one thing I do want to highlight however is his point where he talks about Reagan’s popularity going down dramatically when Volcker put the breaks on inflation and the economy weakened as a result. He said that if you are going to make those hard decisions you should do it at the beginning of your administration. Unfortunately this is not advice that Obama is likely to hear.

I wish there was a 24-hour Charlie Rose channel

Filed under: Economics, Politics — bandsma @ 2:58 pm

I don’t know what the magic formula is but the conversations on Charlie Rose just go to a whole nutha’ level. It’s especially surprising considering that Bill Moyers, who wears his biases on his sleeve, claims to have “discovered” him and helped him establish his program.

I love this discussion about what the US needs to do to deal with the fiscal deficit. Lots of well reasoned points and extremely constructive. It kind of gives you hope that there is still a valid brain trust in this country.

It is sorry to say that the issue is not one of democrats or republicans being responsible but stem rather from the unwillingness of the general American public to make the hard decisions about what to cut necessary to reduce spending.

June 3, 2009

April and May performance

Filed under: Investing — bandsma @ 3:05 pm

Despite being effectively 30% short and 85% long since April 22nd I have only had 108 basis points underperformance with the market over the last two months. The saving grace was my large position in Netease which continues to set new highs.

Citadel Investment Group said their YTD performance is 21%. I’m a bit behind at 18.31%. But then if I was a hedge fund I’d be just 613 basis points shy of my high water mark. That’s a lot more than Ken ‘Whiney Boy’ Griffith can say. According the the linked article supposedly Citadel still needs 8,000 basis points to get back to charging performance fees.

Addendum: Apparently I am also far ahead of Renaissance. But to be fair unlike Renaissance I don’t have seperate funds that I can allocate trades based on whether or not I make money from them. So its not really an apples-to-apples comparison.

May 29, 2009

A few notes from a luncheon with Prof. Stiglitz

Filed under: Economics, The Great Unwind — bandsma @ 3:12 pm

These are some rough notes I took from a talk given by Professor Joseph E. Stiglitz yesterday at a private event. Though I’m sure it wasn’t anything he hasn’t said elsewhere. I would have to agree with him on almost everything. In fact I anticipated almost everything he said simply because I reference the same data and have the exact same interpretations.

Prof. Stiglitz frames the current economic environment from the point of the Asian currency crisis. The lesson Asian countries learned from that experience is to maintain currency reserves. Effectively this is just another form of savings. Therefore Asia suffered from a lack of aggregate demand/over-savings. But Asian countries’ actions by building reserves in USD had the effect of lowering interest rates in the US and helping to encourage increasing consumption. (Me: low interest rates effectively sent a false signal to US households that they should reduce savings and increase consumption. Sub-prime was a symptom of this and not a cause itself of the crisis.) The US consumer was the global aggregate demand but now the household savings rate will likely continue to trend up and reach 10%. China and India will not be able to fill this gap because consumer spending in these countries is so small relative to the US.

We are not at the bottom and things could still get materially worse from here. We got to this position by overspending. Essentially the economy has stabilized because the government filled in the gap left by the consumers retrenching, and as a country, we are just continuing to overspend. But what happens when government spending inevitably scales back – voluntarily or not?

He expects that unemployment will continue to go up in the US. Just cited average forecast of 10.5%.

We can’t go back to 2007 because that was fueled by lax credit standards and overspending. Those days are gone and they are not coming back.

This downturn is not like others in that there is no room for anyone to export their way out of it.  Stiglitz expects that there will be an L-shaped recovery more like Japan than anything else.

Economists like to think that economics and monetary policy today is more sophisticated and therefore we will not see another great depression. But Indonesia saw unemployment rates of 40% during the currency crisis. This was a direct result of economic policies forced on them by western economists from the IMF. So this does not baud well for the current US situation. (Me: True but as he said in his book Globalization and Its Discontents the IMF forced policies on Asia that it would not or could not do to the US.) Indonesia was able to export its way out of their problems but the US does not have that option.

The Fed says don’t worry. They will pull back on liquidity exactly at the right time so that the economy won’t get to hot or too cold. But the Fed doesn’t have a great track record. Thinks they have a bias against inflation so that they would tend to put on the breaks too quickly.

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