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!

24 March 2007

Way too cool tool!

How about a calendar that mines your iTunes music library to generate concerts in a calendar format that feature your favorite musicians at a venue near you?

"iConcertCal is a free iTunes plug-in that monitors your music library and generates a personalized calendar of upcoming concerts in your city. It is available for both Windows and Mac OS X and supports worldwide searches."

[click on image to enlarge]

You need only sample the program to recognize its facility for you.
-- David M Gordon / The Deipnosophist


20 March 2007

Seeking positive divergences

I know, I know, my posts have become infrequent of late. But after warning of the market's abrupt sell-off (Did you take proper steps?), I have been busy refining my buy list... and even buying.

Surprised? Don't be. Whereas the majority of investors assume a trader's break will morph into something worse and more enduring, I seek opportunities to invest. This is only one reason I prefer to be a long side-only investor; I want a clear head and mind to see always the opportunities as they build, never hoping for continued weakness, etc.

So I watch the market closely, diligently, reading its tea leaves for opportunities. As mentioned repeatedly, this decline to date is garden variety - nothing especially fearsome about it - and looks set to remain so; a trader's break only. What do I see...?

As the market (as measured by the S&P 500) declined, it made a lower low. See points 1 and 2 in the chart below.

[click on each chart to enlarge]

At point 2, it reversed hard... up. The chart continues to build as a budding intermediate term base. Because I do not purchase the indices but companies, I next seek those stocks of the companies on my perennial list of favorites that out-perform the market's benchmark index. And I see many; allow me to highlight only one.

In the chart below of Intuitive Surgical/ISRG (mentioned and recommended often), please note that its point 2 occurs at a higher low than that of the S&P 500, a positive divergence! This qualifies as bullish price action, which comes subsequent to a positive upside gap helping to validate the past ~8 weeks of trading activity as a base not a top. Now the shares near an important (but not crucial) breakout.

To place this interior pattern within context, within its continuum, let's look at the larger picture (below)...

Note the shares have been trading sideways for 17 months, since its bullish breakaway gap in October 2005, almost doubling in price to ~$140, and quickly. Perhaps oddly, certainly different from most analysts, I identify all the action as an intermediate term base; now the shares sell just at the midway point, neither here nor there. However, all chart appearances support the argument for upside breakouts at ~$116, ~$118, ~$125, ~$132, and ~$140 to occur soon.

Please do not think I caterwaul for investments solely on the basis of charting and technical analysis; I do not. In truth, I consider carefully and diligently - fundamentals, valuations, and economic opportunity - those companies I deem merit my investment monies. However, once having made that determination, my investment interest manifests as the stock, so I watch and watch and watch the stocks' oscillations, as I await my moment to purchase. Please review this site's archives for my investment rationale for Intuitive Surgical/ISRG. But if you want to obtain immediately a 'handle' on why I find Intuitive Surgical/ISRG to be such a tremendous opportunity, then please download and read this 6 months-old but still excellent research report by Wachovia...

The Wachovia analysts, Michael Matson and Vincent Ricci, do a fantastic job explaining why this company merits your attention and investment monies. This brokerage report might be the best one of its ilk I have ever seen, as it covers fundamentals, valuations, the company's opportunity and risks, and all in an easily understood presentation.

No matter the amount of time Intuitive Surgical/ISRG requires to trace out this base, its doing so helps diminish the company's outsized valuation; as the P (price) goes sideways the E (earnings) continues to explode higher. And its PEG shrivels as well.

And, really, is this not the type of growth company we all hope to own so that our portfolios' values mirror the growth of its holdings?
-- David M Gordon / The Deipnosophist

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Caveat Emptor

Chad Brand offers important words of wisdom.
-- David M Gordon / The Deipnosophist


18 March 2007

My Visual DNA

Click on the link above to discover your Visual DNA!
-- David M Gordon / The Deipnosophist


16 March 2007

Patty Griffin, redux

Okay, okay, I shared already one song from Patty Griffin's new CD, Children Running Through, so how many more must I share, especially when there are many other deserving artists? As the positive comments come flowing in (see below), however, well, when is enough truly enough...?
On Patty Griffin's fifth album, her "bluesy alto, her carefully wrought lyrics, and the spacious, organic arrangements go over like home cooking," said David Marchese in Children Running Through may be the finest record of Griffin's career, and the one that finally helps her cross the line from artist's artist to popular musician. Griffin's songs are favorite cover material for such diverse acts as Bette Midler, Jessica Simpson, the Dixie Chicks, and Emmylou Harris, who delivers a fine cameo performance here on "Trapeze." (The song shared previously - dmg) But for all her famous fans, Griffin has never been a real hit on her own—she even suffered the indignity of two unreleased albums. Having come through those struggles, Griffin's now a gifted, seasoned singer-songwriter "at the height of her powers," said Bill Friskics-Warren in The Washington Post. Drawing on gospel and R&B for emotional inspiration, Griffin seems to be in a musical development phase similar to Joni Mitchell's when she recorded her fifth album, For the Roses. The new CD doesn't confine itself to one genre, said Preston Jones in the Fort Worth Star-Telegram. Griffin covers a wide sonic territory, including the folky aspects of her debut, the rock sensibility of her sophomore record, and the pretty country bits of her subsequent discs. But "what's most striking about Children Running Through is its emotional clarity; whether it's elation or depression, Griffin cuts to the core of each narrative with speed and grace."
So indulge me please this one more song; I believe you will be happy you did.

I welcome all comments re this particular song, or even and including Music for the weekend.
-- David M Gordon / The Deipnosophist


15 March 2007

The Thread of Life

One reader, Hyman Shwarzberg, writes to encourage me to... Well, read his letter for yourself! I viewed the video, and was appropriately astounded.
-- David M Gordon / The Deipnosophist

Watch this Harvard biology video.

As a medical student in the early 1980's, I was often astounded at the beyond mind-numbing complexity and beauty of biology and cellular function and the remarkable wisdom that the sciences have unveiled.

But this video magnificently brings out a minute portion of the orchestrated activities that contribute to life.

After learning biology and watching this video (which is not even the proverbial tip of the iceberg), I cannot fathom that anyone can believe that life was created by accident. This is just a nanofraction of what goes on inside a cell, let alone an organ, let alone a whole creature.


14 March 2007

Putting the subprime problem in context

The interesting commentary that follows (alas, sans the mentioned charts) is by Scott Grannis, Chief Economist at Western Asset Management.
-- David M Gordon / The Deipnosophist
Subprime jitters have put everyone on edge these days, mainly because it's difficult to project the extent of the fallout from what amounts to a credit squeeze that is impacting potentially millions of homeowners, borrowers and investors. Delinquency rates on subprime loans could be as high as 15%, and default rates are rising. Subprime and Alt A mortgages accounted for about 40% of total mortgage originations last year, according to Wachovia Bank.

Will the foreclosures that result from existing subprime borrowers going belly up, coupled with the shutting off of credit to new subprime borrowers, have a significant impact on the overall housing market? Will subtracting a million or so marginal homebuyers from the market have a significant impact on the overall demand for housing, causing housing starts to tumble further and prices to fall further than they already have or would have fallen? Can the subprime tail wag the big dog that is the U.S. economy?

So far the numbers don't look too scary. According to Morgan Stanley, there are just over $600 billion of securitized subprime mortgages outstanding, which probably equates to some 2 or perhaps 3 million subprime borrowers. Even if subprime defaults eventually resulted in as much as $300 billion in losses (the very high end of estimates I have seen), that is only about 2% of the $15.7 trillion liquid portion of the U.S. bond market, and less than 1% of the $33 trillion liquid portion of the global bond market (surely foreign holdings of subprime mortgages are a not inconsiderable part of the total). It's only 1.3% of the value of the U.S. housing market. Furthermore, it only represents 0.5% of the $55.6 trillion net worth of U.S. households, and only 0.7% of the $42.1 trillion of financial assets held by U.S. households, according to the Federal Reserve. $300 billion sounds like a lot, but it's only a drop in the liquidity bucket. Shutting off subprime lending altogether might mean a reduction in the number of homebuyers equal to 1-2% of the nation's 135 million households, but that's hardly enough to push housing prices off a cliff.

Based on the numbers, the subprime lending problem looks rather minor. From a broader perspective, the contagion potential of the subprime crisis has a lot to do with the general health of both the economy and the financial markets. When I survey some of the key indicators of economic and financial health, I am greatly reassurred. We're facing a problem, but it is far from insurmountable.

Implied volatility in stock and bond options is a good proxy for systemic risk and fear. As the first chart shows, implied volatility is still relatively low from an historical perspective. We've seen conditions that were far worse than those we face today, and for sustained periods, without disaster striking. The second chart shows that the recent drop in the stock market is still very minor. The rise in equity volatility we've seen recently is far from the sort that accompanies major market downturns. Fear is maximized when prices fall significantly, and we just haven't seen any of that so far. I note that an index of homebuilders' equity is 16% above its lows of last summer, despite a steady drumbeat of negative housing-related news.

Swap spreads are a good proxy for systemic risk, liquidity, and the willingness of investors to take on risk. Swap spreads were tighter in the mid-1990s than they are today, but they are far from the levels associated with past economic and financial crises (e.g., recessions and the corporate defaults of the early 2000s). Credit spreads in general are relatively tight, and spreads in the riskiest sectors of the bond market are exceptionally tight, suggesting there has been essentially no contagion from the housing market to date. Spreads have indeed widened as fears over subprime loans have mounted, but you can hardly see the widening from an historical perspective.

If the subprime lending crisis is essentially a credit crunch (Freddie Mac, which has typically purchased some 20% of the AAA tranches of subprime loans, will soon cease its purchases of such, numerous issuers of subprime mortgages have either gone out of business or announced they will no longer make these kinds of loans, and regulators have urged much tighter lending standards for those who do remain in the business), will this combine with an existing credit squeeze to strangle the economy? Surveying the principal indicators of the availability of liquidity suggests that there is no shortage of liquidity, and no squeeze apparent anywhere outside the subprime market.

To begin with, the next chart shows that while new applications for mortgages are down some 25% from their 2005 highs, the pace of new lending is still much higher than it was in the booming 1990s, and it hasn't fallen at all relative to the levels of last summer, despite the drying up of subprime lending which began earlier this year. Meanwhile, mortgage rates are still quite low relative to the levels of the not-too-distant past.

The dollar is near the low end of its historical range relative to other major currencies, strong evidence that there is no shortage of dollars in the world.

The Fed has tightened policy relative to where it was a few years ago, but from an historical perspective, monetary policy is still far from reaching the level of "tightness" that provoked past recessions. Fed governors are uneasy with inflation running somewhat above their comfort zone, but with the economy soft and housing questionable they are quite unlikely to take any further tightening measures, at least for the next several months. Indeed, the bond market expects that an easing of policy is far more likely than a tightening.

Gold prices in the past have typically played the role of "canary in the coalmine" when it comes to monetary policy. Gold tends to rise relative to other prices when money is easy and inflationary pressures are rising, and gold tends to fall relative to other prices when money is tight and inflation pressures are declining. Gold at $645/oz. today suggests at the very least that liquidity is more abundant than it has been on average in the past 30 years.

With the exception of energy prices, which are off their highs but still historically elevated, industrial commodity prices continue to move to new high ground. As with gold, this could reflect relatively abundant liquidity conditions, but it also reflects a robust global economy. Industrial production in the U.S. has been stagnant since last summer, but global manufacturing activity has never been stronger. The U.S. has traditionally been the world economy's locomotive, but these days the rest of the world is helping to keep us moving forward.

Tight liquidity is often reflected in bond yields that are high relative to inflation. As the next chart shows, today's real yields are below their long-term average, and well below the levels that have prevailed for most of the past 25 years, suggesting again an absence of any general liquidity squeeze.

The outlook for defaults and distressed home sales would certainly be aggravated by a deteriorating labor market, but so far the worst that can be said is that jobs are growing at a slower rate today (1.4%) than a year ago (2.5%). Despite slower jobs growth, the unemployment rate today is a relatively low 4.5% and has rarely been lower. Weekly unemployment claims have moved up a bit in recent weeks, but this could be due to the effects of bad weather; this is certainly an important indicator to watch on the margin, but so far it is still relatively benign.

Adding it all up, I would venture to say that the subprime mortgage problem is a crisis that has relatively short legs. The U.S. economy is reasonably healthy, financial markets exhibit little or no sign of spreading distress, and liquidity is deep and relatively abundant.


11 March 2007

A Closer Look at the iPhone

Apple Inc's, Phil Schiller, shows John Blackstone (CBS News) the many features of the iPhone, which goes on sale this June. This 4 1/2 minute video merits your attention, whether your interest happens to be the company's stock or the iPhone. (Which, btw, really boggles the imagination. Or at least mine!)

Thanks to reader, Sheila Schneider, for the link!
-- David M Gordon / The Deipnosophist


10 March 2007

So how old do you feel NOW?

From the A picture is worth 1000 words department comes this photo...

Eddie Haskell ---- The Beave ---- Wally

-- David M Gordon / The Deipnosophist


09 March 2007

Music for the weekend

Singer/ songwriter/ violinist, Andrew Bird, is a very different musician from past recommendations. Andrew updates the traditions of small group swing, German Leider, and New Orleans jazz, as he mixes gypsy, folk, and rock elements into his distinctive style. Really, he knows no boundaries in his compositions, both lyrics and arrangements. Moreover, he displays phenomenal ways to play the violin; not solely using a bow. And he whistles. I tend not to like being whistled at, but Bird makes it fun.

Scott Holter discusses both Bird and his newest CD release, Armchair Apocrypha, due in stores on Tuesday, 20 March...
Strip away the music of an Andrew Bird song, and you're left with brilliant prose ("across the great chasms and schisms and the sudden aneurysms"), vignettes about mentally fending off plane crashes, infiltrating characters like the kings of Macedonia and Lou Dobbs, and titles such as "Yawny at the Apocalyspe." It's hard to believe that, really, his music reigns, but when Bird adds understated acoustic guitars, Wurlitzer and Rhodes, and his own mesmerizing pizzicato violin, his songs take on a progressive mood all their own. Bird's tenth album (and his debut for extraordinary Mississippi blues label Fat Possum) is perhaps his most diverse, expansive, and resourceful yet, catering to a half-dozen genres of music while exploring storylines that are naïve ("Dark Matter"), candid ("Fiery Crash"), and blatantly comical ("Armchairs"). Making no palpable effort to crack the conventional with overflowing melodies and love songs, Bird instead latches up the intellect to create tiny packages of literature that always leave you thinking -- and snapping your fingers at the same time.
Really, I enjoy this entire CD so much I had no idea which song to share. So I settled on two, the opening song, Fiery Crash, and the CD's closing song, the all instrumental, Yawny At The Apocalypse. Enjoy!

I have listened to and enjoyed 6 or 7 different CDs by Andrew Bird; in Armchair Apocrypha, he puts together all his diverse and disparate musical interests and elements into one cohesive and coherent whole. It is a stunner.

I am, as always, interested to read your comments.
-- David M Gordon / The Deipnosophist


05 March 2007

Patience & Fortitude

So the market has begun its decline, and with you aboard.

You rely on seasonals, so this decline surprises you? You forgot that February tends to rank as one of the three worst months. You rely on cyclical factors? You forget that all trends include minor trends that swing contra to your wishes and expectations. What many of us investors regularly forget is that markets always oscillate, even within definitive trends (up, down, or sideways). This volatility enables us the opportunity to purchase or sell at better prices, as these movements tend to continue to outlying extremes.

If resolutely long ("Damn the torpedoes, full speed ahead!"), you require fortitude to withstand the depth charges the market will deploy to rock your (emotional) boat. If long cash and eager, you require patience to forget about the now defunct prior (up) trend, and commit your monies only at appropriate moments of low risk, high reward. Not willy-nilly. ("It's an even better purchase now, thanks to this decline!")

This decline is no different than any other... So far. There are some items of bullish merit, and yet almost all technical and fundamental signals suggest lower prices remain to be probed. There will be a tremendous amount of volatility; for example, the market appears set to decline hard on today's opening. The market, and you, will be plagued by lots of intra-day volatility; remember to place within the greater continuum each day's price bar to discern the true trend. For example, do not be surprised should the down opening (with likely gaps) seemingly in the cards for today reverse up intra-day; the surprise will be the market's closing levels. And even that factoid is not particularly important.

Do not allow the market's intra-day oscillations to gull you. No longer rely on tools more appropriate for trending markets such as moving averages -- the 50 day sma will be breached. (As it already has been in most instances.) The 200 day sma remains crucial. The difference between the two is that support at a rising 50 day denotes continued upside momentum, whereas support at a 200 day sma denotes investor (not trader) buying. There are many more investors than traders.

Place some measure of faith in tools that circumscribe range-trading markets; e.g., stochastics, RSI, and other oscillators. Why? Because the market has yet to shift gears to down from up; nothing indicates a change to bear from bull. This remains merely another correction, so far.

Remember to seek inflection points: during market advances, identify resistance ("What force impedes or even stops the advance?"); during market declines, identify support ("What force stems or even stops the decline?"). These inflection points are crucial. On a pattern basis, seek a slackening of the downside momentum; not present at the moment. This action will appear on the charts, perhaps as a falling wedge. (Recall that in late-January I identified the rising wedge to indicate the increasing risk in the market; the rest is now history.)

And never forget, even for a moment, that this hellacious moment too shall pass. They always do.
-- David M Gordon / The Deipnosophist


03 March 2007


Did you happen to catch this ad during the Oscars telecast? I consider it to be not only wholly appropos with the Oscars but also a brilliant display of creative genius. For all that, it rivals this memorable ad directed by Ridley Scott...

btw, the rumor mill runs at full tilt re a 3G version come January 2008! (Of what, however, shall remain unnamed; you will know after viewing the commercial at the first link.)
-- David M Gordon / The Deipnosophist

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02 March 2007


It's Friday, and thus time for some music to kick-start the weekend.

Are you familiar with Ani DiFranco's music? Her newest release, although from 6 months ago, is Reprieve...

One song in particular (Hypnotized) especially haunts me. I love the way the song begins, but she maintains that sense of imagination throughout the song's arrangement. Lyrics that mean something, and a voice to match. And when Ani utters for the first time the song's title, Hypnotized...

What more could you ask? Absolutely magisterial! I hope you, too, like it.

(Please recall this download remains available for only 2 weeks!)

But why limit your enjoyment to just one song? Purchase Ani's CD here.
-- David M Gordon / The Deipnosophist


A brief but pithy market update

The commentary that follows is by the always-excellent and insightful, Dorsey Wright, which service I recommend strongly for all investors.
-- David M Gordon / The Deipnosophist
We’ve obviously received a number of inquiries as to what impact the recent market activity has had on the NYSE Bullish Percent, our primary market coach.

It appears that with Thursday’s market activity, once the dust settles, we will seen enough net new sell signals to push that indicator into O’s and thus onto defense. The final tally will come after Thursday’s close, but it does appear that the bullish percent will fall ~2.0%, when it needed only a 1.57% decline to trigger a reversal. Should this be the case, it is reflective of the fact that meaningful damage has occurred within the market and that risk levels have risen.

A reversal with Thursday’s action should not come as any real shock; this offensive drive has outlasted every major rally in the market since 1997, except one. Possibly moving to defense after 244 days of offense falls short only to the rally that began in April of 2003, which lasted 349 days. And when we look at how long the NYSE BP has remained above 70% without reversing... well, it has been in the “red zone” for 105 days. Using BP data back to 1955, this is just two days over the average length of time this bullish percent has historically remained above 70% (103 days) before turning over the ball. While not surprising, it does represent an actionable change in the marketplace. It suggests an added emphasis upon diversification away from equities should be explored within accounts, and that wealth preservation is now priority number one...

[click on chart to enlarge]
(c) Dorsey Wright


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