Thursday, May 31, 2012

Will The Bounce Hold?

This is what I said yesterday: “we might see a lower low intraday tomorrow but more likely than not, we will also see a bounce”. And we got just that. How far the bounce will go? We will know tomorrow how much fuel is left in the rocket and whether it will go to another planet far away. So no front running. Going against a trend and running with a countertrend rally is an expensive proposition, which I have learned painfully.

The interesting thing that happened in the market today, both VIX and SPX closed at red. VIX is showing a spinning top. I also see a kind of double top.

It kept changing throughout the day. In the morning it was solid green, 30 minutes before close it was a hanging man and at close a spinning top. This shows that there is fair amount of indecision in the market. Greed and fear are fighting for supremacy and if nothing bad comes out of Europe, most likely greed will win, short term. At least I am trying to keep my greed in check.

1300 level in SPX held for now and I sincerely hope and expect that it will now test the 50DMA which is around 1368. Today it looks doubtful whether it will reach there and that is result of the negative sentiment build up. But all that can change in 3 huge up trading days and folks will be talking of new bull run! Zuckers all.

That reminds me of Mr. Zuck. While he is having the fun, his FaceCrook shares had a rare reversal of fortune in the last 2 hours and ended the day in green. After IPO, the share had six red, two green and one eh! days. Talk about hype. And still it is at almost 90 time valuation of its current earnings and possibly 30 times expected earnings. Who all are buying this? What am I missing? It was a great example of greater fool theory beautifully executed by the company insiders who bailed out at the right time. The FB share will have free fall after its next quarterly earnings report and I am very sure it will be counted in penny stocks by 2014.

So where do we go from here? Nowhere actually. We wait patiently for the set up to be complete before we make our next move.  For the last week or so, the markets are churning in a range.

Unless it brakes the range and goes either way, there is nothing much to do. Thanks for reading Please re-tweet, forward, post it on your wall and share it anyway you can. My Twitter id is @BBFinanceblog and Stockcharts : Worldoffinance.  

Simon Johnson on the Euro

Simon Johnson has a good blog post on the end of the euro. Digging in, the run is on, the end is near, and the chaos will be worse than you thought.T he ECB has also monetized a lot more than you thought.

Still, I do not understand why even Simon cannot imagine the idea of sovereign default while staying in -- and firmly committing to stay in -- the currency union. The picture Simon paints of the euro breakup is a catastrophe. So why not even talk about sovereign default (restructuring) without euro breakup?

It strikes me as really the only way out, and the longer Europe waits, the harder it will be. 

Texas Hedge

My first reaction to the JP Morgan loss was, if their "hedge operation" had become a "profit center" as reported, we know exactly what went wrong. (And, if they weren't playing with a government guarantee, who would care if they lost $2 billion and some hedge funds gained $ 2 billion?)

Andy Lo put it beautifully:

Yes, we can tell the difference [between hedging and trading]....There is one very simple question that you can ask — which has a definitive answer — about the small number of individuals who were responsible for managing this group at JP Morgan and putting on the specific trades that lost these large amounts of money. That question is: How were they compensated on an annual basis? Were they paid a salary and a bonus, and was the bonus a function of the profitability of the group, or was the bonus a function of the hedging ability of the group? If you can answer this question — and it definitely has an answer to it; it’s not a metaphysical question — you will have your answer as to whether it was proprietary trading or hedging. I don’t know the answer, but I know the answer exists, and I know that certainly the government can get that answer with a single phone call. 

Hedging is supposed to lose money when everyone else makes money. That can be measured. The risks of the entire bank, which hedgers are supposed to minimize, can be measured.

I think Andy knows the answer to this question. I suspect I do too, but maybe I'm being too cynical.

(Thanks for pointer from Arnold Kling)

Why not thank the speculators?

 The price of oil. (Sent by a friend whose reputation I won't besmirch by name, but thanks.)

Remember how the oil price rise was the work of evil speculators who had to be stopped? (My post here) Well, now that the speculators are driving prices down even faster,  shouldn't they get a thank you? Ok, maybe not medal of honor, but a nice statue out on the Washington Mall would be thoughtful. Flowers are always nice.

Tongue in cheek of course, but the different treatment of price rises and declines by the usual economic and political pundits is interesting to note.

Wednesday, May 30, 2012

Good Comments

Reading through some of last weekend's commentary  got me thinking about what I look for most -- and try to emulate -- in good economic commentary.

One of the first lessons we learn in econ 1 is that economics has a lot to say about incentives, which are usually ignored by popular discussions, and economists have a lot less to say about fairness, morality, or distributional questions, which is what popular discussions focus on. I don't mean that fairness or distributional questions are unimportant, just that economists don't have any special insight into those questions.

For example, an economist contributes best to the tax debate by pointing out margins that others have not noticed, such as the huge implicit marginal tax rates implied by phase-out provisions or the incentives for old people to save vs. consume when looking at confiscatory marginal estate taxes.

Economists need always to disinguish tax rates from taxes.  Whether "the rich" should pay more or less overall is really not that useful for us to comment on. Whether a code  attempts to raise revenue with high marginal rates and lots of deductions or low marginal rates and few deductions is something we can say a lot about. We need to remind people of econ 1, that who pays the tax and who bears the burden of a tax are often radically different. "Corporations" never pay taxes, they pass taxes on either to customers, workers, or investors.

Economists should focus on the things they know something about. Economists who pontificate on  the moral character of public figures are not saying anything about which they have any particular standing or expertise to analyze. It takes a lot of ego to think your political passions are that much more interesting than anyone else's.

More deeply, seeing some people as good and others as evil really is not that useful as social science or as a contribution to policy debate. Our ancestors in the middle ages knew how to do that. If you want to understand why people do what they do, why policies are formed as they are, it is much more useful to view people who disagree with you as well intentioned but mistaken -- we can't all study economics all our lives -- than as evil, or in the pay of dark powers.

Economic analysis is more believable when it is non-partisan. I like commentators who make an effort to find silliness (and there is plenty of it) attached to both parties. When I see an analyst that always seems to be plugging one of the political parties, I know he'll be shading the truth at least half the time. Even people who are partisan function most usefully by holding their own party's actions to scrutiny, rather than sanctifying any action on one side and demonizing any action on the other. Most hilarious are commentators who laud a policy action when their pet party does it, and demonize exactly the same action when undertaken by the other side. 

And economists should insist on precise language. When political discussion uses the word "drastic cut" to mean growing expenses by 5% where before the government was planning to grow expenses by 7%, our job is to remind them what "cut" means. So much economic discussion really belongs on my favorite game,  bullshit bingo.

By now you will probably guess that what set me off is Paul Krugman's announcement in the New York Times that in his exalted opinion New Jersey Governor Chris Christie is a "big fiscal phony," that Congressman Paul Ryan and candiate Mitt Romney are "fakers," who are "willing to snatch food from the mouths of babes (literally, via cuts [sic] in crucial nutritional aid programs)," all to serve the dark conspiratorial interests of their "financial backers."

This column illustrates just about every desirable principle by embodying its opposite.


There actually is a lot economists can add to the distribution debate. There are a lot of facts: the widening distribution comes from a skill premium, not inherited wealth. It's new people getting rich, not the old rich keeping more money. It's pretax income, not the rich keeping more money.  Consumption inequality is much less than income inequality. And so on. There's a lot of good theory: Optimal redistribution with incentive and participation constraints is great stuff. And both theory and experience on how well tax-based redistribution works out. I just meant we don't have much to add to the mostly normative questions. (Thanks to the "Lumpy Economist" Ruediger Bachmann for pointing this out.)

And lots more principles for economics come to mind.

There's always a supply curve and a demand curve. Most discussions assume one away.
Budget constraints.  The trade and capital account must balance.
Higher prices and interest rates can reflect good times not just signal bad times. 

Ok, too easy.

Local Regulation

A nice short video describing some of the trials and tribulations of an excellent Hyde Park cafe trying to navigate our city's over-regulation:

A few things struck me about this story, which only scratches the surface of troubles small businesses have in Chicago.

We talk about "regulation," but the real issue is rules vs. discretion. Regulating by simple clear rules is much better than regulation by discretion, or by rules so complex they amount to discretion. When a zoning inspector can come in after the fact and always find something wrong, it's in invitation to corruption. We are increasingly a country in which "regulation" means that regulators can tell people what to do on a whim, not one in which clear objective rules are imposed.

The ill effects of this sort of over-regulation are hard to measure, so they tend to be forgotten. We talk about tax rates, spending and laws. But how do you quantify the far more important effects of this sort of thing? It's far worse than an explicit tax, or on the books spending. But it just shows up as mysterious lack of business. We can find isolated anectdotes, but how do we add up the effects of regulatory harassment across the whole country?

I am reminded again of Greece. Pundits talk about how Greece needs its own currency so it can devalue its way to prosperity. But the kind of illness shown here in Chicago is multiplied a hundred fold there, and no exchange rate can solve it.

Same Boring Stuff!

I know it is kind of boring to read the same thing. “Hold on”, “don’t do anything”, “this market is not for investors” so on and so forth. But what else can I say. If we got excited yesterday and jumped in, we would have been very sad today. Even if there is bounce on the way, a better entry is always welcome. So where in the grand scheme of things we are right now? It is just my guess and please do your due diligence, but if we compare the price action of last year, I think we are here:

The areas circled.

Here is an interesting tit bit from Bespoke

 Ya, ya I know I know. SPX is going to 1250 1st before any bounce or so they say. The funny thing is when everyone and their grandma agree on same thing, opposite happens. The sentiment is as bearish as it can get. We are almost getting to the point where we are getting bored and develop fatigue about news from Europe. There is no end of bad news from Europe and about Europe. But I tend to agree with Nassim Taleb. Forget Europe, it is USA which is a bigger problem.
Remember my post about the giant Ponzi scheme few days back?

Coming back to the markets here at Ponzistan, we might see a lower low intraday tomorrow but more likely than not, we will also see a bounce.  The FOMC is still three weeks away and it does not serve much purpose to tank the market too much now. The Chairman will not be able to take any action. Technically speaking, now is the right time for a bounce.  Can the market go lower from here? Sure it can. 200 DMA of SPX is at 1283 and would be a good support level. That is about 2% below from here. But the potential for upside is more at this point.  As and when the equities go up, commodities will also go up, including gold. However, I would still stay away from going long gold at this point of time.

I am not suggesting that you start buying tomorrow. All I am saying is: maybe we should not jump on the short side now and just stay in cash and see how things develop.  I know, again the same old suggestion. Boring.

Anyway, thanks for reading . Please forward / re-tweet / post it on your wall and invite others to join. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)

The Solution That Doesn't Exist

Europe's problems are simple: every country in Europe -- there are no exceptions, not even Germany -- borrows to pay for promises that their own economy hasn't got the resources to pay for. The same is true in the US, but it hasn't become front burner yet. It will. Ultimately, you run out of people willing to loan you the money to pay for things that you otherwise can't afford.

It's not as if the US and Europe are borrowing to build bridges. That might represent a legitimate reason to borrow. Instead the indebtedness is a result of current funding needs that will only escalate over time. When does social security and medicare get less expensive? This is the heart of the European problem. They are not borrowing to fund long term investments, they are borrowing to fund the welfare state.

Put another way, they are borrowing for current consumption. The consumption being funded is part and parcel of the way of life in Europe, as it is in the US. There is no real difference. When your economy does not produce enough resources to fund it's obligations, then borrowing from somewhere, anywhere for a while will postpone the day of reckoning. But, not forever. Sooner or later bondholders realize you have no way to pay them.

So, what is the Obama solution. Float more debt. How? Who's going to buy it? Even if Germany were to relent and agree to underwrite the rest of Europe, Germany doesn't have the resources to do so. Once you have a debt that's not payable and you know that it not ever going to be payable, the jig is up. The jig is up. It's just a matter of time until the default process begins. That can either be an orderly process of "restructuring" or it can just be pure chaos.

If Greece returns to the Drachma, how does that help them? Who's buying Drachma based debt? And will Drachmas fund their social welfare agenda? Who's kidding who?

Economists are partly to blame for this fiasco because they have been negligent in pointing attention to unrealistic sovereign debt levels that exist in every western economy. In fact, they've encouraged these absurd debt levels by arguing that higher and higher government expenditures and higher and higher debt levels are good for economies. Read Paul Krugman if you want a taste of this reasoning. If your debt levels are growing so that you fund consumption by transfer payments to "entitled" people, it can't be good for the economy.

There is no serious economic research out there that suggests that this has any beneficial economic effects. Yet most academic economists have remained silent. Many are in the forefront of the clamoring for Germany to underwrite the Eurozone. But, that doesn't work either. Has anybody looked at Germany's numbers? There just isn't anyone left out there to buy bonds to fund other people's retirement at 60. It's over for that. This is not about European unity or a fiscal union or any other nonsense. The is about raw numbers.

Tuesday, May 29, 2012

Floating The Balloon.

There are many theories why SPX had an amazing 1.2% or 14.6 handle jump today. Some say it was because of the reumour that  ECB will re-capitalize the broke banks. Others are talking about some sort of secrete communication between the Fed and ECB. Many others are calling for a bottom and end of the correction. But have we not called for the counter trend rally for days now? It was only to be expected and I am rather disappointed with the speed or momentum of the bounce. Earlier I was expecting a bounce up-to 1400. Now I would be happy if we reach 1360. Already McClellan Oscillator is reaching close to 100.

I have written before, this will be a short squeeze rally, killing the bears and laying trap for bulls. But I have not yet decided to jump in. Because I think this bounce will not last long and we will resume selling soon. I do not think the correction is over.

Despite the general bullishness in the market, the horror story was reserved for Facebook, now below $ 29. Is it possible to cancel an IPO and demand a complete refund? Commodities are not showing much enthusiasm matching the equity. Copper is still around $3.47. Crude have not been able to break $ 91 and dear o dear Gold lost intraday and sitting at $ 1555. Euro broke through $ 1.25 and is at the lowest for the year. Spanish yields are reaching the stage where Greece was two years back. And ECB is yet to come up with money. To top it all, Egan Jones downgraded Spain. Why the euphoria then? Because that is all written, so! No treasuries sell scheduled this week, so no need to create panic. Clear the short term oversold conditions and is ready for fresh plunge. It is that simple. In the process if some momentum chasing lemmings join the buy express, all the better.

It is all good if you are a day trader. But God save you in this market if you are an investor and you listen to all the talking heads and decide now is the time to buy or you will miss the bus like last Jan-March. I think and I may well be wrong, that right now, “Cash is King” and I am waiting on the sideline to see how far the bounce goes.  We have penned the coming course of action many times over and so far it is following the script with minor variations. So save us from temptation God!

Thank you for reading . Please forward / re-tweet / post it on your wall and invite others to join. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)

Sunday, May 27, 2012

Weekend Rambling.

Everything so far suggests that we will see a re-run of last summer.  Like last year, Europe is at the front and centre of everything. Last summer QE2 was getting over. This summer Operation Twist is at its end stage. What is new this year VS. last year is US Presidential election. More the reason for free money. I keep looking at last year’s price action and I get a feeling that the Algos are following the same program with minor variations. Even in 2011, they were following the program of 2010. In effect it is the same program for last 3 years. Take a look at the weekly chart of SPX.

Why would it be any different this year?

The bounce so far has been weak. But that can change quickly. All it needs for the Fed to open its swap lines to ECB. I would have liked if NYMO was at lower level but it is already approaching zero. It is easier to stage a bounce from oversold level.

The counter trend bounce therefore may not be very strong.  Again, if we look at the daily chart of SPX, the Fibonacci retrace levels indicate many different levels of bounce but the one I am looking at is the 61.8% or 1368. That also happens to be the 40 DMA. If it goes past that level, the next one is 50DMA of 1374.

Let us see how it plays out this week.

The settlement for last week’s huge treasury sale will be this week. This may put some pressure on price action on Tuesday. But with no major treasury sales due for the rest of the month, there is less need to create panic and drive the rates down. That may be another factor whereby the master manipulators let the treasury yield rise a little bit and allow the stock market to go up with it.  Already the futures have opened higher but the markets are closed on Monday in USA so it does not really matter what happens between now and tomorrow.

The Fed knows that it has painted itself in a corner but it is reluctant to accept that. Everyone in the corridors of power knows what the challenges facing USA are. There is a Seven Trillion Dollar asteroid     ( yes, trillion with a capital T) coming in the way of USA in 2013. That will knock off 4% of the GDP and will put USA in recession. The first causality will be the Banks  and they need all the free money that are available.  If you do not remember what Bernanke said in last April regarding the looming danger, here it is to refresh your memory:

"It's very important to say that, if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that I think there is absolutely no chance that the Fed could or would have any ability to offset, whatsoever, that effect on the economy," "I am concerned that if all the tax increases and spending cuts that are associated with current law would take place, absent congressional actions, that would be a significant risk to the recovery."

In any event, the “recovery” that the Fed chairman talks about is the recovery of the TBTF banks that he represents and not the recovery of the main st.  But that is the fact of life and all your representatives are also the representatives of the big businesses. So now the effort is on to find a solution to the coming disaster.

Given all that why do you think SPX will go up at all, let alone going to 1500 if there is no easy money from Bernanke? Just because Obama wants to get re-elected does not mean anything to the real money bags! To go there, we need fuel which is QE. If any opposing congressman wants to protest against the Fed giving free money to the banks before election, the best way to shut him is to give him a call from his broker or banker that the world is coming to an end and his shares are now valued much less.  (Except Ron Paul may be) Problem with the giant Ponzi scheme that the Fed and congress are playing is like riding a tiger. They cannot get down without getting killed.

We look at Fibonacci level, over sold or over bought or some other crap to find out what the stock market will do next but the real answer for the stock market going up or down can be found somewhere else.  For the retail investors, who have lost money every time s/he has tried to beat the system with various system, I can only say that be very afraid. Preserve what you have and do not fall prey to the schemes like the FB IPO or some other get rich quick scheme.  This rally is to be sold into. Raise cash and be patient.  We have not seen anything yet but remember timing is everything. The 1st rule of investing is “Preserve Capital”. And be clear to yourself, are you investing or gambling.

Hope you are enjoying the “Memorial Day” long weekend. While you are having fun, it will be nice if you remember that they have killed 1000s of young men and women in the name of honour and glory in needless war which did not protect American or made it any safer. We are not even thinking of many thousand innocent civilians who got killed, maimed, ruined as incidental casualties of war. And yet the real source of the problem, the states from where it all emanates like Pakistan or Saudi Arabia, are our friends!

Thank you for reading . Please forward / re-tweet / post it on your wall and invite others to join. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)

airline seats

You know the drill. They try to board us by groups, but people are smashing on the plane like it's the New Delhi train station. When the plane is half full, the overhead bins fill up. Then people start dragging massive bags all the way upstream for gate checks. On and on it goes, tempers frazzling and  a few hundred million dollars of plane, costly crew, and my not so free time sitting idly on the ground.

So I have long wondered: why in the world do airlines charge $25 for checking bags, and not $25 for bringing huge bags on the plane? 

I finally found out the answer, here

Two years ago, [New York Senator Charles] Schumer got five big airlines to pledge that they wouldn’t charge passengers to stow carry-on bags in overhead bins. The promise came after Spirit Airlines became the first U.S. carrier to levy such a fee.
The article is actually about Sen. Schumer's latest great idea, to force airlines to seat families together even if said families don't want to pay the $25 fee for advance seat selection.

Next time you miss your connection because people took too long to stow their steamer trunks in the bins, you know who to thank.

Of course the larger picture is not the silliness of one individual, but the hubris of the Federal Government to try to regulate such things in the first place.


As the comments point out, taking forever to stow your huge suitcase is a classic externality, deserving of a congestion tax.

Airline and cell phone pricing in general strikes me as price discrimination by needless complexity, a topic for another day.

A Journalistic Coup

John Isner, the top seeded American in the French Open which begins play today in Paris, found himself trapped when I discovered him with his entourage of trainers and coaches in his hotel in Paris yesterday. Isner had agreed to a 9 PM phone interview and made the serious mistake of providing me with the name of his hotel. I wandered over to his hotel and found him in the hotel lobby conversing with his tennis buddies and he graciously granted me the exclusive interview that I sought.

You can read the resulting article in Sunday's Daily Progress at I may not be a great sports writer, but I am doggedly persistent. I discovered, among other things, that tennis players at the top of the world rankings live much better than I do. Isner's hotel put my poor fleabag of a hotel to shame. His hotel was just off the Champs Elysee in a neighborood that I know I could never find a restaurant that I could afford. C'est la vie.

Today, the French newspapers were discussing the Spanish bank problems. They look insuperable. Combined with the fact that regional governmets are imploding financially, the latest in trouble is Catalonia, Spain looks like the next Greece. Spanish unemployment exceeds the levels the US reached in the Great Depression. Soon, the Spanish bond auctions will begin attracting more (negative) attention. This has pushed Italy to the back pages, but their problems will soon reassert themselves and gain better media coverage. The expectation now is that Greece is gone, but then what? There will be no good news out of Europe for a long while.

 I also read a review of another book on the problem of income inequality. I think I will write a book about the problem of tennis playing inequality. There is certainly a bigger gap than ever between the best players and the worst players. In fact, I suspect that is true in every sport. What to do? Why not forbid good athletes from training or competing? That might level the "playing" field some. Or just handicap all the good athletes. Make LeBron James carry an anchor around while he plays.

That seems to be the economic solution proposed by those that decry inequality. Isn't the real point to improve the economic position of the folks at the bottom? Why does it matter what the gap is between the top and the bottom? That is a ridiculous preoccupation and emphasizing inequality may preclude policies that improve outcomes for those at the bottom of the economic pile.

Of course, I am reading papers published in a country that just elected a socialist at its President. But, then, are his policies much different from those of Obama. The rhetoric seems identical. I guess I have to return to Asia to find a real interest in promoting free markets. Who would have guessed?

Saturday, May 26, 2012

1200 OR 1400 ?

Last Monday, may 21st SPX closed at 1316, on May 25th it closed at 1318. It is as if the last few days did not exist at all. All intraday highs and lows for nothing. For two consecutive days I have written that although I expect a “Memorial day rally”, I am not sure how far it will go and it is just a counter trend rally if it happens. For three days in a row, they have goosed the market at the close, to make it close in green by a whisker. And McClellan Oscillator is doing something funny. It is slowly creeping out of the oversold position and reaching the Zero level. All for 20 SPX points?  But then why bother about one week, SPX has not gone anywhere for the years as a whole. If you think this week was a waste, then last one year was waste as well. Only the brokers made money out of us. And of course TBTF banks.

Coming back to the market, it remains oversold and the promised rally is yet to materialize. On the other hand sentiments are overtly bearish and yet we have not seen the capitulation. The immediate downside appears limited to 1280 and the upside potential is somewhere between 1360-1380. ( Very short Term for next few trading days) The seasonality favours the bull in the very short term but the bears are in control of the intermediate term, till Bernanke shows up.

I  think we will see violent and volatile price movement for the next few weeks till the FOMC meeting and much panic will be created here in USA and in Europe that will help the Fed to open its purse string. It is only too willing to help but needs some clock and dagger to perform and appear non-partisan.

The investors should avoid the market till the FOMC is over and we know what is in store. Cycles are down for major part of June and even if it manages to rally to 1380, it will be a counter trend rally and risky to participate.

The markets are closed on Monday, May 28th in USA but open in Europe. It will be interesting to see how the markets open here on Tuesday. If Europe manages not to blow itself up on Monday, next week has promise to have some action. In the mean time enjoy your long weekend.

Thank you for reading . Please forward / re-tweet / post it on your Facebroke wall and invite others to join. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)

May in Paris

Greetings from Paris. It is another beautiful day in Paris where I find myself covering the French Open tennis tournament. This is my other job. The French Open starts tomorrow morning on the courts of Roland Garros. One of my favorite trivia questions is "who was Roland Garros?" You will be surprised. Guess before you google it and see how well you do.

 I am staying at a small hotel a block from the Tuilierries and around the corner from the Place Vendome in the heart of Paris. Wandering around this morning I discovered a parka for sale in a storefront, the price of which is equivalent to my extending my stay in Paris for another three weeks. Wonder who buys things like that? For a clue, I stood outside the entrance to the Westin Hotel to watch how the other half lives. One thing for certain, the other half smokes a lot -- at least they do in Paris. For the convenience of the wealthy tourists and locals in the area, there are conveniently placed receptacles on the sides of buildings that say: "Etienez votre cigarette." How handy! They also say, in English, "Take Your Pill." Hmmm.

I wandered by the Hotel Meurice. I stayed there once many years ago, but it now costs somewhat more than my roundtrip flight to stay there for a single day. But then, Smith Barney was kind enough to pay the bills back then. Here in socialist France, things are quite expensive. A soft drink will run about six euros in any of the establishments within a two block walk of here and it is best not to eat too often or you may not have enough money left to sightsee. A five day metro pass is a mere 31 euros, so getting around is cheap and you see lots of bicycles and motorscooters in use. But the cost of eating is so high, it is not surprising that are few overweight people on view. Not many older people either. Small wonder.

The local French papers say that Angela Merkel is close to a compromise with Francois Hollande regarding Euro-wide guarantees of sovereign debts in member countries. I would doubt that. But, if true, it simply extends the agony and postpones any real resolution of the Eurozone's problems, which is that the current debt levels are not payable. Extending them doesn't really get at the real issue. So more pain ahead for Europe.

I must appear an obvious tourist. The same pickpocket team singled me out twice yesterday in the Place Vendome. The trick is that one of the team appears to find a gold ring on the ground. They pick up the ring and ask if it is yours. Then, as you try it on at their request, another member of the team, finding you distracted, lifts your wallet neatly from your pocket. Since I had no interest in acquiring a ring or trying one on for size, the scheme did not work on me, but it is interesting that the same team tried this on me twice in one day.

Today, I have an exclusive interview with John Isner, 10th seeded (highest American seed) in the tournament. He is one of the few college grads on the tour. Wonder if he will hit a few with me after the interview?

Friday, May 25, 2012

Leaving the Euro again

Yesterday's coverage of the latest European summit seems designed to reinforce my view of basic confusion expressed yesterday pretty clearly.

For example, the Wall Street Journal's "Europe Girds for a Greek Exit" reports that the talk was all about eurobonds, stimulus, or bailout as a way to avoid Greek exit from the Eurozone, repeating the senseless mantra that sovereign default cannot occur in a currency union.
"We want Greece to remain in the euro zone," German Chancellor Angela Merkel told reporters after nearly eight hours of talks. "But the precondition is that Greece upholds the commitments it has made."
I salute Ms. Merkel for not giving in to the camp that wants endless wasted spending disguised as stimulus, to be followed by inflation. But really, why would Greece not "upholding its commitments" mean it has to "leave the eurozone?" Why is it impossible to turn off the bailout spigot, and let Greece default and stop running deficits, while it stays in the euro?

Actually, the article, quotes, and other coverage is deliberately vague on a central question: Are we preparing for Greece to decide to leave the Euro, or are we preparing that the rest of Europe will try to kick it out? The quote reads a lot like the latter!

How do you kick a country out of a currency union? Greece has every right to say "the euro is legal tender in Greece," no matter what the rest of Europe does. Sure banking will be a bit harder if the ECB cuts off the Greek central bank, but unilateral use of another currency is an economic possibility. Kosovo and Montenegro do it.

The mantra continues,
...fears mount that Greece won't be able to carry out the painful surgery to its public finances and its economy needed to stay in the currency zone.
 At least the fact is dawning that a currency switch is the same as default:
In addition, euro-zone members would likely have to take a large hit on governmental and central banks' loans to Greece. There is a risk that some euro-zone commercial banks could face heavy losses on their exposure to the Greek economy. 

A lot of coverage concerned "eurobonds," an idea that has been stuck for years on just who is going to pay for them.

News flash: eurobonds have already been issued. They are called euros. ECB reserves are just particularly liquid floating-rate debt. The ECB issues reserves in return for sovereign debt and lends reserves to banks who load up on sovereign debt. This action is functionally the same as issuing Eurobonds to buy sovereign debts. What happens of the ECB's holdings of sovereign debt or its bank loans turn out to be worthless? If the ECB needs to be "recapitalized," it has the explicit right to call up the member states and demand funds, which means the member states have to kick in tax revenues. This is exactly a eurobond. For better, or, likely, worse. 

The ECB has propped up Greek banks for months through its lending operations and, increasingly, its emergency-lending program, known as ELA.

Under ELA, banks borrow from their national central bank, in this case the Bank of Greece, with approval of the ECB's governing council. The default risk resides with the Greek central bank and, ultimately, the Greek government.
This is a great case of wishful thinking, I'd say. Oh sure, the ECB doesn't have credit risk...if the banks collapse because the Greek government defaults on its debt, the Greek government will pay us back!
To ease the fallout on Spain and others, the ECB could issue more three-year loans to banks, analysts say. More than €1 trillion in these loans have been doled out since late last year. 
A trillion here, a trillion there, and pretty soon you're talking real money -- real debt. 


A quick response to some emails and comments. Yes, I understand that devaluation can change a trade balance towards exports. (I try to avoid the mercantilist implications of writing "improve the current account" or "raise competitiveness.") 

If the US Fed were to say "we buy and sell Euros at $2 per Euro," US prices and wages would not instantly adjust; our exports would become cheaper and imports more expensive, and we would import less and export more for a while.

The reason is superficially clear: prices and wages are a bit sticky. The precise mechanism of such stickiness is the subject of a huge academic investigation and is, I opine, still a little unclear. But it's not really controversial what would happen in the US.

But nominal prices are not always sticky. For example, when countries joined the euro, nominal prices changed by orders of magnitude, overnight, with no output or trade effects whatsoever.

The challenge for theory -- and for predicting what would happen to Greece if it left the euro -- is to figure out which kind of experience applies.

For a small country to suddenly leave a currency union, adopt its own currency, and instantly devalue that currency,  along with likely capital, exchange, trade, and other controls, is a quite different experiment than for a large country, with a well-established currency to devalue.

Does the price and wage stickiness that applies to a US company with longstanding contracts in dollars apply to Greek contracts that expect 10 euros, suddenly told that's going to be 10 drachmas, which are now worth 5 euros? Or do people in that circumstance focus on the euro value and treat the event exactly as they would being told that they are going to get 5 euros? Just how "sticky" will Greek nominal prices and wages be? Will the political constituencies be who don't want explicit euro cuts be mollified if they are paid in Drachma instead?  It's not obvious!

Here I'm willing to offer my Keynesian colleagues a friendly wager: Let's look at Greece 6 months after Drachma introduction and swift devaluation. I bet it will be a continuing basket case, and that Greece won't be exporting lots of Porsches back to Germany. If return to the Drachma and devaluation produce a swiftly growing Greece based on a hot export sector, well, I'll at least say I was wrong. No, you don't get to say it's awful but it would have been worse otherwise.

Thursday, May 24, 2012

Russian Roulette.

Today’s post will be ultra-short as I am going out for a late evening meeting and will not be able to do much later.

In the morning I sent out four tweets. You can see them next to the blog. Around 11.45 AM Eastern, I closed the long positions initiated yesterday and a minute later informed everyone that I am getting out. I am clueless in this market and I do not want to be cute or smart. Just take a look at the price action for the last four days.

I still think we will get the “memorial day bounce” but we might not go very far and may even get a better entry point as well if at all we decide to play the bounce.  It’s a meat grinder of a market and if we are not careful, our hands and fingers will get smashed. The primary objective in this type of market is to preserve capital. You can smell the stinking rat here.

So let us see what happens tomorrow.  Friday before Memorial Day tends to be light and lackluster. If the level holds tomorrow before close, then I might take another stab at it. But this is not investing. This is playing Russian roulette. Do we really want to play this game with a loaded gun? Let me repeat what I wrote yesterday : “ If you are an Investor, it is better to avoid the market now.  A better opportunity will come by 3rd week of June. “

Thank you for reading . Please forward / re-tweet / post it on your Fadebook wall and invite others to join the growing gang. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)

The Jamie Dimon Saga

Jamie Dimon has made himself too visible.  He basked in the glow of a powerful Wall Street post and a left wing image.  Dimon was one of Obama's strongest supporters in 2008.  Like most of Wall Street, Dimon saw nothing wrong in loading up costs on employers, who had made the mistake of hiring workers.  After all, the workers that Dimon hires are high-end, highly skilled employees, who are largely unaffected by minimum wage laws, health care mandates, and a variety of worker protection schemes and union promotions (think "card check").  So Dimon, like Buffett, courted the media and made clear that he was a "caring" soul.  Now, Dimon is finding out, as Buffett will also, that this is not about "caring."  This is about a war on capitalism, waged from the White House.

Dimon had harsh words for Paul Volcker when the so-called "Volcker Rule" became part of the regulatory landscape.  Ouch!  Now, Dimon is getting blasted from the left.  See Simon Johnson's note in today's New York Times, where he quotes "Native-American" Elizabeth Warren and Socialist Bernie Sanders saying that Dimon should resign from the Board of Governors of the New York Fed.  Right!  And maybe put someone on the board that knows next to nothing about Fed Policy, like Elizabeth Warren or Bernie Sanders.

Ironically, J P Morgan should be praised, not villified, for owning up to a relatively minor trading loss that went awry.  J P Morgan weathered the 2008 crisis better than any other major investment bank and has been much more forthright than brethren banks.  But, no one cares about this.  All that matters is that Dimon and JPM stumbled and that is enough to bring forth the "no-nothings" demanding that something be done.  Whatever that something turns out to be, it will further damage the financial services industry and make it even tougher for a moribund economy to get off the mat and less likely that job seekers will find work.

But, who cares about the unemployed or the bad economy, when there is another rich guy to roast.

Wednesday, May 23, 2012


WOW! That was some intraday reversal.  Are we still playing the old tape?

It may not be exactly similar but the theme is very familiar.

This market is insanely dangerous both for bulls and bears. It’s like walking in a minefield at the middle of night blindfold. That is why I keep repeating “don’t do anything, just wait.” I was looking for a bounce but I waited till the last half an hour to decide whether to go long. I think we have had a test of the earlier low and reversal there from.  A close below last Friday’s low will take SPX to 1380 level. Please remember, this is not “Risk On”. This is ‘Risk-Off, Off”. There is a difference.

The model portfolio has been updated with the picks but they have a very tight stop. And as promised, I tweeted my intention well in advance. This bounce is going to be a technical bounce and counter trend rally. So don’t expect too much for too long. However, it is going to be a massive short squeeze.

Germany sold $6 Bn. 2 year bonds at 0 %. Yes you are reading it correctly. But that’s all a galaxy far away. In the immediate neighborhood, the Fed has to sell $ 35 Bn. 2 year notes yesterday and another $ 35 Bn. 5 year notes today. No wonder they had to create little panic to get good rates.  The TNX (10 year treasury yield index) was at historical low.

The recovery for the day was without any volume. But isn’t that the case always?  As I said in the beginning, it is just a technical rally from oversold position.  Seasonality is also a factor.  From now till the first two days of June, it is a bullish period. When bullish seasonality combines with oversold market, we do expect a rally, even if it is a counter-trend one. It is called “Memorial Day Rebound”. The following table is from “ Stock Traders’ Almanac”.

Tomorrow is expected to be bullish. Let us see where and how far it pushed. It is always good to remember that the market is the boss and it inflicts maximum pain on maximum number of people. So be nimble and trade safe. If you are an Investor, it is better to avoid the market now.  A better opportunity will come by 3rdweek of June.

Thank you for reading . Please forward / re-tweet / post it on your Fadebook wall and invite others to join the growing gang. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)

Leaving the Euro

I find all the reporting of the Greek (and following Spanish, Italian, etc.) debt crisis unbelievably frustrating.

Why does everyone equate Greece defaulting on its debt with Greece leaving or being kicked out of the euro? The two steps are completely separate. If Illinois defaults on its bonds, it does not have to leave the dollar zone -- and it would be an obvious disaster for it to do so. 

It is precisely the doublespeak confusion of sovereign default with breaking up a currency union which is causing a lot of the run.

It's pretty clear that if Greece leaves the Euro and reintroduces the Drachma, that event will come with capital controls, swift devaluation, effective expropriation of savings, and a disastrous and chaotic rewriting of all private contracts (do I have to pay this bill in Euros or Drachmas? Every contract ends up in court. Greek court.) 

Quiz: If your politicians are even talking about this sort of thing (together with "austerity" which is heavy on higher capital taxation) what do you do? Answer: take your money out of the banks, now.  Take everything that is not bolted down and leave.

Just talking about leaving the Euro is How To Start a Bank Run 101.

The right step is the opposite: firmly announce and commit as much as possible that Greece (and Italy, Spain, etc.) will not leave the euro.

Precommitment is hard, but a good first step is to make it clear you know the action you're trying to commit not to do will hurt you.  Communicating a commitment not to have dessert is hard. Communicating a commitment not to shoot yourself in the foot should be easier. Start by not saying  that shooting yourself in the foot will taste good.

Politicians need to repeat over and over again that they understand a default does not mean euro exit -- that the two steps are completely separate decisions; that a currency union with sovereign default is perfectly possible.

Them they need to articulate just what a disaster leaving the Euro will be. They need to say they will tolerate sovereign default, bank failures, and drastic cuts in government payments rather than breakup.

Yes, cuts. The question for Greece is not whether it will cut payments. Stimulus is off the table, unless the Germans feel like paying for it, which they don't. The question for Greece is whether, having promised 10 euros, it will pay 10 devalued drachmas or 5 actual euros. The supposed benefit of euro exit and swift devaluation is the belief that  people will  be fooled that the 10 Drachmas are not a "cut" like the 5 euros would be. Good luck with that.

Think what would happen if, in order for Illinois or California to solve their debt,  pension and benefits debacles, they decided to leave the dollar zone, institute capital controls, redenominate all bank accounts and private contracts in their borders, and devalue. Plus big wealth taxes. Now they can tell their pensioners, "see, we didn't cut your benefits after all." Would the pensioners be fooled? Would this set of steps make them more competitive? And if Illinois or California politicians started talking about this sort of thing, how fast would the bank run start?

A Greek departure would also be disastrous for the rest of Euroland. Yes, Greece is small. But  people with bank accounts in Spain or Italy would see clearly that their leaders do not understand sovereign default can coexist with a currency union. The run starts. Sorry, intensifies.  Greece is a huge precedent.  

Tuesday, May 22, 2012

The Smug Little S**T Hosed The Muppets!

You read it right. Now the shocker and it is from Reuters;; Reuters' Alistair Barr is reporting that Facebook's lead underwriters, Morgan Stanley (MS), JP Morgan (JPM), and Goldman Sachs (GS) all cut their earnings forecasts for the company in the middle of the IPO roadshow. They told it to the institutional investors but nothing to the retail. No wonder Goldman calls the retail investors as “Muppets” in their internal emails!

If we did not live in a banana republic, the lead underwriters and owners of FB would have been hauled for criminal conspiracy to defraud the investors. But that is not going to happen. The rot in the system is too pervasive. But even the muppets are to be blamed for their greed. One would have thought that by now the retail investors have learned their lesson as how the St. games the system, but no, not a chance in hell.  From NY Post:
After a 30-minute delay, individual New York investors gobbled up stock online and at discount brokerage houses.
Queens chauffeur Thomas Gardner, whose home was just foreclosed on, could only afford $89 for two shares, which he hoped would eventually send his 9/11-born son to St. John’s University.
“This is a good start,” Thomas said, beaming as he came out of a Midtown Charles Schwab office. “Everybody is hoping for something, so I’m jumping on this wagon. I have a good feeling.”
Michael Scott, an Upper West Side architect, bought his shares on his iPhone.
“I like the chase,” said Scott, who bought Google stock at $100 a share in 2004 and still holds the $618 stock.
Retired nurse Teresa Ryan, who lives in Tudor City, bought 4,920 shares at $40.50, noting she made a killing on Apple stock.
“I’m very psychic when it comes to stocks, I really am,” said Ryan. “I have no retirement, I have no pension, so I try to make money on the market.”


I am disappointed that there are no puts available on FB or I would have bought a boat load of puts on FB. If you consider the EPS of Apple or Google, FB should be trading at $ 2, max. $3. No more.

Coming back to market, the early morning euphoria was absent by the day’s end. We may see further dip tomorrow at least in the morning and that is why doing nothing now is a good idea. Let me repeat what I wrote yesterday: “Tomorrow might be a red day and a better entry point. There is no hurry. This is not the last train leaving station.” Logically and technically speaking, there has to be a test of selling pressure and how aggressively the dip gets bought before we can determine the strength of any up-swing. Pardon me if I have confused  you butif and when I go long, I will inform you by twitter. More the reason you should join me in twitter (@BBFinanceblog). As you know, I do not spam with unnecessary tweets and say something only when it is worthwhile. Most of the time, it is just noise out there and not worth bothering.
The late day sell-off was triggered by the rumour of  Grekxit. This time the rumours are working the other way, to create panic. You can actually see through the game. Greece will exit Euro but not now, may be in another six to eight months time. Despite all the bravado, Europe is not yet ready to face the mess. And don’t forget the almighty “O” wants to get re-elected and will do everything in his power, including arm-twisting the European leaders to at least temporarily pull a rug over the problems and print more money.

So we wait for more price action to get a better idea about the immediate direction of the market. Thank you for reading

Monday, May 21, 2012

Surprise, We Have A Bounce!

So we have a bounce after six or seven down days. Already talking heads in 24 hour news channels have started identifying the next buy! How come there is always a time to buy but never a time to sell? No wonder that most of the time news is just noise.

What happens next? Problems in Europe gets solved? Will Hallande start doling out money to all Europeans?  Or ECB starts its printing press? If none of the above, then why are the talking heads so excited today?

I closed the short positions and was waiting for a bounce even while the world was ending last week. But today I am reminding myself that one swallow does not make a summer. I need to see how things are over night and tomorrow. I am ready for a quick but vicious bounce and would like to take advantage of it. This is just a technical bounce which will also kill most of the shorts.  Let me remind you how the tape was played last year.

This is S&P 400 Mid-Cap ETF, RFG. To me it looks so very similar. At the same time, I want to be sure about the strength of the bounce. So I will give it some more time. Tomorrow might be a red day and a better entry point. There is no hurry. This is not the last train leaving station.

Now that the Fadebook drama is over, folks seem to be in a hurry to get out of the stock. My time line for Fadebook penny stock was May of 2014. But at this rate, it may come in 2012 itself. The best description of this scam is from NY post.

So we wait for clarity and best odds. In the mean time, please re-tweet this post to someone who might like it and follow me in Twitter @ BBFinanceblog. Thank you for reading

The Fixed Pie Theory

Modern public policy in Western countries seems to be based upon the assumption that the economy is a fixed pie, waiting to be divided up "fairly." How else to explain the economic utterances of President Obama and the leaders of Western Europe? It's all about who gets what. Now "economic growth" is on their mind. Where has that been? Who thought about economic growth when politicians were busy saddling their economies with regulations and mandates?

The political leaders of the Western world seem to think that the government spending is the cure for what ails us. If that were true, would we be ailing? When did government spending not exceed revenues in any country in the Western world in the last three decades? Now we need more of the same? This is like the drunk, awakening with a hangover, asking for another drink to cure a hangover. Except, there is no more booze available.

Back when, western economies grew and provided rising living standards for their citizens. But that was before noble minded politicians decided that workers needed protection from management. Now workers have that protection, but no new jobs to go along with it What good is worker protection, if there are no jobs?

All of this is based upon the idea that economies do not and cannot grow. If economies cannot grow then sitting down to divide up a fixed pie makes perfectly good sense. But, sitting down to divide up a fixed pie may mean that the pie can no longer grow. That's where we are.

 Labor and management are natural enemies, so say the modern polticians. Therefore, all political activity should be devoted to providing benefits for labor -- minimum wages, health care, litigation weapons, disability rights, and on and on. The modern politicians got their way and now the reality of a fixed pie is upon us. The western countries really cannot grow any more at any significan rate.

Double digit unemployment is the new reality, both in Europe and in the US. It isn't fiscal stimulus that is needed, as Obama thinks, it is reform of our labor laws, repeal of employer mandates and an unshackling of an oppressive regulatory climate. Absent these things, the pie will stay fixed and we can continue to argue about who gets what, as opposed to having the pie grow larger.

Sunday, May 20, 2012

The Giant Ponzi Scheme.

Black swan of the financial world really exists. No, it has nothing to do with Euroland. Not even coming failure of Spain or Italy. Euro-Zone will survive even if Greece or Portugal exits. It will lurch from one crisis to another and it is not going to get any better either. This is the new normal with Europe. The panic will continue at different levels and TBTF Banks will use that panic to milk money out of the Fed.  Greece going out of Euro will not be the end of it or end of the world. The financial illusion of the world and US of A is actually running on another giant Ponzi scheme. When this Ponzi scheme comes undone, that will be the day of Armageddon. That will be the day when US $ will lose its reserve currency status and the collapse of capitalism will be upon us. The financial system that we know today will be changed forever on that day. Trillions of dollars of assets will be gone in a moment. That Ponzi scheme is called the “US Treasury Market”. Problem with Europe may take DOW to 10,000 but when the US Treasury Ponzi ends, DOW will be at 3000 and SPX at 400.

The primary dealers (Too Big To Fail Banks) borrow money from the Fed at overnight rate of 10 basis points and then invest in 10 year treasury for 200 basis points. Then they put these treasuries up as collateral and borrow again. Do you see the never ending circular loop? In this scheme, the Fed is able to keep the interest rates down, (backdoor monetization of debt which is illegal under US Constitution) politicians are able to borrow from the future and TBTF Banks are free to take risky bets and make profit out of nothing. Even if something blows up once in a while, they don’t really care because their skin is not in the game. Nobody owns the treasury bonds (except retail and pension funds) and the whole scheme is running on REPO. They make money as long as the prices of the bonds are rising or stable. The day the interest rates starts going up the scheme starts to unravel. This massive REPO scheme, which will make the Lehman REPO appear as a grain of sand in comparison, where debt is fueled by more debt, will go on, till it does not.  It makes Madoff looks like an amateur.  Like it happened in country after country in Europe, it is going to happen here. When that will happen I do not know. But just be aware that the timer is ticking.  The result of this endless circular loop is the ever increasing balance sheet of the Fed. From $ 900 billion in Sept. 2008, today it stands at over $ 3 trillion, just to keep things stable where they were. On16rd May 2008, SPX was at 1425. On 16th May 2012 SPX was at 1304. So with all these trillions, they have lost only 120 points. Not bad Mr. Chairman. Now shall we sell Everything?

 I think by end of the year the Fed’s Balance Sheet will be near $ 4 trillion just to take back SPX near its all time high of 1565. Will they succeed in doing that? Difficult but not impossible because they seriously believe “deficit does not matter”.  At what point of time the balloon burst? I do not know. But I am ready to run. Three horsemen of Apocalypse are in view. Expiration of Bush Tax cut, expiration of extended unemployment benefit and debt ceiling issues forcing spending cuts. All three arriving at the same time in 2013.

I do not believe in the growth story. But I do not under-estimate the power of the central banks either. They can keep the ponzi going much longer than you and I can remain short in the market.  Now we have a correction on hand. Do you think they will let it run its course? More so, when a Presidential election is round the corner! You are kidding, right? So I am ready for a bounce anytime now. If the bounce comes just because of fancy words like growth and stability and strong resolve, then we will sell that bounce. When we see money actually coming in, we will buy that correction. Wash, rinse and repeat.

This is the end game. This is the black swan Taleb was talking about and it is very much out there. I can almost see it. By the way, be aware that there are different frames. The end may well be six to eight months away. If you have any questions, feel free to email me. Please re-tweet this post to someone who might like it and follow me in Twitter @ BBFinanceblog. Thank you for reading

The G-8 as an Ostrich

The G-8 communique this weekend is more of the same. The communique calls for "growth measures" for the Eurozone and is an implicit slap at the austerity measures that were imposed, by Merkel and Sarcozy, as the price of bailouts for Ireland and Greece. No mention of the over-regulation and labor laws that have made the Eurozone, even in the best of times, an impossible place for anyone under the age of 25 to find a job.

The G-8 politicians accepted the Obama Administration view that you can put an enormous tax on labor and still expect businesses to be enthusiastic about hiring workers. By piling mandate upon mandate upon employers who make the mistake of hiring anyone, the government has effectively put a huge tax on labor.

Is it any surprise no one wants to hire anyone, when it is effectively against the law to fire anyone in Spain? The 25 percent unemployment rate in Spain has nothing much to do with austerity measures, since so far there haven't really been any in Spain. Instead, the completely stifling labor laws are the main culprit for the plight of those in Spain looking for work.

So, what does the G-8 want? They want the US and Germany to fund the extravagant lifestyles of southern Europe and avoid making any of the tough choices about de-regulating their economies. Obama, of course, was the loudest trumpeter of the increased spending demands by the G-8. More infrastructure! Sounds great. But, where is the money going to come from for this? Obama pledges US funds. Really? From where?

The Eurozone countries look to Germany, but Germany will ultimately collapse if weighted down by the absorption of the debts of the rest of the Eurozone. So, what is the plan really? Avoid hard choices. Pretend that there is money from somewhere to continue to fund promises to the citizenry. Blame rich people. That's it. In other words, there is no plan, just rhetoric. That's the Obama way and is now the G-8 solution.

But, it doesn't really matter. The German public and the American public are out of chips. They can't fund this stuff, even if they wanted to. Which they don't. So put your head in the sand once more. Pretend like there is a way available for everyone to live high on the hog without anyone really working or saving. This is what I would call the "Ostrich policy." Pretend and pretend. It will not end well.

Saturday, May 19, 2012

Fade Book!

Cartoon Source: Walt Handelsman for Newsday

There was shock and awe from the Facebook bankers who fought valiantly to hold the $ 38 line.
If you happen to read this blog on May 19, 2014, remember what I said today. Facebook, Groupon and whole host of social media IPOs  will be penny stock in two years time.Its 2000 all over again.
You might be interested in the following:

The Stock Market Swoons

The US equity markets have given up more than half of their 2012 gains in the last two weeks as the market has plunged more than seven percent in that short space of time. Why? Fear of a weaker economy in the second half is the answer. The economy still seems to be barely moving forward and, with major tax increases on the immediate horizon (January is not far off), a weakish economy could potentially roll into another recession. The odds are probably fifty-fifty.

 But, there is no set of circumstances favorable to a strong recovery. An anti-business White House has put so many roadblocks in the way of economic recovery, that the best hope is a muddling through and that is getting increasingly less likely. JP Morgan's travails will strengthen the hands of those bent on straightjacketing the finance industry.

Who loses? The average American seeking credit and small business seeking financing. The enemies that Obama has on his radar screen are, unfortunately, the only people who can provide the jobs necessary to get the economy really going again. So, the war on rich people surges along out of the White House, while Americans search fruitlessly for the job creators. The government has run out of bullets and the entrepreneurial classes are frightened out of their wits by the White House. That's basically what ails the stock market.

But, stocks are cheap. But, they are cheap for a reason. With the steady drumbeat of bad news that will continue to pour out of Europe, it will be difficult for American stocks to mount much of a rally. There will certainly be big up days in brief spurts, but over the next few months, don't expect much out of the stock market. The politicians have given the equity markets too much to ponder over.

"Greece's Problems are Europe's Problems"

Alexis Tsipras is a 37 year old politician in Greece who is surging to the top of Greek political polls with the message that Greece should not be forced into austerity. I agree with that, but I don't agree with Mr. Tsipras's broader argument.

Tsipras believes that it is perfectly okay for the Greek government to make absurd promises to its citizens and provide no means of paying for those promises. He must have been watching the successful American politicians and following their lead. Tsipras believes that the rest of Europe should underwrite the lifestyle that Greece thinks it deserves and he intends to "call their bluff." Right.

 I suspect that German citizens do not share Tsipras's sanguine view of having other folks pick up the tab, since German citizens are the "other folks." So, what will happen? That's pretty easy to see by simply following the fortunes of Angela Merkel's party in the elections that are going on in various parts of Germany. German citizens are shouting a loud "no" to the bailout program that is basically funded by German citizens. "No more bailouts" is the message coming from the German electorate.

So Tsipras is simply setting the stage for a Greek default, which has been a long time in coming. The Eurozone member countries have wasted hundreds of billions of Euros in the delusion that Greece, given austerity and time, would be able to deal with its enormous indebtedness. We have Sarcocy and Merkel (and Obama and Geitner) to thank for this waste of resources.

 Now comes reality. Greece is not going to live with austerity and they are not going to pay their debts. So there. That's basically Tsipras's message. It has always been the case that Greece would ultimately have to default. There has never been a viable alternative to a Greek default. Never. The only question is whether the default will be an orderly one or a chaotic one, accompanied by civil and political unrest.

The Sarcozy-Merkel illusion has increased the odds that the outcome will be chaotic and Mr. Tsipras's rise to prominence virtually guarantees chaos. A "controlled bankruptcy" was always the right solution. Such a solution would have kept Greece in the Eurozone and likely kept Greece's far left and far right political parties in the closet. But, no. Politicians always think they have a fix for the unfixable.

So now, the worst of all outcomes is likely. Egged on by Obama and Geithner, the European leaders were convinced that there was a "European solution" to Greece's problems. There is no European solution. There is only a Greek solution.

The underlying problem is the unwillingness of political leaders to face reality and to tell their citizens the truth about the seriousness of the problems and the costs of the polticial programs that they are advancing. It is easy to promise things that can never be paid for. That's how you win elections in Europe and in the US. But, eventually the piper must be paid. California, Illinois, and New York are next. You will soon be hearing that "California's problems are America's problems." Don't buy into that one.

Friday, May 18, 2012

Someone Is Lying.

The correlation between Euro and SPX has been strong. And yet, something funny happened today. Around noon, Euro surged and SPX dropped. You can see the divergence in the following chart.

One of these two is lying. I guess it is SPX. For one, it is more difficult to manipulate the forex market which is many times bigger than the US equities market.

Let’s take a look at US $ Index.

It’s down substantially. I wrote few days back that US $ is hitting multiyear resistance and is making a double top. So here it is.

Something is fishy out there. And it got me thinking!

I am thinking that someone wants to create a bit of panic. So that retail sells and they buy cheap. May be I am just nuts but I am expecting some good sound bites from Camp David summit. Don’t get me wrong. I fully expect another 10-15% correction but I only beg to differ on the timing. And timing, as you know, is everything in investing or trading. Ask those who bought gold at $1900 or Apple at $625. Getting even is not a good score in this game.

This is not a sprint. This is a marathon. Most of us want to play this game for another 10 years or more. If we can catch 75% of all up swing and 40% of all down swing, on a consistent basis for a long period of time, we will retire as millionaire. I did not have this discipline when I started out. 20 years after, I am still learning and battling with my own impatience, fear and greed.  I would make good profit in most trades only to give it back and some more in a few bad ones.  To recover a -50% we have to make +100% in the next trade.

Back to the market, oversold became more oversold and is reaching extreme level. Can it go down further? Yes, it can but not much. I think we would reach a tradable bottom soon.  Lots of stop loss levels have been taken out; lots of new short positions have been initiated.  It was only 30 days back, when the sky was all blue and everyone was talking how indexes were going to new high. I was writing about panic that will come because without panic, Bernanke cannot give free money to the Banksters. It serves two purposes, it shakes out retail investors and makes them sell out at the bottom and then pump all the way up with the liquidity provided by the Fed. And if they can co-ordinate this up-swing from July – October, victory is election is guaranteed. And again, mark my words; this is what going to happen.

So I am still waiting and I have no worries of losing because I am in cash. Only I should not get greedy and do something silly. It is not going to end well but we will have to time it right.

That’s all for today. A gorgeous a long weekend is here. Let’s enjoy the sunshine because there is more to life than sitting before computer and worrying if the market will go up or down. If you care, please re-tweet this post to someone who might like it and follow me in Twitter @ BBFinanceblog. Thank you for reading

Thursday, May 17, 2012

Not Looking Good, But!

Definitely not looking good.  A 20 point sell-off is never good looking but it is looking more like a panic bottom. Question is, do we have sufficient panic for a bottom or more panic is yet to come.  If we do get a break down, we are looking towards 1100, so we have not missed much. Better be careful because on hourly as well as daily basis, SPX is way oversold. The following is Daily $NYMO

And the next one is weekly $NYMO

I am not sure how much lower we can expect the market to go from here. On the other hand, oversold can remain oversold for much longer. These are real danger zones. Volume for the day was well above average at 2.88 mil for /ES. It seems no one wants to hold the bag overnight. But Crude did not break down below $ 92.50 and showing a bottoming pattern.  Copper is refusing to break down below $3.45 and is oversold. Of all things, Gold and Silver bounced back almost 3 %. If Europe melts down tomorrow we can always join the party, but better not gate crash unwanted. At the same time, bottom fishing now is like trying to catch a falling knife.  Let us see how things develop for next few days.

Looking at chart pattern, I think this panic is just a teaser of what is to come, but before that we could have another huge up. My downside target as of now is 1280 but the upside target is 1420. I might be totally off my rocker but the risk and reward analysis does not support shorting here. We were short from 1410 and we got out at 1340. So we got most of the correction. Could we have waited? Sure we could have, but I wanted to protect the profit, take the cash and run. There is no best time to take profit and we cannot exactly time the top or bottom. As Joe said, 1stpriority is preservation of capital.

We have to overcome our fear of “missing out”. I quote Joe Fahemi again: “95% of individual traders lose money over ANY 10-year period. Why? I could write a book on the many reasons why I think this happens, but one reason is their inability to sit out (trust me, I struggled with it for years). Many traders not only lose money by trading choppy markets, but more importantly, they lose confidence. Since 80% of anything in life is psychology, protecting confidence should always be a top priority for traders.”

The 1st rebound, if it comes tomorrow or day after, will fail. It is at that point of failure, we should decide the next course of action. I would give few more days for the panic to settle down and see where we are going.
I hope you are enjoying my posts but at the end do whatever is best for you. If you think we should short here, please let me know why. I am always ready to learn and improve.

Join me in Twitter (@ BBFinaceblog) to stay up to date with the market moves. Please forward / re-tweet the post. I would like to have more readers and your re-tweeting  might help.

Thank you for reading

Why do traders still quote Jesse Livermore?

Found this excellent quote from the Elite Trader forums

In a response to one poster asking, "Why does everyone quote Jesse Livermore? He was a horrible trader, who blew up every couple of years. ", another forum member answered: 

"Simple. He was a pure artist of "the game."

Artists always reach beyond their grasp. They sometimes succeed brilliantly. They sometimes fail tragically. But they never fail to inspire.

Speculation is an art form. And true artists, however flawed, never fail to inspire us.