Outlook for 2010

Many financial media sources are providing outlooks that argue either a bullish case or a bearish case for the stock markets in 2010.

My view is that investors need to macroeconomic factors and then react accordingly, since making predictions is an act that is very difficult to do so accurately and consistently.

While searching for the factors that will matter in providing a financial outlook for 2010, two excellent arguments were found.

The first is from Zero Hedge. The site's argument is based on the dynamics of fixed income.

The full article is here, and is entitled "Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else."

The site concludes with the following:

Everyone has major problems at home, and is more focused on the supply than the demand side of the equation.

What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:

1. Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
2. Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
3. Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.

If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors.

My second source below is more optimistic.

Jon Fisher combines the observation of the inverse relationship between housing starts and unemployment with a model in entrepreneurship: the planning the actions while having the end in mind.

In this video, Fisher asks what would happen if everyone was wrong with the forecast that unemployment will continue to rise. What if unemployment peaks at 10.4% in the United States, and then falls...rapidly? If that is the case, then the place to invest in will be in technology and real estate.

Entrepreneurism, Begin With The End In Mind: Jon Fisher

Commonwealth Club

I Can't Remember If the Car Left First, or If the Girl Left First

Carl Icahn is an American billionaire financier. He appears in headline news as a "corporate raider." This means that his company will do what it has to do to unseat existing management of poorly run companies. The purpose for doing so is to change the way it does business. Most recently, Icahn wants to break-up Motorola. He believes its wireless division is worth more than the 0 value that the market is assigning it.

I am reviewing Motorola. Its wireless division is undervalued. Indications for strong sales are favorable:  Motorola's Droid and Cliq are very well-designed and well-received.

In the video below, Yale University's Professor of Economics Robert Shiller introduces Icahn as guest lecturer. Icahn speaks extensively about the lack of accountability in many (but not all) corporations. He explains that these CEO's are morons. They are selected to run the company, because they move up the corporate ladder by being:

1) likeable
2) politically astute.

A CEO's assistant is "dumber" than the CEO for the reason that the job security of the CEO will not be threatened by the assistant. When the CEO retires, the assistant gets promoted.

h/t marketfolly.com for originally posting this video.

"I Can't Remember If the Car Left First or the Girl Left First" - Icahn, on winning ~$10,000 in poker, losing it all in 1962, and then deciding to earn money through his own skill and intellect.

Watch it on Academic Earth

During Q&A, Icahn talks about how to handle when things are going well or going poorly:

If you are do great, don't think you are a genius. If you are doing poorly, don't think the world is coming to an end.

- @27:42 min

So what? Work hard. Believe in your abilities. Stay on course (Embrace luck, which comes and goes). Below is Kipling's poem, If, Icahn mentioned to illustrate this frame of mind. My markings are in bold.

If

By Rudyard Kipling 

If you can keep your head when all about you

Are losing theirs and blaming it on you,

If you can trust yourself when all men doubt you,

But make allowance for their doubting too;

If you can wait and not be tired by waiting,

Or being lied about, don't deal in lies,

Or being hated, don't give way to hating,

And yet don't look too good, nor talk too wise:

If you can dream - and not make dreams your master;

If you can think - and not make thoughts your aim;

If you can meet with Triumph and Disaster

And treat those two impostors just the same;

If you can bear to hear the truth you've spoken

Twisted by knaves to make a trap for fools,

Or watch the things you gave your life to, broken,

And stoop and build 'em up with worn-out tools:

If you can make one heap of all your winnings

And risk it on one turn of pitch-and-toss,

And lose, and start again at your beginnings

And never breathe a word about your loss;

If you can force your heart and nerve and sinew

To serve your turn long after they are gone,

And so hold on when there is nothing in you

Except the Will which says to them: 'Hold on!'

If you can talk with crowds and keep your virtue,

Or walk with Kings - nor lose the common touch,

If neither foes nor loving friends can hurt you,

If all men count with you, but none too much;

If you can fill the unforgiving minute

With sixty seconds' worth of distance run,

Yours is the Earth and everything that's in it,

And - which is more - you'll be a Man, my son!

Primer on Balance Sheet Recessions

The value of Fortune runs far deeper than money and financial returns. On kaChing.Com, I was, and continue to be, fortunate to have acquired a large network of influential contacts. This includes hedge fund managers.

Most recently, Bluecut Capital brought to my attention, economist Richard Koo. Bluecut Capital was also interviewed on BTS. The fund management team currently manages assets via the kaChing product offering (total assets under management is collectively $4 million).

Many investors would not spend an extra moment reading on unrealistic economic models that are consistently proven to be more theoretical than practical.

This viewpoint is short-sighted.

Koo implemented various economic models during both the Latin American crisis in the 1980's and the problems of Japan between 1990 - 2005. Koo is currently the Chief Economist, Nomura Research Institute.

The current economic problems, and its current "solutions," have many similarities to that which occurred in Japan. The presentation below will give an idea of what end-game of "de-leveraging" will be like and the consequences for the U.S. if it continues to follow its economic policies.

A Primer (and a slide presentation) was provided here on Zero Hedge:
http://www.zerohedge.com/article/primer-balance-sheet-recessions

Here is an audio presentation from Koo (November 2008):
http://csis.org/multimedia/audio​-great-recessions-lessons-learne​d-japan

Notes on a 0.01% Returns

Bill Gross of PIMCO wrote about the malaise of holding cash that earns next to nothing. In his December newsletter 'Anything but 0.01%,' Gross stated the desire to earn more than 0.01% also meant the potential return for investors in accepting higher risks:

That 0% yield is not a joke. Almost all money market accounts – totaling over $4 trillion dollars (...) – yield close to nothing, so close to nothing that I mistakenly did a double take when reviewing my monthly portfolio statement. “Yield on cash,” read the buried line on page 15 of the report, “.01%.”

Remember: one component for arriving at the market value of company will depend on whether to assign an optimistic or pessimistic P/E multiple. When there is an appetite for risk, this multiple expands and therefore stock prices rise (if justified by the accompanying earnings growth rates). The stock market's return is a function of these three variables: earnings growth/decline plus change in P/E + dividend yield.

My point is to recognize, and to hope that you recognize, that an effective zero percent interest rate, as a price for hiding in a foxhole, is prohibitive. Like the American doughboys near France’s future Maginot line in WWI – slumping day after day in a muddy, rat-infested pit – when the battalion commander finally blew his whistle to charge the enemy lines, it probably was accompanied by some sense of relief; anything, anything but this! Anything but .01%!

Gross makes a very important point here:

The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until.

h/t marketfolly. Full original newsletter may be downloaded here.

SNL Video: China Cold Open - China Would Like Their Money Back

If It Looks like a Bear, Smells like a Bear, and Acts like a Bear

...It is not a bear.

Before reading on, know that any pattern may exist if you look long enough to find one.


In the chart of the S&P 500 from mid-June 2009 to present, above (click for full image), I labeled the uptrend days (D,E,F) against the sell-off days (A,B,C).

Uptrend Days (%, rounded)
D - +8.0%
E +8.7%
F + 3.4%

Downtrend Days (%, rounded)
A – -2.0%
B - -3.8%
C - -6.4%

The pattern that emerges is that on the downtrend days, volume is higher than average, and on the uptrend days, volume is on the decline. With exception, only the rally in D had rising volume, and was followed by the market still rising in E's rally.

With the trading activity this month, volume decline continues to be even more pronounced with each passing day.

The PPO (percentage price oscillator) compares two different moving averages. Its 3 peaks against the absolute price changes were also on the decline, a negative short-term sign.

About Me
I was interviewed by Behindthespread.com this past week. Here is the link:
http://www.behindthespread.com/chris-lau

Subscribe to blog updates here: http://twitter.com/chrispycrunch

Notes on George Soros, Rosenberg on CNBC

The Mighty U.S. Dollar No Longer?
In the U.S., the S&P 500 is now trading over 60% higher from the bottom reached in March. For we Canadians, this return looks more impressive than it really is: the U.S. dollar fell 20% against the Canadian dollar in that time. Similarly, the U.S. currency is weak against the Yen- and the Euro. A massive U.S. dollar "carry trade" may be in the works, or maybe not.

It remains to be seen.

Rosenberg vs. CNBC

What's Next for Stocks

Michael Pettis is a professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets, and a Senior Associate at the Carnegie Endowment for International Peace.

So, what business does this blog or any individual have, in taking advice or developing/validating a theme for an investment portfolio?

China is a driving force in influencing currency levels and commodity prices. The important point made by Pettis is marked with a bold font.

I spend a lot of time talking to large hedge funds and institutional investors – with at least three or four one-on-one meetings a week – on China and market conditions. It worries me that recently I have heard investors say many times, generally very sophisticated investors, that we are clearly in a bubble and the best strategy is to ride it out as long as we can. This has almost become one of the mantras of sophisticated investors – the less sophisticated, I guess, assuming that the crisis is safely behind us.

It worries me because of course we can’t all collectively ride the bubble and bail out before everyone else does. I wonder if this means that an awful lot of the big funds can be expected to rush to the doors at the same time when things turn bleak. If so, of course, that means we are likely to see both the upside and the downside market risks increase. Several of my fund management friends have insisted the problem has to do with the nature of hedge fund compensation. Most of the hedge funds were hurt pretty badly in the financial crisis, but a very large number of them were very pleasantly surprised by how quickly they’ve been able to make back a substantial share of their losses.

This means that recovering the high-water mark, which many thought would take years, has suddenly become a lot easier, and many expect that if the markets go on as they have been doing for another year or so they’ll be back in business (that is, able to charge performance fees once again). This may create a natural, albeit dangerous, incentive to take big risks on the likelihood of a rapid recovery.

Source: http://mpettis.com/2009/10/chinese-railways-and-speculating-pig-farmers/

Arts and Science: Ying and Yang

Below is an interview Schmidt in regards to its decision to purchase You Tube. Schmidt is, of course, the CEO of Google.

Finance is as much a science as it is an art. Assigning a dollar value to a privately owned company is an art, in that this value is subjective and relies heavily on the optimism or pessimism at the time, a value to a forecast of worth, and a value of what the company is worth in terms of what it can do for and with its buyer.

In this case You Tube's buyer was Google:

Baskin: What methodology did you use to come up with that number?

John P. Mancini, an attorney working for Google, objects.

Schmidt: My judgment.

Baskin: Was it based on cash flow analysis? Comparable companies? What were you using as the basis for your judgment?

Mancini objects.

Schmidt: It's just my judgment. I've been doing this a long time.

Baskin: So you orally communicated to your board during the course of the board meeting that you thought a more correct valuation for YouTube was $600 million to $700 million; is that what you said, sir?

Mancini objects to characterization of the testimony.

Schmidt: Again, to help you along, I believe that they were worth $600 million to $700 million.

Baskin: And am I correct that you were asking your board to approve an acquisition price of $1.65 billion; correct?

Schmidt: I did.

Mancini objects.

Baskin: I'm not very good at math, but I think that would be $1 billion or so more than you thought the company was, in fact, worth.

Mancini objects.

Schmidt: That is correct.

Later...

Baskin: Can you tell us what reasoning you explained?

Schmidt: Sure, this is a company with very little revenue, growing quickly with user adoption, growing much faster than Google Video, which was the product that Google had. And they had indicated to us that they would be sold, and we believed that there would be a competing offer--because of who Google was--paying much more than they were worth. In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It's set by what people are willing to pay. And we ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube.

Source: http://news.cnet.com/8301-31001_​3-10360384-261.html

---
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Crossing...the...Finish Line (Memo to Followers)

Dear Followers:

KaChing is scheduled to launch trade mirroring in under two weeks. However, this portfolio is likely to be delayed in qualifying for mirroring on launch day. Crossing...the...Finish Line of the race will need to wait.

These are the following reasons:

1. Under-performance against the s&p (largest loss was in commercial real estate) over an 8 month period.

2. Lack of sticking to a stated strategy.

3. Maintaining an above-average cash level provided superior safety but sacrificed on potential gains.

My portfolio IQ score is 126. To qualify, a score of 140 is required. It is close to the finish line, but it not close enough.

Investing is not a race. Investing is about (1) not losing assets and (2) beating the market over a very long period of time.

To Beginners:
There are a number of followers who are new to investing. These beginners are smartly learning about the stock market instead of being a sucker (a sucker is born every minute, but clearly "kaChingers" are not one of them).

My advice to Beginner followers:
* Open an IB (Interactive brokers) account and have a balance of at least $5,000-$10,000.

To Interested Investors:
Mirror more than one qualified kaChing "signature investors." This will give you the portfolio diversification.

Tip: Be sure to review the "analytics" first for investors you intend to "mirror." After all, the IQ number will only tell you risk-adjusted return, investment management focus, and ability to write stock research. Since the cost of transactions on Interactive Brokers is low, buy your own stocks too.

As for investors interested in mirroring my portfolio, the game plan stays the same. When the IQ score reaches 140 some time after the official launch day, mirroring my portfolio will be possible.

Below is the game plan. The approach that will be taken in managing the portfolio will be as follows:

1. Risk for holdings will continue to be assessed well before its potential gains (margin of safety).

2. Continue to build portfolio based on identified macro themes playing out.

3. Maintain Hedge strategy to reduce losses.

4. Be a rabbit. Let favorite stocks reach entry price. Don't chase wins. After all, gains are only as good as price paid.

5. Stick to stated a strategy and become an expert that field. It is the only way hard work may be translated to attaining superior knowledge in that field.

6. Invest in companies for which superior insight and knowledge in them may be attained.

...
If you have a twitter account, subscribe to these blog posts @ http://twitter.com/chrispycrunch.

The Sure Thing

Speculating vs Investing

"When I was a kid, my dad used to joke about the habitual gambler who finally heard about a race with only one horse in it. He bet the rent money on it, but he lost when the horse jumped over the fence and ran away. There is no sure thing, only better and worse bets."

- Howard Marks

Is characterizing the current state of the economy an act of speculation?

One mainstream media-driven phrase that is cropping up with unusual regularity is "the new normal." How normal is it for the U.S. stock markets to be up 60% this year since March, whilst the U.S. shed 2.5 million jobs? In Rosenberg's newsletter, Rosenberg describes this phenomenon as jobless prosperity. He goes further to ask who is actually doing all the buying:

FT quotes data from TrimTabs showing that only $2.5 billion in net inflows has gone into U.S. equity funds and ETF’s since the March lows. Inflows into bond funds have been ten times as strong. We know that corporate insiders have been net sellers of size. And the buying power from short-covering subsided months ago.

The answer, and this validated by the FT on page 16 of yesterday’s edition, are the hedge funds. And once they begin to see signs that a V-shaped recovery is about as real as Santa or the tooth fairy, watch out.

If hedge funds are characterizing what is going to happen next in the market, then hedge funds are speculating. Any act that attempts to forecast or predict what will happen is both dangerious and risky. After all, we now know how a "can't fail" one-horse race may still lead to losses.

If the markets continue adjust on the downside this month to account for actual unemployment figures, look for the tide to wash out companies with weak balance sheets. "Simply" invest in companies that are able to produce steady or rising profit margins not achieved through one-time cost cuts.

How? Bring your two warriors.

As Leo Tolstoy said, "The two most powerful warriors are patience and time."

On a personal note, 660 kaChing users following my online virtual portfolio are probably wondering what steps will be taken next. The portfolio activity reflects an IQ score that is 30/200 points from qualifying (140 points) to be mirrored by interested investors.

The strategy continues to be:

• Don't lose money
• Exploit significant spreads between the intrinsic value and current market value of companies

If you have a twitter account, blog posts are broadcast to http://twitter.com/chrispycrunch.

Let's Talk "Zebras"

The only thing more comforting for an individual investor "missing" the March 2009 -Present rally is not having a professional career dependent on justifying why one "missed" the great returns in the market this year (my high-lights in bold). How difficult it is now for investors to pick great investments: when stock prices go up, risks goes up, not down.

Zebras!?
“Zebras have the same problem as institutional portfolio managers. First, both seek profits. For portfolio managers, above average performance; for zebras, fresh grass. Secondly, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions. Third, both move in herds. They look alike, think alike and stick close together.

If you are a zebra, and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best, for there the grass is fresh, while the middle see only grass which is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better. On the other hand – or other hoof – there comes a time when lions approach. The outside zebras end up as lion lunch, and the skinny zebras in the middle of the pack may eat less well but they are
still alive.”

. . . Acorn Fund’s founder, and portfolio manager, Ralph Wanger

H/T Marketfolly. The full article by Jeffrey Saut is here.

Continuing on the topic of investment psychology, Ken Norquay describes risk management in a different way in his most recent entry. Here is an excerpt:

The investment industry’s pat answer does not address the basic truth that there is risk in investing in the stock market and we need to know how to handle that risk.

...


When I first entered the investment business in 1975, mutual funds guru John Templeton got it right. He used to say: “We shop the world for undervalued stocks. We hold them for three or four years and sell them when that value is recognized.” He wanted us to buy and hold Templeton Growth Fund in full knowledge that he would buy and sell stocks for us within the fund. Modern mutual funds do not talk about selling at all. They want us to buy and hold their mutual funds, and they want to buy and hold stocks within that fund. And they really do hold: how many mutual funds off loaded their stocks before the 2008 melt down? Mutual funds management has changed dramatically since 1975.

3 Things You Ought to Know

Michael Lewis is an author and financial journalist. In one of his bestselling books "Moneyball: The Art of Winning an Unfair Game," Lewis writes about how an underfunded team, the Oakland Athletics, was able to wins by 2002.

This book was published in 2003 and anyone - not just an ordinary investor - ought to read about how Billy Bean used statistics, challenged "conventional wisdom," and went against the MLB formula for running a baseball team.

I - Here are the highlights:

1. Know the end result you want

Before anything else, you should know exactly what you want. This requires thought. In Oakland A’s case, their goal was to win as many games as possible, not to retain their stars. This was because they found that the fans would come to games when the team was winning, regardless of whether or not they had their stars with them. They then aligned their strategies with this goal. They often couldn’t afford to retain their stars, but they could find ways to win more games.

2. Ask yourself: What is the Conventional Wisdom?

Now you should ask yourself what the conventional wisdom says about how to achieve your goal. List them. This is what most people think you should do to achieve your goal, and this is what the majority of people are doing.

3. Question the Conventional Wisdom

This is not easy, but this is how you can find opportunities. Your best weapon is why. By asking why you may find that:

• The conventional wisdom is unreasonable
  There is simply no evidence that it works. Most likely it became conventional wisdom because some people said so. In baseball for example, the way people count things can be traced back to a different game: cricket. Because the man who improved the box score in 1859 was familiar with cricket, he brought the ideas to baseball without thinking about whether or not that was the best way to count things in baseball.
• The conventional wisdom is not the best way to achieve the goal
  The conventional wisdom might contribute something to achieve the goal, but there could be other more significant factors that are overlooked by other people.

4. Find the real contributing Factors to Achieving Your Goal

The goal of questioning the conventional wisdom is to find the real contributing factors to achieving your goal. The more different they are from the conventional wisdom, the bigger the opportunities you have. To avoid guessing, it will be better if you can find data to support your ideas. If that’s not possible, at least make sure that you use clear logic.

5. Determine the kind of Stats you Need

After you find some ideas in step 4, think about the kind of stats you need to test your assumptions and help you do things correctly. For now, don’t think about how to get the stats; you will worry about that later. Just think about the ideal stats you need.

6. Find the measurement Tools

The next step is to find the tools you need to give the stats in step 5. Sometimes the tools are available, and sometimes they aren’t. If you can’t find the tools that exactly meet your needs, just find the best possible ones.

7. Measure what you Do

The next obvious step is to measure what you do when you apply your ideas. As I said in step 5, measurement is important to make sure that your assumptions are correct and you do things correctly.

8. Adjust Yyourself Accordingly

The measurement gives you the feedback you need to adjust your actions. This way you can do the right things better over time.

Comments and Application to Investing:

Money can only be made from the stock market using the"2x2" matrix. This idea was discussed on kaChing's blog. To recap, on one axis you are either right or wrong. On the other access you are either consensus (following the herd) or non-consensus (contrarian). As Andy Rachleff describes it:

What most people don’t realize is that you don’t make money if you are right and consensus because all the returns get arbitraged away. The only way to make money in the long term is to be in the right and non-consensus quadrant.

The 2x2 matrix is the model for investors to use for financial success. The reason is that time will be better spent ignoring the direction of the market and focusing the energy challenging consensus and being right (about a company).

II - More Philosophy

While I detest hearing the philosophy from others (it is meaningless without context), I detest even more in regurgitating it. With that in mind, here are other ideas that are worth repeating from Moneyball:

1. Every form of strength covers one weakness and creates another, and therefore every form of strength is also a form of weakness and every weakness a strength.

2. The balance of strategies always favors the team which is behind

3. Psychology tends to pull the winners down and push the losers upwards

III - The Kool-Aid Market

David Rosenberg summed up the advance in the U.S. markets by suggesting various pundits are drinking Kool-Aid:

Marc Faber is the latest pundit to drink the Kool-Aid and recommend stocks over bonds, citing the Fed’s printing press — the problem here of course, is that the U.S. stock market has only recovered in devalued U.S. dollar terms. Look at the Dow or S&P 500 in gold terms, Canadian dollar terms or euro terms, and this wonderful rally basically disintegrates. It’s otherwise known as a rally based on “money illusion.”

Reflections from 1934 - 1 Year Anniversary

With 870 members now registered in the "Intelligent Investing" group on I created on kaChing, it is appropriate to compare a 1934 publication to events that have taken place currently.

In Security Analysis, written by Benjamin Graham, Graham wrote about the real estate mortgage-bond business between 1923 and 1929.

For owners of the first edition publication, this is on page 116. In regards to a bond offering, there was a statement of "appraised value" of the property:

"A typical building which cost $1,000,000, including liberal financing charges, would immediately be given and "appraised value" of $1,500,000. Hence a bond issue could be floated for almost the entire cost of the venture so that the builders or promoters retained the equity (i.e., the ownership) of the building, without a cent's investment, and in many cases with a goodly cash profit to boot. This whole scheme of real-estate financing was honeycombed with the most glaring weaknesses, and it is a sad commentary on the lack of principle, penetration, and ordinary common sense on the part of all parties concerned that it was permitted to reach such gigantic proportions before the inevitable collapse."

1 Year Anniversary
One year after Lehman Brother's collapsed, Financial Post published a great story about it, entitled "After the Fall." Link: http://www.financialpost.com/story.html?id=1987721

Caution
Rosenberg is the former Chief Economist of Merrill Lynch. Now back in Toronto with Gluskin Sheff & Associates Inc., Rosenberg stated the following in his recent (September 11) newsletter:

One thing we do see is that the private client is taking the prudent approach towards risk. There have been $50 billion in net new cash flowing into equity mutual funds over the past four months. It is hard to believe that these flows can really push a $10 trillion market higher by 50%. But we do see that $130 billion of retail fund flows have gone into hybrids and bond funds — income is the key in a deflationary backdrop.

The market sentiment is obvious: investors are hungry for any asset class that generates returns greater than 0% (the approximate rate of government treasury bills e.g. yield on 1 month - 1 year t-bill is 0.13%-0.36%). This hunger is often accompanied by an appetite for greater risk as seen by rising stock prices.

On George Soros - Taleb's Perspective

There are two ideas in Nassim Nicholas Taleb's Fooled by Randomness worth addressing. They are highly pertenant states of the mind that is necessary in navigating through the markets.

The first is on the idea of changing one's mind:

An old trading partner of Taleb's, a man named Jean-Manuel Rozan, once spent an entire afternoon arguing about the stock market with Soros. Soros was vehemently bearish, and he had an elaborate theory to explain why, which turned out to be entirely wrong. The stock market boomed. Two years later, Rozan ran into Soros at a tennis tournament. "Do you remember our conversation?" Rozan asked. "I recall it very well," Soros replied. "I changed my mind, and made an absolute fortune."

Speculating how or why Soros could change is mind would be a fruitless exercise. Taleb's interpretation was that George Soros knew how to handle randomness by keeping a critical open mind and changing his opinions with minimal shame. (Which carries the side effect of making him treat people like napkins.)

The second ideas is on the idea of knowing...nothing:

My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.

When managing money, especially one's own, the first rule above everything else is, as Warren Buffett said it best:

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1"

Soros, for whatever reason, knew when to change his mind, but he did not do so on a whim or a guess (as it sounded in the book). There was detailed work done when an investment strategy was developed. However, when an strategy and investment thesis is carried out but is not working, even more work is needed to make up for losses.

The second idea is about being in a state that frees our mind from trying to control or model the unknown. Not everything may be forecast or predicted, and that which is unexpected to take place can take place. Knowing this (without actually knowing the unexpected) is something investors need to account in the analysis of stocks and the stock market.

Questions that Need Answering:

Here are a few things happening in the market that need resolution:

1. The U.S. 30-year Treasury prices are rising (yields are falling), and yet the stock market is rising. Is U.S. debt not the "safest haven" for investing? How are the debt auctions doing well if China is said to be buying metals instead of U.S. debt?

2. The S&P 500 rally since March was on declining volume, was without conviction, and sentiment was that of complacency (as indicated by the volatility index). Is there a risk of big players stepping in (or out) of the market in the next few weeks?

3. Will there be more government stimulus packages? Once the current programs run out, will markets ask for more?

4. If insiders are heading to the exits (insider selling is 95:1) why would ordinary investors be buying?



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How To Work So Hard and End Up Where You Started

We all want to be on the right path and on the right direction for an assortment of things. For many readers who visit my site, it is the desire to be a better investor.

The right direction is achieved by asking the right questions. The questions that many investors are asking are:

Are we still in a bear market? Are we in a new bull market? Is the marketing correcting in September and in October?

Vitaliy Katsenelson, a director of research, is author of a finance book, "Active Value Investing." In the following slides below, Katsenelson asks what I believe is the right question: Are we in a sideways market?

http://www.scribd.com/doc/18599532/Avi-Presentation

If the market is going to move nowhere, then many tools based on "conventional wisdom" such as buy and hold would not an applicable tool to use in today's market.

The paper concludes with the following points:

• Be a buy-and-sell investor. Buy-and-hold is in a coma
  
• Time(price) stocks through a strict buy-and-sell process
• Time stocks, not the market: Market timing is very difficult
• Don't buy for the sake of being invested.
  
• Don't lose money by making marginal decisions. In the absence of good stocks to buy, be in cash
• Increase your margin of safety: Fewer (better) stocks will be in your portfolio
• Favor dividend-paying stocks (Warning: dividends are part of the analytical equation, not the equation)
• Look overseas - increases return without increasing risk
  

Predicting, Forecasting, and Luck (vs. Skill)

Nassim Nicholas Taleb: A Crazier Future



This video found its way via Zerohedge.

Taleb is the author of "Fooled by Randomness" and "The Black Swan." This video summarizes the concepts discussed in his books, in which Taleb comically describes The Black Swan is a re-write of "Fooled by Randomness." (See @1hr 5min)

Most admirably, Taleb (@1hr 15min) reveals how no one wanted to publish his book. Complete with many rejection letters from publishers, the author prevailed by posting his manuscript on the web, gaining attention, and eventually overcoming this set-back.

This video will take 1hr 30min to watch.

In this video, Taleb talks about some of the things we all would want:

• Predicting the future
• Illusion of control @46:16
• Forecasting
• Moving from Theory to Practice
  

Some of his Tips:

• The Best advice comes from those who give you NEGATIVE advice (as opposed to positive advice). (Reference: @57 minutes)
  

• Do not use forecasts in a qualitative way or for anxiety relief.

• Create small Rules of Thumb

• Do not take advice from people wearing a tie!

• Respect Tradition and Age (Reference: @1:03)

On Managing Risk:
In the Q&A segment at the 1hr 13min mark, Taleb talks about minimizes risks in the stock market in the maximum way: simply by holding an amount he is willing to lose. For example, he says holding 7% in stock would result in a maximum loss of 7%.

On Applying "Black Swan" to Decision Making
@ the 1hr:22min Taleb is asked:

How does focus on black swans affect quality of decision making? Does it increase paralysis or inaction?

His Response:
(my transcription may have errors)

Being skeptical makes you take more risk in some domains. I take more risks on some domains. If you are aware of black swans, focus your risk taking on some things and not [on] others. This allows you to take more risk in tinkering trial and error, and a lot less risk with when you rely on someone else's opinion who can be full "experts."

Taleb is working on the next book that discusses how we are better at doing things than knowing things. When this book is out, it should make for a very controversial reading from the academic community.

Countdown: 45 Days

45 Days
In 45 days, kaChing plans to enable the convenience of allowing users to link their trading account to the account activities of its top-performing users.

Many new and existing users on kaChing's virtual trading community have been following my activities over this past year (to the new users, "followers" enables users to receive email alerts when a trade is made or when a research is posted). The site now has 387,598 registered users.

It is not known at this time if followers will decide to do the following:

(1) Open a discount trading account on Interactive Brokers and;

(2) Link a portion of holdings to seamlessly and conveniently have mirrored trades completed based on my actions.

IQ Me Not Smart Enough
To expand on the second point, there are many other users on that site whom have shown not just good results but results that exceeded my own (I am close to, but not currently at the minimum IQ score of 70 to qualify). By that, I mean simulated virtual returns that are consistent with what they say they are going to do ("investment strategy") and what reported statistics (sharpe ratio, turnover, risk index, downside standard deviation to name a few) say they have done ("Investment IQ") against that stated strategy.

Smart users will best allocate, say, $5,000 to one mirrored "signature investor" (as KaChing calls it), $5,000 to another, and say $3,000 to yet another. The rest of the assets can and should be used to purchase other types of assets (like bonds or stocks).

The Price of Convenience
For those who do not have the endurance to manage a portfolio, or want the convenience of the "kaChing mirroring" option, I asked kaChing and was told that it will be a fairly inexpensive alternative (from 0.25% to 3% annually).

The question then becomes: how do you choose an investment manager? On June 25th, kaChing provided its viewpoint on what it thinks is the best way to choose a manager.

Let's just say that in the last month, the virtual community was in a bit of an uproar. Were users hurling accounting figures, ratios, and even philosophy?

Although my enthusiasm is high for statistics, charts, and graphs, a typical user might overlook these measures. What might be worse is that users may not take the time to understand what these measures mean.

I would urge you not to do so, especially when using these measures to distinguish the intelligent investors from the speculative lucky ones.

Take, for example, the Sharpe ratio. It was developed by Nobel laureate William F. Sharpe. A Nobel laureate! Anyone who read Taleb's works might want to take a lesson on skepticism. However, in my reading of Taleb, my interpretation of skepticism is to understand the limitations, risks, and assumptions for any system that attempts to quantify human behavior and action with a numbers. It is this interpretation, not skepticism, that every investor managing his or her own money, must have.

Security Analysis
When I first joined kaChing, I used the site to apply my investment thesis. In that time, though, I stepped up my understanding of uncertainty, random theory, philosophy (the future is far from certain), risk management (quantify risk using a range of values, higher risk does not mean higher reward)...

...I even learned about hedging strategies and macro analysis, both of which are additional tools that investors need to have an edge over everyone else. More importantly, though, I complimented the activity on the site to work on and to apply "bottom-up analysis" based on Security Analysis (Benjamin Graham).

This is not going to be enough. Not for kaChing, and most certainly not for the general unpredictability of the stock market over the next few years.

kaChing's founder, Andy Rachleff, also provided insight in portfolio management that is used by hedge fund managers and by endowment funds. Generally speaking, both performed very well over long periods (15 years or more).

Compare that to various major indexes. Some moved nowhere in 10 or even 20 years.

What will prove valuable from the insights provided in the blog is that the approach is not generally used by the popular mutual funds sold by bank institutions. Note that kaChing's statistical measure for a user's performance return for Ivy League Portfolio managers. It is hardly a walk in the park.

My Strengths Need to Grow from my Weaknesses
From a personal note, my weakness in managing my portfolio was a twofold:

(1) Sticking to a clear strategy (current holdings contain both value and growth) and
(2) Outperforming the S&P 500 since March 2009*

The plan continues to be to learn from point (1). That is, to stick to a uniform strategy so that time is allocated to one strategy. This would provide more time in identifying companies that offer very compelling returns over the long term. As paraphrase what Warren Buffett said, to let lots of pitches go by but to swing hard when the right pitch comes along.

Other Progress - Leveraging the Virtual Trading Social Network
I had the goal of being able to perform a preliminary security analysis assessment for a company in about 20-30 minutes, instead of over several hours. I leveraged the knowledge of other kaChing users to get a second opinion on calculations and assumptions.

Wall Street is like a casino, so one must always remember that odds are, the house always wins. It should then be rationalized that group thinking within a virtual trading environment might be a way to put the odds back in the individual investor's favor (realistically, other quantitative measures like free cash flow, net present value, and discounted cash flow analysis takes time, but it is a next step after performing the quicker company value assessment for a stock).

kaChing's virtual community will thrive as long as users know that the competition against each other is harmless "play time." The true competition is against themselves and against mighty Wall Street.

As for the "*"

Memo to: 583 kaChing Followers
Re: Luring Rabbits From Burrows

There is no real excuse to justify an under-performance against the S&P 500. I am staying on the original position: taking a defensive approach to the assets managed. This means being under-invested in comparison to the index.

I am not convinced that the current market value of the index is justified.

The reasons are as follows:

• Government spending, stimulus packages, tax credits (in housing and in automobiles) is creating one-time events that the market is pricing in as indefinite
• Growth in the emerging markets is also due in part to government spending
• American consumers spending much less, are less confident
• The annual "Back to school" consumer spike that was seen since 1995 is suggested to be weak this year
• S&P 500's "forward" P/E is over 100
• Market is pricing in a "V-shaped" recovery but given unemployment levels and lack of job creation, "L" is more likely scenario
  
• In real-terms the stock market rally in the S&P relative to other indices (emerging markets) is unimpressive
• In real-terms the stock market rally in the S&P relative to its own currency is unimpressive

For the latter two points, something will need to give way - this is going to be in the form of a strengthening in the US dollar along with a strengthening in long-term treasury.

Yields in corporate bonds and in U.S. debt securities will provide an indication as to which way the major indexes (and the currency) will move, possibly in the weeks ahead (September or October).

Detailed Notes on Holdings

Longs:
My investment thesis is that consumers are going to continue to save substantially. Irrational as they are, they will not give up a few luxuries in the area of entertainment. It is for this reason that I have GameStop in the portfolio (my target price is $33).

Family Department Stores invests on the above investment thesis.

Microsoft is doing everything right with its Windows 7 development and launch. It is fairly valued, but I plan to add a large position in this company. Bing search is impressive.

BCE was simply undervalued after the takeover by Teacher's collapsed due to the credit crisis. Guess what? The crisis is over (by measure of spread, but not necessarily gone for good), and BCE has not traded accordingly. BCE is also focusing on wireless growth.

Biovail deals with generic drugs. Guess what? The U.S. and everyone else wants to cut down the cost of health care and on the cost of prescription drugs. While this does not benefit Biovail directly (from my valuation analysis), Biovail is moving in the right direction to capitalize on this trend.

General Growth Properties trades on the "pink sheets" (meaning it is bankrupt). Its bankruptcy was due to the company unable to roll-over its debt. The valuation of its assets are significantly higher than that assigned by its stock market value.

My position on the 30-year Treasury is bullish. The U.S. dollar should be relatively stronger, and given the change in QE (quantitative easing) by the Federal Reserve, I believe TLT will appreciate in value, especially if or when world stock prices begin to lose confidence in itself.

Shorts:
My bet against FedEx and on the British pound is for hedging purposes. I believe the US dollar will strengthen, and that overall consumption activities are not as strong as the market is predicting.

First Solar's business model is not as solid as everyone thinks, and competitors are adapting to put pressure on this company. Its business model depends on government subsidies. Valuation is too high and needs to come down.

Rio Tinto and Weyerhaeuser are also hedge positions to counter the mis-pricing and valuation given to real estate and to commodities. Rio also has a huge debt which will be a problem should market valuations shrink again.

Furry Rabbit
Rabbits will stay in burrows until carrots are in sight. Since this market is a virtual carrot, this rabbit will stay in cover to wait and will strike with greater decisiveness when the carrot is looking a lot more real.

Missing Out (on the Rally)?

John Mauldin's arguments make a lot of sense.

Source: http://finance.yahoo.com/tech-ticker/article/297409/The-%22Last-Bear-Standing%22-It%27s-December-1974-All-Over-Again?tickers=^dji,^gspc,dia,spy,qqqq&sec=topStories&pos=9&asset=&ccode=

Rosenberg: Bull Market or BS?

How to Start a Hedge Fund with $3 Million

Dan Loeb is someone to learn from. Success is great when you're at the top, but sustaining success is defined by what you do when you are at the losing end of the game.

In the video below, Dan Loeb speaks about the interrelationship between investing and hedge fund management. Loeb started his fund in 1995 with $3.3M. Third Point is now managing over $2B.

This is a great video.

Loeb speaks beyond the need to understand security analysis. He talks about the role of philosophy in money management:

• To whom does the manager look out for first? For self or for investors?
• The importance of teamwork
• Honesty and creativity

A key point I fully connect with is at the 48 minute mark: an investor and manager needs an element of creativity, emotion, analytics, and intuition to tie everything together. For new investors who want book suggestions, a list is provided by Loeb recommends at the 50 minute mark.



Source: This video was originally posted on Market Folley.

Investment Performance Highlights
In 2007, the firm had a good year and made over $1B.

In July 2008, Loeb allowed his risk discipline fall apart due to long exposures in financials and energy.

Loeb essentially panicked during those crisis months.

By the end of the year, the firm lost about 32-37% and lost a third of its clients (still losing fewer clients than other firms.

This year, Loeb focused back on the basics. He focused on investing in places where the government was intervening. As the story unfolded, the fund moved from a 7% loss to a 7% gain in a 6-week period.

Disclosure: These are important lessons learned. I currently have about 550 followers on kaChing. If I qualify as a Signature Investor later this year, and that each follower invests an average of about $5,500, it is possible for me to also start with $3 Million in assets under management.

Conclusion:
Loeb ends the presentation by stating there is andwill be a massive opportunity on investing on the theme of asset re-structuring over the next few years. Note that Seth Klarman spoke on this idea as well - opportunities that exist outside of the mainstream.

The Three Little Pigs and the Fox (1890)

We can only sit back and marvel at how the U.S. government has managed to put the economy back together, but it’s the same problem as the first little pig had in fending off the big bad wolf. Straw will only hold up for so long.

This was how David Rosenberg, former Merrill Lynch chief Economist, began his newsletter today.

It is surprising but not unexpected to marvel at the way the stock market has recovered since March of this year, but I am still on the camp that this is a bear market rally.

It is a belief that this is the mother of all head-fakes of our time. My reasons remain unchanged for why caution is required and why money should not be deployed aggressively on long positions:

1. "Cash for Clunkers" - this was the difference between keeping an old car replacing it with a new one...getting a government-sponsored $4,500 discount and taking on more debt to finance a new car. No more tax credit, no more sales.
   
2. Selling mountains of government-issued debt via U.S. Treasuries, at the expense of a lower U.S. dollar (The U.S. dollar peaked in March at 89.62 and is now 77.80). Will foreigners react to a weaker U.S. dollar?
   
3. Home sales improved, reducing inventory. Fair enough. People are taking advantage of low mortgage rates, bat at what terms? 1-year? 5-year? What happens when rates rise and mortgage rates reset to the higher ones? Will government be constrained in raising rates? Will government be forced to maintain low borrowing rates? The housing market "bottom" is inconclusive.
   
4. Even when the recession is soon to be declared over (when all import, inventory, and other variables are factored in, GDP figures will necessarily be calculated to be higher than in previous quarters), unemployment will still be over 9.5%. Fewer jobs, less consumption. Source.
   
5. U.S. savings rates are rising permanently. Conversely, U.S. consumption is necessarily declining permanently. Sustained unemployment moving into 2010 will be more than likely. The "Recoveryless" recovery is appearing like a likely scenario.
   

Yale economist Robert Shiller on Evaluating Risk

It can be difficult to develop an opinion contrary to that of the behaviour of the market and the mass media. During those times, one might not be focused on listening and watching the opinions of those who express contrary opinions.

Shiller, a Yale Economist does this in his discussion on evaluating risk:



Note: Video was found from Ritholtz' blog site.
http://www.ritholtz.com/blog/2009/08/yale-economist-robert-shiller-on-evaluating-risk/

...The Good ("Better") News

• There were 8.8 months of supply in June - significantly below the all time record of 12.4 months of supply set in January (Source, here)
  

Math Class: Exponential Growth

Below are 8 videos that will help investors correctly interpret news headlines, economic policy and goals. Total class time is about 1 hour.

As an aside, notice the dropoff in views from video 1 to video 2-8. HT (hat tip) to Tom Doser (kaChing).

1. Exponential Growth


2.


3.


4.


5.


6.


7.


8.

No Benefits, No Problem
CalculatedRisk reported that 1.5M unemployed will lose benefits by the end of 2009.

http://www.calculatedriskblog.com/2009/08/unemployment-15-million-workers-will.html

No problem.

The site reported that policies may change to extend benefits.

http://www.calculatedriskblog.com/2009/08/geithner-administration-looking-at.html

Notes on Blogging and on Michael Lewis

Michael Lewis is a columnist for Bloomberg News. I heard about him through other investors a few months ago. He is the author of ''Liar's Poker,'' ''Moneyball'' and ''The Blind Side.'' Incidentally, the latter book will soon be a major motion picture.

Over the past few weeks, there were many rumors spread about the blogosphere and possibly mainstream media. Although the validity of blogs must always be questioned and verified (including my own...by you the reader), Lewis comments on the following rumors:

Rumour No. 1: ''Goldman Sachs controls the US government.''

Rumour No. 2: ''When the US government bailed out AIG, and paid off its gambling debts, it saved not AIG but Goldman Sachs.''

Rumour No. 3: ''As the US government will eat the losses if Goldman Sachs goes bust, Goldman Sachs shouldn't be allowed to keep making these massive financial bets. At the very least the $US11.4 billion Goldman Sachs already has set aside for employees in 2009 - $US386,429 a head, just for the first six months - is unfair, as the US taxpayer has borne so much of the risk of the wagers that generated the profits.''

... Open this link for the full article. It is a worthwhile read.

Here is an interview of Michael Lewis talking about the bank crisis.

http://fora.tv/2009/06/01/Michael_Lewis_The_End_of_Wall_Street#fullprogram

To get a break from investment finance, skip over to:

04.Lack of Professionalism as a Father: Poop in the Pool and
05.Advice for Future Parents

Those sections are absolutely hysterical!

Overconfidence

Malcolm Gladwell wrote an excellent piece about overconfidence in The New Yorker. I bring this to my own attention as well as yours for a number of reasons. It was my experience that one of the ways to produce good research, after obtaining the facts that matter, is thinking objectively.

Separating one's own emotion in analyzing a stock is a requirement. In trading, this same lack of emotion is required. At some point in time, you make consistently profitable trades. Confidence sets in. Overconfidence might set in too. Gladwell's article puts overconfidence into perspective:

Most people are inclined to use moral terms to describe overconfidence—terms like “arrogance” or “hubris.” But psychologists tend to regard overconfidence as a state as much as a trait. The British at Gallipoli were victims of a situation that promoted overconfidence. Langer didn’t say that it was only arrogant gamblers who upped their bets in the presence of the schnook. She argues that this is what competition does to all of us; because ability makes a difference in competitions of skill, we make the mistake of thinking that it must also make a difference in competitions of pure chance. Other studies have reached similar conclusions. As novices, we don’t trust our judgment. Then we have some success, and begin to feel a little surer of ourselves. Finally, we get to the top of our game and succumb to the trap of thinking that there’s nothing we can’t master. As we get older and more experienced, we overestimate the accuracy of our judgments, especially when the task before us is difficult and when we’re involved with something of great personal importance.

Weekend Thoughts

Close attention needs to be given to China and its economy. To achieve this, I bring the attention to John Mauldin's Weekend Thoughts.

This will explain in greater detail why the U.S. dollar is maintaining its value (it was thought that printing over $700B+ would cause its currency to collapse...

...let it just be summarized as interwoven entanglement from globalization); how "growth" in China is possible; impact on commodity prices.

In this note, I defer to Zero Hedge's notes on Mauldin's newsletter accessible on the link below. ZeroHedge did a good job summarizing key points investors need to be aware of:

http://zerohedge.blogspot.com/2009/07/some-weekend-thoughts-by-john-mauldin.html

A Backwards World

The sentiment in the market is reaching levels of optimism that needs to be viewed with risk adversity in mind. A general pros and con list would be a good way to determine, at a fundamental level, the reasons behind the market rise, and the risk factors that still exist to undermine it.

Pros for supporting the S&P 500 near 1,000:

1. Companies beat profit expectations. Examples: Ford
   
2. US Housing figures improved for 3 months in a row
3. Some Banks are reporting strong earnings e.g. Goldman Sachs
4. Demand improved e.g. Family Department Stores - FDO, automobile, housing
5. Rising unemployment is not relevant because it is a "lagging" economic indicator (meaning it will keep rising even after the economy improves)

Cons (counter-arguments):

1. Companies beating profit expectations did so by cutting costs. This "organic" growth is a temporary phenomenon and illustrates the overall economy is still contracting
2. Improving housing figures driven by low mortgage rates. Are rates going to stay low? (Rising rates hurt market but would signal a recovery is underway)
3. Some of GS profits are driven by profiting between the spread between government money and interest rates
4. Demand driven by food stamps (FDO), tax credits (housing, auto)
5. Rising unemployment is actually a coincident indicator because this recession is driven by problem of credit.

Moving on, I turn to John Mauldin's latest newsletter. In it, Mauldin is discusses his view on the government transparency in exposing its end game. In short, he references past materials illustrating reasons why this should not be done. Specifically, his view on increasing rates is described below:

The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".

Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that autumn.

Source: http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/default.aspx

General Comments: Is it too soon to talk about raising interest rates? I would think so. Mortgage rates would rise too soon, and the excess over-leveraged debt still in the market will cost more to finance.

In his July 17th newsletter, Mauldin comments about bank earnings and the associated write-offs:

Banks that are reporting so far this quarter seem to be saying that the write-offs will start to level off in about two quarters, although banking expert Chris Whalen says that the level may stay higher than we think for longer than we think. There are a lot of assets to write off, and they are just now getting to the commercial real estate problems. This is going to take time.

Disclosure: I have been expecting (and calling for) a correction in Commercial Real estate in the U.S. It hasn't happened yet. See SRS.

One more important point to summarize is global leverage ratios. Again, the key points are extracted. We need to get our heads around the importance of monitoring figures that matter, even though stock prices are nice to watch:

• Tangible common equity is all the rage, and that is what the recent "stress tests" measured, as opposed to tier 1 capital, which includes preferred stock (which would basically be the blue portion.) TCE only includes common shares.

TCE for:

• U.S. - mid-40s (leverage is 12:1)
  
• U.K. - ~ 55 (leverage is 40:1)
  
• Eurozone - ~55 (leverage is now 35:1)
  

Comment: It is for this reason that U.S. debt/treasury offers the best of the worst. See TLT.

Bank - TARP - Failure #1 - CIT Group Inc.

As reported by Bloomberg here, CIT stands to be the first rescued bank (December 2008) that will now fail. This bank failure will cost U.S. taxpayers $2.33B.

The possible impact on the economy will be small businesses. They may go bankrupt because they are unable to draw line of credit to fund its daily business, even though they run a healthy business.

If CIT is allowed to fail, this marks the first quiet admission from the government that TARP is not a source for infinite funding. With Goldman Sachs and JP Morgan looking healthy these days, at least in the short-term, the financial sector won't collapse like everyone once thought it would and that the bigger will survive if not thrive.

My bearish call and concerns in option ARM (cheap mortgages that reset to higher rates) and commercial real estate debt still stands. Its concern may be ignored for now. After all, betting against the market when the tide against you is not a good idea.

Free iPhone Application Download - Free Real-time Stock Quotes

I am one of the regular users in kaChing Inc.'s virtual trading site which I found via Facebook. In that one-year period, kaChing launched a stand-alone site, linked with MySpace, soft-launched on Yahoo, and it now has an application built on the iPhone platform.

This is significant.

The virtual trading site is already approaching 400,000 registered users. Now that the site is accessible on the iPhone, I believe that the site will attract a new audience of modern users who are keen to maximize their use of mobile applications.

This is a win-win.

Having more users will increase the knowledge base of the virtual community, foster new and insightful trading and investing ideas, and randomly draw in ordinary people who are just learning about investing.

There are over 10,000 applications written for the iPhone, and over 1 billion applications have been downloaded or purchased since Apple's application store launch. The numbers appear mind-boggling when one forecasts the potential number of downloads for this new kaChing application for the next 12 months.

Here is a list of some of the key features:

• Free real time quotes backed by top rated stock research from kaChing's investors to give you the stories behind the stocks
  
• Shake the iPhone to get investing ideas mined from the top performing portfolios
• Connect existing kaChing portfolio (or start a new one) on the iPhone
• Follow favorite investors in real time

Here is the official announcement and a link to the free download:
http://www.kaching.com/kaching#iphone_app

Screen Shots:

1. Get Investing Ideas

2. View Portfolios

3. Get Stock Quotes and Opinions

Disclosure: on Opinion only. kaChing.com is privately owned and backed by well-known venture capitalists. However, if I could invest in this company, I would! In the meantime, I'll take the next best thing: becoming a better investor through my involvement in and the support from this virtual community. Get updates of these blog entries via twitter at http://twitter.com/chrispycrunch

Soros, Kaynes and ...Beauty Contestants

Soros on Market Instability



I found this video originally posted by Ritholz here:
http://www.ritholtz.com/blog/2009/07/video-o-rama-roller-coaster-ride-into-the-long-weekend/

Soros is a brilliant macro investor. In the video, he describes China as being the main beneficiary of the aftermath of the market crash in 2008.

He also expresses his view that markets do not tend towards equilibrium (i.e. efficient market hypothesis is incorrect). This is contributing to market instability. Market instability runs contrary to the Graham/Dodd's approach of valuing a security using discounted earnings power. It is for this reason that Hedge funds do not use this, because stock prices don't work solely on earnings growth.

I liked this line (from Keynes) describing the above point: beauty in a beauty contest is judged not on how beautiful a person actually is, but on what others all perceive on who is the most beautiful.

By that logic, must hedge fund managers be, metaphorically speaking, beauty contestant judges? In the environment of market instability, I would say so.