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 2008

Between a rock and a hard place (UPDATE)

Now that the media has caught up with Stratfor's earlier analysis re the mayhem in Mumbai, and its consequent devolution of relations between India and Pakistan, Stratfor steps out ahead again, and explains why India -- its government, its people -- is caught between a rock and a hard place.

And why the unthinkable seems to be, correctly or otherwise, that nation's only possible response.
-- David M Gordon / The Deipnosophist

November 30, 2008

India: A Political Response Begins to Form

Five days after the Mumbai militant attacks began, the Indian government's response is beginning to take shape Nov. 30. So far, the following actions have been taken:

  • According to a Reuters interview with India's minister of state for home affairs, Sriprakash Jaiswal, India will increase security to a "war level." Jaiswal went on to say, "They (Pakistan) can say what they want, but we have no doubt that the terrorists had come from Pakistan."
  • Indian Home Minister Shivraj Patil resigned Nov. 30. Finance Minister Palaniappan Chidambaram, who led an effort to overhaul India's security agencies as a junior minister in the 1990s, will take his place. Prime Minister Manmohan Singh, an economist by trade, will handle the finance portfolio for now. National Security Adviser M.K. Narayanan had submitted his resignation, but Singh refused it and thus Narayanan will retain his position, according to the Times of India. More resignations are expected from senior members of the Indian Intelligence Bureau and the Research and Analysis Wing.
  • Singh announced in an official statement that air and sea security would be increased; the counterterrorism National Security Guard will be expanded to include four additional hubs in different parts of the country; special forces at the disposal of the central government will now be utilized for counterinsurgency operations; and a Federal Investigating Agency will be formed.
  • Singh asked Foreign Secretary Shiv Shankar Menon to rush to Washington, D.C., to brief U.S. President-elect Barack Obama's advisers on the Mumbai attacks. Menon is expected to leave for Washington on Dec. 1.
Notably, recent statements from Singh and Foreign Minister Pranab Mukherjee have a revealed a much less hawkish tone and have avoided any further mentions of the attacks being linked to Pakistan. Sources in New Delhi report that the shift in tone has likely stemmed from behind-the-scenes intervention by the U.S. administration.

As Stratfor has discussed, after an attack of this magnitude, India's ruling Congress party has no choice but to respond forcefully if it wishes to avoid government collapse. That response would inevitably be directed at Pakistan, given the growing indications of a Pakistani link to the attacks and the history of Pakistani-backed Islamist militant activity inside India. Though the circumstances are very different today than they were in 2002, after another major attack in India blamed on the Pakistani state, the Indians have a political need to pressure the Pakistani government to rein in the suspected rogue elements of the Inter-Services Intelligence (ISI) agency who maintain close relations with these groups.

But New Delhi is also in a quandary. While it retains the option of amassing troops along the Indo-Pakistani border and possibly conducting cross-border raids against militant training camps in Pakistan-occupied Kashmir, thus building up a crisis with Islamabad, the Pakistani government is now at its weakest point politically, militarily and economically. This is of enormous concern to the United States, which at the very least needs Islamabad to hold itself together in order to make progress on the counterterrorism front in both Pakistan and Afghanistan.

The restraint that the ruling Congress party has exhibited so far, however, could end up being the party's political death sentence. By many accounts, the response thus far is being considered weak. No amount of political musical chairs is likely to satisfy the Indian public and those inside the Congress party arguing for more aggressive action against Pakistan. Moreover, dismissing senior members of the government most intimately familiar with the current situation might be politically necessary, but it could undermine continuity of policy, particularly when there are enormous inefficiencies already inherent in the creation of large federal entities. It could be that the government is awaiting more concrete evidence of a Pakistani link before it ratchets up tensions, but from where things stand now, pressure is building up inside India against a ruling party that has long been accused of being "soft on terrorism."

The main opposition Hindu nationalist Bharatiya Janata Party (BJP) is ready to pounce and retake the government. Already the BJP has run a number of front-page advertisements in major Indian newspapers accusing the ruling Congress party coalition of its failure to defend the nation. One such ad appeared on a blood-red-stained background with the message, "Brutal terror strikes at will. Weak government. Unwilling and incapable. Fight terror - Vote BJP." The next few days will be critical as the BJP looks for the most optimal time to make its move against the government to bring on early elections. It must also be remembered that the BJP and its Hindu nationalist affiliates have ties to a number of activists reeling from the Mumbai attacks. These could easily be used to start riots inside India to put more pressure on the ruling Congress party (a tactic that Islamist militant groups operating in India have long hoped to trigger). The BJP has also condemned Congr ess for trying to get the Pakistani ISI chief to come to India, saying, "Inviting ISI for probe is like handing over treasury keys to the thief."

The political situation is still dicey, but Congress is increasingly looking like it will be unable to survive the aftermath of this attack unless it takes more aggressive action. At the same time, the buildup in the BJP's rhetoric locks that party into a more hardline position, should it end up coming to power. Either way, the potential for a crisis in Indo-Pakistani relations is still high.
Geopolitical Diary: The Mumbai Crisis
1 December 2008

The world grew more complicated during the American Thanksgiving holiday. On Wednesday night, Nov. 26, a group carried out a complex terrorist-style attack in Mumbai, India. In addition to seizing two luxury hotels and a Jewish facility, the attackers carried out a series of random attacks throughout the city, using automatic weapons and hand grenades. Current evidence indicates that at least one group came to Mumbai from Karachi, Pakistan, via ship, then hijacked an Indian vessel and landed at a fairly isolated beach, hooking up with operatives already deployed in Mumbai. Some of the attackers appear to have been Indian Muslims and some from Pakistan, but under any circumstance the attacks were more complex and sophisticated, and of longer duration, than previous terrorist-style attacks in India.

The Indian government, which is not particularly strong, obviously must respond. It does not have the option of simply moving past the event. The Indians’ two responses must be either blaming themselves for poor security or blaming the attacks on a foreign power —obviously Pakistan. Both of these could be correct responses, but emphasizing one would probably bring down the Indian government, while emphasizing the other would allow the government to deflect responsibility to Pakistan, a country neither liked nor trusted in India. The charge would not necessarily be that the Pakistani government, or even elements of the government, planned the attacks. The charge would be that the Pakistani government failed to act decisively to prevent the attacks. In other words, the attacks occurred because the Pakistanis have not been sufficiently aggressive in bringing radical Islamist forces in Pakistan under control.

This is, of course, the same charge the Americans have been making against Pakistan, and is one of the foundations of U.S. President-elect Barack Obama’s foreign policy. He has said that he would place heavy pressure on the Pakistanis to get them to be more effective in fighting al Qaeda and the Taliban. Indeed, Obama has said he would be sending more troops to Afghanistan and would expect Pakistan’s cooperation with U.S. efforts.

It is not clear precisely what India will do in this crisis. In 2001, when New Delhi was responding to another terrorist attack, it took about a week to decide what to do; in the end, the government sent forces to the Pakistani border. The tension escalated to include nuclear threats. If that model is followed here, we might well be in an intense crisis in a week or so, although reports of intense political infighting might delay a response. The Pakistanis will try to head off a crisis by offering full cooperation with India in dealing with the problem, but it is not clear that the Indian public or politicians will accept this. It will be regarded as an ineffectual gesture by many, if not most. From where we sit, Pakistan will have to provide more than an agreement to increase cooperation.

That places Pakistan between two very powerful forces: India and the United States. Pakistan has already indicated what it might do, saying that if India increased its forces along the border, Pakistan would shift 100,000 troops to the border as well — all of them drawn from its border with Afghanistan. In other words, Pakistan has let the United States know that Indian pressure will result in a reduction of Pakistani forces along the Afghan border, while the United States is demanding that the number of forces there actually be increased. That in turn would create a crisis in Pakistan’s relations with the United States.

Pakistan’s other option is to take effective action against Islamists along both its borders. The problem is that it is not clear that the Pakistani government could do this, even if it wanted to. There are elements within the Pakistani intelligence service that potentially could sabotage any move in this direction, and there is widespread opposition among the Pakistani public to any crackdown. If the government attempted one, it is not clear that Pakistan would not fracture and dissolve into chaos.

The Mumbai attackers, whoever they ultimately turn out to have been, clearly were not stupid. They were less interested in killing people in Mumbai than in creating precisely this crisis. First, the Pakistanis are trapped between the United States and India. Second, the government either turn can on the Islamists — unleashing chaos — or refuse to do so, creating an international crisis. In the event of chaos, whoever organized the attack is in a position to increase their influence in Pakistan. In the event the government refuses to act, it will grow more dependent on radical Islamists. In either case, the attack has set into motion a process that could increase the influence of Islamists in Pakistan.

The alternative is for India to let the attacks pass without generating a crisis with Pakistan. But he problem with that strategy is not only internal Indian politics. There is also the fact that there is no reason to believe that attackers don’t have the ability to mount more attacks in India. There is no way for the Indians to block these attacks, and if such attacks were to continue, the Indian government not only would lose further credibility, it would wind up in the same crisis it might wish to avoid now. And no one knows what follow-on capabilities and plans the attackers have.
For the moment, therefore, the attackers — whether al Qaeda, Lashkar-e-Taiba or some other combination of groups — are driving events. It is not clear how the Indians, Americans or the Pakistani government can seize the initiative away them. And it is not clear that any of the three countries can get out of the way of the crisis that is unfolding.

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28 November 2008

I stand corrected

On 16 November, I wrote a post, Beyond Disgust, which offended at least one reader.

And today I received a private message from that reader that I share with you (below). In it, the reader takes me to task, rather gently, for my misperceptions re Islam and sharia law and for spreading same beyond the confines of my own mind (via my public post, Beyond Disgust). Yes, I know the author of the letter, but choose to grant anonymity to the person because he or she wrote to me via private letter not public post.
-- David M Gordon / The Deipnosophist

Dear Mr. Gordon,

Just days after smearing [unintentionally, I confidently and compassionately assume] Islam and sharia and its strict practitioners by connecting them to the reported killing of a young rape victim at the hands of Muslims whom Islam and its sharia law would actually consider as criminals if it is proven (with more than Amnesty and UN claims, thousands of news reports and bloggers repeating those claims, and no trial) that they did that, you have again unwittingly joined millions of other newsmakers and reality distorters in smearing Islam, its fundamentals, and those who follow them.

You should feel happy and secure to learn and know without doubt or reservation, that the fundamentals of Islam and the countless Muslims like me who follow Islam's fundamentals utterly reject and condemn the crimes of terror that have happened at the hands of currently unnamed individuals of a currently unidentified group (be they nominally Muslims, or otherwise, proven to be guilty or merely blamed and convicted without proof) killing over a hundred civilians in Mumbai. We also utterly reject and condemn the hurried, shameless response of politicians world-wide, calling to intensify their government-sponsored wars of known, named, and virtually unconditionally-praised uniformed soldiers and their commanders that have already killed countless (and uncounted) hundreds of thousands of innocent Muslims who follow the fundamentals of Islam in numerous countries, people who are killed in direct response to terror actions like those in Mumbai and elsewhere, though they have absolutely no involvement whatsoever in such acts.

Why do you condemn one form of rogue terror and its unknown or alleged or known practitioners and you loudly morn its numbered innocent victims; yet you do not condemn the other form of resulting state-sponsored terror and its known practitioners and you remain deafeningly silent about its countless innocent victims? Why do you describe the killing of innocent people as an act of Islamic fundamentalism, of any sort, or as the action of Islamic fundamentalists, of any sort, when crystal clear and publicly available Islamic sources of Quran and Sunnah, the Muslim scholars who explain those sources, and the lay people who follow them all universally reject such criminal actions as unislamic and against Islamic principals?

"Extreme, radical Islamic fundamentalists", you say. These latest planned terror attacks are extreme and radical, indeed, though not nearly as radical or extreme as the disproportionate, barbaric, misdirected, more sophisticated and far more deadly state-sponsored and public-approved and -funded bombings and military invasions and occupations of entire Muslim populations in multiple countries. Neither forms of terror, however, are the work of people who follow and respect the fundamentals of Islam, those hundreds of millions world wide who have earned the honor of being rightly called Islamic fundamentalists. The security you feel in a world with almost 2 billion Muslims is proof of that.

Certainly, we Muslims ought to be better exemplars of Islamic fundamentals, and you non-Muslims ought to make more effort in learning about Islam and Muslims by speaking with us, in person. Increasingly, we live among you. And that will not, God-willing, change.

from a servant of Almighty Allah,

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Throw a dart

Focus solely on price, and miss the big picture.

But if you prefer to focus on price, remember what I said in my
Kairos post,
"... note those stocks that build internal bases and improve on a technical basis within the confines of their overall negative trend. For example ... several key large cap companies, but especially the pharmaceuticals, have produced important long-term relative strength changes in recent weeks ... Other stocks in other groups and sectors of the market behave even better."

Note well the preponderance of capitulative lows made on 10 October; iow, right on schedule. Also in the Kairos post was this comment:
"Consider that the first group of stocks to emerge could be those traditionally favored by institutional investors; specifically, large cap." (Go back and re-read the remainder of that paragraph for added insight.)

Martin Sosnoff, of Atalanta Sosnoff Capital, provides an excellent example of a time-tested institutional investor; Marty has invested successfully through all phases of the market's cycle. All investors should read his recent Forbes article (a snippet of which is below)...

On Black Monday in 1987, I remember a conversation with Mike Milken. We were talking about where the money would come from to shore up the market. Milken said, "I can identify at least 500 individual money pools with $500 million available for the market. The money's in the country." I feel the same way today. Kirk Kerkorian is a good example, but he was early and chose the wrong stocks, first General Motors and then Ford. Kerkorian got burnt fingers trying to relive his felicitous experience with Chrysler decades ago. There are dozens upon dozens of billionaires waiting to step into his shoes and become players. Just you wait and see. Good riddance to October. During October, daily fluctuations of 5% to 10% prevailed. Specific sectors like the financials showed weekly ranges of 30% and much higher even among sizable properties like Goldman Sachs, MetLife, Bank of America and Morgan Stanley. An efficient market, anybody? ... forced liquidation was a factor in the market's demise but that the worst may be over sooner rather than later. So take your head out of the oven. The market may sell as low as 10 times earnings for a while but when inflation is low and 10-year Treasuries yield approximately 4%, the market normally sells at a mid-teens price-earnings valuation. I'll take the other side. Obama comes out running his first 100 days in office, pushing through a $300 billion stimulus package. It contains enough infrastructure spending to shorten the recession by a couple of quarters. The market smells blood and begins to discount the next recovery by at least six months. Last week, it felt as if this scenario was beginning to be tested as investors seemed to begin to value stocks not on recession earnings, but rather on normalized earning power over the next recovery cycle. I'm seeing too many major companies with positions on the board selling today at 10 times earning power or less. Leave aside most banks and brokers as too difficult to model with much confidence. My list is long: It includes...

Marty then proceeds to name the stocks of many companies, each large cap. Understand yet...? Non-institutional stocks tend to be bull market phenomenons -- they rise almost exclusively during a bull market; i.e., the last to rise and the first to decline. As such, they primarily are the domain of retail investors... the very same investors who likely are frightened away from the markets for a long while to come. Meanwhile, institutional type stocks will rise and rise and rise some more -- yes, to new all time highs -- because
1) Professional investors invest throughout the complete market cycle;
2) They purchase stocks with sufficient liquidity to sop up the massive sums of monies at their disposal;
3) Their mandate typically forbids purchases of stocks that sell for under ~$15/share;
4) Etc.

Returning to the Kairos post, I also said
"Subsequent to the low trade, comes the bottom, which self-defines as a lot of give and take, price movement up and down but confined to a range, an area pattern. Time heals all wounds. Whether a bottom builds from recent lows, or later from even lower lows, certain items must transpire before a more bullish price environment (read, continually rising prices) were to appear. Viewed on a chart, these certain items include (but are not limited to):
a) A diminution in the total number of stocks that trade at new lows (recent numbers have been astronomically high);
b) The decline's trajectory loses its nose-dive formation in favor a flattish shape;
c) Hold repeatedly at support;
d) An upside reversal off said support;
e) A subsequent test of the upside reversal;
f) A breakout above initial resistance;
g) A breakout above its 50 day sma;
h) A price rise toward its 200 day sma;
i) A retracement back down toward its 50 day sma;
j) Back and forth price action circumscribed by the two moving averages;
k) A breakout above its 200 day sma;
l) A new right side to the chart builds.
Among the many price tests and re-tests comes the crucial news response syndrome. Stocks fail to make lower lows, even as the economic and financial news worsens..."

Now is a good time to show you how the above steps work real time via annotated charts. First condition "a" is being met now, as new 52 week lows contract severely and very quickly and the new 52 week highs begins to expand. 52 week highs in this market environment? This is a little noticed but very positive change. All the other conditions, can and should be seen visually, which I will do below, beginning with the news response syndrome.

[click on each chart to enlarge]

Deere/DE reported earnings before the markets opened Wednesday that were worse than the market expected; in reaction, sellers sold and the stock tanked on the opening. But in a 'surprise' development, the stock reversed and closed substantially higher. (See chart above.) This reaction, the news response syndrome, and the building positives within DE's internal pattern augurs for follow-on gains.

You can view more of the initial steps of a reversal and bottom in the chart above; each letter corresponds to the steps quoted from my Kairos post (higher up on this post). Again, the capitulative low on 10 October (highlighted but not pointed to) stands out like a sore thumb; while investors fret and predict even worse price declines to come, stocks quietly go about their business. The worst of the decline occurred, as stated, during the one week of 3 to 10 October -- and then it was all over but the shouting.

More of the steps of another institutional stock that also hit its capitulative low on 10 October, and builds one bullish development after another. Note, too, how compressed the decline is on both the x and y axis. All the sound and fury for this... blip? This price decline (amplitude) is barely noticeable, leave alone notable, and the amount of elapsed time (from high to high, or magnitude) is brief enough to raise barely a squawk. Or hurt.

And last -- but certainly not least! -- is the stock shown in the chart above. Note that its capitulative low was the earlier 15 July (recall Don Coxe's brilliant scenario as mentioned in -- where else but? -- my Kairos post), with a second, and higher, test on 10 October. Easily observable to all viewers by now is the increasingly obvious and bullish pattern of higher lows and higher highs. Do you recall this comment (also from my Kairos post)...?
"... note those stocks that build internal bases and improve on a technical basis within the confines of their overall negative trend..."

Look again at the chart immediately above, but look closer this time; really see it. You will see variants of this pattern begin to proliferate... before it finally comes to predominate. My Kairos post, and other posts before it, could not prepare you any better for what transpires now: a changing reality... a change in direction.

An investor could purchase (trade) at any of the steps I limned in the Kairos post, and be successful. All while the news backdrop worsens, as it will, and as the markets bounce about; rally, test, rally, test. By the time most investors finally make the decision to shed their overwhelming bearishness, the early leaders -- the 2 or 3 I share in this post, and many, many others -- will be higher in price, substantially higher. So study the market averages for the markets' direction and trajectory, and base your investment decisions on your perceptions thereof, if you prefer, but recognize that the markets rarely, if ever, proceed monolithically down... or up.

The best investment opportunities occur at the oddest of times, such as now; consider that the charts I share above show stocks that change direction (to up from down), and not the many stocks that rise already to new all time highs. Surprise, surprise. Prices and values have been mercilessly and indiscriminately beaten down today, such that you could throw a dart and select a winner -- but only if you limit your dartboard of possible investment opportunities to large cap stocks with strong technical patterns and studies. Define your opportunity, your core competency, for success.

Please do not scoff at the notion of investing in large cap stocks...
1) They typically begin major market rallies;
2) They represent the leading edge investment opportunities; merely the first step, the first class and type of opportunity of many classes and types of winning long-side opportunities yet to come;
3) If your investing objective is to make money (and do not laugh, it is not everybody's), then you have everything on the institutions for investment success, especially nimbleness. Buy the same stocks they too will buy, but do not yet know; their buying will power higher the shares you purchased in advance, and will sell to them... at higher prices.

Invest well.

Full Disclosure: Long the shares of Deere/DE. (And the other stocks in this post whose names I do not reveal.)
-- David M Gordon / The Deipnosophist

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27 November 2008

Thoughts of thanks

Okay, today is a day of thanks and positive thoughts, so to begin and end the day with the ugly situation in Mumbai (post below) is rather inappropriate. Perhaps a cartoon to lift the mood...?

[click on cartoon to enlarge]

Okay, the cartoon makes me smile, but really does not do the trick. How about David Broder's essay from today's edition of the Washington Post?

"... for several years, I have been arguing that there are traits much more important to the success of a president than brainpower. Self-confidence, curiosity, an eye for talent, the ability to communicate, a temperament that invites collaboration -- all these and more rank higher on the list of desirable presidential traits. I am not ready to abandon that view. But I am struck by how lucky this country is, at the moment, that the president-elect is a super-smart person like Barack Obama. With each passing day, it becomes more evident that even the smartest and most experienced managers of the American economy are struggling to understand -- and fix -- what has gone wrong in our markets... The sums are so staggering, the vocabulary so unfamiliar, the experience so uninformative that I have not a clue whether Bernanke, Paulson, and Co. are on top of the situation or are inadvertently making things worse... Obama is not similarly handicapped. Even in the emotional maelstrom of his election victory, and even with the pressures of assembling his administration, everything points to his managing to focus on the policy choices looming in the economic field...Two people on the fringe of the transition team ... have been asked for input by Obama, and both say that the quality of his questions -- and his follow-ups -- were a measure of the depth of his knowledge of the situation. His ability to respond to the questions he has been asked, to make his points in a coherent, balanced way and to avoid any misstatement has certainly been a treat to watch. The appointments he has made to his economic team have been impressive, and the response to them has been almost uniformly positive from Capitol Hill to Wall Street. But it is not just the incoming White House and Cabinet people who have been reassuring; it has been Obama himself. As well as he handled himself during the long campaign, he has been equally sure-footed in the transition. And behind the smooth public performance is a mind that seems able to stretch to encompass even the most complex of policy choices."
I quoted more of the essay than I had intended. And none of it is new or earth-shattering, but it ably captures the essence of President-elect Obama's qualities of mind and character and temperment. I do not know him (though I wish I did), but his bearing to date speaks volumes; from the outside looking in, the man oozes charisma, gravitas, even duende.

A more appropriate and positive post for today (of all days). Happy Thanksgiving to All!
-- David M Gordon / The Deipnosophist

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Possible Geopolitical Consequences of the Mumbai Attacks

On this day of giving thanks, I think often of the many people who do without -- and some who have their assumptions and suppositions shattered, suddenly and unexpectedly. Such as the unfolding drama in Mumbai, India. Photos here of the carnage and mayhem.

I have shared previously a handful of essays from Stratfor, but the one below shows what the firm does best: assess, interpret, and then forecast the consequences of geo-, and socio-, political actions.

Read on to learn more...

-- David M Gordon / The Deipnosophist

27 November 2008

Red Alert

Possible Geopolitical Consequences of the Mumbai Attacks


If the Nov. 26 attacks in Mumbai were carried out by Islamist militants as it appears, the Indian government will have little choice, politically speaking, but to blame them on Pakistan. That will in turn spark a crisis between the two nuclear rivals that will draw the United States into the fray.


At this point the situation on the ground in Mumbai remains unclear following the militant attacks of Nov. 26. But in order to understand the geopolitical significance of what is going on, it is necessary to begin looking beyond this event at what will follow. Though the situation is still in motion, the likely consequences of the attack are less murky.

We will begin by assuming that the
attackers are Islamist militant groups operating in India, possibly with some level of outside support from Pakistan. We can also see quite clearly that this was a carefully planned, well-executed attack.

Given this,
the Indian government has two choices. First, it can simply say that the perpetrators are a domestic group. In that case, it will be held accountable for a failure of enormous proportions in security and law enforcement. It will be charged with being unable to protect the public. On the other hand, it can link the attack to an outside power: Pakistan. In that case it can hold a nation-state responsible for the attack, and can use the crisis atmosphere to strengthen the government's internal position by invoking nationalism. Politically this is a much preferable outcome for the Indian government, and so it is the most likely course of action. This is not to say that there are no outside powers involved — simply that, regardless of the ground truth, the Indian government will claim there were.

That, in turn, will plunge India and Pakistan into the worst crisis they have had since 2002. If the Pakistanis are understood to be responsible for the attack, then the Indians must hold them responsible, and that means they will have to take action in retaliation — otherwise, the Indian government's domestic credibility will plunge. The shape of the crisis, then, will consist of demands that the Pakistanis take immediate steps to suppress Islamist radicals across the board, but particularly in Kashmir. New Delhi will demand that this action be immediate and public. This demand will come
parallel to U.S. demands for the same actions, and threats by incoming U.S. President Barack Obama to force greater cooperation from Pakistan.

If that happens, Pakistan will find itself in a nutcracker. On the one side, the Indians will be threatening action — deliberately vague but menacing — along with the Americans. This will be even more intense if it turns out, as currently seems likely, that Americans and Europeans were being held hostage (or worse) in the two hotels that were attacked. If the attacks are traced to Pakistan, American demands will escalate well in advance of inauguration day.

There is a precedent for this. In 2002 there was an
attack on the Indian parliament in Mumbai by Islamist militants linked to Pakistan. A near-nuclear confrontation took place between India and Pakistan, in which the United States brokered a stand-down in return for intensified Pakistani pressure on the Islamists. The crisis helped redefine the Pakistani position on Islamist radicals in Pakistan.

In the current iteration, the demands will be even more intense. The Indians and Americans will have a joint interest in forcing the Pakistani government to act decisively and immediately. The Pakistani government has warned that
such pressure could destabilize Pakistan. The Indians will not be in a position to moderate their position, and the Americans will see the situation as an opportunity to extract major concessions. Thus the crisis will directly intersect U.S. and NATO operations in Afghanistan.

It is not clear the degree to which the Pakistani government can control the situation. But the Indians will have no choice but to be assertive, and the United States will move along the same line. Whether it is the current government in India that reacts, or one that succeeds doesn't matter. Either way, India is under enormous pressure to respond. Therefore the events point to a serious crisis not simply between Pakistan and India, but within Pakistan as well, with the government caught between foreign powers and domestic realities. Given the circumstances, massive destabilization is possible — never a good thing with a nuclear power.

This is thinking far ahead of the curve, and is based on an assumption of the truth of something we don't know for certain yet, which is that the attackers were Muslims and that the Pakistanis will not be able to demonstrate categorically that they weren't involved. Since we suspect they were Muslims, and since we doubt the Pakistanis can be categorical and convincing enough to thwart Indian demands, we suspect that we will be deep into a crisis within the next few days, very shortly after the situation on the ground clarifies itself.

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26 November 2008

Some advice on what to eat and drink

Q: I've heard that cardiovascular exercise can prolong life. True or false?
A: Your heart is only good for so many beats, and that's it. Don't waste them on exercise. Everything wears out eventually. Speeding up your heart will not make you live longer; that's like saying you can extend the life of your car by driving it faster. Want to live longer? Take a nap.

Q: Should I cut down on meat and eat more fruits and vegetables?
A: You must grasp logistical efficiencies. What does a cow eat? Hay and corn. And what are these? Vegetables. So a steak is nothing more than an efficient mechanism of delivering vegetables to your system. Need grain? Eat chicken. Beef is also a good source of field grass (green leafy vegetable). And a pork chop can give you 100% of your recommended daily allowance of vegetable products.

Q: Should I reduce my alcohol intake?
A: No, not at all. Wine is made from fruit. Brandy is distilled wine, that means they take the water out of the fruity bit so you get even more of the goodness that way. Beer is also made out of grain. Bottoms up!

Q: How can I calculate my body/fat ratio?
A: Well, if you have a body and you have fat, your ratio is one to one. If you have two bodies, your ratio is two to one. Etc.

Q: What are some of the advantages of participating in a regular exercise program?
A: Can't think of a single one, sorry. My philosophy: No Pain = Good!

Q: Aren't fried foods bad for you?
A: YOU'RE NOT LISTENING! .... Foods are fried these days in vegetable oil. In fact, they're permeated in it. How could getting more vegetables be bad for you?

Q: Will sit-ups help prevent me from getting a little soft around the middle?
A: Definitely not! When you exercise a muscle, it gets bigger. You should only be doing sit-ups if you want a bigger stomach.

Q: Is chocolate bad for me?
A: Are you crazy? HELLO cocoa beans -- the best feel-good food around!

Q: Is swimming good for your figure?
A: If swimming is good for your figure, explain whales to me.

Q: Is getting in-shape important for my lifestyle?
A: Hey, round is a shape!

The final word on nutrition and health.
1. The Japanese eat very little fat and suffer fewer heart attacks than Americans.
2. The Mexicans eat a lot of fat and suffer fewer heart attacks than Americans.
3. The Chinese drink very little red wine and suffer fewer heart attacks than Americans.
4. The Italians drink a lot of red wine and suffer fewer heart attacks than Americans.
5. The Germans drink a lot of beers and eat lots of sausages and fats and suffer fewer heart attacks than Americans.

Eat and drink what you like. Speaking English apparently is what kills you.

Happy Thanksgiving to All!
-- David M Gordon / The Deipnosophist


23 November 2008

Pearls Before Swine

I am a late-comer to the comic strip, Pearls Before Swine by Stephan Pastis; now I read it everyday.

[click on cartoon to enlarge]

Read it here daily, and laugh often.
-- David M Gordon / The Deipnosophist

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Inner8 - a completely new way to find new investment opportunities

Inner8 is a new site for investors that warrants your attention, if not use...

Invest with Confidence: We think professional stock brokers and money managers do not have a lock on investment talent. Or that they should reap all the rewards of investment success. Only Inner8 makes it easy to build your own smart, private, inner-circle of trusted investors powered by our new proprietary analytics. You get profitable investment ideas, demonstrate your own expertise, and save a bundle on investment suggestions. Inner8, it’s a rewarding experience.

[click on image to enlarge]

Check it out. And, as always, please share your comments and thoughts.
-- David M Gordon / The Deipnosophist


19 November 2008


The ugliness we humans can perpetrate on each other -- yes, the brutal ending to Aisha Ibrahim Duhulow's brief life still haunts me -- has me thinking dark thoughts. I need a lift every once in a while, and especially now, which the poem below provides.


Sometimes when day after day we have cloudless blue skies,
warm temperatures, colorful trees and brilliant sun, when
it seems like all this will go on forever,

when I harvest vegetables from the garden all day,
then drink tea and doze in the late afternoon sun,
and in the evening one night make pickled beets
and green tomato chutney, the next red tomato chutney,
and the day after that pick the fruits of my arbor
and make grape jam,

when we walk in the woods every evening over fallen leaves,
through yellow light, when nights are cool, and days warm,

when I am so happy I am afraid I might explode or disappear
or somehow be taken away from all this,

at those times when I feel so happy, so good, so alive, so in love
with the world, with my own sensuous, beautiful life, suddenly

I think about all the suffering and pain in the world, the agony
and dying. I think about all those people being tortured, right now,
in my name. But I still feel happy and good, alive and in love with
the world and with my lucky, guilty, sensuous, beautiful life because,

I know in the next minute or tomorrow all this may be
taken from me, and therefore I've got to say, right now,
what I feel and know and see, I've got to say, right now,
how beautiful and sweet this world can be.
-- David Budbill

-- David M Gordon / The Deipnosophist


16 November 2008

UPDATED - Beyond disgust

Rape victim was stoned to death

Kismayu, Somalia -- Islamic fundamentalists brutally executed a 13-year old girl who was convicted of adultery for being raped by three men, the United Nations confirmed last week.

Aisha Ibrahim Duhulow was visiting her grandmother when she sought out the rebel militia that controls the city of Kismayu to report that she'd been raped; that amounted to a confession in the eyes of a sharia court. "The evidence came from her side and she officially confirmed her guilt," said the presiding cleric, Sheikh Hayakalah.

Duhulow was reportedly dragged screaming into a soccer stadium in front of 1,000 people, buried up to her neck, and stoned for more than 10 minutes by 50 executioners. Militia members fired on a few people who tried to intervene, killing an 8-year old boy.

The rapists were not arrested.

Plenty of information all over the Internet (here, for example, and from Amnesty International), and yet it remains unclear why the rapists (extreme radical Islamic fundamentalists? local militia? thugs?) have not been prosecuted, leave alone named.

Which leads me to wonder why we send cash and other humanitarian aid to these... animals; we might as well aid and abet them. What we should do is tar and feather them... for a start. And, while there, put an end to this matter of Somali piracy.

Please do not talk to me about tolerance, for I am about as tolerant as a person could be. But these incidents of piracy and this latest example of sharia law -- correctly or incorrectly interpreted and applied -- disgust me; these incidents should not be beyond reproach.
-- David M Gordon / The Deipnosophist


15 November 2008

Investing and relationships

Well, forget about the relationship portion. Just enjoy the video...

How true it is!
-- David M Gordon / The Deipnosophist

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Chasing a ghost

Wrapped in a cloak of hype and spin, we never really see the true person for the candidate; a loss for all of us. I suppose the story below about Barack Obama also could be hype, but I doubt it. As such, it reveals a man who is intelligent, reflective, patient, and who prefers to listen more than talk; four qualities I seek in friends and Presidents.
-- David M Gordon / The Deipnosophist

Chasing A Ghost

It took three decades for Barack Obama to understand the father who abandoned him, says The Washington Post’s Kevin Merida. He has spent the years since trying not to be that man.

Sometimes the trigger will be a newspaper story he is reading about Africa. Or he may spot a group of boys on a street corner in Chicago and think that one or more of them “could be me, they may not have a father at home.” At other moments, he will be playing with his daughters—Malia, 10, and Sasha, 7—and begin to wrestle with what kind of father he has become, what a career in politics has meant to their lives and how to guard against his father’s mistakes.

Thoughts of his father “bubble up,” as Barack Obama put it in an interview last year, “at different moments, at any course of the day or week.”

“I think about him often,” he says.

America’s new president-elect last saw his father in 1971, when the future politician was 10 years old. Barack Obama Sr.—remarried at the time and living in his native Kenya—sent word that he wanted to visit his son over Christmas at the apartment in Hawaii that the boy shared with his white grandparents.

To the son, the father had become a ghost, an opaque figure hailed as brilliant, charismatic, dignified, with a deep baritone voice that reminded everyone of James Earl Jones. All the boy knew was that his namesake had gone off to study at Harvard and had never come back. Now, the old man would put flesh on the ghost.

On the day his father arrived, young Barack, known as Barry then, left school early and headed toward his grandparents’ apartment, his legs leaden, his chest pounding. He nervously rang the doorbell. His grandmother, “Toot,” who died of cancer just this week, opened the door, and there behind her was a dark, slender man wearing horn-rimmed glasses, a blue blazer, and scarlet ascot.

“He crouched down and put his arms around me, and I let my arms hang at my sides,” the son recalled in Dreams From My Father, his soul-baring 1995 memoir.

“Well, Barry,” his father said. “It is a good thing to see you after so long. Very good.”

For a month, the father hung around, speaking to his son’s fifth-grade class, taking the boy to a Dave Brubeck concert. But he never quite re-established himself. The trip’s pivotal moment came one night as Barry prepared to watch How the Grinch Stole Christmas, the annual Dr. Seuss special. The father said the boy had watched enough television and insisted that he go to his room to study. Barry’s mother and grandparents intervened in what became a heated argument. But they proved no match for the strong-willed father, who in an instant had reclaimed the paternal role he had long ago abdicated.

Barry went to his room, slammed the door, and “began to count the days until my father would leave and things would return to normal.”

For Barack Obama, that visit set in motion a journey to make sense of his father so that he could make sense of himself. The sojourn marked the last time he would ever see his father, whose squandered promise and abandonment of his son have molded the man preparing to become this nation’s 44th president.

When Obama talked on the campaign trail about his father’s desertion, he frequently summoned a quotation that he believes explains how it directed him. “Every man is either trying to make up for his father’s mistakes or live up to his expectations,” he would say. Until recently, he thought it came from Lyndon B. Johnson.

At one point in the campaign, Obama asked an aide to call Robert Caro, the pre-eminent Johnson biographer, to check. Caro said no, the quote was not from Johnson. The biographer was reminded, though, of something Johnson’s brother had told him. The most important thing to Johnson, the brother had told Caro, was “not to be like Daddy,” whom LBJ had once idolized but who later lost the family ranch and became a laughingstock.

Not to be like Daddy.

“I think he sees this as a challenge every day, that I want to do better than my father,” says former federal judge Abner Mikva, a longtime Obama mentor.

When you grow up without a father, Michelle Obama says of her husband, you think about what you may have missed. “At some level, you wonder,” she says. “You wonder all the time: Who would I be if I had my father in my life? Would I be a better person?”

Uncertainty crowds your mind about your own abilities. As Obama wrote in The Audacity of Hope, his 2006 best-seller, “of all the areas of my life, it is in my capacities as a husband and father that I entertain the most doubt.”

It is the reason why Dan Shomon, for many years Obama’s top political aide in Illinois, urged him not to run for the U.S. Senate in 2004. “I think you’re going to feel guilt about your kids,” he told his boss, to no avail.

Obama struggled to find a way to reconcile his desire to be the father he never had with the long absences required of a presidential candidate. Over the past two years, he attended parent-teacher conferences and dance recitals, and he structured his campaign day to always include a call to his daughters. But as his wife noted, “They are sometimes not ready to receive you when you call, and he has to suck that up.”

“It’s a struggle not just for him but for me,” she said recently, adding that they have concluded that there is great value to their daughters in having a father with the ambition to be president. “One thing I learned from Barack is there is not one right way to parent.”

Men often long for their fathers’ approval, to shine in their fathers’ light. Obama was asked last year how he felt about his father, what the dominant emotion was. Regret? Unhappiness? Anger?

“I didn’t know him well enough to be angry at him as a father,” Obama said. “Mostly I feel a certain sadness for him, and the way that his life ended up unfulfilled, despite his enormous talents.”

Barack Hussein Obama Sr. grew up herding goats in the remote village of Alego, Kenya. He belonged to the Luo tribe, one of the nation’s largest. Bright and enterprising, he became in 1959 part of the first large wave of African students to study abroad. With a scholarship to the University of Hawaii, the 23-year-old quickly fell into a group of graduate students who met on Friday evenings to eat pizza, drink beer, and talk world politics and economics.

“He was an intellectual in every sense of the word,” recalls Rep. Neil Abercrombie (D-Hawaii), who was part of the older Obama’s inner circle. “He was the sun, and the other planets revolved around him.”

It wasn’t long before Obama brought another planet into their orbit, an 18-year-old white freshman from Wichita—Ann Dunham. In late 1960, despite concerns from both families, Obama and Dunham were married. On Aug. 4, 1961, Barack Hussein Obama Jr. was born.

The fact that there was a marriage at all—such interracial unions were banned in 22 states—reflected, as Abercrombie saw it, his friend’s incredible confidence and daring. But the marriage did not last long. When Obama Sr. won a scholarship to study at Harvard in 1963 and didn’t have the money to take his young family with him, some were not surprised that he didn’t return. Abercrombie sums up the reason in a single word: ambition. “His ambition was to be a force in Kenya, to fulfill the drive that he had to make a difference in Kenyan life and perhaps even in African life.”

It was Ann Dunham who filed for divorce in January 1964. Whatever anger she felt, she did not share it with her son. She made a point of telling Barry that his smarts, character, and charm came from his father. Years later when he became upset about his father’s behavior, she counseled against judging him too harshly.

The effect, as Obama’s sister Maya Soetoro-Ng saw it, was to make him more independent. “It made him perhaps more introspective, perhaps more thoughtful than many people his age,” says Soetoro-Ng, the daughter from Dunham’s second marriage, to Lolo Soetoro, an Indonesian student she also met at the University of Hawaii. Soetoro moved the family to Indonesia, where Barry lived for four years before returning to Hawaii to live with his grandparents and to attend the prestigious Punahou prep school. The Dunham-Soetoro marriage would not last either.

Every adult in Barry Obama’s life, it seemed, was something of a rolling stone—his grandparents had moved around, and his mother had hopscotched back and forth from Indonesia to Hawaii, getting her master’s degree in anthropology and becoming an expert in microfinance. His father? He wrote occasional letters, each on a single blue sheet. “Like water finding its level,” the father once wrote, “you will arrive at a career that suits you.”

It would take Barry years—and a 1987 sojourn to Kenya—to unravel the mystery of his father, who died in a car accident in 1982. The painful truth was that his father had a series of tangled relationships—by some accounts, four wives and nine children. When he came to the United States, he left behind a pregnant Kenyan wife and a child. And when he returned to Kenya, he took with him an American woman he had met at Harvard.

Professionally, he was prosperous enough to drive a Mercedes and generous enough that family members and friends knew where to go for handouts. But he often drank too much, stayed out too late, mouthed off too frequently. Though a respected economist in his country, he never reached the heights he set for himself. During a 1968 visit to Nairobi, Abercrombie and a mutual friend witnessed his crumbling. “It was clear to us how disappointed he was,” Abercrombie recalls. “He was drinking. There was a bitterness in him, an edge.”

Years later, after Obama’s election as the first African-American president of the Harvard Law Review, he used his 1995 memoir to deeply explore his father’s absence. Rich in emotion-laden self-analysis, it concludes with five chapters about his visit to Kenya, where he meets siblings, aunts, uncles, his grandmother, and his father’s ex-wives, and he finally understands the turmoil that consumed his father’s life. At the end of the book, Obama is sitting between the graves of his father and paternal grandfather, weeping.

“When my tears were finally spent, I felt a calmness wash over me,” he writes. “I felt the circle finally close. I realized that who I was, what I cared about, was no longer just a matter of intellect or obligation, no longer a construct of words. I saw that my life in America—the black life, the white life, the sense of abandonment I’d felt as a boy—all of it was connected with this small plot of earth an ocean away.”

At some point, maybe enough is enough.

“I think that book was very cathartic for him, and it was a hard book to write,” Michelle Obama says. “It was very hard for him to get all the pieces and make sense of them. But once you do that, you’re done. I think he has clarity on that part of his life.”

Sometimes when Obama sees friends who have their fathers to rely on for support and advice, “I look at them with a little bit of envy,” he has acknowledged.

But not remorse. The abandoned son is still working to carve out something positive from the legacy of the goat herder, who also dreamed of changing a nation.

From a story originally published in The Washington Post. ©2007 and 2008 by The Washington Post Co.

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13 November 2008

We interrupt this broadcast for a moment of beauty

I listen to a lot of music, and most of it is good, very good indeed; rarely, though, is it great, for the ages, Art. With a capital A. I consider Hem [to be] rara avis, as do may critics. Below is a snippet from Michael Hill's review of Hem's, Funnel Cloud:
Hem’s third studio album, Funnel Cloud, features songs of such carefully crafted, dream-like beauty that it’s almost impossible to place exactly where they’ve come from or even in what era they might have been recorded. You can hear a subtle country twang, the storytelling simplicity of great folk music, a touch of Tin Pan Alley sophistication. They at times recall the emotionally stirring sweep of movie music from an age when the best pictures were shot in Cinemascope and orchestras crowded onto sound stages to perform the scores. These tunes are so immediately involving, sometimes so soothingly familiar, that you’ll insist you know them - and love them - already. Hem exists very much in the here and now, but always manages to evoke the timeless."
Yeah, you got that right. When I shared Hem with you 2 weeks ago, I selected a song from their first CD, Half-Acre, a slow moving ballad. I thought I would up the ante, and speed, with their song, Not California, and Sally Ellyson's big voice, and that mind-blowingly fantastic closing refrain...

Yes a moment of beauty, as we investors wait impatiently for tomorrow's close of business -- the final business day for redemptions at hedge funds. Thankfully, too, as forced, indiscriminate selling by hedge funds is the cause of much of the markets' havoc the past 2 months.
-- David M Gordon / The Deipnosophist

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12 November 2008

Who needs a job?

Fair is fair; time now to poke some fun at President-elect Obama...

[click on cartoon to enlarge]

-- David M Gordon / The Deipnosophist

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The market's current aerodynamics could use a wing and a prayer

So, okay, I am a sucker for this photo, but I could not resist sharing it with you. Who could, what with the cute kid and the dog in the memorable pose?
-- David M Gordon / The Deipnosophist


11 November 2008

Chaos and intuition

I typically post one article by someone whose professional insights warrant your regular attention; I figure one time should be sufficient to whet your appetite.

Daneen Skube is already in this blog's archives, but this article is better than that one, so I post a second one. Guess what -- it is germane to my Kairos post.

Right brain will steer you through chaos
By Daneen Skube / Syndicated Columnist

Q: My company and job seem to be lurching from one unexpected crisis to the next. Usually I can predict problems and be proactive, but the world seems to be going crazy. How can I navigate through a workplace that is nothing but chaos?

Use your gut right now, not your head. The intellect can guide us well during rational times, but it's obvious to most of right now that we do not live in rational times.

Many scientists believe that the 20th-century science will be known for only three theories: relativity, quantum mechanics and chaos. Chaos theory was originally discovered by a meteorologist and has since been used in mathematics and science.

The simple version of the theory is that as systems evolve, they can appear to become totally chaotic. However, as scientists closely study the chaos they find there is a new order inherent in the chaos. The bottom line is that every system goes through perpetual cycles of order, chaos and new order.

We are leaving behind an old order where we could predict our economy, our industry and our workplace. Most people are feeling like the only thing that is predictable about their current job is unpredictability.

It appears that business is still going through the old-order-falling-apart stage, so the new order that will emerge is not easy to see right now. We can't prevent these cycles from occurring any more than we can control the weather. However, we can take comfort in knowing that existing systems always fall apart, the chaos hits a zenith, and then emerges into a new order.

Many social scientists believe that being capable of right-brain (intuitive) thinking is critical for everyone right now. They point out that left-brain (analytic) thinking works best during periods of predictable order, not our current chaos.

Try this exercise: Before you start your day, close your eyes, breathe deeply and imagine going through the day ahead. Keep breathing and notice ideas, feelings or impressions you get about how to deal with your workplace. When you open your eyes, jot down everything you can remember.

Now, implement the advice your right brain gave you. If your intuition suggested to give someone a call, do it. If your intuition whispered to meet with a client, do it. If your intuition has a creative plan for a new project, do it. Now evaluate your results.
You'll often find that whatever order is hidden during these chaotic times will be impossible to analyze but easy to intuit.

Consider this period of chaos impeccable training for all of us to develop our right brains in the left-brain world of business. People who seize the opportunity to become experts at right-brain knowing may thrive while people only using their left brains struggle to survive.

Copyright © 2008 The Seattle Times Company

Okay, twist my arm; while the article does not relate directly to the markets, it does to investing. Recognize patterns that recur, and you can recognize the Kairos within chaos.
-- David M Gordon / The Deipnosophist

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10 November 2008

Life grows more difficult


"Credit insurer, Euler Hermes, has canceled insurance protection for suppliers of General Motors/GM and Ford/F, two people familiar with the matter told Dow Jones Newswires Monday.

"According to the sources, deliveries from the suppliers weren't covered by insurance in the last two weeks, as the risk of the car makers failing to pay them for deliveries is too high. Today, up to two-thirds of auto parts aren't produced by the car maker itself, but by suppliers, who must take on considerable credits for that. The cancellation of the insurance protection puts suppliers under additional pressure, making it more difficult for them to obtain loans. The suppliers might start demanding advance payment for their deliveries or set short-term payment deadlines."
Money, whether as cash or credit, is the lifeblood of the economy. Or so most people perceive. I believe credit in its literal meaning (faith, from the Latin credito), is the true lifeblood of the system. Lacking faith means you lack confidence in the system. And as the institutions with cash and deliverable credit hedge against a borrower's default risk by not making the loans and issuing the insurance they had done, they effectively self-create the very effect they seek to avoid: strangle the life from those companies in desperate need of credit or cash. Business diverts elsewhere, defaults begin, and the devolution gathers momentum.

Not good.

-- David M Gordon / The Deipnosophist

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Deipnosophist reader, Ray Seakan, notes, "I noticed there hasn't been any recent posts regarding specific investment recommendations. Is this a change in the direction of the blog?"

No. Please do not interpret a lack of investment recommendation posts as a change in this blog's direction or purpose. I attempt to accomplish two core items as an investor:

1) Investigate further my favored investment opportunities, old and new
2) Discern how each opportunity trades in relation to the market's direction, its relative strength (more below).

And please recall my preferred investment opportunities tend not to change from one season to the next. Price action does not determine my decisions and actions, only changes the reward:risk ratio. In light of these comments, what more could I add to what I have already said re Apple/AAPL, Google/GOOG, and Johnson & Johnson/JNJ, et al? I admit, though, that my 9 Core Opportunities have changed quite a bit; when the time is right, I will reveal those changes. For now, though, please see #s 1 and 2 above.

Matthew writes...
"You make posts about issues that play key roles in determining the financial zeitgeist. My difficulty is that while now I have a better understanding and more knowledge, when I log into my trading account I still don't know what to do. There is a distance between understanding the financial situation and where to actually invest. Sometimes the gap is alienating and shows little clear relationship -- and other times the relationship is painfully obvious. How to bridge that gap?" ... "You're helping me to better understand the context in which I am trading. These "background" variables obviously play a huge role in individual stock prices. And of course the background/foreground distinction is not ultimate since they both participate in each other. More and more I am seeing how understanding the system and the environment is crucial to success on an in individual level. I always knew that background variables played a huge role but I was at a loss to understand the whole environment. I don't have capital to utilize at the moment so I haven't been actively trading these last few months. But in the end, is not all this background info useful in as far as it informs our direct actions (i.e., trading and investing). Unless one is studying these matters like a "pure science" or out of interest we want this information to translate into action. I wonder if this kind of knowledge could even be fit within the confines of an algorithm. A good test of knowledge too of course is its predictive value. I still don't understand the whole environment to have a sense on how deterministic its features are. If the variables are massively complexing and changing (if even only by virtue of the fact "more is different" -- quantitatively larger systems are qualitatively different -- then how to create fixed knowledge structures that remain efficacious? Sometimes we don't even need to understand the underlying mechanisms to exploit the higher level phenomena. I think a chartist might go that direction. Due to my lack of understanding I'm still having difficulties translating background info to a usable form in the foreground."
Whew, excellent questions and comments, Matthew. Thank you. Where to begin?

I once labored for many hours each day, before the markets opened and after they closed, to discern background noise from salient points I could bring foreward into the foreground of that day's decisions and actions. Meanwhile, my colleague and friend, Trader Dan, would stroll into the office, yapping away with friends, grab coffee, and did not sit down at his desk until the markets opened. At which moment, he became a whirlwind of decisions and actions; his trades outnumbered mine (although neither of us are or were day-traders), despite my preparation. How could this be? The markets' ovements should appear random to him, as they lacked any background to foreground context. And then I understood: I could control only this moment -- here, now -- not what occurred in the past or would occur in the future. Investors whose time frame measures in hearbeats especially live in the moment; for example, Mark Haines (of CNBC) typically introduced Jim Cramer as "He, from the Church of What's Working Now." While that quality makes for a good trader, it also hallmarks a terrible investor. (And certainly disqualifies the person from politics. Sorry, Jim; 'tis so.)

The US equity markets, by and large, are open for 360 minutes each weekday; i.e., Monday through Friday. Does your holding period exist within that daily measure of 360 minutes? Then the background information you require is only to know that today, now, is a market day, and you can make money; not dissimilar from heading to the supermarket knowing that you need cereal and eggs and milk, etc, but care not at all for brands, etc. Any stock works for you, so long as it works; just as Special K works equally as well as Rice Krispies, if only one is available that day. But if, like me, only Special K will do, then you wait to purchase when it is next available.

A similar rationale applies to my investment decisions; not every stock passes muster, only the best. (Or what I perceive to be the best.) I seek what I view to be Core Opportunities, and then attempt to find opportune moments to purchase, and sell. Market trends come and go and come again, but my favored investments should stick around for more than a season or two; not one is a flash in the pan.

A wise investor, Ed Hart, who sadly is no longer alive, frequently described a phenomenon he described as tension on the tape. While the markets trend in one direction or another, something other would occur under the surface, less obviously. Ed would create a basket of securities, frequently reconstituted, that would betray a market's subtle clues of directional change, and as those items broke through their surface tension, up or down, the market often would follow. I view Ed's method an excellent perceptual tool for all investors, of all time frames. Professional investors tend to accumulate, and distribute, during periods of sideways-trending prices, always mindful of time frame and periodicity.

Call it the week from hell, or even a bear market, but the week from Friday, 3 October through Friday, 10 October 2008 will live long in our collective memory. Funny ironic, not ha-ha, how that week seemed to linger on, uninvited, and cause investors everywhere to shun the markets, like avoiding your eyes anytime a character walked through Linda Blair's bedroom door in the movie, THE EXORCIST. "Don't look; fearsome things reside there!" Don Coxe (BMO Capital Markets) tells an interesting tale of how the FRB, in the person of Ben Bernanke, and the US Treasury, in the person of Henry Paulson, in a clever attempt to leverage the markets pushed downhill the first pebble; from Don's essay, I infer the Law of Unintended Consequences assumed control and the pebble quickly became the avalance we suffered in September and October. But is the market decline over, or merely resting before resuming its plummet? Contact me, if you would like a copy of the germane section from Don Coxe's research commentary. (UPDATE: Offer rescinded on 11.17, due to a lack of interest.)

Ugly as the markets' recent trend has been, its woes are nothing when measured against the possible and probable difficulties that lie in wait for the economy, for us all. Our portfolio losses can decline only to $0 before the pain ends, but lose a job, and struggle to pay bills (Which bill first?), and the concerns mount. Consider the ripple effect from the layoffs just now beginning in New York City; not solely Wall Street, but real estate, restaurants, retail, consumer anything. In turn, layoffs will occur in those areas, which will create their own ripple effect, and cause other derivative ripples from there. One of the reasons we, and other nations everywhere, did so well during the 1950s and 1960s was the sudden burst through the surface tension of forced deprivation engendered by the Depression (1930s) and World War 2 (1940s); the 1980s, 1990s, and the the early years of this decade had the digital revolution. I am not a seer, but I see no similar engine of massive, overarching growth that could pull us back from our collective Wile E Coyote moment. (Run off the cliff edge, with the only terra firm beneath us way down there.) We all can hope I am wrong again.

In such an environment, the markets recent ugly action is understandable. Negative chart patterns and setups predominate; an overwhelming 90% of NYSE stocks remain in a negative price trend. But this all, and more, is obvious; too, this bear market has endured for 1 full year, and then some. The markets' recent plummet could be the fireworks that signal a change of direction that endures for more than 3 days or even 3 weeks. Although such a price move, should it occur, would be sideways to slightly up at best, it is necessary to help build a more enduring base and to restore investors' confidence. New trends start somewhere, though; every journey begins with a single step. This reality makes it imperative to note those stocks that build internal bases and improve on a technical basis within the confines of their overall negative trend. For example, after ~10 years of wandering in the desert, I note several key large cap companies, but especially the pharmaceuticals, have produced important long-term relative strength changes in recent weeks. For example, Johnson & Johnson/JNJ produced a relative strength buy signal versus the market this month (upside breakouts above at ~$62 and ~$66), as did Bristol-Myers/BMY. Other stocks in other groups and sectors of the market behave even better.

Subsequent to the low trade, comes the bottom, which self-defines as a lot of give and take, price movement up and down but confined to a range, an area pattern. Time heals all wounds. Whether a bottom builds from recent lows, or later from even lower lows, certain items must transpire before a more bullish price environment (read, continually rising prices) were to appear. Viewed on a chart, these certain items include (but are not limited to):
a) A diminution in the total number of stocks that trade at new lows (recent numbers have been astronomically high);
b) The decline's trajectory loses its nose-dive formation in favor a flattish shape;
c) Hold repeatedly at support;
d) An upside reversal off said support;
e) A subsequent test of the upside reversal;
f) A breakout above initial resistance;
g) A breakout above its 50 day sma;
h) A price rise toward its 200 day sma;
i) A retracement back down toward its 50 day sma;
j) Back and forth price action circumscribed by the two moving averages;
k) A breakout above its 200 day sma;
l) A new right side to the chart builds.

Among the many price tests and re-tests comes the crucial news response syndrome. Stocks fail to make lower lows, even as the economic and financial news worsens, which will happen. Markets, though, rarely are monolithic, and upside opportunities crop up even during the most ferocious declines, and vice-versa of course.

Due to the ferocity and rapacity of the recent portion of the decline, a lot of time must lapse before even the possibility of new all time highs. (In which "lot of time" equals months, if not years. Obvious, then, the lack of need for excitability to hurry and buy now. The confidence of all investors of all time frames must itself rebuild; without systemic faith, which has been shaken to its foundation, most investors will simply stay away.

Items to keep in mind:
• Let not temptation get the better of you. Have available the cash to buy -- but only when the moment is ripe with opportunity.
• Know in advance the investments you will want to own for when that better moment comes to be, if it has not already arrived.
• Keep your head in the game by maintaining the flow of ideas. Leave your heart and stomach out of it.
• Consider that the first group of stocks to emerge could be those traditionally favored by institutional investors; specifically, large cap. Retail investors, mostly, will remain in their trenches, heads down while maintaining a low profile while they attempt to time the market. Whereas the job of institutional investor is to invest, and when the itch hits, they will scratch. Thus, I would seek initial potential winners from large cap stocks, and sort through the groups and sectors whose strength is both absolute and relative to the market in general. I see many examples of that type of cropping up in increasing numbers.
• Remember that the sun does rise every day, no matter how dark the night becomes.

So, yes, Matthew, there is some aspect of "prediction" to chart reading, but in the end, it is just one more methodology, and thus more deterministic than predictive; deterministic of your decisions and actions, and other like-minded investors. But that is fodder for another post.

My titles frequently offer a deeper meaning to the post itself; such is especially true with this post's title. Learn more re

Trade well. Be well.
-- David M Gordon / The Deipnosophist

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08 November 2008

Google's view on the future of business

Google's view on the future of business:
An interview with CEO Eric Schmidt

In a compelling video interview with James Manyika, a McKinsey director, Google/GOOG CEO, Eric Schmidt, reflects on the coming transformation of strategy, competition, business models, and management.

-- David M Gordon / The Deipnosphist

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07 November 2008

Here's looking at ya, kid!

Deipnosophist reader, Harry van Beuningen, points us to a collection of astoundingly beautiful photos, whose subject happens to be of President-elect Obama. Many seem as art due to the photographers' talent. I like just about all of them, but especially like the photo below...

[click on photo to enlarge]

The future, our shared future, to the 2nd power.
-- David M Gordon / The Deipnosphist

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06 November 2008

A chart of a different sort

But an eye chart? Okay, let's call this chart...

How to be cruel to old guys

[click on chart to enlarge]

Really, where are my glasses when I need them...?!
-- David M Gordon / The Deipnosophist

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President (-elect) Barack Obama

So many explanations for why and how candidate Barack Obama became President-elect Obama. The video below, viewed by very few people because the network edited the crucial moment, is merely one of many...

Okay, 'tis funny, but let's cut with the jokes. John McCain offered a moving and heart-felt concession speech, which, considered apart, should inspire us all. The hope now is that Obama's 'honeymoon' endures for longer than recent trends indicate; certainly he has his work cut out for him.

I awakened yesterday morning to an email message from an English friend (she lives near London, England) who was the first person to offer "Congratulations!" that the USA had elected Barack Obama as President. Not lost on me is that most people around the world favored the candidate of change and hope rather than politics as usual. Soon after I began writing my reply (below), I received the essay from Stratfor (also below) that does a far better job of saying what I had hoped to say. My aborted message...

"FINALLY, we Americans can hold our heads high, no longer held down in shame. No matter which candidate we voted for, we all hope that Barack Obama can restore the luster of our Shining City on the Hill, our lost glory. And restore our relations with our international friends.

No doubts, though, that he (and us) has his (our) work cut out for him (us). Faced with the many obstacles that lie before us, the road ahead looks especially difficult. Amid that rubble of difficulty, though, also lies opportunity."

Begin Stratfor's commentary...

Obama's Challenge
By George Friedman

Barack Obama has been elected president of the United States by a large majority in the Electoral College. The Democrats have dramatically increased their control of Congress, increasing the number of seats they hold in the House of Representatives and moving close to the point where — with a few Republican defections — they can have veto-proof control of the Senate. Given the age of some Supreme Court justices, Obama might well have the opportunity to appoint at least one and possibly two new justices. He will begin as one of the most powerful presidents in a long while.

Truly extraordinary were the celebrations held around the world upon Obama's victory. They affirm the global expectations Obama has raised — and reveal that the United States must be more important to Europeans than the latter like to admit. (We can't imagine late-night vigils in the United States over a French election.)

Obama is an extraordinary rhetorician, and as Aristotle pointed out, rhetoric is one of the foundations of political power. Rhetoric has raised him to the presidency, along with the tremendous unpopularity of his predecessor and a financial crisis that took a tied campaign and gave Obama a lead he carefully nurtured to victory. So, as with all politicians, his victory was a matter of rhetoric and, according to Machiavelli, luck. Obama had both, but now the question is whether he has Machiavelli's virtue in full by possessing the ability to exercise power. This last element is what governing is about, and it is what will determine if his presidency succeeds.

Embedded in his tremendous victory is a single weakness: Obama won the popular vote by a fairly narrow margin, about 52 percent of the vote. That means that almost as many people voted against him as voted for him.

Obama's Agenda vs. Expanding His Base

U.S. President George W. Bush demonstrated that the inability to understand the uses and limits of power can crush a presidency very quickly. The enormous enthusiasm of Obama's followers could conceal how he — like Bush — is governing a deeply, and nearly evenly, divided country. Obama's first test will be simple: Can he maintain the devotion of his followers while increasing his political base? Or will he believe, as Bush and Cheney did, that he can govern without concern for the other half of the country because he controls the presidency and Congress, as Bush and Cheney did in 2001? Presidents are elected by electoral votes, but they govern through public support.

Obama and his supporters will say there is no danger of a repeat of Bush — who believed he could carry out his agenda and build his political base at the same time, but couldn't. Building a political base requires modifying one's agenda. But when you start modifying your agenda, when you become pragmatic, you start to lose your supporters. If Obama had won with 60 percent of the popular vote, this would not be as pressing a question. But he barely won by more than Bush in 2004. Now, we will find out if Obama is as skillful a president as he was a candidate.

Obama will soon face the problem of beginning to disappoint people all over the world, a problem built into his job. The first disappointments will be minor. There are thousands of people hoping for appointments, some to Cabinet positions, others to the White House, others to federal agencies. Many will get something, but few will get as much as they hoped for. Some will feel betrayed and become bitter. During the transition process, the disappointed office seeker — an institution in American politics — will start leaking on background to whatever reporters are available. This will strike a small, discordant note; creating no serious problems, but serving as a harbinger of things to come.

Later, Obama will be sworn in. He will give a memorable, perhaps historic speech at his inauguration. There will be great expectations about him in the country and around the world. He will enjoy the traditional presidential honeymoon, during which all but his bitterest enemies will give him the benefit of the doubt. The press initially will adore him, but will begin writing stories about all the positions he hasn't filled, the mistakes he made in the vetting process and so on. And then, sometime in March or April, things will get interesting.

Iran and a U.S. Withdrawal From Iraq

Obama has promised to withdraw U.S. forces from Iraq, where he does not intend to leave any residual force. If he follows that course, he will open the door for the Iranians. Iran's primary national security interest is containing or dominating Iraq, with which Iran fought a long war. If the United States remains in Iraq, the Iranians will be forced to accept a neutral government in Iraq. A U.S. withdrawal will pave the way for the Iranians to use Iraqi proxies to create, at a minimum, an Iraqi government more heavily influenced by Iran.

Apart from upsetting Sunni and Kurdish allies of the United States in Iraq, the Iranian ascendancy in Iraq will disturb some major American allies — particularly the Saudis, who fear Iranian power. The United States can't afford a scenario under which Iranian power is projected into the Saudi oil fields. While that might be an unlikely scenario, it carries catastrophic consequences. The Jordanians and possibly the Turks, also American allies, will pressure Obama not simply to withdraw. And, of course, the Israelis will want the United States to remain in place to block Iranian expansion. Resisting a coalition of Saudis and Israelis will not be easy.

This will be the point where Obama's pledge to talk to the Iranians will become crucial. If he simply withdraws from Iraq without a solid understanding with Iran, the entire American coalition in the region will come apart. Obama has pledged to build coalitions, something that will be difficult in the Middle East if he withdraws from Iraq without ironclad Iranian guarantees. He therefore will talk to the Iranians. But what can Obama offer the Iranians that would induce them to forego their primary national security interest? It is difficult to imagine a U.S.-Iranian deal that is both mutually beneficial and enforceable.

Obama will then be forced to make a decision. He can withdraw from Iraq and suffer the geopolitical consequences while coming under fire from the substantial political right in the United States that he needs at least in part to bring into his coalition. Or, he can retain some force in Iraq, thereby disappointing his supporters. If he is clumsy, he could wind up under attack from the right for negotiating with the Iranians and from his own supporters for not withdrawing all U.S. forces from Iraq. His skills in foreign policy and domestic politics will be tested on this core question, and he undoubtedly will disappoint many.

The Afghan Dilemma

Obama will need to address Afghanistan next. He has said that this is the real war, and that he will ask U.S. allies to join him in the effort. This means he will go to the Europeans and NATO, as he has said he will do. The Europeans are delighted with Obama's victory because they feel Obama will consult them and stop making demands of them. But demands are precisely what he will bring the Europeans. In particular, he will want the Europeans to provide more forces for Afghanistan.

Many European countries will be inclined to provide some support, if for no other reason than to show that they are prepared to work with Obama. But European public opinion is not about to support a major deployment in Afghanistan, and the Europeans don't have the force to deploy there anyway. In fact, as the global financial crisis begins to have a more dire impact in Europe than in the United States, many European countries are actively reducing their deployments in Afghanistan to save money. Expanding operations is the last thing on European minds.

Obama's Afghan solution of building a coalition centered on the Europeans will thus meet a divided Europe with little inclination to send troops and with few troops to send in any event. That will force him into a confrontation with the Europeans in spring 2009, and then into a decision. The United States and its allies collectively lack the force to stabilize Afghanistan and defeat the Taliban. They certainly lack the force to make a significant move into Pakistan — something Obama has floated on several occasions that might be a good idea if force were in fact available.

He will have to make a hard decision on Afghanistan. Obama can continue the war as it is currently being fought, without hope of anything but a long holding action, but this risks defining his presidency around a hopeless war. He can choose to withdraw, in effect reinstating the Taliban, going back on his commitment and drawing heavy fire from the right. Or he can do what we have suggested is the inevitable outcome, namely, negotiate — and reach a political accord — with the Taliban. Unlike Bush, however, withdrawal or negotiation with the Taliban will increase the pressure on Obama from the right. And if this is coupled with a decision to delay withdrawal from Iraq, Obama's own supporters will become restive. His 52 percent Election Day support could deteriorate with remarkable speed.

The Russian Question

At the same time, Obama will face the Russian question. The morning after Obama's election, Russian President Dmitri Medvedev announced that Russia was deploying missiles in its European exclave of Kaliningrad in response to the U.S. deployment of ballistic missile defense systems in Poland. Obama opposed the Russians on their August intervention in Georgia, but he has never enunciated a clear Russia policy. We expect Ukraine will have shifted its political alignment toward Russia, and Moscow will be rapidly moving to create a sphere of influence before Obama can bring his attention — and U.S. power — to bear.

Obama will again turn to the Europeans to create a coalition to resist the Russians. But the Europeans will again be divided. The Germans can't afford to alienate the Russians because of German energy dependence on Russia and because Germany does not want to fight another Cold War. The British and French may be more inclined to address the question, but certainly not to the point of resurrecting NATO as a major military force. The Russians will be prepared to talk, and will want to talk a great deal, all the while pursuing their own national interest of increasing their power in what they call their "near abroad."

Obama will have many options on domestic policy given his majorities in Congress. But his Achilles' heel, as it was for Bush and for many presidents, will be foreign policy. He has made what appear to be three guarantees. First, he will withdraw from Iraq. Second, he will focus on Afghanistan. Third, he will oppose Russian expansionism. To deliver on the first promise, he must deal with the Iranians. To deliver on the second, he must deal with the Taliban. To deliver on the third, he must deal with the Europeans.

Global Finance and the European Problem

The Europeans will pose another critical problem, as they want a second Bretton Woods agreement. Some European states appear to desire a set of international regulations for the financial system. There are three problems with this.

First, unless Obama wants to change course dramatically, the U.S. and European positions differ over the degree to which governments will regulate interbank transactions. The Europeans want much more intrusion than the Americans. They are far less averse to direct government controls than the Americans have been. Obama has the power to shift American policy, but doing that will make it harder to expand his base.

Second, the creation of an international regulatory body that has authority over American banks would create a system where U.S. financial management was subordinated to European financial management.

And third, the Europeans themselves have no common understanding of things. Obama could thus quickly be drawn into complex EU policy issues that could tie his hands in the United States. These could quickly turn into painful negotiations, in which Obama's allure to the Europeans will evaporate.

One of the foundations of Obama's foreign policy — and one of the reasons the Europeans have celebrated his election — was the perception that Obama is prepared to work closely with the Europeans. He is in fact prepared to do so, but his problem will be the same one Bush had: The Europeans are in no position to give the things that Obama will need from them — namely, troops, a revived NATO to confront the Russians and a global financial system that doesn't subordinate American financial authority to an international bureaucracy.

The Hard Road Ahead

Like any politician, Obama will face the challenge of having made a set of promises that are not mutually supportive. Much of his challenge boils down to problems that he needs to solve and that he wants European help on, but the Europeans are not prepared to provide the type and amount of help he needs. This, plus the fact that a U.S. withdrawal from Iraq requires an agreement with Iran — something hard to imagine without a continued U.S. presence in Iraq — gives Obama a difficult road to move on.

As with all American presidents (who face midterm elections with astonishing speed), Obama's foreign policy moves will be framed by his political support. Institutionally, he will be powerful. In terms of popular support, he begins knowing that almost half the country voted against him, and that he must increase his base. He must exploit the honeymoon period, when his support will expand, to bring another 5 percent or 10 percent of the public into his coalition. These people voted against him; now he needs to convince them to support him. But these are precisely the people who would regard talks with the Taliban or Iran with deep distrust. And if negotiations with the Iranians cause him to keep forces in Iraq, he will alienate his base without necessarily winning over his opponents.

And there is always the unknown. There could be a terrorist attack, the Russians could start pressuring the Baltic states, the Mexican situation could deteriorate. The unknown by definition cannot be anticipated. And many foreign leaders know it takes an administration months to settle in, something some will try to take advantage of. On top of that, there is now nearly a three-month window in which the old president is not yet out and the new president not yet in.

Obama must deal with extraordinarily difficult foreign policy issues in the context of an alliance failing not because of rough behavior among friends but because the allies' interests have diverged. He must deal with this in the context of foreign policy positions difficult to sustain and reconcile, all against the backdrop of almost half an electorate that voted against him versus supporters who have enormous hopes vested in him. Obama knows all of this, of course, as he indicated in his victory speech.

We will now find out if Obama understands the exercise of political power as well as he understands the pursuit of that power. You really can't know that until after the fact. There is no reason to think he can't finesse these problems. Doing so will take cunning, trickery and the ability to make his supporters forget the promises he made while keeping their support. It will also require the ability to make some of his opponents embrace him despite the path he will have to take. In other words, he will have to be cunning and ruthless without appearing to be cunning and ruthless. That's what successful presidents do.

In the meantime, he should enjoy the transition. It's frequently the best part of a presidency.

© Copyright 2008 Stratfor. All rights reserved.

Our nation, our world, shares many vexing issues, many difficult problems, and enemies of all types lurk seemingly everywhere. What better moment than now to renew old friendships? Godspeed, President Obama.

I welcome your comments, as always.

-- David M Gordon / The Deipnosophist


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