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!

30 November 2007

The US$

The article below, about the US$, is from the current edition of the Economist. I share the entire article, as it is available to all readers on the Economist website. My comments follow...
The panic about the dollar
A full-blown dollar collapse would be disastrous. Thankfully, it need not happen

THE weather may be cold and wet, but in the rich world's financial markets it is beginning to feel like August all over again. Credit spreads have widened and shares are pitching from gloom to elation as investors look to the Federal Reserve for solace. The anxiety is unmistakable. But this time the scare is about more than bad mortgage loans and their baleful effect on the credit markets. America may be falling into recession. And a new fear now stalks the markets: that the dollar's slide could spin out of control.

A full-blown dollar crisis on top of a credit crunch and a weakening economy would be frightening. It would send financial markets reeling and tie the hands of the Fed, perhaps forcing it to raise interest rates even as recession looms. The sky-high euro would soar further, choking off Europe's growth. Political tensions would also rise. Already Airbus has called the dollar's decline “life-threatening” and France's president, Nicolas Sarkozy, has given warning of “economic war”.

At worst, the shadows could darken further. For half a century the dollar has been the hegemonic currency. A large slice of global trade is counted in dollars. Central banks hold most of their foreign-exchange reserves in dollars, a boon for America that has allowed it to issue debt more cheaply. That dominance has survived dollar slides before, as in the late 1970s and mid-1980s. But now, with the euro as an alternative, the fear is of a sudden shift in the global monetary system, with investors switching quickly from one currency to the other.

So far, this remains only a fear. Although the dollar has been falling at quite a lick—down 6% against a trade-weighted basket of currencies since August—it has seen no chaotic slump, but a slide interspersed, as this week, with brief rallies. Americans' expectations of future inflation have not yet risen much. Yields on government bonds have fallen: clearly, investors do not yet expect higher premiums for safe American assets. Whether disaster strikes depends on what exactly is driving the dollar down and on how policymakers react.

Headwinds and tailwinds

Much of the dollar's weakness is driven by economic fundamentals. Since peaking in 2002, it has fallen by 24% against a trade-weighted basket of currencies. Given America's need to borrow from abroad to finance its consumption, that is neither surprising nor sinister. By inducing Americans to import less and export more, a weaker dollar helps cut the current-account deficit. For America, the medicine has been working—the deficit is down to 5.5% of GDP from a peak of almost 7%.

If the dollar's decline has accelerated of late, that is largely because of the cyclical divergence between America's economy and the rest of the world. America fears recession; the Fed has already cut interest rates by 0.75 percentage points and financial markets are convinced that it will cut another quarter point on December 11th, when it next meets. When America's growth prospects and interest rates fall relative to those elsewhere, a cheaper currency is inevitable.

But economic fundamentals are not all that is hurting the dollar. The currency is also suffering because the credit mess is concentrated in dollar assets. Investors' conviction that transparent markets and vigilant regulators make America a safe place to store money has taken a battering from the revelations of recent weeks. Net private capital inflows into America seem to have evaporated since the credit turmoil began. The subprime crisis has tarred the dollar as a subprime currency.

In recent years a fall in private inflows has usually been offset by central banks in emerging economies that link their currencies to the dollar. This system (often known as Bretton Woods II) has thus propped up the dollar. But this time these central banks have been less willing to take up the slack. Right on cue, the cracks in Bretton Woods are becoming clear. China is routinely attacked in America and Europe for linking its currency to the dollar. Squeezed between rising oil prices and the falling dollar, the Gulf states face rising inflation: speculation is rife that one or more of them will modify their currency pegs at a regional meeting on December 3rd.

Handle with care

There you have it: the ingredients of a nasty crash. But self-interest and sensible policy can cut the odds of trouble. The first step is for American policymakers to pay more heed to their currency. For all their talk about a strong dollar, American officials have behaved as if they cared little about its worth. A reserve currency is supposed to be a store of value; by running a huge current-account deficit America has left the dollar vulnerable. At such a tricky time, benign neglect will no longer do. For the moment, this need mean little more than some carefully chosen words. If the slide becomes chaotic, it could demand currency-market intervention and a willingness to hold back interest-rate cuts for the sake of the dollar.

The other part of the solution lies elsewhere, particularly with those countries with dollar-pegging currencies. These economies need to allow their currencies to rise, both to curb inflation and encourage the rebalancing of the global economy. Appreciation would mean that these countries accumulated new dollar reserves at a slower pace. That in turn would lead to a loss of the dollar's pre-eminence and the emergence of other reserve currencies: there is no rule to say you can have only one reserve currency. But this need not—and in today's febrile environment must not—mean dumping existing dollar reserves. That would impose a far higher cost on everyone, including the dumpers.

The history of international co-operation on currencies is patchy. But China and the oil-rich Gulf states have ample reason to play their part in an orderly decline of the dollar's dominance. Despite the opprobrium heaped on them, the Chinese do not want to see the Fed's hands tied by a dollar crisis; nor do they want to see the euro zone, one of their best markets, slow sharply; and they have little interest in the external value of their existing dollar reserves plunging. Beyond all that, China's leaders want to be taken seriously as responsible actors in the international system. Now is their chance.

The Economist's writer does a yeoman's job of limning the items that ail the US$, and the consequent risks of a sudden crash in its value. Alas, over the past ~90 years, our (the US) government has allowed the US$ to lose ~90% of its value. It might be slow-motion, but it still quantifies as a crash.

But, then, most Americans fail to feel this particular crash. Their dollars purchase the same items, at the same cost, and at the same venue irrespective of location -- but only within the US. Remove yourself from the shores of the USA, and suddenly you see how much (little) the $ buys; for example, a can of Coke at a restaurant in Paris costs $8, etc.

Forty years ago, our government engaged in a bit of tit for tat with the government of France...
John Connally, Secretary of the US Treasury: "The $ might be our currency, but it is your problem."
Charles de Gaulle, President of France: "We do not want your $$ to pay your bills; send only your gold from Fort Knox."
Lyndon Johnson, US President, in an unprecedented nationally-televised appeal to Americans: "Please, this summer (1968), do not travel abroad. But if you must travel abroad, wherever you go, just do NOT visit France."

Is this any way to manage a nation's finances? The Economist's writer has it correct, "The first step is for American policymakers to pay more heed to their currency." The problem is that American policymakers have hewed to a strategy of debasing our currency to cheapen our products abroad (while concurrently making imports to the US more costly), thus allowing us to compete in international markets on an unfair basis.

I believe in a strong currency, especially the world's reserve currency (which role the US$ currently fills), and especially if the current global financial system (currencies that float in value vs the other) chooses to hang its hat on the hook of fiat currencies.

Consider the notion of floating currencies with no thermostatic measure. Imagine you had a fever, and the thermometer reads 102˚ -- but there is no constant of 98.6˚ that tells you when you vary from 'normal'. Instead, you take into account the temperature of the room, the time of day, and the position of the sun when taking the temperature. Thus, lacking a constant measure (thermostat), value become a slippery notion, measured in relative values and not absolutes.

Please do not interpret my comments as me favoring a return to the gold standard, or any other scheme; I argue only that, in a world of fiat currencies, at least one currency (ideally, the world's reserve currency) would be strong, stronger than the others. Period. And if any nation could withstand the resulting economic gales of a strong domestic currency, it arguably would be the USA.

However, as it stands right now, with the US$ sinking slowly, slowly, slowly into the west, I am embarrassed, even ashamed. The US$ should be just as sacrosanct as our flag, and our nation's ideals.
-- David M Gordon / The Deipnosophist

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Google: bid higher

Google/GOOG is bid higher by ~$13/share (to ~$710) in pre-opening trades; the most likely reason is this tidbit of speculation from
"The FTC is poised to approve Web omnipresence Google's $3.1 bln acquisition of online ad provider DoubleClick/DCLK, without any conditions, according to a lawyer involved in the merger review. The approval is expected as early as next week, the lawyer said, with the deal likely to close soon afterward."

Full Fisclosure: Long the shares of Google/GOOG
-- David M Gordon / The Deipnosophist


28 November 2007


Okay, you made money with your stock investment; now discover the product that makes all the money for Intuitive Surgical/ISRG...

"The Da Vinci Surgical System (Intuitive Surgical/ISRG) is a hulking behemoth of a robot, yet its mechanical hands can perform open heart surgery in the smallest places, with a range of motion far greater than laparoscopic instruments. We watch the Chief of Cardiothoracic Surgery at UCLA Medical Center join forces with his RoboDoc colleague to perform a complicated multiple bypass surgery."

btw, ISRG shares held at crucial support at ~265, and subsequently rebounded, especially yesterday and so far this morning, due to the company's presentation today (at 10am pst) at the Piper Jaffray Healthcare Conference. Check the company's website for transcripts of its presentation, if interested. (I am!)
David M Gordon / The Deipnosophist


16 November 2007

More market trouble ahead?

From the fine people at Dorsey Wright (subscription required) comes this pithy, and important, market comment. Hey, one paragraph (I do not include the introductory paragraph) and one chart? That qualifies easily as pithy!
-- David M Gordon / The Deipnosophist

The benefits of technical analysis largely reside with its ability to provide objective information to investors, with which to avoid emotionally charged decisions at inopportune times. And so we try to avoid becoming overly bullish or bearish upon observing any single development on a Point & Figure chart, as it would run contrary to the very discipline that Point & Figure analysis supports.

That said, the S&P 500 Index/SPX is on the brink of what would be a very unattractive breakdown at 1430. Upon such a print the index would break a spread quadruple bottom, complete a bearish catapult formation, and violate the bullish support line as well. This trend line dates back to the March 2003 lows, since which this market index has produced higher tops and higher bottoms upon every major market cycle. A violation of trend would make the August lows the next logical test of support, and a violation there would effectively end the 4 1/2 year series of higher tops and higher bottoms. On the "glass is half-full" side of the equation, a potential buy signal for SPX is now established at 1,500.

[click on chart to enlarge]

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Beside the Point

Does poetry require an introduction? I think not, although sometimes the poet's meaning is not always clear, and readers would benefit from some pointers. In the poem below, the poet's contextual meaning and intent are clear as crystal; the poem itself apropos of the moment.

-- David M Gordon / The Deipnosophist

Beside the Point
The sky has never won a prize.
The clouds have no careers.
The rainbow doesn't say my work,
thank goodness.

The rock in the creek's not so productive.
The mud on the bank's not too pragmatic.
There's nothing useful in the noise
the wind makes in the leaves.

Buck up now, my fellow superfluity,
and let's both be of that worthless ilk,
self-indulgent as shooting stars,
self-absorbed as sunsets.

Who cares if we're inconsequential?
At least we can revel, two good-for-nothings,
in our irrelevance; at least come and make
no difference with me.

-- Stephen Cushman


14 November 2007

Online Broker Troubles

A picture is worth 1,000 words, especially when accompanied by word balloons!

[click on cartoon to enlarge]

-- David M Gordon / The Deipnosophist

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13 November 2007

Where in the world is dmg?

A sudden onslaught of wildfires of personal crises burn the dry tinder of my life, and cause me to be absent from this website. My apologies. I just now began writing what I hope will become a lengthy commentary re the current market environment, expectations and lessons included. I hope to complete writing it late today or tomorrow. Meanwhile, I habituate the comments area with several off-the-cuff remarks.

Thank you for your comments and questions, which help me to address the issues germane to you. And, thank you, Boris, for your excellent comments. I especially like your follow-on comments re Blue Nile/NILE. (I bet you could guess I have a reply... :-)

btw, check out this site's archive for more good posts and readers' comments!
-- David M Gordon / The Deipnosophist


08 November 2007

Android, part 2

This article, Google and Cellphones: Let Freedom Ring, by Rob Pegoraro, begins well, but finally fizzles.

"Google might save the cellphone from its miserable self. In a year. If wireless carriers stop acting like, well, wireless carriers."
Unlike salespeople everywhere, the writer forgets the distinction between features and benefits; or, perhaps, he confuses the difference between the middleware programmers and the purchasers/users of cellphones, us.

No matter, as the article still offers several interesting points. Worth your time, if interested in the topic.

Full Disclosure: Long the shares of Google/GOOG

-- David M Gordon / The Deipnosophist


05 November 2007

Android Conference Call

Google, T-Mobile, HTC, Qualcomm and Motorola to Discuss New Open Platform for Mobile Devices

Industry leaders hold conference call to discuss the development of Android, the first truly open and comprehensive platform for mobile devices, and the announcement of the Open Handset Alliance, a multinational alliance of more than 30 technology and mobile industry leaders.

Monday, November 5, 2007, 9:00am pacific / 12:00 pm eastern

The following executives will participate in the call:
Eric Schmidt, Chairman and CEO of Google Inc.
Andy Rubin, Director of Mobile Platforms, Google Inc.
Rene Obermann, CEO of Deutsche Telekom, parent company of T-Mobile
Peter Chou, CEO of HTC Corp.
Paul Jacobs, CEO of Qualcomm
Ed Zander, Chairman and CEO of Motorola, Inc.

With nearly 3 billion users worldwide, the mobile phone has become the most personal and ubiquitous communications device. However, the lack of a collaborative effort has made it a challenge for developers, wireless operators and handset manufacturers to respond as quickly as possible to the ever-changing needs of savvy mobile consumers. Through Android, developers, wireless operators and handset manufacturers will be better positioned to bring to market innovative new products faster and at a much lower cost. The end result will be an unprecedented mobile platform that will enable wireless operators and manufacturers to give their customers better, more personal and more flexible mobile experiences.

Toll-free: 800-817-2743
Toll: 913-312-1295
Confirmation Code: Google 8747527



Due to a sudden and unforeseen change, I am behind schedule on my responsibilities. My market commentaries will resume asap -- until then, please expect a frequent brief snippet, or two.

Thank you for your patience,
David M Gordon / The Deipnosophist


02 November 2007


Yesterday's market action is decidely negative.

That much might be obvious to all, but the more interesting question is whether yesterday's ugliness proves ephemeral, or instead ushers in an intermediate term change of trend. Unfortunately, and despite the likelihood of gap higher openings (typical market action) this morning, it will likely prove to be the latter case.

lengthier post showing why risk increases for more than mere short term reversals (to down from up) should appear this weekend.
-- David M Gordon / The Deipnosophist


01 November 2007

Real time investment advice

'browser' writes...
"Would you please consider a journal entry, or a regular monthly revised entries on what sensible entry points for your Core 9 might be? The last I recall was your recommendation of GOOG at 500, which was a great winner. Many of the others have run wildly since then without entry points for new monies having been discussed. I would find your appraisals of risk/reward for placing new money into the Core 9 most helpful."
Well, browser, as sensible as your request might be, it also is beyond the scope of this blog. I did not envision this effort to be a trading advisory service; there are plenty of those around. This blog, really, is my trading log, albeit very public. Nonetheless, I will attempt to comply with your request in some manner that satisfies us all.

Yes, frequently comes an opportunity to purchase -- or sell, as with the recent partial liquidation of ISRG -- so fantastic that I scream it from the rooftops. But, no, my objective here is to share winning investing techniques via the correct discernment of price, volume, pattern, and trend (continuum). Thus, you will find many, many lessons -- but no lesson plan. Oh, and the opportunities (the Core 9) that crown my list. When considered together, my Core 9 and the lessons I (attempt to) teach, consistently successful investing should be the result for your portfolio; i.e., an ever-increasing total portfolio value over all seasons and cycles. Match off the investing techniques with the investment opportunities that resonate for you. All of which means save your favorite posts, as they would make for an excellent investing book. (Any publishers out there?)

It so happens that I help manage clients' portfolios. My objective as a money manager is not to trade short term opportunities, but to identify the best long term investment opportunities in the quest to build wealth, not generate taxable trading profits. Once identified, we purchase at opportune moments, and then hold long term. ("Long term" = a valuation based on many measures that is sufficient to our shared objectives.) I find this effort to manage my clients' portfolios to be the best admixture of their needs and my talents.

If this opportunity catches your fancy, and you would like to learn more (including discussing past performance with clients), please contact me at

Full Disclosure: Long money management as a practice and as a business

-- David M Gordon / The Deipnosophist

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