The Deipnosophist

Where the science of investing becomes an art of living

My Photo
Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

30 May 2006

Quickly, briefly...

This sell-off in the markets not only re-asserts itself, but it worsens and thus likely deepens the location for the ultimate low. I retreated to cash weeks ago, and remain there. Trading positions prove ephemeral: AAPL, MRVL, and SNDK were each sold long ago; RACK likely soon. (It will most probably double-bottom, assuming the bullish resolution of this budding pattern.) Investment positions linger, as always.

New and interesting opportunities repeatedly crop up; however, the market is in buzz-saw mode -- it chops down everything within sight. Do not allow the market's many (bullish) feints to gull you; continue to trade carefully, diligently, and with close stops - as I warned ~3 weeks ago. Who knows how low, 'low' truly is...?

-- David M Gordon / The Deipnosophist

26 May 2006

Housing market weakness spreading - Scott Grannis

The attached charts present the best picture to date of a housing market that is clearly deteriorating, driven down by a 120 bps increase in mortgage rates since last summer. It's encouraging that home prices are still generally flat to up somewhat, but with activity slowing rapidly I imagine that prices are likely to begin falling by year end, if not sooner. The only question now is the extent to which things deteriorate further, and how much of an impact this has on the rest of the economy. In that regard it is still the case that federal and state tax receipts are growing by record amounts, and corporate profits remain very strong. Interest rates have been driven higher largely because economic growth has proved to be much more resilient than most people thought, so while higher interest rates are taking a bite out of housing on the margin, they needn't signal slower overall economic growth going forward. The Fed has raised short-term interest rates 400 bps in the past two years, but in real terms interest rates are still only about average.

[click on images to enlarge]

In any event, all eyes are now on the housing slowdown. Whether or not it makes a significant dent in the economy will be the key thing to watch for as the summer unfolds.

Scott Grannis
Chief Economist
Western Asset Management

The "All Allan Effect"

Read this post, and then view the chart below.

[click on image to enlarge]

Really, now, what more need one say? How about this...? If you do not read regularly Allan Harris, you deal yourself a grave disservice.

-- David M Gordon / The Deipnosophist

23 May 2006

Rack 'em up! - The Sequel

No matter how bullish or bearish an investor might be on any given situation, things change. Sheesh, you should not have to pay this site's hefty subscription fee to learn such a self-evident truth. And yet it remains a reality that seemingly surprises investors again and again.

For example, the decline in the market the past ~2 weeks. I warned you that it would occur before it began -- and provided the reasons why. But investors require the complex to explain the simple. So they quest for ex post facto explanations from people who never even saw it coming! Rather than ask those who did. Oh well.

Perhaps my most mis-understood post was this post re Rackable Systems/RACK. (At least it is so far; I feel confident there will be others. :-) My objective in writing it was to show the genesis of an opportunity as it unfolds real time -- from its first notice to its purchase; when, why, and how, etc. That initial post was to show that the key item that attracts me (and which does not necessarily mean that I consider it beyond that starting point), is resolute strength of the share price. RACK displayed that strength, rising to $56 from ~$13 in ~5 months. While recognizing that strength -- and the stronger the better -- I also recognize that things change; that the displayed primary up trend will give way to a decline, which itself should setup a new intermediate term base that endures for a minimum 3-6 months. During that interregnum, I perform my due diligence: does this stock truly merit my attention? Is it an opportunity? For how long? Etc. The fruits of this labor -- from first notice through due diligence to recognition of it as an investment opportunity that appeals to me -- were the subject of the initial post. What remained to unfold was the decline that would set up the base that garners my investment interest -- and dollars.

Which all is precisely what has transpired since my post, as thought, and right on schedule. In fact, although RACK shares have tumbled to ~$32 from $56, thereby scaring the bejeezus out of most investors, the shares have declined beautifully. Huh? Everything about this decline to date tells me that it is a correction in the stock price rather than a bear market for the company; the difference is that the share price will recover, and go on to new highs.

[click image to enlarge]

And here is the rub: while I expect my favored investment opportunities to be stronger than most during price advances, I demand they also be less weak than most during declines. And to conform to area patterns as they build. For example, whereas I had expected RACK to decline as low as ~$28 at the time I wrote the original post, I now revise that estimation to ~$32, very near to this past Friday's (5.19) intra-day low trade ($32.61). Why is that? Look at the chart above. Trend line 1 captures the important low trades of this primary up trend, if it continues. (Otherwise, it is incorrectly identified. Recall Rule 1 of an up trend line: it captures each low prior to a subsequent higher high; thus line 1 anticipates a higher high, higher than $56.) It shows Friday's low as tagging the line. Moreover, trend line 2 shows why the $32 again is notable support. And then there is item 3, the quickly-rising 200 day simple moving average, which itself is only weeks away from the same $32 support price. So there are three reasons why the share price for RACK should hold at this particular level. It is also why I will repeatedly purchase the shares in that zone: I prefer to purchase as close as possible to my sell stop.

I admit my methodology is not for everyone. Most investors require the market to ratify first their 'analysis' before taking action. Nothing wrong with that thesis, I suppose. The price of certainty, however, is the debasement of inherent value. Certainty itself is not a reward.

Consider that most investors reach for the news to explain the decline; in this instance, both of RACK as well as the market. And the 'news' for Rackable Systems/RACK right now is laden with all manner of reasons (rationale) as to why the shares should plummet even lower from here. Yawn. Not having expected either decline (that of RACK or the market), investors remain as confused and empty-handed as ever.

Learn patterns -- which do recur, and reliably so! -- and rarely again be surprised by market action. Or don't, and do. The decision, as always, is yours.
-- David M Gordon / The Deipnosophist

18 May 2006

The Thread of Life

My overwhelming (overweening?) thoughts of late have me caught betwixt and between, neither here nor there; a jumble. I never did write the post promised last weekend. At least not yet, as time has eluded my clutches. Too, I depart later today, and will be away and incommunicado for several days. I will write it, however, upon my return (next week).

Until then, I leave you with my thoughts -- or some measure of them -- captured wonderfully and brilliantly by the phenomenally talented poet, Christina Rossetti...

The Thread of Life
The irresponsive silence of the land,
The irresponsive sounding of the sea,
Speak both one message of one sense to me:--
Aloof, aloof, we stand aloof, so stand
Thou too aloof bound with the flawless band
Of inner solitude; we bind not thee;
But who from thy self-chain shall set thee free?
What heart shall touch thy heart? what hand thy hand?--
And I am sometimes proud and sometimes meek,
And sometimes I remember days of old
When fellowship seemed not so far to seek
And all the world and I seemed much less cold,
And at the rainbow's foot lay surely gold,
And hope felt strong and life itself not weak.
Thus am I mine own prison. Everything
Around me free and sunny and at ease:
Or if in shadow, in a shade of trees
Which the sun kisses, where the gay birds sing
And where all winds make various murmuring;
Where bees are found, with honey for the bees;
Where sounds are music, and where silences
Are music of an unlike fashioning.
Then gaze I at the merrymaking crew,
And smile a moment and a moment sigh
Thinking: Why can I not rejoice with you?
But soon I put the foolish fancy by:
I am not what I have nor what I do;
But what I was I am, I am even I.

Therefore myself is that one only thing
I hold to use or waste, to keep or give;
My sole possession every day I live,
And still mine own despite Time's winnowing.
Ever mine own, while moons and seasons bring
From crudeness ripeness mellow and sanitive;
Ever mine own, till Death shall ply his sieve;
And still mine own, when saints break grave and sing.
And this myself as king unto my King
I give, to Him Who gave Himself for me;
Who gives Himself to me, and bids me sing
A sweet new song of His redeemed set free;
he bids me sing: O death, where is thy sting?
And sing: O grave, where is thy victory?
-- Christina Rossetti

"I am not what I have nor what I do; But what I was I am, I am even I."
Hmm, is that the truth, or what...? :-)
-- David M Gordon / The Deipnosophist

17 May 2006

Barry Eisler tours the world...

... in support of his most recent novel, The Last Assassin, Book 5 in the series that features the derring-do and gimlet-eyed perspectives of assassin, John Rain. (My review of the novel can be read here.)

Plan on attending and meeting Barry during a whistle stop on his tour near you. Barry is smart as a whip, a raconteur, and about as nice a person as they come, so your time would be well spent.

And tell him I sent you!
-- David M Gordon / The Deipnosophist

16 May 2006

In which capitalism is put through the wringer

In posting this comment, "Jorge Loco" indicated it might deserve its own thread. I agree, so have moved it here. Please offer your comments in response, if so inclined.
First, I would like to start by saying that I'm not sure if a comment is the correct place for what I'm about to say. If it is not, please do not flame me readers of "The Deipnosophist," and simply allow David a moment to remove my comments. For while I do use technology extensively; I am not 'hip' to the current trends of blogging.

David, you asked me to take a look at your website, because you were interested in increasing ... the number of intelligent responses, and while I'm not sure I'm the best choice to start with, I will do my best. Though I am writing this comment attached to "Standing perpendicular to the world," I do believe it is possibly it's own 'thread?'

The comment I would like to humbly offer is an observation I have not only concerning yourself, but others who I will refer to as 'day traders.' Before I continue, however; I would like to denote that I only have a cursory understanding of economic and market theory. I make extrapolations to what I have learned in courses/reading as an engineer or hard scientist would. Furthermore, please do not take my comment in a negative light for its sole purpose is to engage in discussion in order to promote a further understanding of the world around us.

I will now attempt to convey my comment in what will hopefully be one of the intelligent responses you are attempting to cultivate. In your 'About Me' section of "The Deipnosophist", you state the following:
==> "Life is more about the quality of our relationships rather than the quantity of money we amass."
You continue in the section, "Standing perpendicular to the world," to state:
==> "I am a swing trader who hopes to catch the bulk of each primary movement, my time frame is ~6 months."

Now without going into all of the many different ideas, thoughts, concepts, and quandries I entertain concerning our (meaning a variety of scopes) economic environment; I would like to in a sincere fashion ask, "What is the value of 'investing' on the timescale of ~6 months, or in a more extreme fashion, a few hours/day(s)?"*

When I say value, I do not mean the obvious immediate value of making money for the trader in question. What I refer to by value is the value to society and/or economy as a whole. From my perspective, based on my limited education and experience in this arena, the 'markets' are nothing more than a perpetuated fallacy created by and for most traders. Even for people who truly wish to 'invest,' they are in most cases not able to truly do so due to the extremely high 'price' to 'worth' ratios in most major markets today be it stocks, real estate, etc. After all, in my mind the purpose for 'investing,' for 'stocks' should be to raise capital to accomplish some company's objective(s), while sharing the risk and benefits of the results of said company's endeavors and a form of sustainable partnership.

I feel that today's traders are... irresponsible towards society as a whole. After all, stock brokers get paid on the 'trading' of shares, similar to how credit card companies make money. Day traders seem to make money from gambling on a stock's short term perception of worth. So from a broker's perspective in a simplistic sense, the more trades the better, for every trade means more money. But this in turn creates a 'false priority' for both investors and companies. Many companies are chasing myths of perceived future worth, that in any other scenario would be obviously impossible.

I personally would like to see 'investing'* in stocks to be changed in a fundamental fashion (though due to my ignorance in economics, this may have already been tried at some point in history.) I would like to see a mandatory hold period in all stocks of say... five years. I pick five years because that seems to be the statistical determining benchmark in determining a company's long-term viability and in part arbitrarily due to my own guess at what would make people change their outlook on the market.

I am interested in your ideas, David, on what I have said, as well as those of your other readers who are interested in an open and positive exploration of ideas. Also, while there are many tangents, some close, some far to this particular 'thread,' I have endeavored to limit its scope in a practical manner.

Thank you for your time, sincerely,
~ JL

* Note: I am excluding certain short-range investment opportunities (which could quite possibly be considered from my perspective, the equivalent of loans; i.e. some (but not all) implementations of futures markets.
Thank you for adding your comments. For the record, I should note I welcome all comments but especially treasure intelligent comments, of which this blog's readers specialize. Too, I agree with many of your comments, although you would be better served to leave off the editorializations ("gambling"), etc. After all, "One man's Persian is another man's Mead."

You seemingly believe that a single person (or entity, governmental body, etc) is smarter or better informed than the lumpen proletariat. And that person should decree what is best for all. Well, I believe that each investor knows himself or herself better than some all-knowing overseer. Moreover, I believe each person everywhere to be unique, and therefore the quest to mandate private behavior is doomed from the get-go; but especially so in a 'free' society. Of course, society might attempt to encourage certain behaviors -- for example, to change the holding period to 5 years (as in your example) to qualify for the preferential tax rate of a long term gain -- but the attempt to penalize instead behaviors not harmful to other people -- for example, to assess a surcharge tax for short term gains less than your preferred holding period -- is not a society in which I care to live. I believe there should be no preference rate whatsoever for capital gains of any holding period.

It seems you believe the duration of the holding period defines the validity of investment activity. I disagree. Investments made in which the issuing company receives the capital might be the sole type of that denotation. Secondary markets exist for very explicit reasons; the duration of an investor's holding period of shares purchased in the secondary market has zero validity on any level. That is, you cannot have it both ways: either it lacks validity, in which case you ignore it altogether or it has validity, in which case you attempt to regulate or institutionalize it, as you propose.

Remember this tidbit, however: all of those gains are taxed. (And short term gains are taxed at a higher rate than long term gains.) These tax revenues add to the coffers of our governmental bodies, which in turn finances or encourages other types of activities you possibly do support.

Apart from the increased tax revenues, I agree that my economic activity as an investor adds little value to the lives of other people... or even to the big picture. Certainly, my trading/investing creates nothing tangible; I am not building a refrigerator or car, etc. This is a matter I have dwelled upon for a long time. I yearn to be a part of something larger than myself; creating a community such as this one (and others, prior to this effort) is a manifestation of that effort. For as long as secondary markets exist and I have a talent for creating profits in them and on a consistently successful basis, then I will continue to share that expertise in the quest to help other people. It is, after all, my talent; perhaps even my sole talent. While the ostensible purpose of this blog is to help other people make money and to understand (better) the mechanisms of the secondary markets, its true purpose is to enrich my readers' lives and broaden their horizons via exposure to the humanities. That all sounds grandiose, I suppose, but it is what excites and motivates me. Hey, we each do what we can.

And if my personal visionquest helps only one person enrich their existence on whatever level is meaningful to him or her, then I am happy. To each his or her own.

-- David M Gordon / The Deipnosophist

14 May 2006

Standing perpendicular to the world

I participate in a private email circular, which activity helps me to hone my mind and perceptions. Recently, another participant responded to one of my posts to the email group, as follows...
"I foolishly traded out of gold stocks back around when NEM dropped back to 39 IIRC and now find myself in the all-too-familiar territory of regret AND fearing to chase a move that already has gotten away from me. (To my credit I took a pretty substantial position in silver play PAAS when it was in the 8s and it now approaches a triple.) Yet the recent threads similar to this one of yours have me thinking I need to "do something" more in this vein. I know you often post pieces because you find them interesting even though you personally have a different perspective. Would you be so kind as explicitly summarize your thoughts for the mid to long term? For me, although I continue to dabble in the market, I am more interested in my work than the market and therefore find myself thinking more in terms of sound portfolio diversification to protect myself from adverse trends and perhaps benefit from them. I already do have solid sized positions in XOM, SUN, BR, BP and some others of that ilk. I have a fairly substantial position in cash and near cash at the moment-- and have been so for long enough for this money to have missed a goodly amount of movement up."
To which I replied...
I think you needlessly confuse yourself; in fact, I believe most investors needlessly confuse themselves. Investing is easy; consistently successful investing is simple. We each choose to confound ourselves in the quest to make the simplex and the elegant into the complex.

You yourself state your interest is more in your work than the market, so why do you fret over every squiggle in the market? Define the time frame that is important to you — i.e., how much time you can look away to meanwhile pursue other goals — and then remain true to that understanding, to yourself. For example, because I am a swing trader who hopes to catch the bulk of each primary movement, my time frame is ~6 months; in thi role, I note certain patterns that fit within that time frame, and pay heed. Oh, and make money.

None of the preceding answers your direct question, of course. So let me state the following: everything — allow me to repeat that, EVERYTHING — hinges on the course of the US$. I think Stephen Roach [to be] something of a simpleton for believing a declining value of the US$ is not merely helpful but would cure all that ails the global economy. I understand his thesis re global imbalances but I disagree that a notional decline in the value of one currency (US$), key currency though it is, will change those imbalances except on global (not corporate) income statements and balance sheets.

I have been alone (here, at least) for a long time fretting over the course of the US$; long time readers here know that. I also have been alone fretting over a possible implosion of the obvious credit bubble. And for those readers who believe real estate is not a bubble — and whether or not it is one, it is dwarfed by the credit bubble — any one of many pins that might prick the credit bubble will rapidly deflate the real estate bubble, despite the bulls' shopworn cries of "Location, location, location!" A credit implosion, itself brought on by a collapsing value of the US$, would wreak havoc with our economy and the global economy. Enough said re this tired topic.

Re precious metals, and your feeling bereft because of bad timing… I would suggest you stop perceiving investing as a zero sum game — "If that declines in price/value, then this will increase in price/value, and I want to be aboard the latter" — and instead perceive your investments something like I do. I want to make more money than I lose with the declining value of the home currency; i.e., on an absolute and relative basis. To create a hypothetical example: if the home currency declines by 50%, then I must not only generate a positive absolute return but I must earn 100% on a comparative basis to retain PPP (purchasing power parity). It matters not at all to me what instrument garners the return; only that I generate the return. For those here who travel abroad often, they will understand immediately the urgency of this task. You are one of those people.

One more item: stop thinking this thought process: "I own it, so of course it will decline at some point. Oops, here is the decline now, SELL!" and "I am NOT long, and the stock is running away without me aboard — it will never again return to a comfortable place to buy." IOW, reconcile these two notions that cannot co-exist in our reality. Either stock prices oscillate. Or they do not.

And a final item: I am as dumb as they come. Knowing the limit of my bounded intelligence, my goal is only to make money, not be right. Once relieved of the emotional burden of having to prove myself right even when wrong, I was freed to make money. All the time, and under all market conditions.

My reply caused a 'conversation' to ensue between Scott Grannis (Chief Economist at Western Asset Management) and me. To wit...

Scott Grannis:
David, there is an inherent conflict in your concerns. Yes, the dollar is falling, and could fall more. Yes, there is a lot of credit out there. But a declining dollar will only add to the inflation pressures that are already significant, and rising inflation is a debtor's best friend! If you were certain that the dollar would decline significantly over the next 5 years, then my strongest recommendation would be to borrow as much money as you possibly can today. By the same logic, the "inflated" prices of US real estate will not seem so inflated in 5 years if all other prices rise by a considerable amount.

David Gordon:
Thank you for chiming in with your comments, Scott. As you know, I respect your insights.

I recognize the truth of what you say, especially in light of historical precedent (specifically, the 1970s). Back then, the quip quickly became, “It is not what you own, but how much you owe” that was the true measure of wealth. And that quip came about solely because of the truth of what you say: inflation debases the debt at the same time it erodes the value of the underlying asset. There comes a moment when one’s ability to repay the loan principal is of equal importance to his or her ability to service the debt on that loan. Consider the sub-prime loan market, in which loans are made to bad credit risks who lack the financial capacity to repay the principal, leave alone continue to service it (make regular interest payments). Many private RE loans today are 100% financing; no money down! For the right person, there is nothing inherently wrong with these loans. Unfortunately, they are made available to all. I understand that no bank in its ‘right mind’ shelves loans any longer; each instead seeks the fee income for the loan origination. Then the loans are packaged, and passed off to Wall Street’s clients. I see two primary risks for those investors...
1) Desirous of monthly income the loans instead are quickly re-paid causing the investor to scramble in his search for yield (especially in a declining interest rate environment).
2) Who seek the return of the principal and the borrower instead defaults.
When these birds come home to roost, who will be left holding this particular bag of tricks? Most investors, especially the retail investors, do not understand the potential for true calamity. Wall Street, and the mechanism of the markets, is a transferor of risk, not a guarantor.

On an economic and financial basis, the world today is more inter-connected (is that an oxymoron?) than ever before. Certainly, more so than the 1970s. (Perhaps only the 19-teens in recent memory represent a close parallel. I think we all recall the fallout then.) I liken it all to our (humanity’s) vainglorious attempt to (re-)build the Tower of Babel. The story always remains the same; only the facts change. A US$ that declines below a certain threshold — it need not precipitously collapse nor crash — could usher in certain changes in the global scoreboard. Stephen Roach and I agree on one item: the US is the engine of the world economy. We consume so much that if our consumption were to stop suddenly, the global economy would grind loudly, if not fall off its treadmill. We (Roach and I) part company when he states his belief that a declining US$ corrects the imbalances he sees: we must produce and sell more and consume less, whereas other nations must in turn produce less and consume more. (This is a horrid over-simplification of his belief.) And the world would be set to rights.

But rarely, if ever, does it work out that way. Although I disagree with several of its tenets, the HARPERS article shared last week is a helpful primer, especially with regard to the global recycling of the US$. I believe, as it indicates, that a declining US$ would slow, possibly even halt, inflows into the US; that rate of change alone would change global financial and economic dynamics. In fact, it might usher in outflows of capital. Which in turn could exacerbate a bad situation. The potential for disaster — if not, at minimum, calamity — is present. Whether it occurs is a different story altogether. The world typically muddles through each crisis, although many people are crushed by the Caterpillar tractor of history.

Because the world is predicated on the US$, its stability — nay, its strength — should be viewed as sacrosanct (the history has been anything but). And because the US represents the global consumer of first and last resort, negative changes here — a repatriation of foreign assets to other shores, etc — would have a ripple effect elsewhere, yes, but felt first here. The virtuous circle of the global recycling of $$ quickly becomes a vicious cycle; ever lower. The specific pin that pricks the credit bubble need not be a declining value of the US$ (heck, it could hold once again at this 85-80 level). It could be anything: a loss of confidence in the US, etc. There are many problems and potential fallout a collapse of credit and the decline of the US$ would bring about. Our nation has a history of debasing the value of its currency; embarrassingly so. At some point, the world will recoil; it always has. And then we no longer will be able to, in the words of Michael Haseltine, “Punch above our weight class.”

There are so many problems out there that afflict us: the dumbing down of our society, the hollowing out of our manufacturing base, etc (I just deleted an entire listing of concerns as OT) that this problem only weighs as one of many. In the end, a loss of confidence in the US$ would have negative repercussions for all. Thanks to seignorage and the primacy of the US$ -- at least as it exists for the nonce -- we would not immediately feel the impact, as you note. Inflation would play its part, and we would continue on our merry way. (Insert here Dorothy Parker’s quip.) Hell, for all I know, that is what we do now. That, in fact, we are on the downside of our hegemony.

For Joe and Jane Six-pack, they would feel it initially in their role as traveler. And they feel it now at the gas pump, as rising prices there take another nibble from their hide. Soon, they will notice that foreign goods purchased here will be more expensive, too expensive, to continue to purchase. So they will decide to purchase American. Only to discover that we don’t make anything here any longer. They discover their money buys less and less and less. So they must sell assets to pay current bills. It is then that those “For Sale” signs resemble surrender flags. “I give up!,” they seemingly cry.

I did not intend to wander into the land of potentiality, as I obviously have. I prefer to invest with what is; the reality of the marketplace: thousands of decisions made by thousands of investors, each smarter than me. And, in aggregate, way smarter than l’il old me. I did intend to indicate, however, that the financial climate today is an outgrowth of the 1970s, thanks in large part to people like Walter Wriston. Too, that a declining US$ would have a deleterious effect for everyone. And that the game of relative values (‘The discounted present value of future inflation,’ etc) is only that, a game. That the phrase “full faith and credit” once meant and stood for something; and it still should.

Increasingly, I grow horrified to learn that most people lack the financial wherewithal to live in a changed -- nay, changing -- financial world. Perhaps that means less income; perhaps it means the same level of income but that it purchases less. You and I, Scott — and probably everyone here — have the means and resources to ‘continue’ should a global financial and/or economic calamity strike. Most people, I daresay, do not. I am frightened for them. As such, I hope none of the dire forecasts come true.

But certainly, global markets make their bets. Every day. We, you and I, can see that. We might not agree as to the outcome, we might not even agree as to the potential, but we likely agree that the markets are priced for perfection while under the surface, the waters boil.

I think I will continue as I have; to live within my means. Who needs grief?
In all the years I have read Scott’s commentaries, I rarely, if ever, have known him to be as direct, straight-forward, and cogent, as he is in the message below. There is a lot packed into each sentence and paragraph. Please pay heed to Scott's next reply... Of course, you could continue your quest to find ‘answers’ elsewhere, but Scott’s message below is as clear as they come.

Scott Grannis:
The dollar is clearly under siege. On the one hand the Bernanke Fed has decided to announce that it is considering a "pause" in its tightening campaign, at a time when sensitive prices are signaling that the market desperately wants more. On the other hand the Bush administration is completely disregarding all common sense and appears eager to embrace a weaker dollar vis a vis all Asian currencies (which would be the likely result of any significant revaluation of the yuan).

In this context, it is not surprising to see precious metals soaring and the yield curve steepening and breakeven spreads on TIPS widening and equity prices declining. Most amazing, from my perspective, is that bond market is still in deep denial of the inflation risks that are surfacing in every direction. All are part of the same story. Not good, not good at all. The parallels to the 1970s are growing stronger with every passing week. Complacency is rampant, as reflected in a relatively low VIX and a very low MOVE index (implied volatility in bond options).

This all adds up to a reason to be worried, since the current state of affairs is not something that can persist for very long. Something has to happen, and it could be any of a number of things. But unless some major change in Bernanke's mindset occurs, the result of all this in the end will be higher inflation and higher interest rates. Buckle up, its going to be a wild ride.

I've been searching for ways to hedge equity exposure, and so far the best thing I've come up with is to short long-dated eurodollar futures contracts (1, 2, and 3 years out). Rising inflation will eventually get the Fed's attention, and the result would be substantially higher short-term interest rates, thus giving this position a nice profit. If I'm wrong, then not much happens to short-term interest rates, which is what the bond market in all its wisdom is currently projecting.
And how about that "standing perpendicular..."? The ultimate in stability is to remain in one place for a specific measure of time, while the ultimate in change is to travel a specific measure of space while remaining still in time. Investing confounds this understanding because investing conflates the two: price trends transcend the dimensions of space and time while remaining circumscribed by them. As long as the world is a flux system, I prefer to remain mutable.
by Percy Bysshe Shelley
We are as clouds that veil the midnight moon;
How restlessly they speed, and gleam, and quiver,
Streaking the darkness radiantly! -yet soon
Night closes round, and they are lost for ever:

Or like forgotten lyres, whose dissonant strings
Give various response to each varying blast,
To whose frail frame no second motion brings
One mood or modulation like the last.

We rest. -A dream has power to poison sleep;
We rise. -One wandering thought pollutes the day;
We feel, conceive or reason, laugh or weep;
Embrace fond woe, or cast our cares away:

It is the same! -For, be it joy or sorrow,
The path of its departure still is free:
Man's yesterday may ne'er be like his morrow;
Nought may endure but Mutablilty.

-- David M Gordon / The Deipnosophist

Can you afford to retire?

Baby boomers are in for a rude surprise, according to this FRONTLINE investigation: As corporations shed responsibility for retirement, 401(k) plans are in trouble and pensions are becoming a thing of the past. Coupled with longer life spans and insufficient savings, that means financial calamity may loom not only for the boomers but also for the entire economy their spending fuels.

Tuesday, 16 May at 9pm; PBS; check local listings.
-- David M Gordon / The Deipnosophist

11 May 2006

A shot across the bow

Recent bearish market action is the same action I recently have been warning about, in spite of the recovery highs recently recorded: bearish setups, sudden failures (think TEVA), lack of positive follow-through to seemingly bullish news, poor (read, negative) inter-market relationships (tumbling US$, rising oil prices, rising interest rates), etc... And all conflated by the typical seasonal weakness. In a word, not good. (Oops, make that two words!)

This upcoming patch of market time we now face looks not at all promising for the bulls. As I scan the markets, the patterns I see are not bullish setups. As such, I have sold down my portfolio to my "sleeping point" -- and probably will step aside, and perhaps even away from the markets for a protracted period. Even my most highly-prized favorites likely will not withstand the coming fusillade.

Be aware. Be wary. Be prepared.
-- David M Gordon / The Deipnosophist

Federal revenues still robust, but Fed looking for a slowdown

The commentary that follows is by Scott Grannis, Chief Economist at Western Asset Management.
-- David M Gordon / The Deipnosophist
Federal revenues continued to surprise on the upside last month. Indeed, the surge in taxes paid to the Treasury has no historical equal. Revenues have soared almost 10% in inflation-adjusted terms for fully two years now. As a result, the deficit over the past 12 months has fallen to $265 billion, down sharply from its high of $455 billion two years ago, and it now represents a mere 2% of GDP. The Bush tax cuts were likely contributors to this outstanding performance, so it is a great relief to know that Congress has finally agreed to extend the cuts for another two years (through 2010). Fantastic growth in corporate profits, personal incomes, and capital gains are the drivers behind this revenue gusher. Not surprisingly, the Dow Industrials index is within inches of reaching a new all-time high, and the Dow Transports index is well into record-high territory. Reflecting robust demand conditions globally, commodities continue to move broadly higher. (Sugar has tripled in the past two years, copper has tripled, oil has almost doubled.)

[click on image to enlarge]

What is perhaps surprising is that despite all this good news on the economy, both the bond market and the Fed are expecting the economy to slow down. The FOMC made its case explicitly today, citing as reasons for a slowdown a "cooling" of the housing market (which has indeed been slowing for almost one year now), the drag of expensive energy, and the lagged effects of higher interest rates. A relatively flat yield curve is the bond market's way of predicting a slowdown, since it assumes that the Fed will not need to raise rates much further if the economy slows. The slowdown that is supposedly just around the corner is very important, because it is assumed that a slower economy will reduce the inflation pressures that are being signalled by $700 gold and a weaker dollar.

Thus we have the makings of a double bank shot in the bond market. Not only is the economy expected to slow, but that slowing is expected to reduce inflation pressures. Both assumptions need to be right, but both assumptions run counter to current evidence. If either assumption is wrong, the Fed is likely to continue to raise rates.

08 May 2006

Paradise Sold

Fascinating article that, in the process of reviewing two recent books, alerts you to what you truly buy when you buy organic. Of course, no article about organic food would be complete without mentioning long time favored investment, Whole Foods Markets/WFMI...
The share price of the Whole Foods Market, Inc., now stands at $62.49. Adjusting for stock splits and dividends, one share would have cost you $2.92 when the company opened on Nasdaq, in January of 1992, so it has done extremely well. Last year, its total revenue was more than $5 billion and its gross profit was more than $1.6 billion. In 2004, according to the Financial Times, Whole Foods was “the fastest-growing mass retailer in the US, with same-store sales rising 17.1 per cent quarter-on-quarter.” Having opened in 1978 with a single countercultural vegetarian establishment in Austin, Texas, Whole Foods now has a hundred and eighty-one natural-food supermarkets, including many acquired in purchases of smaller chains: among them, Wellspring Grocery, in 1991; Bread & Circus, in 1992; Mrs. Gooch’s Natural Foods, in 1993; and Fresh Fields, in 1996. In 2004, Whole Foods opened a fifty-eight-thousand-square-foot mega-mart in the new Time Warner Center, at Columbus Circle, with forty-two cash registers, a two-hundred-and-forty-eight-seat café, and three hundred and ninety employees. “Our goal is to provide New Yorkers with an engaging shopping experience and to become an integral part of this truly unique community,” a company executive said. And in 2004 Whole Foods crossed the Atlantic, acquiring six Fresh & Wild stores in London and making plans to open others there under its own name. Its ambitions are global.
Continue reading here.

-- David M Gordon / The Deipnosophist

Rise and shine at Google

In his typical style, Robert Cringely waxes fanciful in Part 1 of 2 parts as to "...why Microsoft is headed down and Google is headed up."
"Right now in computing and the Internet, there are four fundamental forces to be reckoned with -- Google, Intel, Microsoft, and Yahoo... Of these companies, only Intel actually makes hardware and so it acts as a surrogate for the entire hardware industry -- an industry in decline."
"You'll notice, for example, that I didn't include Sun in my list of vital companies. That's not so much because Sun can be defined in terms of the others but that Sun is simply doomed..."
"Microsoft is a dinosaur that survives and will continue to survive because it has been anticipating misfortune, well, since forever. But for all its survivor instinct and cash in the bank, Microsoft is trapped by an antiquated business theory."
In this essay, Cringely also shreds Yahoo/YHOO's strategy in some surprisingly interesting comments. As to why he believes Google/GOOG is on the ascendant, we must await next week's Part 2.
-- David M Gordon / The Deipnosophist

07 May 2006

Understanding Secular Bear Markets

Some of the information included in this essay, Understanding Secular Bear Markets: Concerns and Strategies for Financial Planners is questionable, either in perspective, approach, or foundational validity. But that alone does not make the entire essay suspect; certainly, its included tables and figures are interesting.
-- David m Gordon / The Deipnosophist

Piper Jaffray re Apple Computer/AAPL

Piper Jaffray analyst, Gene Munster, addresses 22 unanswered questions re favored investment Apple Computer/AAPL (via AppleInsider)...
Why Are The Apple Retail Stores So Unique?
The difference between Apple retail stores and other stores is that Apple is hoping the real relationship with the customer starts when the customer is buying the product and is at check-out, while with other retail stores, the relationship with the customer ends at check-out. The goal of the Apple retail store is to move customers from making a one time purchase into becoming ongoing participants in the store. Apple wants people to keep revisiting Apple's offerings. Pro Care is an example of this: at $99 a year Pro Care is essentially a membership to the Apple store and all the resources that are available at the store. While the company does not disclose attach rates, we estimate about 25% of people who buy a Mac in an Apple retail store will buy Pro Care. If you assume that Apple will sell 200,000 Macs in its retail stores in CY07, that is 50,000 members at $99 a year, or $4.9m in income from store memberships. We believe the retail strategy gives customers the ability to go deep (Genius Bar and Studio) and, ultimately, buy more Apple products. It is the strong Apple service element that is really driving more revenue per customer. As a sidepoint, Apple is starting to create a more definable career path for its retail store workers (more full time positions) to try to retain its top employees.
Continue reading here.

As always, I welcome all comments, particularly from those readers especially savvy re Apple Computer's products. C'mon, don't be shy!

-- David M Gordon / The Deipnosophist

06 May 2006

The Star Spangled Banner

This essay by Isaac Asimov re the US’ national anthem is fascinating on several levels.
David M Gordon / The Deipnosophist

05 May 2006

Jobs market still healthy

The following commentary is by Scott Grannis, Chief Economist at Western Asset Management.
-- David M Gordon / The Deipnosophist

Bonds perked up this morning on news that payrolls rose only 138K instead of the expected 200K. But as the charts show, the April numbers were well within the range of normal fluctuations. The trends in place for jobs remain intact. Overall, jobs continue to grow by 1.5% per year, and private sector jobs continue to grow by 1.6% per year (government jobs are up only 0.6% in the past year). The 4-week average of weekly unemployment claims has risen a bit in the past few months, but from very low levels. Claims over the last six months are down at a 14% annual rate, about the same rate that prevailed through February. The labor force is growing a bit over 1% a year, so if current trends continue, the jobs market should tighten gradually and the unemployment rate should decline slowly. I see no sign yet of any slowdown in the jobs market, and the unemployment rate remains at a relatively low 4.7%.

[click on images to enlarge]

03 May 2006


Garmin/GRMN reports Q1 (Mar) earnings of $0.80 per share, $0.13 better than the Reuters Estimates consensus of $0.67; revenues rose 67.3% year/year to $322.3 million vs the $259.6 million consensus. Comany issues upside guidance for FY06, sees EPS of $3.40 vs. $3.25 consensus; sees FY06 revenues exceeding $1.4 bln vs. $1.31 bln consensus. Company also announced a 2-for-1 stock split and a post split dividend of $0.50 per share.

[click image to enlarge]

And from this eensy-teensy, little base (A, indicated), Instinet indicates GRMN shares will open at ~$95! 'Regular' pre-opening trading does not commence for another ~30 minutes; until then, this is the best indication of Wall Street's current demand.

I would say, "WOW!" but then I already did. Perhaps better, "A trend in motion..." and all that.
-- David M Gordon / The Deipnosophist

He returns

Jeez, I don't know, but it sure does look pretty entertaining to me...!
-- David M Gordon / THe Deipnosophist

02 May 2006

A hypnagogic myoclonic twitch

Is it not always so? The unsolicited and presumably informed comments stated elsewhere in re to this post about Rackable Systems/RACK is that he or she saw it first.

Yawn. These readers are seemingly unaware of what I was trying to betray -- specifically, what draws my attention to this stock vs that one. I am more interested in what will happen, not what has happened. Investors do not make money by buying what has happened, but what will happen. (The profit vs prophet syndrome.) When the moment to act is before me, I care only for what I do in the markets. The actions of other investors are portrayed already in summation in each daily bar, and those decisions in sum are the reflection of their due diligence, from both professionals and amateurs.

And, of course, there is the small fact that I believe RACK shares have need to decline first into a new intermediate term base. I thought I made that point clear, but perhaps not. I expect such action, and invest accordingly. I see(k) a specific pattern to emerge in bars that have yet to occur. And as many of you know (largely due to me constantly repeating myself! :-) I do not seek market action to ratify first my perspectives before investing; instead, I establish my positions knowing how patterns tend to build, to create themselves. The sole deterministic factor when investing is your behavior; how you act and react to each new signal. And that, I believe, is the Holy Grail of investing. Too many investors instead buy and sell on a wing and a prayer.

The foregoing is as true for Rackable Systems/RACK, as it is for Google/GOOG, Apple Computer/AAPL, and Teva Pharmaceuticals/TEVA, et alii. Place each pattern within its continuum, keeping in mind your time frame, and recognizing that all true patterns are replicable in all periodicities.

-- David M Gordon / The Deipnosophist

01 May 2006

HUGE breakout now in process...

... and the market has yet to open!

Teva Pharmaceuticals/TEVA, oft-recommended and for a long time now, is staging this moment the breakout from its base of the past 4 1/2 months. As of 6:00 am pdt, it has traded ~1,200,000 shares, ~25% of its average daily volume of 4,700,000. The high in pre-opening trading activity is $43.23; Friday's close is $40.50. I do not know the news to account for this sudden spurt of activity, but as soon as I learn it, I will share it.

[click image to enlarge]

The trend line of declining tops I have drawn in the chart above is one interpretation; I believe it is the correct one. It could be drawn more liberally -- connecting the intra-day highs, for example -- but in either identification, this moment is the one sought for lo the past 4 1/2 months. Of course, the shares could futz about today after the opening gap higher in price, but that would count as mere (short term) noise compared to the change in momentum: to suddenly bullish from meandering. Buy now, IF you are a breakout buyer. I know I will purchase more.
-- David M Gordon / The Deipnosophist

who's online