Shocked Investor: The Illusion of the DJIA - Updated

Interesting stats on how the skyrocketing price of Gold could really be just an illusion for people in Canada.  Any gains realized in USD translated to CAD could be quickly lost.

Sounds like CAD is a hedge against US-based inflation, the common reason for buying gold as a hedge?  So instead of buying gold, you should stock up on cash?  I'm a bit confused... that's not how it's supposed to work.

Consider also the appreciation of gold in 2007. While the price of an ounce of gold has gone up by 18% in USD and by 11% in Euros in 2007, it has not appreciated at all for those investors in Canada and Brazil

Source: Shocked Investor: The Illusion of the DJIA - Updated

When Money Market funds are paying out more than a 1 year GIC you know there are issues with the markets... and it's going to get worse before it gets better.  Today's MM rate - 4.21%... and the spread should go higher when Canada's central bank follows it's US masters and chops rates a bit more.

I was expecting the Fed to disappoint with a .25 cut, but as soon as they chopped .5 off the rate I ditched my short holdings, which have been ticking me off ever since the last emergency cut.  Basically the Fed, now sitting at 3%, seems to be determined to chop until they either hit zero or positive market sentiment returns.  Somehow I think 0 is in the cards...

With China revaluation of the Yuan, (currently at 7.19 per USD according to Yahoo, give or take the bank spreads) it appears that this could be a contributing factor to US inflation.  As China fights inflation with an increasing Yuan, this would deflate the value of their USD holdings and increase the costs of exports.  Wal-Mart is going to have a tough time trying to put smiley faces on increasing import costs, though it could be good for export businesses in the US (think manufacturing?)

It seems as though the middle of the teeter-totter could break at any moment, with 2 - 500 lb gorrilas sitting on each side.  According to some articles, this decrease, if it hits 6, could pose a danger to China's staggering economic growth, though it's a lucky number in Chinese.

"The number six, liù, is considered to be a very auspicious number because it is a homonym of the word for "flowing" or "smooth," liū. This is the reason why the Western ominous number combination 666 does not get the hairs on the back of Chinese people to stand up. The "devil's number" is a particularly lucky one in the Chinese language, as it sounds close to the words meaning "things are going smoothly." People often pay extra to have this string appear in their telephone number. Basically, it seems that the more times a lucky number is repeated one after another, the more potent will its fortune-bringing effect be."

This can't be good for offshore companies...

In other news, or in more of the same news... more downgrades.

Bond insurers' possible downgrade spurs market angst seems to indicate that another wave of writedowns are going to hit the market next month.  However, after reading more about mining stocks and various concerns about South African stakes, plus the skyrocketing price of gold, I see that there could still be some upside to the gold miners in Canada.

Though short term, it doesn't look that anything's got upside, except for some highly-manipulated small caps.

Somebody was on the right side of the trade with Kelly Services.... 200 shares traded, up 31% today.  Damn market orders...

Of course, if you are on the Ultrashort side, you had a 9% gain in FXP today... but the word "ultra" is probably just another way to say "weapon of mass destruction" in your portfolio, unless you're a day trader with a good eye for trends and a good ear to the ground for emergency rate cuts...

Microsoft Massage v1.0

 Microsoft Massage v1.0 is the latest entry to their financial product line. Run against a balance sheet, and it will point out the best way to move the numbers to please investors and analysts, causing stock prices to increase.

With respect to the earnings bump reported on Friday by Microsoft, Honeywell and Caterpillar, traders are not fooled by results that are boosted as a result of huge share buy-backs.

To show how earnings are increased via financial balance sheet restructuring rather than from operations, look to the number of outstanding shares as reported by Value Line:

MSFT
2005: 10700 mil shs
2006: 10062
2007: 9380
2008: 9000e

HON
2005: 829.48 mil shs
2006: 800.59
2007: 745.00
2008: 745.00e

CAT
2005: 670.87 mil shs
2006: 645.81
2007: 635.00
2008: 615.00e

Despite higher internal rate of return from operations, these corporations were buying back treasury stock in the open market at cycle-high prices. As I see it, these companies seek to boost their per share profit in order to derive higher management bonuses and/or to rationalize extreme compensation.

It’s a case of everybody has to get theirs as soon as they can get it.

Source: Bill Cara: Daily Report for Sat, Jan 26, 2008

Note: There is no such thing as Microsoft Massage, though it could be a good idea.  Contracting the money supply (or in this case, the share supply) increases the value of the stock, even though corporate assets are being used to buyback shares at top value.  This is probably not the best way to deploy capital, but when you're a cash cow like Microsoft it probably doesn't matter a whole lot what you do... especially when you now have a profitable gaming system, and a bigger bonus to spend on cheap games from the Microsoft store.

Minyanville - NEWS & VIEWS-Article

 

Five Things You Need to Know: President Bush, Congress Weigh Economic Stimulus Package Targeting Economic Stimulus Package

Minyanville - NEWS & VIEWS-Article

Pam Martens: How Wall Street Blew Itself Up

 

Interesting peek behind how  the current financial crisis may have been started... and by whom.

The private company that would become Wall Street's ticker tape for pricing exotic credit instruments (derivatives on subprime mortgages and credit default swaps) started out as Mark-it Partners in 2001, the brain child of Lance Uggla while he was working for a division of Toronto Dominion Bank, TD Securities.

Pam Martens: How Wall Street Blew Itself Up

A Wile. E. Coyote moment... Super Genius no more?

 Yes, there are problems with the markets.  Yes they are big problems.  Is the media milking this?  Probably.  The media likes big problems.  Is it an opportunity?  Nobody will know for probably 2-3 years at least.

It's the Wile. E. Coyote moment. The ha-ha point at which the cartoon character runs off the edge of the cliff, looks down and realises there's nothing there.

Except it's not so funny when it's your savings in freefall. Since the beginning of the year, equity markets have looked and decided they didn't like what they saw down there. Having run in mid-air for months, convincing themselves that the stock market could shrug off the credit crunch, they've had a rethink.

Source: Not selling in October is no reason to sell shares now - Telegraph

Downgrade will hurt CDO markets

The $450 trillion CDO market seems to include a lot of double-triple-quadruple counted numbers. $27 trillion is still a lot of money. If we're talking about this being the worst recession since the Great Depression, we're looking at defaults of at least 12.7% or $3.43 trillion?
Or will the swaps end up cancelling each other out?

This has grown to be a huge market: The total value of all CDS contracts is something like $450 trillion. Because buyers and sellers of insurance usually create multiple "policies" as they attempt to control risk, that number includes a lot of duplication. Real exposure, says the Bank for International Settlements, may be only 20% of that, or $90 trillion. Some studies have put the real credit risk at just 6% of the total, or about $27 trillion. That puts the CDS market at somewhere between two and six times the size of the U.S. economy.
The CDS market has been a good place to make money in the past few years because default rates in the junk-bond market have been historically low. The default rate for all junk bonds declined to 1.7% in 2006. That's the lowest rate since 1996. With defaults that low, sellers were paid insurance premiums but didn't have to cough up much in return.
But that default rate started to rise in 2007, climbing to 2.6%. And Standard & Poor's projects the rate will climb to 3.4% by October. At that rate, 56 bonds would go into default in 2008, compared with 14 in 2007.
That level of default isn't likely to inflict too much damage on the CDS market. The historical rate for defaults by corporate junk bonds has averaged 5% a year since 1980. But the default rate has run as high as 12.7% in previous recessions.
Source: The next banking crisis on the way - MSN Money

The economy slows down with its ships

As the price of oil goes up, so does the cost of shipping.  Reductions in shipping speeds mean a slower time to market, which should ultimately cause shortages for products and hence increase the cost of goods.  With a 1 1/2 day lag in receiving goods, just-in-time manufacturing companies could have a harder time.

"Slowing down by 10 percent can lead to a 25 percent reduction in fuel use. Just last week a big Japanese container liner gave notice of its intention to slow down," he added.

Source: Slower boats to China as ship owners save fuel - Yahoo! News

Stock Market Trading & Investing Analysis

Are we in a bear market yet?  Naaaa... it's way worse than that.  

We're going to need to start talking in marine terms pretty soon. This one's a whale.

The possibility of an up close this week certainly did not come into being. Weekly price charts of major US Stock Market Indexes show major devastation from last weeks trading and overall breadth for the week was as bad as it’s ever been in any of the last downside week’s over the past few months.  Only 10 of the 273 sectors we tracked had better than 0% breadth, that’s just nasty!  This suggests lower lows to come or at least serious testing of the lows made this week.

Source: Stock Market Trading & Investing Analysis

Ambac downgraded, cities seen at risk

Dominoes are falling... 

Since late last year, when the agencies first raised the prospect, analysts have suggested any move to cut Ambac or MBIA below "AAA" could be disastrous. The concern is that downgrades will lead to a reduction in the value of portfolios at dozens of financial institutions, said Donald Light, a senior analyst at Celent LLC.

"Bond insurers are the lynchpin holding together valuations of portfolios of all kinds of financial institutions," Light said.

Source: Ambac downgraded, cities seen at risk

Could be a time to pick up another few shares of Berkshire Hathaway.

Ugly Chart Sector Charts

Ugly's got some good charts for sector rotation analysis. 

Link to Ugly Chart Sector Charts

Capital Link Shipping | Baltic Exchange (Baltic Dry Index: BDI) Charts

If this was a depth finder I would say that we hit the bottom in October and are taking on some serious water.

So the is price of moving things getting cheaper, or is demand just drying up?

Baltic Dry Index
Stock Charts

Capital Link Shipping Baltic Exchange (Baltic Dry Index: BDI) Charts

Robbing Peter to pay... Peter?

 I'm having a hard time understanding the results of the 'Slosh Report' URL link to the right under the Links list.  According to this, the Fed injected 124.8 billion into the markets on Friday, where only 12.25 billion was accepted.  A similar situation happened on Thursday, where $101 billion was injected and $10.5 billion accepted.  Things feel much different than they did on January 4, 2007, though there is only $4 billion more sloshing around than last January 4. 

This article tries to explain what the mysterious Fed really does with short-term liquidity, and what it is really doing... namely Jaw Boning.

The Fed – “Hocus Pocus – it's the same money!”

Last week, the Fed executed the first of its highly publicized “term auction” transactions. As I noted in A Little Acid Test for Fed “Liquidity” last week, the Fed had $53 billion in repos outstanding on Friday December 14, fully $39 billion of which were due to expire last week. This ensured that the Fed would initiate new repos of a similar amount. The acid test was whether the term auction repos would represent a) new liquidity, or b) just a different way of rolling over the same money. Last week, we learned the answer to that question is b.

You can follow along using the Fed's actual data using this link:

http://www.ny.frb.org/markets/omo/dmm/temp.cfm?SHOWMORE=TRUE

Source: Hussman Funds - Weekly Market Comment: Vanishing Act - Are the Fed and the ECB Misleading Investors About Liquidity? - December 24, 2007

What is the saying, "the US sneezes, the world catches a cold?"  I will be a bit more concerned when China happens to sneeze.  There are a lot more people in China.  Perhaps true liquidity is coming from non-domestic sources. 

Kenya: Tribal Rage Over Disputed Election - washingtonpost.com

Sudan's regime of terror
After watching "The Devil Came on Horseback" about the killings and mass exodus of people in Western Sudan & Darfur, it really got me thinking again about situations that are happening today in the Eastern hemisphere.  Many people in the West really don't know how isolated we are from the daily atrocities and staggering poverty that is overseas.  The US media is focused on an election where candidates are focused on Iraq, save a few who are proposing some ideas that all troops could be pulled out of Iraq and redeployed to Sudan.  With a March 2008 timeline, this probably isn't going to happen any longer, though the UN should at least send in a few helicopters & Rambo to get some order and protect the refugee camps.

The current US administration is doing something to Sudan.  They are cutting economic ties.

Investment Funds and Human Rights

President Bush signed legislation on Monday that makes it easier for mutual funds and private pension funds to sell their investments in companies doing business with Sudan.

No mention of how this will affect jobs and the people over in Sudan.  However China holds large stakes in Sudan.  Specifically PetroChina, a company formerly owned by Warren Buffett, who got into some serious hot water over the holding.  Berkshire made $3.5 billion selling its shares in October... coincidentally when the Darfur bill was going through the house.   Maybe this bill will affect China a bit?

Poor Warren (and Poor Charlie) seem to get hit regularly with organizations that disagree with their investments, like opponents of Planned Parenthood.   In the case of that investment, they shut down their shareholder donor program.  This would have cut out a lot of funding for the 3,500 or so organizations that were affected by the program.

Berkshire class B stock was up around $5000/share in December.  It's revenue was $98 billion dollars.  That put it at #53 in the list of GDP by country, ahead of Kuwait.  It will probably be much larger this year.  2008 could be a value investors dream year if things keep going the way they have been since last August.

Berkshire doesn't show up in the Sudan Divestment Stock Screener any more, though there are over 500 funds with ties to Sudan.  Realistically, any funds on the stock markets of the world will have things in their closets that they don't want you to see.  Some more than others...

Even Warren's friends Bill & Melinda are having troubles investing all their capital without hitting regimes with poor track records for human rights.  A "miniscule" $22 million, or around 6% of their $38 billion endowment was invested in companies related to the Sudanese government, which they dropped like a hot potato after a New York Times article.

Think Different

Bill steps down this year from Microsoft to focus his efforts on the foundation. 

A charity close to me is Room To Read.  I am a book fanatic, and probably have about 5 books on the go right now.  I am regulated to a quota of no more than 10 book purchases a week by my better half.

The statistics below are almost as mind-boggling as Berkshire's revenues, and it all started from a single ex-MSFT'ie who was upset over how stupid it is that children don't have access to books.

Since our inception in 2000, Room to Read has impacted the lives of over 1.3 million children by:

• Constructing 287 schools
• Establishing over 3,870 libraries
• Publishing 146 new local language children's titles representing over 1.3 million books
• Donating over 1.4 million English language children's books
• Funding 3,448 long-term girls' scholarships
• Establishing 136 computer and language labs

They focus mainly on Asian countries, though they have started moving towards Africa.

Books or Guns

It seems almost that a campaign is being put in place to bring disorder to countries outside of the West, and therefore bring the emerging market funds back into domestic hands, at the expense of the people.  Hopefully the policies of governments and world organizations will somehow take into account that human capital is worth a thousand times more than venture capital, and these funds should be put to work maintaining social and economic benefits for the people who need it the most.

Toronto, Canada: I am African and I love Kenya dearly. I pray and hope that it survives intact the current unrest. Do you think Kenya will survive this? What will happen to the bouyant economy after the violent upheaval? Will Kenyans continue to enjoy the good economy that is one of Africa's best?

Kenya: Tribal Rage Over Disputed Election - washingtonpost.com

Do you think that roving blackouts in Iraq could cause the situation there to continue to destabilize?  How about bombings in Afghanistan?  During the great blackout the Eastern Seaboard experienced a few years ago, even homeless people directed traffic, and people ate ice cream and drank beer in the dark.  Something tells me we don't understand how isolated we really are from the "real world".

In 3 days of 2008, 42 people have died in Afghanistan.  Over 300 people have died in Kenya.  Last year 84 people were murdered in Toronto.  This was a record.  It should not be that scary for the general public though, since 80% of all the victims knew their killers.  Of course 20% is not a number to sneeze at, though with 5 million people you're odds are probably greater to win the lottery. Not that any of these people should have become statistics in the first place...

Unfortunately 100% of the people in Darfur know who their killers are too, though perhaps not the indirect ones.

The list of travel warnings continues to grow.

Bingo! You can buy this overpriced house!

This reminds me of a certain speaker that I saw a couple of months ago at a real estate convention, who promised a "free" cruise ship vacation for everyone who signed up for  his seminar.  What's the catch?  There's always a catch...

Faced with crowds of a hundred buyers, bank loans in hand, all chasing the 20 houses he might have on offer, he organised bingo-style lotteries.

"We had ping-pong balls with numbers, just like you'd see on a TV show", Mr Trawick recalls.

"Everybody would have a number. We'd put the ping-pong balls in, spin it and, you know 'Number 22! Yoo-hoo!' They'd jump up and yell, come on up and pick which home they wanted, and leave a deposit cheque".

Source: BBC NEWS | Business | City of debt shows US housing woe

Someone captured some videos of a Trump wealth event in Vancouver that should give you an idea of the mania of crowds... the opposite of the book I'm reading right now, Wisdom of Crowds.

Especially when the event involves money.

Opportunity Amid the Ruins - Barron's Online

One fund manager thinks that all this noise about writeoffs is really just a psychological thing - no money is changing hands here and losses aren't "real."

Hopefully his stock PZN is of the same opinion - it is down by almost 50%. 

But they're still reporting losses.

They are taking accounting losses. They haven't taken real losses. The situation was exacerbated by changes in accounting rules. Since the last banking crisis almost 20 years ago, two things have changed dramatically. Banks don't lend money anymore so much as arrange loans and then sell them through securities transactions and derivatives to other investors. Thus, they tend to have less on their balance sheets. And, they have to mark their portfolios to market based on psychological perceptions of the loans' value. If banks had to do this in prior cycles, there isn't one of them that would have survived. And yet they all survived, because they don't lose the money everybody thinks they lose. Some of these losses will turn into real losses, but the provisions the banks have taken against their earnings, which are a function of widening credit spreads and interest-rate changes, cause them to mark down their portfolios. Look at it this way: If you were a corporation that invested $100 in a U.S. Treasury bond that paid 5% interest, you'd get $5 a year. If interest rates go to 6% you have to mark down the value of the bond, even though you're still going to earn the same $5 a year.

Source: Opportunity Amid the Ruins - Barron's Online

So what if the losses aren't real?  In terms of accounting rule changes, one rule caused a mass exit of the USD.  Nixon's abolishment of the gold standard.  This wasn't real until it happened 17 months later.  But the mere idea and shock of this proclamation caused a big stir in world markets.  Things don't have to be real in capital markets... heresay is enough to move prices. 

Similar echoes happened two years ago, when the Great Halloween Income Trust Proclamation was released by the Canadian Finance Minister.  Immediately a massive drop in paper values translated into a real value decline of the investments of many trusts.

Another rule that moved markets and destroyed value?  Immediate criminalization of online poker.  That didn't work so well for companies dedicated to online gaming... but it probably will when the brick and mortar casinos & big media players get into the game.

Perhaps the most important way to invest in the stock market is to watch what is happening in international politics, particularly with the ongoing currency and liquidity wars.  And perhaps inflation can be monitored by watching the minimum wage scale...

But watch out... Some countries are more effective than others at enforcing these regulations, so that the effective minimum wage may be lower than the official one.

Capital markets are all about regulations and the movement of money into "self"-regulating countries.