Daily Dose of Excel & Dollar-Cost Averaging

Volatility isn't always a bad thing.

In the volatile market, I have about $700 more in my account than if the market was steady. Either way the stock is $1.24, I was just able to buy more of it in the volatile market. It’s the underlying fundamentals of a company that determine its stock price over time, but the utter wackiness of investors that determine it in the short term.

I believe investment folk call it dollar-cost averaging when you invest the same amount of money periodically. What do you think? Should I rejoice at each downturn?

Daily Dose of Excel

Subprime in pictures

DANGEROUS VISUALIZATIONS

In other cases, there may be good ways to visualize something but it is not clear that they should be visualized. The danger comes from the power of images to confuse the viewer or to distort data.

Provisional Theories

A scientist who is just beginning to work out a theory might create pictures simply to test out some ideas. The problem comes in when the quality of the graphics is better than the quality of the theory. Since it is so easy to construct flashy computer graphics, even half baked ideas are endowed with a believability beyond that which even the originator intends. Perhaps researchers should be encouraged to make low quality graphics on purpose for theories that are not yet well supported.

After reading Jim Blinn's (MS Research) paper on Visualization, I asked myself... what does subprime look like?

A major factor in the growth of CDOs was 2001 introduction by David X. Li of Gaussian copula models, which allowed for the rapid pricing of CDOs. 

Of course!  It's a pyramid!  In the "before" photo, the green indicates the happy folks at the top.  Red indicates some serious problems at the bottom.

The bottom seems to have fallen out of the "after" photo.  Happy times?

More on CDOs from Wikipedia.

Miller Center of Public Affairs - Gerald Ford Speeches

This speech resonates today's economic woes.  "We must Whip Inflation Right Now." from Gerald Ford, 1974.

"A stable American economy cannot be sustained if the world's economy is in chaos. International cooperation is absolutely essential and vital. But while we seek agreements with other nations, let us put our own economic house in order. Today, I have identified 10 areas for our joint action, the executive and the legislative branches of our Government.

Number one: food. America is the world's champion producer of food. Food prices and petroleum prices in the United States are primary inflationary factors. America today partially depends on foreign sources for petroleum, but we can grow more than enough food for ourselves.

To halt higher food prices, we must produce more food, and I call upon every farmer to produce to full capacity. And I say to you and to the farmers, they have done a magnificent job in the past, and we should be eternally grateful.

This Government, however, will do all in its power to assure him--that farmer--he can sell his entire yield at reasonable prices. Accordingly, I ask the Congress to remove all remaining acreage limitations on rice, peanuts, and cotton.

I also assure America's farmers here and now that I will allocate all the fuel and ask authority to allocate all the fertilizer they need to do this essential job.

Agricultural marketing orders and other Federal regulations are being reviewed to eliminate or modify those responsible for inflated prices."

Miller Center of Public Affairs - Gerald Ford Speeches

So what is the US doing to "Whip Inflation" today? Farmers are hoarding food speculating that higher prices will be coming soon.  Higher prices are coming due to scarcity of foods.  And the US, as the world's "champion producer of food" is turning that food into petroleum.

It has been over 34 years since this speech, and the cycle has returned in spades.  Even the players are the same.

$60 billion in closed funds are left hanging

As banks are unwilling to take risks or leave capital on the table, investors in 'cash-equivalent' preferred shares receive no bids for their shares.

``You've got $60 billion in which the holders believed until recently they could liquidate on par on demand and suddenly that $60 billion is frozen,'' said David Kotok, chief investment officer of Cumberland Advisors Inc. in Vineland, New Jersey, which manages $900 million in assets.

Bloomberg.com: Worldwide

If the ABCP market was $30 billion, then this is it's bigger brother.

Why I'm not trading right now... and why charts sometimes lie.

I have turned into somewhat of a technical analyst, though I still have a lot to learn about when to sell and how to control losses.  Back in January of 2007 I bought USO at a dip low of around $42 that could have ended up being a $75+ gainer.  At a financial conference, I pointed it out to the Metastock rep there, who called it one of the best calls he had seen.

I sold out at 14% so I wouldn't get greedy.  Could have been almost 50%.

Along with stop gains, I believe in stop losses.  Right before the crash in January, I put a couple of "stink stop" bids on a few of the stocks I owned.  All of them were grabbed from me at the low of the day (all at losses), and by the next day they were all above what I had paid for them. 

Intervention by the Fed at it's finest.  Technical analysis of the charts would have told me we were in for a long ride down.  Realistically I should have known that government intervention will skew results beyond what a chart can predict.

After that, I became a bit more disillusioned with the whole market itself.  And this is the main reason why I don't feel like touching stocks any more.  Because the market isn't acting right.

"If a stock doesn't act right don't touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit. It is a very old thing, this of noting the behavior of a stock and studying its past performances." - Jesse Livermore

Bill Cara: Cara's Commentary & Community Chat, Tues., Feb. 19, 2008, 7:57am ET

Of course, in this case, we know what is wrong.  The loss of faith in global markets and financial institutions.

We can see this with the price of gold, which is up $21.60/oz today.  10 year gold since June '07 has gone vertical.   60 day gold shows 3 distinct peaks, with a 4th peak forming.   Point and Figure chart doesn't indicate any bottom.  Are we on our way to $1000 gold in the next month or so?

Oil also hit $100/barrel today, after various issues with Texan oil refineries and Venezuela.

BMO didn't do too well today after announcing writeoffs.

"Part of the problem is that they're just writing this off, writing that off,"said Chyanne Fyckes, chief investment manager at Stone Asset Management.

"I think if they had any idea about how bad it was, they would just go ahead and write it off and be done with it. But they're not doing that this time because they don't know what's going on and that's what I find very disconcerting."

I'm not sure that anyone knows exactly what's going on and how bad the current financial situation is with the banks.  How do you value illiquid assets?  What risks are you taking on if your risk models aren't accurate?   

Financial Alchemist: Importing Financial Web Data into Excel, part 2

For the technical analyst, Excel is the #1 tool in the toolbox.

A particular model I want to highlight is the EPS_Estimates_MultiSource_v5 that you can download from the files section.
Following trends in analysts’ EPS estimates can be a valuable tool. Research suggests that companies experiencing downward revisions will likely receive more in the future. This spreadsheet shows the trends in EPS revisions. In addition, the model tracks historical EPS announcements. This can be valuable information too, especially if the company has been surprising on the upside and estimates have just started to be revised upward. This may depict a situation where The Street hasn’t fully grasped the potential earnings growth. This may lead to an undervalued situation if there is evidence that growth is underestimated and not priced into the stock.

Financial Alchemist: Importing Financial Web Data into Excel, part 2

Credit card rates for the bond markets?

 I wonder if they will offer job loss insurance for $2 per month, or Air Miles on their bonds if they end up paying 14% credit card-style interest?  We'll see in 2 weeks what this brings... but it doesn't look good.

Investors set prices for bonds by bidding for them at bond auctions approximately every month. If the bonds are perceived as risky, investors can demand a higher interest rate to buy them, and the interest rate rises. If they are perceived as so risky that no one wants to buy them and the auction fails, the bonds automatically rise to the maximum rate allowed for the person who previously bought them and is now stuck with them until the next month's auction.
In Citizens' case, that maximum rate is 14 percent.

Source: Bond troubles may dog Citizens - New Orleans Louisiana Local & Small Business News – Economics & Finance News Articles - NOLA.com

Apparently nobody wants bonds due to the amount of risk involved if any of the insurance companies default.  Over $10 billion worth of bonds failed to auction this week, which, according to the article, could cause rates to rise anywhere from 8-14% during the next auction.

It doesn't help that they lost their data during the last storm.

"For any of these, we're going to have financial data," she said.
Citizens has been unable to produce an audited financial statement since the 2005 storms because of problems with its computer system, and the group has been working for most of the past year on extracting the data and reconstructing it so that it can be audited.

Wednesday March 5, 2008 is the next full moon if you're superstitious.  With the stock market (and now the bond market) the way it is,  throwing dice, reading palms or dealing tarot cards are about the best ways to predict future prices.

Smoot-Hawley Tariff Act - Wikipedia, the free encyclopedia

Potentially one of the worst laws to pass in the US, extending the Great Depression, ticking off their trade partners (including Canada) and causing a general feeling of disgust at the protectionist measures being enacted.

This would be equivalent to a Great Leap Forward in terms of its effect on the population and the economy, or perhaps an injection of subprime and fraud into otherwise marketable securities.

The Hawley-Smoot Tariff (or Smoot-Hawley Tariff Act)^[1] was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods to record levels, and, in the opinion of most economists, worsened the Great Depression. Economists have now generally regarded this Tariff Act (i.e., tax increase on imported goods) as the greatest policy blunder in American economic history, coming as it did after the 1929-30 recession and preventing the economy from a full, natural recovery which had already started by the Spring, 1930. Many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half.

Source: Smoot-Hawley Tariff Act - Wikipedia, the free encyclopedia

Plus Ben Stein's performance made Ferris Bueller's Day off...

... Bueller?  ... Bueller?

The Bermuda Copper of 1793 - Introduction

 

Just like prison, you used to be able to barter with tobacco in Bermuda, due to the lack of currency.  

Following the brief episode with "Hogge money" in 1615-1616 (see the Sommer Island section), Bermuda returned to the barter system with tobacco serving as the standard currency. During the 18th century, the tobacco standard was supplemented with Spanish silver and gold, and after 1761 some paper certificates were issued.

The Bermuda Copper of 1793 - Introduction

Hogge money were coins with a hog on the front and a sailboat on the back.  Later,  a low-grade, brassy copper coin was introduced, with a wash of silver that didn't mix with the salty climate and wore off.  This reminds me of the red wash on some of the new quarters here in Canada.

What's so important about the first coins made in Bermuda?  They were destined to go to the Americas, to be used as the first British coins for the New World.

Bespoke Investment Group: Correlation Ticking Higher in Current Market Environment

I threw up my hands a couple of weeks ago.  Looks like others are doing the same.

So what's there to buy in markets like these besides the ultra short ETFs? 

These figures confirm the basic idea that in bear markets everything becomes correlated because market participants end up selling all of it. Traders facing margin calls are end up forced to sell-off "quality" things, and others just throw up their hands and dump everything.

Source: Bespoke Investment Group: Correlation Ticking Higher in Current Market Environment

Stock screeners

No surprises here, but a good overview of some free stock screening tools. 

Caveats
No free screener does the best job for every conceivable search. MSN Deluxe might offer the best chance over all but some of the others may do a better job depending on the search parameters specified. And it is quite possible for the same search criteria inputted into different screeners to return dissimilar lists of companies.
“Screeners seem like great tools for finding errors in databases,” quips Michael James Weiner, who writes the Michael James on Investing blog. While this may be a lesser problem for subscription-based screeners and the better free screeners, Mr. Weiner’s reservations do highlight the issue of data quality and timeliness. Another caveat, as Investopedia.com notes, is the inability of screeners to sort on the basis of intangible variables (e.g. the value of a brand name).

Source: globeandmail.com: Globe Investor Magazine

stocktickr blog » Blog Archive » Replay the Trading Day Using Automatic Screenshots

Here's how to monitor your trading day using IrfanView and some automated screen shots. 

Compile these with Windows Movie Maker and you have a run through of your daily activities.

It's not just for trading....  

IrfanView Software
You might be surprised to learn that there is a free software package that can do almost everything you need from automatically taking the screenshots of your desktop to replaying them. It is called IrfanView and it’s available as a free download for Windows. Once you’ve installed it, just start IrfanView from the windows start menu. From the Options menu, choose Capture/Screenshot. Here’s the screen that appears.

Source: stocktickr blog » Blog Archive » Replay the Trading Day Using Automatic Screenshots

Panic strikes the wheat market

Liquidity is a two-way street.  Lack of sellers is just as bad as a lack of buyers... especially when you're selling short and need to close out a position.

This should have an interesting effect on food prices in the next few months.

Matt Pierce, Futures International Inc. says there is an absolute run on spreads right now. "It's the scariest thing I've ever seen on this floor," Pierce says.

Source: Panic strikes the wheat market

As inflation grows, product packaging shrinks, and gas mileage goes down

 This sounds like a recipe for disaster... a machine that you need to feed with land, seeds, fertilizer, hay, water, electricity, steel, building materials, food, food-byproducts, natural gas, oil, gasoline, trucks, electricity, and pumps, not to mention the printing costs for all the currency required to sustain this endless cycle of consumption.  All this will drive a steady influx of jobs back into the farming industries, while driving existing farmers to increase yields and burn out their lands.  It will increase drivers to adopt "eco-friendly" cars due to tax breaks and marketing, while causing many to adopt more frugal lifestyles or face financial ruin due to skyrocketing food costs. 

Will it create the next dustbowl effect, as Australia is currently experiencing?

"This energy loss leads to a 2% - 3% decrease in miles-per-gallon vehicle fuel economy with 10% [ethanol]."[7] Essentially, drivers will not be able to go as far on each gallon of ethanol as they currently do on gasoline.

Source: Ethanol: Bumper Crop for Agribusiness, Bitter Harvest for Taxpayers

This sounds like a problem invented by governments and the so-called "renewable energy" associations, or lobbyists.  Will it be solved by them too?

What could go up in price?

• Cereal
• Wine
• Ethanol and Washer fluid
• Gas
• Alcohol
• Tobacco
• Corn
• Water
• Fertilizer
• Anything made with wheat
• Anything requiring animal feed (cows, pigs, sheep)
• Sugar and anything made with it
• Milk and anything made with it

This really starts at the bottom of the food chain and works its way up into the global economy very quickly.  Farmers will sit on their harvests as long as possible, in order to capture the skyrocketing costs of their commodities.  The real estate (shelter) bubble burst - Is the food and water bubble upon us?

EU Economic Forecasts in a couple weeks

Watch for these to affect world markets.   The last forecast?

"Autumn economic forecast 2007-2009: growth moderating" 

Thursday 21 February: Interim Economic Forecasts

The news:

The Commission will publish its interim economic forecasts updating the outlook for GDP growth and inflation in 2008 for Germany, United Kingdom, France, Italy, Spain, the Netherlands and Poland as well as the EU and Euro area aggregates.

The background:

Interim forecasts are published in February and September between the major spring and autumn forecasts for all Member States and all variables, including national debts and budget deficits.

The next fully-fledged forecast comes out on 28 April 2008.

Source: EUROPA - Rapid - Press Releases

More ways of holding energy - Aluminum foil?

 My wife thought I was a bit crazy to be grabbing a couple Costco-sized boxes of aluminum foil last time we went.  I figured the price of food is going up more over the next few months, so starting with something that preserves food would work out well.  Looks like following and trading stock charts can apply to the real world.

``Aluminum is the one to watch at the moment,'' said David Thurtell, an analyst at BNP Paribas SA in London. ``Aluminum is often referred to as solid electricity'' because it requires so much power for production, he said.

Aluminum production consumes 15.5 megawatt hours of power per ton compared with about 4 megawatt hours for a ton of copper, said Goldman Sachs analyst James Gutman in London.

Source: Bloomberg.com: Commodities

I noticed AA when reviewing P/E for the large DOW stocks... theirs has steadily declined up until the Jan '08 crash.

Realistically it is probably 40% of costs that are electricity, less tax benefits and such.  That's still not bad if you want some solid electricity... and it's a conductor if you want to give it a charge.

But watch out for recycled Aluminum foil... it only takes 5% of the energy from it's parent.

"Aluminum for delivery in three months fell $15 to $2,695 a metric ton as of 3:17 p.m. on the London Metal Exchange. The 6.7 percent gain this week would be the biggest since November 2001.

Copper declined $85 to $7,265 a ton. "

Forget Gold, I'm going to go find a ton of copper someplace...

Safe Haven | The Double Whammy of Geopolitical Gold Games

One way to earn income with a fluctuating gold and silver.  Hold and short. 

Lending money necessarily involves risks: the borrower may default. But if you don't give up physical control, then you will escape the monetary debacle unscathed. Because of the imbecility of the managers of the paper dollar standard there exist durable risk-free profit opportunities in holding monetary metals in the balance sheet. The trick is: covered selling. That's possible because the price of monetary metals has been allowed to fluctuate. The price fluctuation of a monetary metal, like the flow-and-ebb of the oceans, represents energy. Energy that can be harnessed. Energy that can be harnessed only by those who understand monetary economics.

Source: Safe Haven | The Double Whammy of Geopolitical Gold Games