Bad News Is Good News.

Headline news from AP; “Dow up for a fourth day, turns positive for 2011”. But what changed from the beginning of August? Have we solved all the structural problems or have the sovereign debt crisis in Europe been solved? Or for that matter, have the capital adequacy requirements of the European banks been met? Nothing of that sort has happened and yet we have a mini bull run.

This Bull Run is based on few things:

•             Month end window dressing.

•             Hope that QE3 is coming.

•             Hope that Obama Administration will socialize the mortgage and housing mess and thus the insolvent banks will be saved.

•             Hope that some sort of stimulus package will be worked out.

•             The economic indicators and news are so bad that actually it is good news for the Banksters because it means more free money.

Any one of these hopes can materialize and the market can continue to go up to new heights but the timing does not seem right. If the market continues to go up, then the Fed will not inject liquidity. For that to happen, TPTB (The Powers That Be) have to create panic. So my wild guess is that we will see renewed volatility again and most likely the lows of August will be revisited or broken. Without that panic, they are not going to get more free money.

Hope is not a good investment strategy. Tomorrow being the 1st of the month, there will be lots of new fund allocation and possibly the last day of the prices going up till October. The sentiments have become overtly bullish and the put call ratio has reached a new high which is flashing red light. The COTS report is indicating that it is time to get back in cash. And possibly Gold will make a run for new high before the correction.

Overbought Markets, confusing signals and Keynesian stupidity

First the Keynesian Stupidity.

Is there any provision to take back the Nobel prize?
The governments of the world thought that they can stop all recessions just by pumping in more money, printed out of thin air. Bubbles replace bubbles and pop ups are messier.

The stock markets continue to go up and Gold jumped more than $ 30 just by the whisper of QE3 in the minutes of the Fed meeting. The markets are overbought and corrections, even if limited, is due any time. May be tomorrow.  There is no clear trend, just HFT confusion.

In that confusion, NASI gave a buy signal.

How much to act on this signal is big question. In the past, this signal has been quite good. So again, no clear trend. I am expecting Euro to continue moving up, after a brief spell of weakness. If that happens, we might see the general stock market also move up.

But move up or down, it is a market for day traders. Investors better stay away.

P.S.: A very nice short clip from BBC; http://www.bbc.co.uk/news/business-14678859

In charts: Apple (AAPL) vs. Microsoft (MSFT)

Here's a look at some charts shared recently on Chart.ly and StockTwits. Think of it as a quick follow up to our Steve Jobs and Bill Gates post from last Friday, looking back on 30 years of technology innovation.

The long view of Apple: monthly chart of AAPL stock price dating back to 1984. That's shortly after the Mac was introduced (click to enlarge chart).

The following chart shows a comparison of Apple and Microsoft's share performance from 1986 (the year MSFT went public) to 2011. 

On this timeframe, MSFT trounces AAPL from the early 1990s on to the dot.com bubble peak. 

Still, Apple shares gain momentum in the 2000s, finishing the 25 year period with a more than 15,000% gain. Microsoft achieved a 25,000% gain in its stock price for the same period (down from its 1999 peak near the 50,000% mark). 

Finally, we see the same two stocks measured from 1997, the year of Steve Jobs' return to the company he co-founded. The second act of Jobs at Apple was a wildly successful period for the company and its shares, as you can see from the chart below. 

While MSFT's share price barely managed to keep its head above water in the post-dot.com bubble period, AAPL went on to slay the competition and innovated its way to a 7,000% return over 14 years. 

For more on what both companies and their famous founders have accomplished over the last 30-odd years, check out our related posts below.

Related posts: 

1. Interview: Steve Jobs and Bill Gates discuss careers, tech - Finance Trends.

2. MSFT and AAPL: a tale of two tickers - Finance Trends.

Pavlov Rang the Bell

Excerpt from Stock World Weekly

Last week we wrote in To QE3 or Not to QE3, “The biggest hope for the markets may be another round of quantitative easing. Investors and traders have been carefully listening to the words of Fed officials, looking for clues of an impending announcement for QE3. Such a move might be bullish for the markets, at least in the short term.” On Friday, Ben Bernanke gave his much anticipated speech in Jackson Hole, Wyoming. He expressed mild optimism for the U.S. economy and did not explicitly announce a third round of quantitative easing. 

Bernanke acknowledged that while the housing market is bad, and the current rate of unemployment is unacceptably bad, the economy is not in terrible shape and can grow normally again. However, the U.S. government and European governments are going to need to get actively involved. For as Bernanke put it, “most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” 

Taking Congress to task for the game of chicken they played with the debt ceiling, Bernanke declared, “The country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.” Paul Dales, senior U.S. economist at Capital Economics commented, “[Bernanke] appears to be saying that the Fed has largely played its part and that the politicians need to step up their game.”

The market initially sold off, but soon recovered as people realized that more easing is likely on the way.

While Bernanke didn’t promise to announce QE3 at the September Fed policy meeting, he dropped enough hints to make the markets respond as if he had done so. The response of the market makes sense from the perspective of Pavlovian conditioning. First you ring the bell, then you give the food. After some repetition, all you have to do is ring the bell to make the subject salivate in anticipation of the food. While Bernanke may not have served the QE3 food to the hungry markets, he did “ring the bell” by dropping broad hints about how the Fed is “prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”

So Bernanke laid the groundwork for justifying more easing at the Fed’s September policy meeting. That meeting had originally been scheduled for one day, but was expanded to two days so members could enjoy a “fuller discussion” of their options. St. Louis Fed President James Bullard pointed out that adding a second day to the September meeting would allow more time to review easing options. “If the economy is weaker and the inflation picture moderates, we could consider more action. The call is much more difficult this year than last year. We have a much different inflation situation than last year.” 

Bernanke was probably telegraphing to the market that some form of QE3 would be announced in September. As Bruce Krasting surmised, “This is a heads up to the insiders that more monetary gas is in the works. The stock market’s first reaction to today’s nonevent was to sell off hard. But after the word got around that this was just a delay (and a short one at that) stocks caught a bid. Basically, the plan by Bernanke to leak his intentions worked..." (My read on the speech) 

Commenting on the media’s response to Bernanke’s speech, Phil wrote, “What more can the guy say – they WILL do what they can – we DO have problems that the Fed is able to address. They think inflation is under control, but unemployment is too high and liquidity needs to be improved. How can someone read this and not conclude QE3 is coming?...CNBC has stopped saying no QE3 and is now saying that Bernanke has ‘kicked the stimulus can into September.’ I guess enough people finally pointed out to them how ridiculous they sounded saying that there was no QE3 in that speech.” 

Bruce Krasting made the point he felt obligated to repeat - and we agree:  "I flat out hate that this Fed is conducting monetary policy through leaks, a wink and a nod and innuendo.

“It feels like we should just put up a tent, because a three-ring circus is what we are getting nonstop. And Bernanke is the strong man in the middle ring.” (My read on the speech) 

As reported by Zero Hedge, Jeff Snider of Atlantic Capital Management wrote, “His statement spoke volumes without saying anything. Yes, he disappointed the hardcore debasement enthusiasts called stock investors, but only at first. In between the lines of what he did say, it was crystal clear: Chairman Bernanke wants to do more QE. ‘Want’ is not really the right word because it doesn’t really go far enough into Bernanke’s canon. I think it is abundantly clear he believes the Fed needs to do it as soon as operationally possible... 

“He said QE 3.0, without really saying it.  The markets, seeing the enlarged schedule for the September meeting and interpreting the likelihood of heavy discussions, have gotten the message. Stocks threw off the daily mortal struggle that is life as Bank of America and bid for the QE future that is now September (good riddance to August apparently). Gold prices followed on those expectations of a resumption to the willful and wanton dollar destruction that QE purely represents.

“If the Chairman can influence a major market rally without ever having to face the growing dissent within the FOMC ranks, then his speech has proven to be a stroke of genius.  That is the essence of rational expectations, making others believe you have magical powers so that they do your bidding without any actual work or direct engagement on your part.”  (Bernanke In A Box)

Not everyone expects QE3 to be delivered at the September meeting. According to Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, “The move to a two-day meeting means [Bernanke] will work to build consensus. They will end up with QE3, but probably not in September. They will edge closer to it in the September statement.” (Bernanke May Seek Consensus on Easing)

Regardless of what eventually happens in September, expectations for more easing have now been established. The markets may now rise in Pavlovian anticipation of more free money from the Fed (or fall less than it may have otherwise). 

Click here for a free trial to Stock World Weekly

Economic Policy Confusion

Isn't it obvious that the politicians have no idea why the economy is staggering? After the arrogance of January, 2009, when the exuberant victors of the 2008 election proceeded to toss away $ 800 billion in a foolish waste of money known as "the stimulus."



The Obama folks assumed that throwing taxpayer money in the direction of Obama political allies (mostly state employee union members) would magically get the economy back on track. Why the Obama folks thought that, no one knows?



Then the Obama team began the process of erecting roadblocks (think Dodd Frank, Obamacare, the Credit Card Reform act, stifling regulations from the EPA and the NLRB) that would virtually guarantee that the economy had no real chance of recovery.



Now, Obama promises to come up with a new package to deal with the "jobs problem." This would be comical were it not so tragic. Putting up more roadblocks does not remove the original roadblocks.



This economy will not get out of its own way until the roadblocks are dismantled and real market forces are permitted to function again -- especially in the labor market.



Bernanke's comments on Friday were ridiculous. It is time that Bernanke return to academia. Bernanke's Fed is arguably the worst in the history of the Federal Reserve and its results on the economy are there for all to see.



The usual response by defenders of Obama and Bernanke is to say that things would have been much worse had they not done what they did. Really? When, other than the last time policies like these were tried in the 1930s, were things ever this bad.



The Reagan recovery in the 1980s shows how to get it done. Get the government off the back of the citizenry. That is the solution. The government is not the answer. The government is the problem and until it changes course (or gets changed), America will continue its slide into irrelevance.

The Next Twelve Months.

As the days of summer draw to a close, we are filled again with uncertainty about the future. The scares of 2008 have not been erased from the minds of the investors and we are constantly looking over our shoulder to watch out for the double dip recession. But 2011 is not 2008. The central bankers have learned their lesson or so you would think. Perhaps they are better prepared in terms of addressing the crisis, but they still do not understand how to solve the crisis on a permanent basis. Much of the crises of 2011 are actually fiscal crisis and credit crisis. To solve a fiscal crisis with a monetary tool is not only ineffective, but a complete waste.

The threats facing the world economy today are ironically the things which were responsible for the progress for much of last 40 years. The globalization of trade and interdependent nature of the economies. The Keynesian theory of growth followed by the world governments, which depend on debt to deliver prosperity. The desire of the politicians to hang on to power by providing or promising to provide everything to everyone. And of course, the growing power and greed of the “Bankers” to manipulate the political class and engage in excessive speculation.

In the USA, from the period of dot com bust, till date, the political class and their henchmen in the Fed, have created bubble after bubble by borrowing and injecting liquidity in the system. There was no job growth, no real income growth, only an illusion of prosperity, created by simply inflating asset prices. Stock markets went up and up, house prices went higher forever, fooling the mass that they are far wealthier and they need not save or produce anything. Only one country in the western world has bucked this trend. That country is Germany. But there also they were fooled by megalomaniac politicians, notable among them Mr. Helmut Kohl. Helmut Kohl, a post world war 2 politician, who grew up in the guilt of wars, wanted to become a world statesman and thus pushed for the creation of a unified Europe and Euro. While Euro has helped German export machinery to a great extent, it has also tied Germany to other profligate countries in Europe and its periphery that do not have the fiscal or work ethics of Germany.

So in 2011, we are faced with two headwinds not one. The economic powerhouse of the USA is slowly turning to recession again and Sovereign defaults in Europe is a real possibility and banking crisis in those “soon to default” countries is going to explode sooner than expected.

For all the news of BIRC countries who will take us to economic salvation, these countries cannot even save themselves, let alone the world. China and India are just other developing countries, who will soon turn to emergency market from emerging market, when the markets in the USA and Europe dries up and protective barriers start to come up. Make no mistake, politicians will install protectionism to appease their vote bank and the globalization that we know will be a thing of the past. When the unemployment rate hits past 10%, who do you think the politicians will blame for the loss of jobs? They won’t take any blame themselves. They will sure find scapegoats and the easy ones that too.

Anyway, let’s just look at the real GDP figures of USA.

The 1^st revision of the 2^nd Quarter GDP figure stands at barely 1%. So year on year we are below 1.5% and the 3^rd quarter is not going to be pretty either.  Normally, consumers get the feel of economy better and earlier than the sale-side economists in the big banks. So the following chart says.

The GDP and Consumer sentiment have mostly walked together. So what can we expect here? GDP following the sentiment or sentiment climbing up?

And then we have glorious politics. The presidential election of the USA in 2012. With the bitter partisan divide that we have seen so far, the slash and burn method employed by the Republicans, and their pledge to make Obama one term president, we can be sure that they will do anything to turn the voters away from the incumbent president. What better way than to sabotage the economy.  Historically, the 3^rd year of the presidential cycle is the best in terms of stock market returns and the 4^th year is the worst.  You can read it here; http://alphaim.net/research/Pres_Cycle/index.html

When we combine all these three, we can be almost certain that a recession is in the cards by 2012. Stocks typically go down 40% or more in a recession, but this one is going to be a depression, not just our garden variety recession. In addition to the negative economic growth in the USA, we are going to have sovereign default in Europe and possibly a banking collapse there as well.(More on that,later)  All these toxic combinations will lead to massive balance sheet contraction and we are looking at an uncharted territory 12 months down the line. In short-term, I think we might still re-test the lows of August or might even go below it, before the Fed is forced to tip its hand with more liquidity. If that happens, it will consistent with the script of 3^rd year cycle and also the fact that when January of a 3^rd year of a presidential cycle has been positive, 90% of the time, the stock markets in that year have ended in positive territory as well.  

That is another reason, I am not expecting the bottom to fall off yet, but we are not far from the cliff either.

If you like this macro economic analysis, invite your friends to read it and follow me on twitter. bbfinanceblog

The Jobs Problem

If cell phones cost $ 10,000 apiece and required $ 1,000 monthly service bills, who would own them? Well, no doubt, Warren Buffett would own one and perhaps Bill Gates and Barrack Obama as well.



But, what about the average guy. Would he own a cell phone at those prices? What if the economy was very strong, would most folks get a cell phone, if these were the costs?



The answer is pretty obvious. At that price, very few people would be interested.



This is the fundamental jobs problem in the US. Because of government mandates, the anticipation of Obamacare, litigation fears, OSHA rules, threat of unionization, a blithering variety of employment taxes, family leave laws, American labor is priced out of the market for most businesses. There are some businesses for which price is not an issue: Wall Street, the movies, professional sports, working at the White House, etc. But, for most private businesses who do the bulk of hiring in the US, labor is just way too expensive thanks to the various levels of government.



If you are a movie star and a sports celebrity (or even a reality show star), then these are not your problems. The wealthy don't really have a problem in this brave new Obama world. They are a-ok. That is why the Buffetts of the world strongly support the Obama program. It doesn't hurt rich people. It is the average guy or girl who has no real hope in the Obama economy, not the rich guy. The rich guy, like Buffett, is having a ball. this is fun for him.



The average American worker is simply not affordable anymore and it has nothing to do with with wage and salary and has everything to do with government. All of these programs to "help the average guy" have made the average guy way too expensive.



Unemployment is not going to go away in the US. This is the new reality. Those who are protected from the problem, like Warren Buffett, will continue to cheerlead for the programs that devastate middle and lower income Americans. "Let them eat cake" has a certain ring to it for the Buffett-Obama class. But, for the rest of America, life will stay pretty grim. I wonder how long Obama and Buffett can blame all of this on George Bush -- 10 years? 20 years?

What Do Markets Assume?

There are very scary stories out there: 1) a European debt crisis; 2) Incredibly slow economic growth in Western countries; 3) A potential for Asian economic growth to top out. Does this mean stocks cannot do well?



Surely "the market" knows what we know. How much worse news is yet to come?



Greece will default. Has the market fully factored that in? While the initial shock of a Greek default would likely cause stocks markets to skid, the reality is that a Greek default could be the harbinger of good news to come. The sooner that defaults and workouts become the order of the day in Europe, the sooner Europe can begin to heal its economic woes.



Why are defaults and workouts therapeutic for Europe? The reason is that politicians will never be able to reverse the spending and entitlement train. They just won't be able to do it. Instead, a default will let the market itself force the necessary reforms on Europe. It won't be possible for Europe to access debt markets in the future unless Europe begins to tackle its unaffordable spending and entitlement programs. Market discipline will solve a problem that politicians have no hope of solving. This is good. So, defaults are good news not bad news and defaults are coming soon.



What about the US? It is unlikely that the US is headed for a recession. Try as it might to strangle the economy, Obama and his allies will not be completely successful in their efforts to destroy the American economic engine. Besides, unless Obama shifts ground and does it quickly, he will be a one-termer and his successor is likely to to do a complete about face on the Obama agenda. This is good news as well, whichever way it shakes out. The hide tide of government intrusion and regulation in the economy may be just over the horizon. In any event, a downturn in GDP isn't likely. Slow growth, not negative growth, is probably our future for the next year or two until the cavalry arrives.



All of this suggests that stocks are probably a good buy for the long term investor. For the short term investor, who knows? But, for the long term investor, this is probably a historic opportunity to own equities.

Interview: Steve Jobs and Bill Gates at D5

So this week's resignation announcement from Steve Jobs has many of us looking back through the archives, compiling old interviews and articles, and summarizing the accomplishments of Apple and its iconic co-founder. 

It's prompted me to look back not only at what Steve and Apple have done in the past 30-plus years, but what the tech industry as a whole has created in that time. We're all familiar with the stories of famous rivalries and stolen (or "borrowed"/cheaply purchased) technologies in the PC and software industries. It hasn't always been pretty.

It's quite interesting then, to find two of the tech industry's most famous sparring partners (and sometimes, business venture partners), Steve Jobs and Bill Gates, sharing a stage and chatting about their careers in this D5 (All Things Digital, 2007) conference panel interview. 



The panel discussion begins when the two great entrepreneurs are asked to describe the other's impact on technology and our daily lives. Quite an interesting opportunity to hear these two gentlemen speak. This is something our grandkids will probably watch someday. 

Enjoy the video, and check our related links section for more.

Related articles and posts: 

1. Steve Jobs resignation: reactions from Wozniak, et al. - Bloomberg via YouTube.

2. How Steve Jobs Made Business Cool Again - Bloomberg. 

3. Discussion with Steve Jobs & John Lasseter - Charlie Rose. 

4. The ultimate Steve Jobs resignation linkfest - Abnormal Returns.

All Eyes on Bernanke...Why?

Whatever Ben Bernanke has to say on Friday is irrelevant to the grand picture. The American economy is stuck in a quagmire that Ben Bernanke cannot do anything about. He can make things worse, indeed he has already. But, can Bernanke do anything that can help? What can Bernanke can do that will convince a business to shoot itself in the foot by hiring someone in a world of massive regulation, litigation and mandates? Not much.



But, I guess the press has to talk about something. So, the Bernanke sideshow continues.

Au Revoir Mr. Jobs.

Today’s headline stories are:

·         Steve Jobs Steps down and

·         Gold and silver starts correction.

For the first news, I do not have many comments except wishing Steve Jobs good luck and good health. He has singlehandedly turned around Apple and made the company what it is today. Many things can be said about Apple but no one can deny the fact that it is the most valuable company in USA just by market capitalization alone.  We need to wait and see how it will affect the stock price tomorrow. But nothing or nobody goes on forever. So “ Au Revoir” Mr. Jobs. Well done Sir.

The second news was about the sharp decline in Gold and other precious metals.  

From ETF Digest; the sharp decline in the price of gold was “the result of the Shanghai Gold Exchange raising margin’s the second time this month Tuesday late, the impending options expiration on the COMEX Thursday which generally leads to chaos, a much overbought market and, let’s face it, Bernanke doesn’t want continually rising gold prices to embarrass him Friday. (BREAKING NEWS: After the close the CME raised gold margins by 27%! This must have been leaked to other exchange members. Options traders at the COMEX will feast on this and this is another reason markets are broken and corrupt.)”

I am borrowing another chart from the master chartist Chris Kimble regarding gold;

Please continue reading here:

http://bbfinance.org/1/post/2011/08/au-revior-mr-jobs.html

Europe and US Face Similar Problem

The "Greek Problem" is really no different than what might be called the "California Problem" in the US. The 50 states of the US are in a common currency, yet each state has its own "fiscal policy." This is essentially the same as the situation in Europe wherein European countries (excepting Switzerland) are banded together in a common currency -- the Euro. Each country has its own fiscal policy.



Greece (and California) are eventually going to be unable to continue financing their outstanding debt. There is no scenario possible that would permit either Greece or California to fund their outstanding debt over any significant future time period. The only way to postpone a default in either place is for someone to step in and bail them out and let them continue to expand their indebtedness.



That's why politicians will soon be clamoring for the US government to bail out California, just as many are pushing the concept of Eurobonds in Europe to bail out Greece (and Spain and Italy and on and on).



These bailouts permit profligate countries to expand their indebtedness and postpone making the decisions that would be required to put their financial house in order. This only makes the impact of the ultimate default (which will come in any event) that much worse. Meanwhile, along the way, to entice the bailer to do the bailout, Greece and eventually California, will be asked to enact "austerity" measures that their populations will not support. Greeks will eventually reject the austerity measures and proceed to a default "workout" on their own. Three is no way that Greeks will, voluntarily, agree to the kind of austerity that the bailout folks will want to impose on them. Ditto for California.



In the US, there is a growing list of states that will join California in the rush to get a federal bailout. Essentially, the idea is to have states like Texas and Alaska, who haven't behaved stupidly with their spending, provide the money to bail out the delinquents like California, Illinois, New York, etc. This is the same idea as having Greece saved by the frugal German taxpayer.



All of this, as it takes place, rewards those who made bad decisions and punishes those who made good decisions. Ultimately, it won't work anyway as the bailer and the bailee will all be forced to some kind of debt default. Pity the poor bondholders who fall for all of this. They will be big losers.



But, there are other losers as well. The citizens of Greece and California and other profligate places will face economic paralysis as they put on the austerity straight jacket, which the bailers will insist upon. There will be a global economic paralysis brought on by the foolish idea that those who made good decisions should pick up the tab for those who made decisions. Foolish economic policy by the Eurozone and US politicians will cause a lengthy period of economic pain which will end with massive defaults through the Western economic structure.



It is possible that the citizens of Europe and the US might wake up before this situation develops too far along the bailout road. We shall see. The optimistic scenario is bolstered by the rise of the tea party and the focus of current debate upon the problems of sovereign debt. So, maybe, just maybe, the Western world will stop the bailout process before it goes too far and is irreversible.

Have Markets Reached Bottom?

Nothing happens in small measures in stock markets anymore these days. Either DOW goes down 400 points or it goes up 400 points. The question that is in everyone’s mind; “ do we have a tradable bottom”? Let us read on to find out.

Given the fact that HFTs and ALGOs rule the market, in short term the markets are ruled by irrationality not economic fundamentals. I would like to draw your attention again to the Russle chart I showed few days ago. Does it look similar? If it does look similar, that is because we are in a similar situation.

Please continue reading here;

http://bbfinance.org/1/post/2011/08/have-markets-reached-bottom.html

J.J. Butler - Successful Stock Speculation (Scribd)

New to the Scribd trading books collection, John James Butler's, Successful Stock Speculation (1922). 

I was introduced to this short handbook on investing and speculation through Michael Bigger, who created an appended version of Butler's book with his own summary notes called, In Praise of Speculation. 

I'm just starting Butler's book, but I find his introductory notes quite useful in clearly defining the meaning and purpose of that now mistreated term (and misunderstood activity), "speculation". 

Butler defines the act of speculating as follows: 

"To speculate is to theorize about something that is uncertain. We can speculate about anything that is uncertain, but we use the word "speculation" in this book with particular reference to the buying and selling of stocks and bonds for the purpose of making a profit. 

When people buy stocks and bonds for the income they get from them and the amount of that income is fixed, they are said to invest and not to speculate. In nearly all investments there is also an element of speculation, because the market price of investments is subject to change. "Investment" also conveys the idea of holding for some time whatever you have purchased, while speculation conveys the idea of selling for a quick profit rather than holding for income.

To the minds of most people, the word "speculation" conveys the thought of risk, and many people think it means great risk. The dictionary gives for one of the meanings of speculation, "a risky investment for large profit," but speculation need not necessarily be risky at all. The author of this book once used the expression, "stock speculating with safety," and he was severely criticized by a certain financial magazine. Evidently the editor of that magazine thought that "speculating" and "safety" were contradictory terms, but the expression is perfectly correct. Stock speculating with safety is possible. " 

Enjoy the book and its classic insights.Successful Stock Speculation, By J. J. Butler The Project Gutenberg eBook

Goldman and BRIC Theory Bull*hit.

Among many jitters in the stock market, today it was hammered hard by the news from GS that the vampire squid has hired a high profile Washington based lawyer to defend its chairman from the possible perjury charges for lying to Congress. I am not sure if we should laugh or cry. After all, it may be all noise without any meaningful action. But we can be assured that lots of backroom posturing is going on and there will be more market volatility. The stock markets today are a giant casino run by the Banksters.  They always win.

Market’s hope is being built on coming QE3 expectation but I think the market will have huge 

disappointments there. I do not think the Fed is going to come out with any additional bond buying program now. But if we step back a while from the five minute chart and daily churning and look at the big picture, we can be sure that central banks of the world have almost run out of bullets to inflate the bubble.

Please continue reading here:

http://bbfinance.org/1/post/2011/08/goldman-and-bric-theory-bullhit.html

A Bad Idea Can Do Some Real Damage

What we are experiencing now are the fruits of the "too big to fail" mentality. In the US, the crisis of the Fall of 2008 began with the government orchestrating a purchase by JP Morgan of Bear Stearns with a $ 29 billion guarantee by the US government. That was the beginning. Before they were done the politicians had bailed out half the financial system, even those who did not wish to be bailed out.



Now the European politicians are doing the same thing. Greece was too big to fail. Now, Spain and Italy are too big to fail. Germany and France are, no doubt, to big to fail too, but there is no one left big enough to bail them out.



This is all ridiculous. No one is too big to fail. The world would not have come to an end if the various financial institutions that were liquidity starved had been permitted to fail in 2008 (or provided some orderly form of Chapter 11 bankruptcy). There was absolutely no reason to protect bondholders from the risks that they had assumed. They should have suffered not the taxpayer. Ditto today for Greece, Ireland, Italy, Spain, and Portugal and, if it gets that far, Germany and France.



Bondholders take risks too. Why shouldn't they pay the price, if they have taken a foolish risk.



By not letting the chips fall where they may, the Western economies now face austerity programs, zombie institutions, and economic stagnation for generations. Is this price worth paying just to protect a few bondholders?



The problem is that politicians love this. It makes folks like Tim Geithner feel really powerful to wander around distributing taxpayer funds to those in need. But, it is very bad economic policy and we are paying a horrendous price for such bad policy.

Recession or Depression?

It is now almost given that we are going to have economic downturn. Except the Fed and Obama Administration, everyone is pretty much sure that we are going to get a double dip. For people on the main st. we never left recession in 2008 in the 1st place.

Question is, are we going to be in recession or in a worldwide depression?

From Wikipedia; “In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.”

So what we have here?  We all know that GDP growth is below 2% in USA and almost 0 in most parts of Europe. In Japan it is negative. Only growth we still see is in the fantasy land of China and in some developing countries like India and Brazil. But we should be fools to believe anything coming out of China at face value. Before we go any further, let us understand what is GDP. It is C+I+G+Net Export. C is the consumer spending. I is investment by industries. G is spending by government and Net export is difference between export and import.  We also know that there has been no growth in real wages for the last 10 years. Consumers have been spending by borrowing, using home equity or some other form of bubbles created by the Fed. That ATM has now been turned off. Industries are sitting on piles of cash and not investing because they do not see any increase in sales in future.  Net export is negative in USA and in most European countries. We are helping the Chinese to come out of the swamp by purchasing all the junk from them and creating jobs there. In return they are now able to give lectures to America how it should live within its means.

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Reasons for Optimism

Reading this blog and following the markets can get one down after a while. So, what is there to feel good about. Several things.



First and most important, the world is now fully cognizant of the profligate ways of the Western economies. This is a plus.



Second, the Asian economies and some scattered others are motoring along quite nicely and they are not enacting the kind of poison pill social policies that destroyed the Western economies. At least not yet.



Third, government bureaucrats have not yet caught up with technology, though they are trying to. It is still possible to come up with a new technological idea and put it out there without drowning in red tape (which is what happens to you in the bricks and mortar economy).



Fourth, the global warming folks are losing their audience, though they still have President Obama dutifully in attention.



Fifth, left-leaning Americans are mad at Obama.



Sixth, Paul Ryan might run for President



So, rejoice, buy stocks.....all is not lost

Martha's Vineyard

There is no reason why the President should not have a vacation and enjoy it without the press (and Maxine Waters) villifying him for taking time off to be with his family. The focus on the President's trip to Martha's Vineyard shows the bankruptcy of the modern media.



The problem is not that the President is taking a vacation. He doesn't need to hurry back, call Congress back into session, and then inflict more damage on the US economy. Better that he enjoy himself at Martha's Vineyard and leave us alone. Would that his EPA and his NLRB would do the same.



Our problem is not too little attention from the President, but too much attention. The Credit Card "Reform" Act, Obamacare, Dodd-Frank as well as various direct administrative acts by government agencies have all but guaranteed that the US economy will remain mired in stagnation for a generation. This is what happens when Obama takes an interest in our welfare. Lets hope he forgets all about us. We will have a better chance for an economic recovery if he stays away. Perhaps he can take Harry Reid and Nancy Pelosi with him to Martha's Vineyard.

The Focus on Jackson Hole

Once again all eyes are pointed in the wrong direction. The Federal Reserve's annual conclave is this coming week in Jackson Hole, Wyoming. Nothing of any significance can possibly emerge from this gathering.



But for the media, this is the big event. The media can pretend that somehow, someway it matters what happens and what gets said in Jackson Hole. This is complete nonsense.



The American economy's problems cannot be fixed by applying any strategies from the Federal Reserve. The Fed has done enormous damage to the American economy in the last three years, in part because it was handmaiden to an Administration and a Congress intent upon destroying the private sector economy. Ben Bernanke has only one goal -- getting himself reappointed by Obama as Fed chairman. Nothing else really matters to Bernanke at this point. Greenspan behaved in a similar fashion when Clinton was President. There is nothing new about a Fed Chairman playing the politics of survival.



But fixing the economy is an entirely different matter, unrelated to anything that might transpire in Jackson Hole. What the economy needs is breathing space. It won't get that breathing space. What it will get is more regulation, more litigation, more taxes and more demonizing rhetoric about millionaires, billionaires, special interests, etc. This Administration is all about finding the enemy and exposing the enemy to its political base. This Administration has little or no interest in economic recovery. Economic recovery shows the triumph of capitalism, not an outcome that this President shows much interest in.



So, forget the politics. Take a course on microeconomics. Learn why business hire employees. Ponder why raising the minimum wage does not create jobs. (If you think raising minimum wages is a good thing, why not raise it to a $ 1,000 per hour. That ought to make everyone wealthy!). Ponder why Obamacare and its mandates make business lose interest in having US employees and even US facilities. Ponder why litigation to protect the rights of virtually every group one can find a definition for saps the energy of businesses who might otherwise wish to grow and expand. Ponder why Sarbanes-Oxley and Dodd-Frank are destroying the American financial institutions so that they can be replaced by their equivalents in Asia. If you wanted to destroy the American economic engine, you could not dream up a better set of government policies than these. And, they are working. Capitalism is being annhilated in the US economy and is being replaced by government bureaucracy. We are switching places with China in every respect.



Outsourcing and replacing labor with capital is the sensible business policy when faced with the politics of big government interference in free markets. This is the future.



It is worth repeating that stocks can do fine in this environment. The main impact of Obama policies is to dramatically increase the inequality of opportunity, the inequality of income and the inequality of wealth. Buffett should like that.

No Help For Small Business

Let me indulge in some shameless self-promotion. Our new look business web site is now ready. So henceforth all market blogs will be written and posted in the blog of our company website; http://bbfinance.org/

We are basically small business consultants and one of our major operations is offering off-site accounting and bookkeeping function to small businesses. We offer to save up to 50% of the current cost in accounting and bookkeeping function. Just think, even if a small business owner saves $ 10,000 in cost, s/he would have to generate sales of over $ 100,000 to generate that much profit otherwise. It is the small business which makes America tick. People are surprised to know that US Economy is by no means dominated by big business. Yet the big business gets most of the tax cuts and favorable policies, simply because they have the money to lobby to the politicians.

These small business account for almost 60% of the workforce and yet the government makes the life of the small businessmen/women difficult with innumerable rules, requirements and bureaucratic hoops. The financing to small business is always a problem and there are times when we have seen small business owners pawn their personal assets to make the payroll. If these people survive, America will survive. 

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A State of Denial

Both the US and Europe are loath to acknowledge the facts on the ground. Governments in the US and Europe have, for half a century, pushed entitlement programs, erected massive regulatory edifices, and sold bonds to finance what taxpayers will not and cannot pay for. Now what?



You still see calls for politicians to act. Haven't they done enough?



When will the press and the politicians admit the cold hard truth. The policies enacted in Europe and the US are not affordable and are pushing their economies into permanent economic stagnation. The Krugman view that all one needs is a new dose of massive government spending has been tried by every country in the Western world. That it failed miserably spurs Krugman on to demand more of the same. Krugman is comfortable. He has a job. This is all "academic" to him. And, he's having fun to boot.



But the economic malaise that the world is stuck in is a direct result of the policies of Western governments for the past half century. Sticking your head in the sand is not the route to intelligent policy. It is time to admit failure.



Only free markets provide economic growth. Shutting down free markets in Western countries has lead to what we are now observing. Pretending that politicians can "fix" this so it all works is ridiculous.

The Cost of Dodd-Frank

Senator Chris Dodd and Congressman Barney Frank know little about economics and less about financial services. Nevertheless, their names adorn one of the worst pieces of legislation in American history -- the Dodd-Frank bill. This bill, one of the first of Obama Administration's body blows to the American eoonomy, is now bearing fruit in massive layoffs at the major banks in the US.



What Dodd-Frank does is shift the center of the financial service world from the US to Asia. What Dodd-Frank doesn't do is provide any reform whatever to the delivery of financial services in the US. Dodd-Frank enshrines "too big to fail" as the cornerstone of US bank regulatory policy. Dodd-Frank is an absurd, suicidal act imposed upon the financial services by ignoramuses who don't understand the purpose or operation of a financial service industry. It's a lawyer's dream and country's nightmare.



Check out the bank stocks. This year they are down from 35 percent to 60 percent, pretty much across the board. Pick up a newspaper. Banks are laying off employees in the US in huge numbers.



I wouldn't be a bit surprised if this was the purpose of the "envy crowd." Crush American financial services so that you don't see those rich Wall Streeters around anymore. The rest of the country is just collateral damage in this assault on what used to be the dominant financial service country in the world.

All The Bad News is Going to Get Worse

Don't expect the bad news to end any time soon. As long as politicians continue to try to sweep things under the rug, both in the US and in Europe, markets will swoon from time to time.



But, the markets have priced much of this in. The markets are not fooled by the politicians. The truth is that Europe and the US have both put their economies in straight jackets for the foreseeable future. The desire to do good has accomplished what sworn enemies could never achieve -- the decline of the Western economies. We are watching that unfold before our eyes. This means periodic slamming of markets.



But, the larger companies will survive this onslaught. They are in cahoots with the politicians in any event. It is the small companies and the middle and lower income groups who will bear the brunt of the unwinding of the European-US pipedreams.



All of this protection for minorities, for the disenfranchised, etc., simply entrenches the wealthy, like Warren Buffett and Bill Gates. None of this really affects them and their wealth will survive this. Obama will live to a ripe old age and will be worth hundreds of millions of dollars, if not billions, in the late stages of his life. They've got it made.



The ones that lose are those trying to make their way in this sea of red tape and mixed signals. Anyone who wants to start a business or build a career starting from ground zero has no real shot in the world that is now the Eurozone. The US is rapidly becoming its twin. The real losers will be the minorities, the low skilled, the poor and the middle class. They have no future in the world that their great champions have created for them. That's why Buffett likes this and is its most visible cheerleader. He and other rich folks have nothing to lose in this brave new world.



Economist Thomas Sowell wrote a great book entitled "The Vision of the Annointed," where he describes in detail the process by which do-gooders destroy the opportunities for poor folks. Now we are seeing Sowell's vision play out on the world stage.



But, stocks will do fine and so will Warren Buffett.

No Inflation....Just 6 Percent

So Bernanke sees no inflation, nor do any of the major economists working with the Obama Administration. The CPI rose at an annualized rate of six percent in the month of July. How's that for no inflation.



The bankruptcy of Bernanke's and Obama's policies are unfolding in the only logical direction that such policies can take us: rising inflation and a weak and stagnant economy.

Politicians Busy Solving Europe's Problems

You knew when various European countries banned short selling that the politicians were beginning to panic. Fix it! Fix it!



What is unfortunate is that folks in the investment community are on the sidelines urging them on. They want the taxpayers, once again, to step up and bankroll the banks, governments and whoever else has made serious, gigantic, mistakes and need financial help. Why? Why not let them go under? Why not force Greece, Spain, Portugal, Italy, whoever to do workouts with their creditors. The creditors loaned them money (or bought the debt with eyes wide open). Why is this the taxpayers' (of other countries) problem?



The usual tactic to justify putting taxpayers on the hook is to argue that, absent a bailout, the world is coming to an end. Really? How do they know that? Are they objective in this assessment?



The ECB should quit meeting. Merkel and Sarcozy should take a 16 month vacation. Let the profligate borrowers go bust or do workouts with their lenders and leave the taxpayers alone.

Market Analysis and Outlook, August 17th.

Yesterday was an extremely busy day for me. We are giving a new look to our official web site and it took all my time.

Coming back to the market, it does not look good at all. The market opened strong but closed weak.

There is huge resistance around 1200 level in SPX. May be people are selling the rally. I think it is time to get back in cash by Friday, which is the OPEX. Historically August expiration has been bullish lately, DOW up seven times in a row. But I think the upward momentum is losing steam and the lows will be retested.

The Franco-German joint statement was possibly the 1^st indication that France will save its skin when push comes to shove. Their joint statement made some demands regarding fiscal stability and sovereign policy, which only few in Europe can match. There is no mention of Euro-Bonds. The irony is that Germany fought two world wars to win over what is Europe. Now they effectively control the rest of Europe and they did not have to fire a single bullet.

My favourite chartist  Chris Kimble has this chart to share.

The similarities between 2008 and 2011 are eerily similar. But the market has to churn in that grey rectangle area few times, before it can roll over. I do not see any chance of the indexes going up without any further stimulus from the FED. That seems highly unlikely today, unless the market tanks a good bit and all the highly popular (13%, no less) leaders in Washington lose half the value of their portfolio. Then there will be a bipartisan call for action and we shall see happy days again, even if for a short while.

Mark Cuban interview: "Buy and hold is a crock"

Entrepreneur and Dallas Mavericks owner, Mark Cuban recently chatted with Alan Murray at the Wall St. Journal about investing, entrepreneurship, job creation and innovation, patent trolls, and the NBA. 

Mark kicks things off on a frank and "controversial" note by stating up front his belief that, "buy and hold is a crock of shit", and the idea that one should be almost fully invested in the markets at all times is similarly bunk.

As Cuban puts it: "Unless you really have a commitment to something, just keep your money in cash - knowing that at some point in time there's going to be a week or two like we've had [recent volatility and stock market plunge]."

Mark explicitly states that these are his times to look for opportunity in the market, and implicit in his statements are a belief in the value of market timing and his own ability to find relative bargains in the capital markets. He likes to find things that are cheap, but is not seeing the bargains he needs in leading shares yet. You'll hear more about what he's doing and his philosophy on the current realities of trading and investing in the interview.

What's really interesting to me, beyond the investing discussion, are Mark's comments on patents and the current business environment. Cuban says patent laws and patent litigation are having a "huge", negative effect on the economy and job creation, particularly with technology companies. In fact, he flat out says, "You don't need patents...ideas are easy", citing his own experience with Broadcast.com and its technology patents in the dot com boom environment.

Note that Cuban's remarks on defensive purchases of patent troves came just ahead of the Google - Motorola Mobility deal (driven largely by patent protection needs for the Android OS in the litigious mobile phone industry) announced this week.

There are a few things that I may not agree with in this interview (mostly Mark's ideas about government grants for job creation), but I really like the fact that Mark speaks his mind and is just so off the cuff and straight up with his remarks. Really refreshing at a time when you see so many mealy-mouthed individuals hemming and hawing with their measured, pre-planned responses in interviews. Great stuff, watch and enjoy.

Related posts: 

1. Howard Lindzon interviews Mark Cuban on StockTwits TV - Finance Trends.

2. Billionaires are different than the rest of us - Abnormal Returns.

Now Germany

You knew that, sooner or later, the German economy would slow under the onslaught of the bailouts demanded for the rest of Europe. The economies of both Germany and France are beginning to get crushed under the weight of the profligacy of the rest of Europe. In actuality, neither Germany nor France were in good shape to begin with. Only by comparison with the rest of Europe, did Germany and France look like winners. Both economies are long-run losers.



Unless the bailout game plan is reversed soon, there isn't much hope for economic growth in Europe. Unfortunately, the European culture has long ago adapted to the idea that everyone is entitled to everything. That worked as long as population increases and gullible bond buyers could fuel the pipe-dream. That's over now. Nothing short of a complete dismantling of the welfare state offers any hope of economic growth for Europe. This spells political upheaval, the beginnings of which we are already observing.



It will be interesting to see what happens next, but this movie will not have a happy ending.

Market Analysis, 15th August.

The price action of the market makes news. This was evident today. The economic data was bad and normally when the Empire manufacturing index is negative for three consecutive months it signifies recession.

But bad news is good news for the super computers that control the markets. Markets are up three days in a row on decreasing volume. That is quite understandable. After the panic, retail investors do not have the stomach yet to go long. If anything they are selling into the rally. That is the whole idea of the panic. Buy cheap and then sell high. Very soon, 200 DMA will be overcome and once again greed will overtake fear. Wash, rinse and repeat.

If 2008 was memorable for bank failures and credit crisis, 2011 / 2012 will be remembered for sovereign debt crisis and of course bank failures. This time the bank failure will come from Europe. French banks are particularly vulnerable. It seems banks like Society Generale has a leverage of 50:1. How long before it blows up? The trouble was evident last week but France banned short sale of bank shares for 15 days. So the problem has been hushed up for now.

So the market rally today because TPTB (The Power That Be) wanted it to go up. Today was a major accumulation day. So we can expect a red day tomorrow or a very small green. But the rebound is not over yet. I expect the SPX to rebound between 1250 -1300. 61.8 % of Fibo. Retracement is 1270 and 200 DMA is 1280.

If you believe Elliot wave mumbo jumbo, then we are in wave 4 up and it should be followed by wave 5 , testing the lows. Most likely reason, Banksters will create panic for QE3.  

I think we shall see more disturbances by the end of the month or even before and markets will retest lows.  

Watch The Money Supply

The money supply (M2) is growing again and at a very fast clip. This means three things: 1) The economy will not fall back into recession; 2) Asset markets are headed up, not down; 3) Inflation is going to pick up.



What growth in M2 does not necessarily imply: 1) a major increase in GDP growth; 2) any substantial improvement in employment levels.



So, watch for stagflation and watch for asset prices to move up.

The Coming Hard Landing of China.

China is a success story told many times over. It’s economic miracle has been the stuff of folklore. There are investors out there who think that China will keep growing forever. The commodity speculators love China. Be it oil price or copper, any spike in price in any commodity is attributed to the insatiable demand from China. But behind the obvious, there is another story. For those who are willing to question the fairy tale story, it is time to short China.

Let us start by looking at the socio-economic model of China. The communist party of China has ruled the country with iron hand for over from 1949. The political elite of China want to avoid any social unrest and upheaval at any cost. They have an unenviable task.  They have to provide enough work, food and shelter to the millions of ordinary Chinese. Being a command economy means there is no free market. The local purchasing power is insignificant compared to the western world. In order to create work and alleviate poverty, the leadership decided to take the route of growth by export.

Today China is the manufacturing powerhouse of the world and the single biggest factor in the growth has been low labour cost. Companies from all over the world shifted their production base to China to take advantage of the cheap labour. With the result, western civilization lost jobs. But most of the wages that a Chinese worker gets is at a level that is just sufficient for survival. Millions of rural poor migrate to bigger coastal cities in search of work and live in deplorable conditions. The worst part of the deal is that the companies that produce goods for the world do so at a very low level of margin, average 4% to remain competitive. And now every country is trying to grow out of poverty through export. Irony is, not every country can be net exporter, and someone has to be net importer as well. And consumers in western civilization do not have the capacity anymore.

China imports all the raw materials from other countries, iron ore from Australia, energy from Middle East, and machinery from Germany and produce goods to export. When the world demand for the cheap Chinese goods plummet, as it will with the slowdown of the global economy, what will happen to the export oriented growth model?

After 2008, China decided to kick start its economy through construction. And they found it is the easiest way to keep people employed while projecting a growth of GDP. But creating assets which does not give income does not actually create sustainable growth. When, not if, the world economy slows down in the coming months and years, the available capital to continue such useless construction projects will come to a halt. Already millions of homes and cities are lying vacant across China. As if the sub-prime housing crisis is being played all over again in China, but in a much greater scale.

Over the last 40 years, there has been a growing middle class in China who are well educated and are demanding. Since the currency is pegged to US dollar, the QE in the USA is exporting inflation to China in the form of higher food cost. And unlike in America, food cost constitutes over 40% of the average household expenditure in China. So inflation is rising in China and China is now battling hard to control the price rise. This is causing huge social unrest and the Communist Party is uneasy about it. As a result, we are seeing a slow rise in the value of Chinese Yuan vis-à-vis US$. But this cuts both ways. While a rising Yuan will help reduce the cost of imported foods, it will reduce the profit margin of the exports and make them uncompetitive. More so in today’s weak demand situation where the exporters do not have the leverage of negotiating higher prices.

There are talks about the huge Chinese holding of US debt and the threat they possess to US Economy. Actually it is the other way round. China has no option but to invest in US treasury and if they don’t, they would not be able to keep their currency down and be totally uncompetitive. If they want to sell the massive holding of the US Treasury bonds, they would push the prices down and lose money.  So again, China is caught in a no win situation there. With the money fleeing Europe, there is no shortage of demand of US Treasury, at least for now. So US do not need China, as much as China needs US.

The demographics are another factor to be worried about China. With one child policy strictly followed by the party for so long, the average age of the population is growing and the country is graying. Moreover, because Chinese parents prefer boys to girls, there have been systemic abortions of girl featus on a large scale for a very long period of time. With the result, the ratio of man and woman has been totally skewed. In some places there is one woman for every two men and poor migrant workers cannot get wife for the love of their life.

Central command always fails. The asset allocation in central command economy is not based on efficient use but what the party leaders think best. And few people cannot decide what is best for millions. Corruption is rampant and so are the red gift bags. Even the death penalty does not deter the local authorities much. The end result is something other than desired.

The bubble is about to burst along with the global debt deleveraging and the popping  sound will be heard loud, far and wide for many years to come.