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!

23 August 2007

Summer vacation, part 1

I will be away on summer vacation from Saturday, 25 August through Sunday, 16 September 2007.

For readers curious as to my whereabouts, my first week will be in Lyon, France (where I meet up with Rochelle & Kenn Bates from Los Angeles and Pauline from London, England); we four will sightsee our way through that portion of France. The following two weeks will find me trekking the Tour du Mont Blanc, along with a hardy band of 12 other trekkers.

Yes, I will post photos for the curious soon after I return.
-- David M Gordon / The Deipnosophist


17 August 2007

Back to the drawing board

I receive many messages this morning that read, in part, "Praise be the FRB! Today's discount rate cut kick starts the markets' rally..." -- which could not be farther from the truth.

Today's action by the FRB does not, by itself, cause a reversal (up), but does exacerbate the short term up trend that kicked into gear yesterday.

Please recall that traders had their signals, purchased yesterday at varying points based on each trader's objectives, and would likely purchase more shares today based upon tick by tick data. Today's news reverses the previous trend: the sellers suddenly stand aside, as the buyers crush the doors attempting to get into this (new) market trend. Its duration, however, remains to be determined.

So, to reiterate, today's FRB action merely exacerbates what was to occur anyway.
-- David M Gordon / The Deipnosophist


16 August 2007

Market Thoughts, part 2

The market's current environment has become obviously ugly for the bulls -- but any market move that has become obvious to all has me looking for clues that the obvious move will soon reverse -- and for more than an hour or two, or even a day or two.

First, the charts have built especially ominous patterns of late, of which the breakdowns this week -- especially yesterday and (so far) today -- represent serious breaches. The auguries portend more problems ahead, although not necessarily all in one fell swoop (or plummet). Just as easily as a price correction could be a time correction, in which chart action moves left to right with lessening up and down movement, and whence the charts heal themselves; i.e, build bases rather than intermediate term tops, as is prevalent now. Too, many of the items that caused me grave concern sufficient to warn ~2 months back of an imminent market decline, now reverse positively; for example...
• Interest rates in the credit markets (to a sudden crash in yields from higher rates, which changes fundamentally albeit not immediately the dynamics for equities to increasingly positive from negative);
In addition, the strengthening today of the US$, which really is more a result of a plummet in other global currencies than outright purchases of the US$. (US$ today at a 2 month high vs the Euro, for one example -- and which, I admit, does not say much!);
• And a flight to quality, as a global search for liquidity causes selling in emerging markets and other global markets, and the newly obtained liquid assets seek a safe, non-turbulent home -- the US$ and markets, primarily US Treasury securities;
• Finally, the (too-often mentioned elsewhere) VIX index screams to multi-year highs, although a far cry (of pain?) from its all time highs set during the Crash of 1987. So while the markets' fundamental backdrop improves as a result of dynamic processes that continue, its valuation also improves, as declining prices shrivel those measures.

But let's not place too fine a spin on it. This price decline hurts us all. Is there some signal or signals traders seek that would indicate a price reversal is in the offing? Yes. First, it will be traders rather than investors who make the first stab in the dark, as their shortened time frames tend not to be direction-specific (non-directional), so what tell tales do they seek?
1) A sequence of negative (lower) closes (extreme weakness), followed by
2) A huge gap down opening (obscene weakness), which leads to
3) Short term traders (day traders, and other traders whose time frame do not endure for more than 2 or 3 days) buying that moment of extreme, obscene weakness. (This moment is very precise and specific.)

(As a paranthetical aside, the recent pattern of higher opens followed by lower closes is as bearish as they come; do not allow the markets' breathlessly up openings to gull you -- such openings are not the way markets bottom, or at minimum hit their low point.)

Traders purchasing at the moment of extreme, obscene weakeness in turn cause short sellers to cover their positions, powering prices even higher, as buying power doubles up. Then longer term traders (holding periods of days and weeks) seek their clues...
4) Do individual price bars (bar charts) cluster into 3 or more up days and 3 or fewer down days? This action would, could, and does include some horrific and terrifying down days, which lack downside follow-through. This tell is crucial, as it prepares speculators (traders, but with a longer term time frame) to step up boldly with their buy orders.

Thence come the chart readers, who rely on pattern recognition to discern their purchase opportunities. As those patterns begin to build, each investor purchases as his or her signal flares. Jack Cory shared his perceptions in part 1 of this post, which are anticipatory; other investors prefer to react to a chart's signals rather than create the signals. Each perspective is equally valid.

This recent bout of selling will exhaust itself, like a fire that burns itself out for lack of combustible material. First, note well
A) This decline occurs with comparatively and relatively little volume, which means this decline is as much a buyers' strike as the sellers overwhelming the buyers. With ever fewer numbers of buyers, the sellers crowd toward the market's exit doors; not all can get through, of course. Prices suffer declines, as the sellers scream in anguish, "Sell me out at any price!" The experienced and thus wise buyers stand aside, patiently biding their time. They know this decline too shall pass, as they always do. And that subsequent to this devastation will be screaming buys, literally and figuratively.

If you prefer to watch and wait, then watch also for inside bars -- daily price action whose high and low are inside the the bar's range of the day prior, etc; such activity indicates a cessation of selling. I admit that many investors are fooled by the 'false' signals of a chart, although I argue those false signals in fact are faulty identifications by the investor. Please be patient if your experience is not up to a professional's perceptions; this decline is a fantastic opportunity to learn and gain some valuable experience. btw, a decline of this ferocity does not simply "V" its way from high to low to (new) high.

But with so many sellers crowding into an ever shrinking window of (perceived) opportunity to sell, and with buyers stepping aside waiting with their clean out bids, prices drop due to the vacuum of a one-sided -- and, seemingly, one-way -- market. This action creates your opportunity to profit. I suspect this decline will exhaust itself within weeks, and struggle to right itself for a breakout from new bases (not new highs!) by ~15 October. But let's take each day one at a time.

A very smart person (Thank you, YKW!) noted only last night that I remind her of the real estate agents I take to the woodshed for their status as perma-bulls on real estate despite market realities. Am I guilty of the same item I chastise in others? On closer reflection, I realized (Hey, I might be slow, but I am deliberate!) that my argument is not that other people are stupid, but that they refuse to see change -- and change is what successful investing is all about.

And what drives your and my profits. So while I recognize that many stocks plummet for valid reasons, my Core Opportunities are unfairly punished. Is this runaway bullishness on my part? No, as I await change to create my opportunities to purchase and sell; I am not monolithically anything, as I await the market's clues. The Core Opportunities, as leaders, will be among the first to stop their declines and the first to rebound while the markets continue to drop or struggle. I also know that as horrid as recent days appear on the charts of my Core Opportunities, these price bars will shrivel in significance, especially when compared to the higher prices each Opportunity will achieve in the months and years to come. Of course, the future is unknowable, which is another reason I prefer only to invest in the crème de la crème; investing in fly-by-night stocks rather than excellent companies help usher in bouts of selling such as we now experience. This recent market action, bleak as it might be though, is nothing different than the typical price action of any August, only the names and reasons differ: same circus, different ring.

Change creates opportunity; for my (or your) Core Opportunities, as well as the opportunity to learn, to know -- and to profit. I hope this post helps you see the light at the end of the tunnel for what it is... And, no, it is not a speeding train!

Be well; invest well!
-- David M Gordon / The Deipnosophist


Market thoughts, part 1

Good morning, All.

Obviously, the markets endure a serious tumble the past 5+ weeks. With this decline now obvious, the questions become "Where to now?" and "What can I expect next?". This post provides a reply from two individuals whose market insights are well-respected. One is Jack Cory, who requires no introduction to many of this site's readers but for other readers, Jack has deep and broad experience in the markets' wily ways; the second is Eric Anderson, who views the markets through a statistical prism. Each person's analysis makes for interesting reading.

I will follow on later this morning (I hope) with my comments in part 2 of this post. I will state now, however, that it would not surprise me were the markets to reverse up from today's gap down openings and early morning lows, for at least a short term reversal. More anon.
-- David M Gordon / The Deipnosophist
First, Jack Cory...
Yesterday I reviewed a recent chart of the McClellan Oscillator. That appears so oversold as to encourage me to look at Oscillator result after today's (Wednesday 8/15) close.

The Oscillator is in the process of making a complex bottom, the type from which major market uptrends begin. Although the market was down significantly today and was extending its downtrend, including a continuation of a break down through a major up trendline, the Oscillator was barely able to continue to go down. This is very bullish.

I expect that the market will begin a rally either Thursday or Friday. However, I always look for a confirming "hook" in the Oscillator as a buy signal. That should probably come in the next few trading days. The wonderful thing about the hook is that it is almost unknown for it to fail as a great buypoint and as a confirmation of a new uptrend of significant proportion.

I should also point out that Bill O'Neil's buy point will come a little later, usually about 7 to 10 days after the bottom. Watch for a quick rise off of a complex bottom, followed by a three to seven days of sidewise action, and then a continuation to the upside.

Personally, I prefer the McClellan Oscillator hook as a signal. Usually both the hook and the O'Neil signals occur at significant market bottoms, but not always. On the other hand I cannot recall when at least one of these did not occur.

I will continue to watch the market and the oscillator and let you know my impressions of it.

And Eric Anderson...

Based on our talk I looked at some weekly S&P 500 data again, 1950 to present week. At this point in time we are some 5 weeks and 10% in the midst of what I hope to be a short term opportunity.

The odds, if you assume we have not yet reached the market cycle peak, then...
• 2 of 14 times a short two week 5% drop occurred (This did not happen),
• 8 of 14 times a 5-6 week drop of 10 to 15% occurred (This may be where we are now),
• The other four times the drop lasted 9, 10, 11,13, and 13 weeks for a 15 to 25% drop from recent highs. This may be where we are going...

So a bottom might happen in conjunction with the Aug, Sept, or October options expiration weeks. At this point, I am looking for lower lows in 5% increments for the S&P 500. This way I use either time and or percentage move.


13 August 2007

Keeping Things in perspective (cont'd)

In which Scott Grannis, Chief Economist at Western Asset Management, continues his thoughts on the current 'crisis'.
-- David M Gordon / The Deipnosophist
Homeowners who might have been able to get a subprime loan a year ago can no longer do so, given that most banks have shut down subprime lending. The credit markets seem to have seized up, spreads have surged, and there is talk of a liquidity squeeze that could trigger a meltdown scenario. While it is true that some sectors are really hurting, not everyone is. In fact, small businesses and many corporations are enjoying easy access to credit these days, as reflected in strong growth of commercial paper and C&I Loans. According to data compiled by the Fed through the first week of August, there's been almost $138 billion of new money made available through these two conduits so far this year. C&I Loans are up $90.5 billion, for an annualized rate of growth of 13.4%. Commercial paper issuance is up $47.3 billion, a 56.7% annualized rate of increase. Those who leveraged themselves into subprime paper are likely deleveraging as fast as they can, but other sectors of the economy are still releveraging themselves. The average household, meanwhile, has experienced an insignificant increase in the burden of its financial obligations over the past several years.

[click on each image to enlarge]

And what about the generalized decline in housing prices that is emerging across the country? According to the Fed, as of March 2007 U.S. households owned $22.9 trillion of real estate, out of a total net worth of $56.2 trillion. Let's assume a massive, unprecedented drop in nationwide home prices of 20% over the next two years. That would represent a destruction of wealth on a par with what was lost in the equity market from 2000 to 2002, and that was an earth-shattering event that saw the mildest recession in modern history (and recall that the Crash of 1987 produced only a one-quarter slowdown in growth). Some further perspective: households added $2 trillion to their their non-equity financial assets in the 12 months ending March, enough to offset an almost 10% decline in real estate prices. And even if home prices fell 20% from March '07 levels, they would still be higher than they were three years ago.

As for liquidity in general, M1 is flat over the past year (and for the past 3 years as well), MZM is up an annualized 9.5% year to date, M2 is up an annualized 5.9%, and no measure shows any deterioration over the past two months when the subprime crisis really came to the fore. With the dollar still scraping the bottom of the valuation barrel, there does not appear to be a generalized shortage of liquidity or even a developing shortage of liquidity.

All things considered, this still looks like a problem that is relatively contained, and one that the economy should be able to absorb without major difficulties.

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11 August 2007

re Stardust

Some readers, knowing my proclivity to see almost every movie, request my opinion re STARDUST, which opened yesterday...
Please post a mini-review to let us know if we should see this movie. The promos look good, but you never know.
Hi, Linda,
I lack the time to write a complete review, and want to avoid including any spoilers in what I do say, so I am left with what will seem an opinionated screed.

I sure would like back the 2 hours this movie stole from me. I acknowledge that many people in the audience were seemingly enchanted and charmed by this movie's surface qualities; any intelligent person, however, will wax increasingly angry, as dues ex machina piles upon dues ex machina.

Really, who bears the responsibility for this travesty? A work of art must hew true to its internal logic, no matter how preposterous the story or its setup. This movie fails to hew true to itself, fails to engage your mind, and merely hopes it can charm its way into your heart, so that you ignore its pervasive imbecility. Repeatedly painted into a corner (albeit not much of one), the writer or director opts for the easy way out -- even though the moviemakers' and movie's characters make many decisions that make no organic sense. Alas, the movie falls flat on its face, and that flatness weighs heavily on your sensibility, as 1 minute creeps its way to two, and then three, as it dodders its way to 125 minutes of soul-deadening, time-wasting claptrap.

Yes, other people seemingly enjoyed the movie; it is possible you will as well. If you do go see this movie, I suggest you bring along your tax return and a clip-on light so that your 2 hours could be spent productively.

You never know," is correct!
-- David M Gordon / The Deipnosophist


10 August 2007

Music for the weekend, take 10

Let's mix up the musical offerings a tad...

Bodies of Water is an LA-based band that creates a type of music that includes an almost overwhelming blend of soaring vocals. Think four part gospel, and you are close to the mark; think music that causes your body to move in reaction to the harmonies -- I dare you to will successfully your body from not moving! -- and you will share a sense of the joy I feel when listening to this band's music.

Playback says,

"Standout track, These Are the Eyes, begins with marching drums, bleating horns and chanted vocals that eventually slow down into gently strummed acoustic guitar before erupting into lovely call and response between male and female. In yet another turn, horns are added to the mix and the guitars speeds up, testing just how fast they can take it, before erupting into chants of
These are my eyes,
these are the eyes of my eyes
It's an absolutely "indie-liscious" (thank you) pop song that challenges how many mood and tempo changes a song should have."

Really, is it any surprise that I begin each day listening to this band's exciting CD? This band's music is alive, vibrant, and powerful. Unfortunately, this CD is not available at most retailers (nor from Amazon), but check out the band's website for complete purchase information.

As always, I am interested in your comments and thoughts... after you stop moving long enough to type, that is!
-- David M Gordon / The Deipnosophist


The long haul

No, I am not oblivious to the turmoil the markets now endure. Yes, I see the ugly gap down openings set to occur today. It is difficult to get worked up into a lather, however, when the investor expected the turmoil; morever, it also is difficult to get worked up when that same investor, who has a keen sense of historical perspective, recognizes that, though the specifics are each time different, they always work out the same. This too shall pass.

So I keep my (gimlet) eye on the (money-making) ball; the profits machine. Having reduced weeks ago to my Core Opportunities, I of course ask myself, "Will this spot of market difficulty infect my portfolio for more than several weeks to a few months? More telling, perhaps: Will the worries of investors ("SELL!") translate to problems in company fundamentals (worries about consumer retrenchment, etc)?"

Of course, I am not happy to lose profits. Of course, I would prefer that contagions in the market not affect my favored opportunities. But without declines such as the one now extant, I would have no method to measure the best of the best, the crème de la crème. The 9 Core Opportunities.

And to make money over the long haul, aka my time frame.

--David M Gordon / The Deipnosophist

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07 August 2007


There are many reasons market oscillations fail to frighten me; I mentioned one or two in my reply to Dan's excellent question re JCG and MA. I suspect you would more easily understand, if you could see what I see; thus, I include a chart (below) of MasterCard/MA since its IPO...

[click on chart to enlarge]

Again, I delineate only one trend line: its primary up trend, or continuum. This line conforms to all of my rules for the correct drawing of trend lines (see post in left sidebar); you will note immediately that this decline, as forbidding as it seems while living through it -- and holding the shares! -- registers as barely a hiccough in the stock's continuum; its decline is only a measure of its successful trajectory north and east. This decline will shrivel even further in significance -- if I am correct, and the stock records higher highs over the months and years to come. I believe that will prove to be so, as MA is not a one-season stock.

NB: I since have tweaked marginally lower the trend line (not shown) in anticipation of the base pattern I expect to build off the current budding formation; the shares could break out above the base, but not yet to new highs, on ~13 October 2007, if correct. New highs would follow on the breakout rather quickly. Of course, holding an investment in anticipation of a likely bullish resolution in the future is one that must be monitored closely, seeking any hint of a negative divergence before a serious decline. Yes, that is correct: the current decline does not even merit the moniker of "serious," as it is merely an oscillation prefatory to an intermediate term base -- in advance of new all time highs.

Full Disclosure: Long the shares of MasterCard/MA.
-- David M Gordon / The Deipnosophist


05 August 2007

After a lengthy absence...

... "Music for the weekend" returns, thanks primarily to Allan Harris, who shared with me privately that he, and many other readers, enjoy the music suggestions. So with no further ado...

It is difficult to know which musician or band to recommend first, as I have enjoyed the music of so many phenomenally talented musicians since my last update; Sara Bareilles, however, is a very easy selection. I have not been this excited about a singer/songrwriter since 'discovering' the phenomenal talents of Patty Griffin and Brandi Carlile!

The CD's title Little Voice is misleading, as Sara has a big, BIG, voice. Her lyrics tell tales of love and heartbreak, and she sings them with a big voice, yes, but also sultry, jazzy, and very stylishly. The arrangements and composition smoke, carrying the listener from one song to another until, suddenly, the CD ends. WOW! (Sara's bio and AMG's review of Little Voice.)

The song I have decided to share, GRAVITY, receives a lot of radio play, and has been used in several movies already; I suspect you will recognize it immediately. It is not necessarily the best song on this, Sara's second CD, but it sure does impress (me)....

Something always brings me back to you.
It never takes too long.
No matter what I say or do I'll still feel you here
'til the moment I'm gone.

You hold me without touch.
You keep me without chains.
I never wanted anything so much
than to drown in your love
and not feel your rain.

Set me free, leave me be.
I don't want to fall another moment into your gravity.

Here I am and I stand so tall,
just the way I'm supposed to be.
But you're on to me and all over me.

Oh… You loved me 'cause I'm fragile.
When I thought that I was strong.
But you touch me for a little while
and all my fragile strength is gone.

Set me free, leave me be.
I don't want to fall another moment into your gravity.

Here I am and I stand so tall,
just the way I'm supposed to be.
But you're on to me and all over me…

I live here on my knees as I try to make you see
that you're everything I think I need
here on the ground.
But you're neither friend nor foe
though I can't seem to let you go.
The one thing that I still know
is that you're keeping me down…
Keeping me down.

But you're on to me and all over me.

Something always brings me back to you.
It never takes too long.

... in fact, the entire CD smokes! Enjoy!

And, as always, please share your comments re this week's selection of music for a weekend...
David M Gordon / The Deipnosophist


04 August 2007

Scott Grannis's pithy update

Scott Grannis (Chief Economist at Western Asset Management) writes privately to say (and share)...
- David M Gordon / The Deipnosophist

Here's the latest version of my favorite charts.

It's clear to me that the economy is not going to be very strong, but at the same time it's hard to find signs of impending disaster. There's a decent mix of weakness and strength out there.
-- Scott Grannis

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