The Deipnosophist

Where the science of investing becomes an art of living

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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!

31 August 2006

The simple IQ test

"I got 100%. Got any more?"
For you, Jaquito -- and any other reader up to the challenge -- I offer this stripped down, plain vanilla, simple IQ test. (Give it a moment to load.) Set aside 13 minutes to begin and complete the exam; once the timer begins, it does not stop. That is, it is not solely an IQ test, but a race against the clock as well.

And do not neglect to report your score...
-- David M Gordon / The Deipnosophist


30 August 2006

What goes around comes around

Some readers might recall my chart analysis of Trico Marine Services/TRMA. Since that post, nothing has changed but 6 weeks of short term base building. And yesterday, TRMA broke out -- above and away -- from that base. Investor's Business Daily reports:

"Trico Marine Services/TRMA leapt 2.63 to 38.69. Trico, which provides support vessels for offshore oil and gas facilities worldwide, said four of its workers were safely released after being abducted from a supply ship off the Niger Delta."
I certainly would not attribute the breakout to the release of the company's abducted employees; I would attribute it to a stock that stairsteps higher: basebreakoutminor uptrendnew basebreakout... etc. Too, note the volume on yesterday's breakout; excellent indeed.

[click on image to enlarge]

This is a beautiful chart with excellent price and volume action, and with bases that recur regularly; the whole only gets better and better. TRMA readily avails itself to pattern analysis -- and profits! -- by the interested investor. But now I repeat myself from the original post.

Remember to thank Ray Seakan; he brought it to our attention.
-- David M Gordon / The Deipnosophist

How good is your 'score'...?

More to the point, just how familiar are you with this corner of the globe...?
-- David M Gordon / The Deipnosophist


28 August 2006

Housing downturn now very obvious + Capex still strong

The comments that follow are by Scott Grannis, Chief Economist at Western Asset Management.
-- David M Gordon / The Deipnosophist
Begin Scott Grannis...
Housing downturn now very obvious
These three charts make it pretty clear that we are in the midst of a
full-blown downturn in the U.S. housing market. The financial markets have been waiting for this for quite some time, and it's now no longer a rumor but an established fact. The inventory of unsold homes has almost doubled since the peak of the market early last year. An index of home builders' confidence has dropped by almost half. Residential building permits are down just over 20% from their high. The other shoe that has yet to drop is housing prices, which on average have stopped rising, according to the National Assoc. of Realtors, but will most likely fall in the months to come; the only question now is how far prices will eventually decline.

The trigger for the "bursting" of the housing bubble appears to be higher mortgage rates, which earlier this year were 140 basis points higher than their lows of last summer. Housing prices may have been "fair" at the mortgage rates that prevailed a year ago, but higher rates have tipped the affordability scales in the direction of lower prices, and it's now a buyer's market. With the Fed on the sidelines, the bond market has breathed a sigh of relief, and 30-year fixed mortgage rates have fallen 40 bps from their June highs. Adjustable mortgage rates are up 140 bps from the levels of last summer, but have been relatively stable for the past several months. Refinancing activity has actually picked up in the past month, and applications for new mortgages have stopped falling. So the news is not all bad, but it's hard to imagine that housing won't continue to deteriorate over the next year.

As the second and third charts suggest, a housing downturn on the scale of the one we're witnessing could be signalling a recession, and that would be the third shoe to drop, as it were. However, there are a number of indicators that are still flashing very healthy signals for the economy: tax revenues are still flooding into state and federal treasuries; corporate profits are at all-time highs; weekly claims for unemployment are still trending down; the real Fed funds rate, currently a bit less than 2%, is far below the 4% that has preceded every recession for the past 40 years; the yield curve is not inverted; tax burdens are not particularly high; business capex is still rising; the ISM index is still a healthy 55, far above the 45 which typically signals a recession; and industrial production is accelerating both here and abroad. It's also important to note that residential construction is a much smaller part of the economy today than it has been in the past: building permits today are about the same as they were in 1984, but the economy today is twice the size it was then.

The housing slowdown will certainly contribute to slow the economy, but probably not enough to qualify as a recession. And even if prices decline significantly, it wouldn't necessarily be the end of the world. Recall the massive wealth losses that the economy has sustained in the past without falling into a recession: the 33% crash in the stock market in October 1987; the real estate crash of 1990-95, when prices fell 25-30% in many markets; and the 30% decline in the S&P 500 in 2002.

[click on images to enlarge]

Capex still strong
Housing may be tanking, but the business community remains optimistic about the future. Capital spending has been growing at a 10% pace for the past two years, with no sign yet of any slowdown. Corporate profits have surged, and the money is being put to work, laying the foundation for ongoing productivity gains and economic growth in the years to come. Indeed, corporations have only just begun to tap the mountain of cash that they have accumulated in recent years. After tax corporate profits have doubled since 2000, but capital spending has only just returned to the levels of 2000. This equates to a substantial source of reserve energy that can help offset the weakness coming from the housing sector.

[click on image to enlarge]



Reader, Ray Seakan, informs us all of a comparatively new website...
-- David M Gordon / The Deipnosophist

Hi, David,

I have recently investigated the site I found it to contain a wealth of useful information about financial and money management.

There are recommendations for the best credit cards (two of which I already own and they give great cashback.) The site discusses how to purchase T-Bills and calculate the rate of return. It has helpful advice on insurance, banking, mutual funds, retirement plans, brokerage accounts, personal finance and savings.

The site supplies numerous links to other financial sites for specific information and keeps archives of its article back to 2004.

From my own experience on some of the issues discussed, the webmaster has done the research on the topics. It is a site I will visit regularly.

-- Ray Seakan

22 August 2006


I will be away and incommunicado between late-Tuesday and late-Sunday, the 27th.

Trade well; be well!
-- David M Gordon / The Deipnosophist

17 August 2006

The eremite's kingdom

Successful investing is not about precise timing. If that were so, then it follows as necessitous that both the buy and sale must be monitored for the precise moment to act -- when the gears change direction to up from down, and vice-versa. Oh sure, there is some measure of egoboo (satisfied inner ego) one derives by purchasing the low or selling the high. And, of course, there remains the omni-present need for perfection. Perfection, I contend, can be found only in the graveyard. Nonetheless, many investors strive for this fool's gold, especially the many who fancy themselves to be a technical analyst. So how do your efforts to time precisely the market's many squiggles help your portfolio achieve its objective (increasing value)?

The real problem, the one that requires your attention, is money management. One reason proper money management trumps technical analysis is that, as your portfolio's value increases, the corresponding and commensurate need to purchase larger positions increases as well. No longer will you be buying 100 share lots. No longer will you be buying and selling positions in one fell swoop. You will stage into and out of your portfolio holdings, and within a circumscribed area of your objective. (I utilize a 10% band.) So, yes, money management wins the day.

For example, in this post, I argued to swap a long-term market leader for a long-term market loser; that the market itself paid you to make the swap. That is, it was (is) folly not to make that swap. I did not argue in favor of the swap on the basis of technical analysis (although I could have). And what do you know? Subsequent events have borne out the wisdom of that recommendation, as Johnson Controls/JCI shares have tumbled, whereas Ford/F shares have skyrocketed higher. (F's out-performance, in fact, has occurred both absolutely and relatively.)

Perfectionism...? Timing...? More appropriate would be value -- whether that perceived value is found in a company's fundamentals... or a stock's technicals. Nothing, including the markets -- and certainly no person -- exists in a vacuum. Perceptions are both absolute and relative; relative to its own history, of course, but also relative to its competitors. Perhaps a stock is cheaper than a competitor on all valuation metrics, and yet its stock continues to decline ("Hey, it's a better value!") while the competitor's continues to rise. Technical analysis does not betray this recognition, whereas an understanding of value does. Hence, the recommendation of F a brief time ago.

The market is typically open 5 days each week and 390 minutes each day. No matter the direction the market trends, there always exist opportunities to make money on any analytical measure you prefer.

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 seem’d not so far to seek,
And all the world and I seem’d much less cold,
And at the rainbow’s foot lay surely gold,
And hope felt strong, and life itself not weak.
-- Christina Rossetti
-- David M Gordon / The Deipnosophist


Greg Reiman asks,
"Many of the stocks on my watch list have been experiencing something of a recovery rally since the July lows. Especially the past three days. Yet I am hesitant to get back in because there has not generally been a concurrent increase in volume. If anything, volume has been lower in many cases. So I continue to stand aside.Am I focusing too much emphasis on volume during this historically lower volume month? Letting opportunity pass me by?"
Well, of course, my answers are not necessarily your answers. That said, if prices move and you are not aboard, then yes you allow opportunity to pass you by. I think you might have a touch of the perfectionist in your portfolio management techniques. This is a pernicious ill that I discuss frequently, as well as share excellent essays by other market analysts. Note, for example, the essay below in reply to Allan's question.

Back on point. Why can you not allow yourself to stage incrementally into a position? For example, do prices move sans volume (or etc)...? Then take a smaller initial position. This is how pro's do it, and is only one reason for the existence of follow-through days. And never forget volume accords its status at specific inflection points; i.e., crucial moments when the market's gears change direction. This concept might appear visually obvious; it is anything but.

And Allan Harris writes,

"Lots of rules there, David. Is it possible to abide by them all, or even apply them in the heat of battle?"
It seems that Michael Shropshire (and the rest of the InnerWorth team) answers your question particularly well. See their essay below...
The Obsessive-Compulsive Trader
Obsessive-compulsive disorder is a serious psychiatric condition that was brought to the attention of the general public by Jack Nicholson's portrayal of the obsessive-compulsive author Melvin Udall in the movie, "As Good As It Gets." Since then, television portrayals have sprung up all over, bringing knowledge of this disorder further into the mainstream. Adrian Monk is an obsessive-compulsive detective, and "Hands" is an obsessive-compulsive lawyer in "Boston Legal." Many of these portrayals are not as extreme as a full-blown maladaptive form of obsessive-compulsive disorder. All three characters are quite successful in their professional lives, although somewhat unsuccessful in their social lives. A recent episode of "Monk" portrays the dilemma of the obsessive-compulsive person. Mr. Monk goes undercover to solve a crime in an office setting. He organizes the office, designs a new filing system, and carefully makes sure every form is clearly filled out. At first, many people appreciate his efforts. Discipline, perfectionism, and methodical organizational skills are valuable, but few people have the diligence and focused attention to engage in such exacting tasks all day long. Later in the episode, Monk alienates everyone in the office by sticking to his rigid standards and losing a bowling match for the office staff. Such exacting standards usually get everyone upset in the end, leaving the obsessive-compulsive person friendless and alone.

In a classic book in the field of psychiatry, Neurotic Styles, Dr. David Shapiro described the maladies and qualities of the obsessive-compulsive person. He or she is constantly searching for rules to follow, turning a world that is often full of shades of gray into black and white universal standards. I doubt many of us would want to be around such people. There are some settings where this style of thinking is rewarded, however. For instance, when doing your income taxes, the rules can be quite rigid, and following unfailing, exacting standards can be a virtue. I'm sure that you can think of various occupations where focused rigidity is useful. Some engineers or accountants may realize success by approaching their job with an obsessive-compulsive rigidity.

Is trading one of these fields? It depends on how you look at it. Surely, discipline is essential when trading the markets. After mapping out a specific trading plan, it is useful to follow it to the letter. Traders are infamous for either failing to make a trading plan or abandoning it prematurely. A little bit of obsessive-compulsive thinking would not hurt most traders. For example, it is useful to buy at $100, decide to sell at $105, and exit if it goes down to $95. A true obsessive-compulsive person probably wouldn't make a good trader, however. Such a person would constantly worry about where the price was relative to entry and exit points. Waiting for the eventual outcome would be agony. In addition, the markets don't follow precise rules. Trading is more of an art than a science. We can't always buy at $100, and expect to get filled, and sell at $105, and expect enough buyers to take our position at our asking price. It's more like we sort of buy at around $100 and sell when the price starts going down to around $95 or up to around $105. It's useful to be a little flexible when trading the markets. In addition, obsessive-compulsive people like sure things. They fruitlessly strive for perfection, thinking there is perfect knowledge and that everything operates according to rule-driven logic, but as we know, the markets go where they want and when they want. The markets are not always logical. In addition, trading the markets requires taking risks, and living with constant uncertainty. An obsessive-compulsive person couldn't stand the risk. It would be torture to live under such uncertainty. If you like trading the markets, you probably don't suffer from obsessive-compulsive disorder, or a full-blown case of it at least. But adding a little bit of obsessive-compulsive thinking to your trading cannot hurt when it comes to executing your trading plan. It's useful to think of a trading plan as a set of rules that you absolutely must follow. Pretend that you have no choice but to follow the rules. If you stay a little rigid during this one phase of trading, you will be more likely to minimize losses and increase your ability to make huge profits across a series of trades. There are times when a little obsessive-compulsive discipline can't hurt.
I hope there is some answer herein for everyone. Please ask again, if not.
-- David M Gordon / The Deipnosophist

14 August 2006

Richard Donchian’s 20 Trading Guidelines

Richard Donchian began his Wall Street career in 1930. He published the weekly letter, "Commodity Trend Timing," based on his 5-20 moving average method.

This information comes via Ed Seykota, one of the original Market Wizards.
-- David M Gordon / The Deipnosophist

General Guidelines:
1) Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.
From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
Limit losses and ride profits, irrespective of all other rules.
Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.
Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.
Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.
In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%.
In taking a position, price orders are allowable. In closing a position, use market orders.
Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.
Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.
A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.

Technical Guidelines:
A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected.
Reversal or resistance to a move is likely to be encountered:
• On reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range
• On approaching highs or lows.

14) Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently.
Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken.
Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places.
Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side.
Watch for volume climax, especially after a long move.
19) Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps.
During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.

11 August 2006

A thought for the weekend

Of the many things I am, and of the many names others have called me, the one thing I am not is a bible thumper. But every once in a while; well, you know...
-- David M Gordon / The Deipnosophist

If I speak in the tongues
of men and of angels, but have not love, I am only a resounding gong or a clanging cymbal. If I have the gift of prophecy and can fathom all mysteries and all knowledge, and if I have a faith that can move mountains, but have not love, I am nothing. If I give all I possess to the poor and surrender my body to the flames, but have not love, I gain nothing.

Love is patient, love is kind. It does not envy, it does not boast, it is not proud. It is not rude, it is not self-seeking, it is not easily angered, it keeps no record of wrongs. Love does not delight in evil but rejoices with the truth. It always protects, always trusts, always hopes, always perseveres.

Love never fails. But where there are prophecies, they will cease; where there are tongues, they will be stilled; where there is knowledge, it will pass away. For we know in part and we prophesy in part, but when perfection comes, the imperfect disappears. When I was a child, I talked like a child, I thought like a child, I reasoned like a child. When I became a man, I put childish ways behind me. Now we see but a poor reflection as in a mirror; then we shall see face to face. Now I know in part; then I shall know fully, even as I am fully known.

And now these three remain: faith, hope and love. But the greatest of these is love.
-- 1 Corinthians 13

10 August 2006

Base... or top?

While this pattern (one limned recently) might appear, at first glance, [to be] a base...

... it is anything but a base; in fact, odds are excellent it is a top. (btw, the company name matters not at all for the purposes of this post.)

[click on each image to enlarge]

NB the following subtle clues:
Area #1) The presumptive base...
Area #2) That follows the aborted prior base -- aborted by insufficient time, even though the share price went higher;
Area #3) The extraordinarily weak rally in price, accompanied by insufficient volume (price:volume relationship). That final rally proves so weak that it too quickly exhausted itself after only marginally higher highs and too few days of up trend.
#4) Note the abundance - nay, the preponderance - of reversal bars (highlighted) within the presumed base; way too many! In fact, the reversal bars populate this chart prior to the final push to new highs.
#5) Note the 2:1 split (highlighted) that follows 3:1 split (not shown, but just off the left margin). Share splits that occur too regularly, or greater than 3:1 are anecdotal evidence of an imminent end of prevailing trend.
#6) This particular stock has rallied to ~$45+ from ~$1.50 in ~5 years. Wow!

The market's leaders, even the strongest of the strong, require a breather every now & then, if for no better reason than to test the resolve of the bulls. It seems such will be the case soon for this company's stock. Lower prices ahead.

-- David M Gordon / The Deipnosophist

09 August 2006

The modern corporation?

© by Bill Watterson
[click on image to enlarge]

08 August 2006

An overview

A reader comments...

"You say often that now's the sort of time to review sectors. Get the sectors right, then look for the stocks. Would you offer a lesson on how one ought do this? Are these sectors pre-defined ones e.g., the Global Industry Classification Standard? Lots of institutions seem to have their own sector funds, ETF's and indices, but I imagine that not all taxonomies are equal. And what does one look for to decide that a sector is doing well? That it has shown strength in recent months? Do you apply similar techniques as with individual stocks, i.e., analyzing the chart of the sector index? An overview would be appreciated."

Your answer requires a lengthy reply; more time than I have right now. Too, over multiple posts, I have addressed this issue, albeit wholly unsuccessfully. (Note the continuing confusion.) Your request for an overview provides a good beginning to a new aproach.

Arguably the best display of group and sector performance is Daily Graphs Industry Groups, which is data heavy but visually rich. At a glance, you can see which groups are moving up or down, either quickly or molasses-like, and then home in on the group's component stocks, and see immediately the true leaders. There is an art to all this, and requires companion subscriptions, which are worth the money. (Especially if you prefer your data in visual form, as I do.)

In the graphic below, you will note the performance of a widely-accepted benchmark, the S&P 500 index...

[click on image to enlarge]
(c) Investors Business Daily

... Its specific rate of change matters little, however, because what you really seek is whether any given group or sector out-performs, or under-performs, the benchmark. Obviously, the Retail drug-store group out-performs on both an absolute and relative basis. And then there is CVS/CVS, the leader of the group itself; it out-performs both its group and the market, each by a massive margin. (I have mentioned CVS previously in these pages.) If I seek to purchase a leader based solely upon relative strength. then I just now have found a possibility deserving of additional investigation.

-- David M Gordon / The Deipnosophist

03 August 2006

UPDATED! - Crow's feet

Updated to include this morning's (Friday, 4 August) brief comment and chart from Dorsey Wright. I also corrected in my text many errors of grammar, syntax, jargon, and assorted confusion; thus a re-reading of the entire post seems a good notion! -- dmg

I could populate this Google/GOOG chart (below) with all manner of trend lines, but that attempt would only obfuscate this picture by that amount more. What I hope to show is what I term "simple peak & trough analysis" -- a stock that trends higher should have a visibly apparent pattern of higher highs and higher lows. (A downtrend manifests as lower highs and lower lows, of course.)

Now this rule is true always, although only within the studied periodicity. For example, although it appears Google/GOOG loses upside momentum, a glance at the farther out periodicity (basis weekly) shows this recent action as a possible symmetrical triangle, which typically is a continuation pattern. Unfortunately it appears probable this pattern will be despoiled. Zooming in on the chart action, basis daily...

[click on image to enlarge]

Data point:
• #1 encircles a possible blow-off (again, daily basis) -- a straight up move of $60 or ~15% in a matter of days. Most measure a blow-off or finishing move as 35% or more in 3 weeks or fewer -- I agree, but make allowance for the foreshortened time frame (days);
• #2 shows an integral reversal day and minor top;
• #3 shows a lower top and another crucial reversal day;
• #4 is the same as #3;
• #5 encapsulates what appears to be an intermediate term top of some potential consequence.

What I neglected to delineate is the pattern of higher lows of mid-March and mid-May. These higher lows provide only two datapoints for the symmetrical triangle apparent on the weekly basis chart. Unfortunately, recent trading action for GOOG shows the minor rising trend line (not shown, but easily drawn) has been breached. This makes the odds increasingly likely that the symmetrical triangle (basis weekly) soon will be an item of the past. That causes the chart to assume an increasingly portentous tilt to that of a potential descending triangle. Yes, support lies below at ~$360, and then again at ~$350 before the crucial, and long-argued, support at $330. Should Google/GOOG decline that low, however, helps create the afore-mentioned descending triangle. It is impossible to discern, at this moment, the near term direction for GOOG.

Is the $100/share decline off its high and seven months of mostly sideways movement sufficient for a new base? If not, will it instead breach support at $360 and $350 and decline again to $330, the low of this range? If yes, will it hold at ~$330 (and gap support)? If it instead breaks down, will the shares decline rapidly or begrudgingly? And if it does break down, how low might be the subsequent low? Lots of questions with no prescient answers.

From Dorsey Wright, a service that relies on Point & Figure technical analysis:

"We continue to see a number of troubling signs from the large cap growth arena, to the extent that even Google/GOOG has fallen victim to the forces of supply. After a series of lower tops this year shares of GOOG have violated their long-term bullish support line at $364. GOOG remains a 4 for 5'er, but the trend line that was violated dates back to the IPO period."

[click on image to enlarge]
chart and comment courtesy of and (c) Dorsey Wright

My interest in specific companies/stocks endures for more than a season or two. Well-known and highly regarded companies populate my investing ideas, and I return to them repeatedly for opportunity. Stocks oscillate many times for no better reason than that is what stocks do. Despite this, I cannot help but wonder over the seeming 'disasters' that have befallen favorites such as Rackable Systems/RACK, Starbucks/SBUX, and Whole Foods Markets/WFMI (to name but three such 'disasters'). Remember that price oscillations create the opportunty to buy cheap and sell dear. Thus, it is folly to ignore current price action, and yet these four companies (the three above + Google/GOOG), among others, will remain on my monitor for more than this declining season, as I await a low risk, high reward buying opportunity.

Long term leaders and winners repeatedly get ahead of their valuation measures; Google/GOOG at $475 and arguably $375 is a real time example. While the fundamental numbers (revenues and earnings, growth, etc) pour forth from the Googleplex, the e (earnings) of the PE multiple shrinks (rapidly). But sometimes that is insufficient, so the p (price) shrinks as well, causing the once stratospheric PE to shrivel. That action occurs now. There are fundamental concerns -- there always are -- such as the company's massive capex. But if not this concern, then another; it is always thus.

An extraordinarily gifted and shrewd investor (who prefers remaining anonymous) shares his insights...

"I'm glad you're going to post on GOOG. I've never had a position, but I remain both fascinated and agnostic. For what they're worth (I know, just what you paid for them!) here are my thoughts: I've been watching the poor action. Clearly it could not hold the obvious trend line, even on a moderately positive day. I would guess that it's unlikely to hold the gap support at 360, and is likely to fill the lower gap and test major support at 320. I would not even begin to venture about possible action below that.

"I suppose that my inclination to a negative propostion is based somewhat on the weekly chart, which has failed to show one accumulation week since March. (This notion is crucial! -- dmg) Plus the general market action in so many leaders (or now ex-leaders). It seems that every day something else blows up, and often on very good earnings and, like RACK, not because it was all that bad a child. Day after day I'm seeing what looks to me like institutions selling their winners, booking their profits while they still have them -- across the spectrum -- and rotating into the most beaten down, "safe" names they can find. The averages haven't broken down, but something like 70% of stocks are now trading beneath their 200 days, so it might not be a bear market by definition, but it sure acts like one. I'm making no prognostication as to where the market in general is going, but I do know that every stock on the board that still has big profits in it is extremely vulnerable.

"Last thought. Because technical analysis -- at least as to obvious trend lines and moving averages -- has become so ubiquitous, it has become obvious to me that many fundamental investors are using these breaks to accumulate postions -- hence, the quick washouts and turnarounds that we now see so often on these breaks. However, it also seems to me like these quick turnarounds -- where the fundamentalists are fading the chartists -- usually happen very quickly -- generally within a week -- rarely longer than two weeks. The way GOOG has been trading, dripping and drabbing away -- leads me to believe that the fade-trade won't be at work here."

I cannot say it better than that, so I will not even make the attempt. When embracing opportunity, we simultaneously assume risk. We assume risk as well when avoiding positions. Sometimes it appears the risk of a mono-directional move is greater than others; we invest or avoid during those particular and peculiar moments. This moment (the coming days and weeks; remember, leaders decline begrudgingly, if at all) for Google/GOOG might just be one of those moments. Only time will tell.
-- David M Gordon / The Deipnosophist

02 August 2006


Okay, I have taken some time away to give thought to this notion of "betrayal." As introduction to my thoughts, this snippet from a private email:

"You've got a tricky situation which I could argue from about 99 different points of view. At the end of the day, you are not a paid service offering investment advice. You are blogging your ideas. If others wish to trade based on your ideas you can't stop them, nor can you hold their hands in real time -- even if you could hold their hands, what would you do -- send out email alerts? That would put you in the position of offering advice (for free) which might even edge you into murky legal waters (a subject for securities lawyers, not one I'm expert in). I suppose that you could have posted right after you executed your own trades, but I don't see that you had a moral obligation to do so given that you have not promised anyone that you would do so in the first place. I know you are genuinely trying to help people by sharing your knowledge, but as we both know, no matter how good the tutelage is, one must pay one's own tuition at the University of Wall Street if one wishes to learn the art of the trade. I don't mean to sound harsh, because I can sympathize on a simple human basis with those who held their positions into the earnings and did nothing and found themselves down 30%, but you had warned them very clearly that 32 was critical support and your stop-loss. You had also warned them that earnings were coming and that the stock had the potential to break decisively one way or the other. They needed to monitor the situation into the close and in the after-market trading, and be prepared to act. I grant that few, if any of them would have had the experience that you have, or I might have, to act preemptively based on intra-day action, but they certainly don't need much experience to watch their screens and enter sell orders when 32 is breached. I watched the tape myself. I was quite curious as to what would happen although I had no position. There appeared to be plenty of time to get out at decent prices unless you were trading at institutional levels, certainly not the case for your readers. I guess I'm writing all this to try and say that I don't think you wronged anyone. But perhaps you didn't realize the degree to which you had the potential to effect people's real economic lives..."
I stated on the 26th that post might represent my final post re RACK. The implication is that, should it breach $32, then I considered that post to represent the concluding post, and its “From inception to conclusion” sentiment. The post on the 27th represented an entirely different topic – one in which I was wrong and how I handle that situation. Unfortunately, I chose RACK as its subject, thereby possibly sowing unnecessary confusion.

Yes, I could have provided an update during market hours that I was selling, and in retrospect I might revise that decision. Certainly I will pay heed to this possible situation in the future, and take appropriate measures. Then again, and as the letter writer suggests, I cannot alert readers to every squiggle in the price; of course, I thought then and think now the information in the post of the 26th to have been sufficient. I alerted to event, price, and time; the requirement to sell on the breach of $32 remains yours. And as the letter write notes, “There appeared to be plenty of time to get out at decent prices.

I made two purported 'errors' (three, if you include the supposition that RACK would hold at $32-34) -- one of omission, the other of commission:
Omission: I did not post here during the trading day that I sold;

Commission: I confused readers by writing a post about how I handle the situation in which my analysis was wrong.

That second 'error' was using RACK as the subject of that post. (I had thought about this issue in advance of writing, and thought it to be a good idea. Obviously, I thought wrong.)

Re the first 'error' -- I rarely post re my every buy and sale, as few people trade as rapidly as me. (Some trade more rapidly, of course.) That I sold a few $$ above the stop was the subject of the second 'error' -- the art of the trade.

This blog is about the process of investing; as such, I share rules for successful investing. The more experience one gains as an investor -- in fact, in any endeavor -- the more frequently he or she knows when and where and how to break those rules. Thus, my post of the 27th.

Promises often are empty, goals and objectives often fungible, so I will say only this: I will learn from these presumed errors, as we must from all errors in all aspects of life.

-- David M Gordon / The Deipnosophist

01 August 2006

GDP slower, inflation higher + ISM indices still point to growth and inflation

The commentary below is by Scott Grannis, Chief Economist at Western Asset Management. (Alas, eBlogger again fails to work properly, so the charts Scott mentions are not included.)
-- David M Gordon / The Deipnosophist
The bond market was excited last week by news that economic growth in the second quarter dipped to 2.5%, below expectations, since this bolsters the case for the Fed to take a long-awaited breather next month from its 2-year tightening campaign. However, as the charts show, weaker growth has come at the expense of higher inflation. Nominal GDP today is growing at just about the strongest pace we have seen since 1990, while real growth, at 3.5% over the past year, is substantially below the 4-5% growth rates we saw in the late 1990s. The Fed will undoubtedly be comforted to see a slower pace of growth, but they will also remain worried that inflation is drifting higher. If these trends continue much longer, it will put the Fed squarely on the horns of a dilemma: whether to ease in deference to the economy or tighten in reaction to uncomfortably high inflation.

Both the Fed and the bond market believe that slower growth will bring lower inflation in the future, although just the opposite has been the case over the past decade. TIPS breakeven spreads are forecasting the CPI to rise at a 2.2 % rate for the remainder of this year, and only 2.6 % over the next 18 months, both down sharply from the 4.3% pace of the past year.

The Institute for Supply Management's index of manufacturing activity was a bit stronger than expected today, and at 54.7 is still consistent with economic growth in the neighborhood of 3-4%. The ISM price index remains in distinctly elevated territory, at 78.5, and as the second chart suggests, rising energy prices help explain why.

The core PCE deflator for June was released today, and with revisions to past data we now see that inflation by the Fed's preferred measure has been above its 1-2% target range for the past two years. Over the past year the core PCE deflator is up 2.4%, and in the past six months it has risen at a 2.7% rate. It would thus appear that monetary policy has been somewhat accommodative, since higher energy prices are finding their way into non-energy prices.

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