Soft Landing Continues to Fade

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The market can stay irrational longer than you can stay solvent.
John Maynard Keynes (1883 – 1946)

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Yesterday, I received the following question: "Why aren’t you short yet?"

The short answer is, "No manager can afford to be too early on the short side. You can be long and wrong; you can even afford to be in cash and wrong; but short and wrong is fatal."

The more complete answer is simply this: The markets have been banking on a soft landing; As the recent economic data points have shown, this is an increasingly unlikely outcome. Consioder the following:

Durable Goods Orders: A key barometer of business CapEx equipment spending – decreased by 0.5% in August. Durables were downwardly revised to 2.7% in July. This confirms prior reports indicating slowing growth in the manufacturing sector. ISM index slipped 54.5,  in August from 54.7 in July. The Philly Fed reported a -0.4 reading of its business conditions index. Economists had expected 15.0;

Mortgage Apps  Despite rates sliding to multi month lows, mortgage apps were soft.

New Homes Sales: We looked at the New Home Sales data last year,
and found them unreliable — they are based on statements from
Builders; A more accurate basis is to use a moving average, and to
ignore wild swings beyond the margin of error.

Existing Homes Sales: Existing home sales, at 6 X the size of the new home sales, continue to slide as sales units slow, inventories rise and prices fall.

Consumer Revolving Debt: As HELOCs and Mortgage refis fade, we see revolving credit increase.  That’s right, the US consumer has maintained their consumption by taking on more debt;   

Business CapEx Spending:  See Durable Goods

The market’s short term technicals do support the run for the highs; We have an excessive short interest, as well as generally gloomy sentiment readings.

But that peak is unlikely to be very sustainable.

Sources:
Durable-Goods Orders Declined Unexpectedly in August by 0.5%
JEFF BATER
WSJ, September 27, 2006 9:16 a.m.
http://online.wsj.com/article/SB115935977968175402.html

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  1. TRJ commented on Sep 28

    The consumer revolving debt is from the unaffordable $3 gas. Now, rather than spend the savings from $2.25 gas, consumers are using that “surplus” to make interest payments on their Mastercards.

    short and wrong is fatal. Good wisdom.

  2. Michael C. commented on Sep 28

    >>>But that peak is unlikely to be very sustainable.<<< On the other hand, the peak may go on longer than we expect. If in May, we were told that by the end of September, the SPX would be making new highs, would most of us have believed it?

  3. dblwyo commented on Sep 28

    Barry (& readers) – on new home sales it pays to look at YOY changes to get a better feel. Rather than do that ourselves may I quote our friend at CalculatedRisk:
    The Not Seasonally Adjusted monthly rate was 91,000 New Homes sold. There were 110,000 New Homes sold in August 2005.

    On a year over year NSA basis, August 2006 sales were 17.3% lower than August 2005. Also, August ’06 sales were below August 2004 (102,000) and August 2003 (105,000) sales. This is the lowest August since 2002 when 90,000 new homes were sold.

    He’s done an exemplary piece of work in that post and some later ones on housing, realities and the economy: http://calculatedrisk.blogspot.com/2006/09/new-home-sales-revisions.html

  4. eli commented on Sep 28

    dblwyo,

    The funny part is.. when calculating percentages for YOY.. it’s the same when using seasonally adjusted numbers versus raw numbers. The census bureau already calculated that for you at -17.4%

    My personal favorite is using $volume = (sales*avgprice). This way, you get a feel for how fast the money is fleeing. That’s at about -14.6%.

    In fact, the $volume change is -13.89% for existing homes. When you total new and existing dollar volume and compare this August to last August, you get a -14% change. (14.03 to be exact.. but these numbers they’re releasing aren’t exact anyway.)

    That suggest that $330 billion has left (over the last year or estimated to be gone by the end of the year or in the next 12 months? I don’t know. I haven’t read exactly what the seasonally adjusted number means, yet.) Where did the money go?

    Fun Fact: did you know that the $vol for existing homes in the West experienced a drop of about 21% (from last August)? That’s $138 billion (seasonally adjusted) gone.. where’d it go!

    This is magic! Personally, I’m working on a chart using raw $volume month to month over the last 5 years to get a sense of the actual money flow.

  5. Steve Waldman commented on Sep 28

    Barry: “No manager can afford to be too early on the short side. You can be long and wrong; you can even afford to be in cash and wrong; but short and wrong is fatal.”

    …which explains why…

    Keynes: “The market can stay irrational longer than you can stay solvent.”

    God bless efficient markets, and the angels too.

  6. Sherman McCoy commented on Sep 28

    OK, this is going to be a long comment, but it’s something I feel I need to share here:

    I have a new principle that helps me understand what is going on in the market, real estate, etc… I call it “SLACKERNOMICS”. The basic idea is this- no “difficult” personal economic issues are dealt with by consumers, by and large, until the last possible moment.

    And I think this is a NEW characteristic of the economy now. Something that has been increasing over time and has snuck up on the post-WWII American financial conservatism. I believe there are a number of reasons for it, including:

    (1) In an era of relative prosperity and wealth, where basics such as food, shelter, and health care are taken for granted, there is no sense of urgency in planning for the future.

    (2) The pervasive use of modern information exchange, such as the Internet, keep us focused very strongly on the NOW and the immediate. Our attention that should be focused on longer-term solutions is diverted to immediate, less significant issues.

    So what does SLACKERNOMICS tell us about the consumer?

    Well, a couple of things that jive really well with the observations in Barry’s post:

    (A) In the face of increased energy prices, whip out the credit card! Why spend time thinking about how to trim energy costs when there’s Internet surfing to do instead!

    (B) Sure, let’s buy that house, even though we might be at the top of the market! Because I want to be happy, and happy is hard to find in a rushed life when the kids need to be shuttled around all the time and work is hard at 55-60 hours a week and…

    THE POINT: All this stuff that is going on in the economy might not make a whole deal of sense from an economist’s point of view, but it all makes a great deal of sense from the SLACKERNOMIC consumer point of view.

    And we cannot expect any hard landing until the SLACKERNOMIC consumer is presented with A BIG GIANT INCENTIVE (positive or- more likely- negative) to change behavior.

    I also think the SLACKERNOMIC view is affecting the political direction this country is taking, and those political actions are enabling the economic actions and vice-versa… But that’s a whole ‘nother story…

  7. Craig commented on Sep 28

    “If in May, we were told that by the end of September, the SPX would be making new highs, would most of us have believed it?”

    Okay Michael, I know BR won’t pat himself on the back, but if you just read this blog in that timeframe I think you will see that particular prediction was made.

    So far so good Barry.

  8. Bob A commented on Sep 28

    I would also say the answer is similar to why you don’t buy at 52 weeks lows. Stocks can continue to make new 52 week lows over a very long period of time. You’re much more prudent wait instead until the trend has changed by breaking out one way or the other.

    As for ‘Slackenomics’, I think ‘Sheepenomics’ might be more accurate. Most consumers don’t do anything until everyone else is doing it, because they are afraid or incapable of making independent decisions. They are programmed to be that way from day one and it’s the exception rather than the rule that is able to free themselves from that disease during a lifetime.

  9. ~ Nona commented on Sep 28

    Re: “Slackernomics”

    I think the point you make about human economic behavior today is (dare I say it?) on the money.

    Thanks, SMcC, for taking the time to make it.

  10. lurker commented on Sep 28

    Hey Bob A, if everyone thought for themselves the markets might be efficient so please be careful what you wish for. For contarianism to work, it must be, or at least begin as, the minority view. As for slackernomics, isn’t it smarter to spend NOW before the value of your dollars goes down even more? And isn’t it wise to maximize your mortgage for the same reason? You will be paying it back in devalued currency. That’s why deflation is so much the scarier of these two evils.

  11. S commented on Sep 28

    Sadly, gone are the days when hedge funds were clubby little partnerships of wealthy individuals. It’s now an institutional product. Capital contributions to hedge funds are not “sticky”….lock-ups for emerging managers are rare. Investors demand immediate gratification and above average returns from their managers, but if the manager prints one down month he lives in fear of redemption requests flooding his fax.

    I believe the evolution of hedge funds into an institutional product discourages even well calcuated risk taking and inhibits managers (particularly emerging managers) from acting on their convictions. They can’t afford to be “early” on a trade, and it explains in part the sub-par performance of many emerging managers.

  12. T commented on Sep 28

    S,

    Most large hedge funds (over $5 bn) have significant lockups these days of 1-2 years — and those are the funds getting investment from large institutions. Funds added lockups in anticipation of the SEC regulations, plus most funds have so much demand for capacity from investors that they can easily ask for (and get) a lockup.

  13. Lord commented on Sep 28

    Two sayings:

    A bull market has a copper roof.

    Bonds lead and stocks follow.

  14. Michael C. commented on Sep 28

    >>>”If in May, we were told that by the end of September, the SPX would be making new highs, would most of us have believed it?”

    Okay Michael, I know BR won’t pat himself on the back, but if you just read this blog in that timeframe I think you will see that particular prediction was made.

    So far so good Barry.<<< Hold the pats for those that actually made good coin. If so, then kudos to Barry or those that did. But my point is that, the summer fear probably whipped around most people such that their accounts are probably below the May highs despite the Dow cheerleading. My further point here is I've been reading commentary everywhere and the toughest trade here actually seems to be going long. While there is that goldilocks soft landing group out there, they don't seem to be very loud. Unless you turn the volume up on CNBC from what I hear. Personally, I don't know what channel that is after changing cable companies 5 years ago.

  15. Rusty commented on Sep 28

    Just to add to the Slackernomics theory, another thing that has changed for American consumers over the last generation is that almost everything is paid for via credit card. Groceries, gas, season tickets, furniture, whatever, no one uses checkbooks and/or cash anymore. This isn’t about borrowing to buy, it is about using the card as a more convenient vehicle for a transaction. It is easier to write one check to the credit card every month than write 30 checks all over town and hit the ATM every other day. And you can get miles! Speaking of miles, you can even use your credit cards to do automated billpay for things like utilities and your mortgage.

    For responsible people, this is a great innovation. It saves you time and trouble, and as long as you pay off your balance every month, you incur no finance charges at all – thus getting a very short term loan for free. You also get the spiffy monthly statement that you can download to quicken and use to analyze your expenditures. Lots of cool benefits.

    I think that this innovation has been the hidden factor of the demand side of the Mortgage Equity Withdrawal phenomenon of the past few years. Sure, there’s been the cheap and easy credit goosing the supply, but you still need demand, and here it is – people hitting the housing ATM to pay off credit card balances that they were not able to keep up with every month. They started out using the card for ease of transaction, but the lack of restrictions on their spending led to monthly balances that roll over.

    I like this explanation more than just the “people are just trying to keep up with each other by buying status doo-dads”. When has that ever NOT been the case?

    Nowadays a purchase decision is not, at root, determined by whether you have enough money in your checking account RIGHT NOW to pay for it, but whether you will be able to cover that amount in a couple weeks, or months, or years (if planned to hit the housing ATM). A lot of the discipline imposed on spending by the bygone tradition of using money in hand has been lost, and now almost every purchase, from a sixpack to a boat, can be fit into future budget periods.

    The pet word for this – how about plasticrastination? Doesn’t exactly roll of the tongue. I’ll keep working on it.

  16. Ryan commented on Sep 28

    I personally don’t understand why this market is going up either. A possible reason is that the weak dollar is helping some corporate earnings. The market may assume that strong international economies are going to lead companies to be able to increase their earnings whether or whether not the US slows down or goes into recession. I don’t know. It seems really irrational to me too. I think the market just treads water here for about a month or two and then finally starts going down.

  17. Michael C. commented on Sep 28

    >>>The pet word for this – how about plasticrastination? Doesn’t exactly roll of the tongue. I’ll keep working on it.<<< I like it! From the history books, civilizations either get conquered or destroy themselves socioeconomically. Unfortuneately, I think we are slowly heading towards demise on both fronts. On the former, we are increasing anti-American sentiment. And thus it's only a matter of time before there is a great impact on our civilization (and by great impact I mean greater than 9/11 and suicide bombers). On the latter, we are heading downhill socioeconomically. Our lack of savings. Greenspan just last year pushing variable mortgages. And as Barry has pointed out before, the increasing divide between the wealthy and poor. That's to name a few. Don't get me wrong. I'm optimistic. But as a realist also, I see the way our pendulum is swinging at the moment.

  18. Bob_in_ma commented on Sep 28

    “The market’s short term technicals do support the run for the highs; We have an excessive short interest, as well as generally gloomy sentiment readings.”

    Can anyone explain why if there is excessive short interest, puts can be realtively cheap? I guess calls are cheap too.

  19. DenverKen commented on Sep 28

    re: ‘Slackenomics’

    I think this is another facet of what I like to call the ‘We’ve Had It Too Good For Too Long’ syndrome.

    The last really painful recession was in 1981-2. So, to remember that from personal experience you would need to have been at least 20 at the time. Therefore anyone born after 1960 or so ( people around 45 now) hasn’t really had those painful memories to keep them cautious.

    A majority of the population, those under 45, have always experienced more or less ‘good times’. So, why be too worried about the future. Things have always worked out…why wouldn’t they going forward?

    Add that to the credit card spending ease (one fills up?..well, just open up one of the solicitations for a new one in today’s mail) and you’ve got a unworried (VIX stuck in the 10-11 area) non-saving population.

    It works until it doesn’t.

  20. Michael C. commented on Sep 28

    >>>Can anyone explain why if there is excessive short interest, puts can be realtively cheap? I guess calls are cheap too. <<< I would say because volatility is in the crapper. Which begs the question...

  21. M.Z. Forrest commented on Sep 28

    I wouldn’t put near as much into the credit phenomena. There was plenty of credit available in the 1920s. One could get credit from the corner grocery and a myriad of other places. The more important factor is the savings rate. Another factor is the inverted yield curve which is making it disadvantageous to move current liabilities into long term debt. The ‘Big Picture’ is at what point and what happens when our ability to secure more long term credit deteriorates. Historically, negative savings rates haven’t persisted long.

  22. John123 commented on Sep 28

    Your quote from Keynes was quite amusing and timely. Keynes’ essential contribution to economics was his recognition that markets and financial markets in particular are irrational, and inevitably lead to a crisis. Rational governments can steer markets by offsetting policies, but markets are not self-correcting, self-governing nor are they efficient.

    The anti-keynesian and de-regulatory Republicans over the past 30 years have done much to reverse the Roosevelt New Deal and post-WWII financial and economic policies that Keynes favored after the Great Depression of the 1930s. Consider for example elimination of Glass-Segall act barring investment and commercial banking ties; the elimination of heavy taxes on the rich; elimination of government jobs programs and minimum wage.

    The financial market regulatory agencies today sit by and do nothing to control excess, even where they recognize “irrational exuberance.”

  23. Ryan commented on Sep 28

    John:

    Capitalism works efficiently when the market is efficient and the participants are rational. When you have pure capitalism with no safety nets, you end up with periods of boom, bubbles and then periods of bust. The gilden age ended in depression. The roaring 20s ended in depression. That’s back when America had pure capitaliam. It worked for some of the people some of the time. After Roosevelt, the economy was more stable because capitalism was still allowed to thrive but purchasing power was more evently distributed.

  24. Barry Ritholtz commented on Sep 28

    John Succo says not so fast:

    “Short interest is now absolutely meaningless,” he wrote on the Buzz and Banter yesterday, thanks in part to the derivatives market, which is 10 times the size of cash markets.

    “Never in the history of man have so many call options been sold on stocks,” Succo explained. “This causes large funds like mine to buy those calls and short stock. I will never cover that short stock. As the stock rises, I will short more and more until I am one up against the calls I own. At or near expiration I will then exercise those calls and my position will be gone. No more short interest.”

    We thought that was an interesting point, but wondered if it was possible to see that kind of expansion in derivatives usage and call selling in action.

    John Succo says not so fast

  25. KirkH commented on Sep 28

    I like the Slackernomics theory too. I read somewhere about necessities before the last depression being a huge part of global trade. Improvements in technology mean that we’re now shipping around a bunch of stuff bought with discretionary income. So what happens if we massively cut back on discresionary spending?

  26. Byno commented on Sep 28

    Anecdotally, a thing or two:

    In the last twelve years, my model has gone from small cap growth to large cap growth to large cap value in sequential order only once. As you might have guessed by the lead in, this happened in the Fall of 2000, in which case bonds were the next sector my model showed maximum exposure to. And bonds are where things stayed until February of 2003.

    Also, AAII is now above 50% bullish once again. I’d imagine after this week’s action that # could be @ close to 60% next Thursday, so I wouldn’t exactly say that sentiment is bearish.

    Just sayin’…

  27. GRL commented on Sep 28

    I personally don’t understand why this market is going up . . .

    People taking money out of housing and putting it into stocks?

  28. Mark commented on Sep 28

    Byno! Where have you been?

    Very interesting observation.

    I am incredulous that the market seems so attracted to that Dow high. Today’s bad news shaken off once more.

  29. Byno commented on Sep 28

    My life is a zoo right now. Had a little time today, little being the key word.

  30. Cherry commented on Sep 28

    Shades of 73, the death is coming soon as the economy nears contraction……………

    Why Mark are you “surprised”, understand the ignorence, explains the irrationality of the situation.

  31. Sherman McCoy commented on Sep 28

    A few more thoughts on SLACKERNOMICS:

    You could say that the core tenet of it is that, at a personal financial level, caution is out and complacency about the future is in. Now this is ONLY at the personal level; corporations can’t do this, nobody wants them too, and everybody’s been reading Andy Grove’s “Only the Paranoid Survive” for so many years that complacency and big business are like oil and water (for the most part- for instance, AMZN comes to mind as an exception).

    Let me give you a personal example, applied to a concrete situation: I am 29 years old. Do I feel a need to save now for retirement? NO! Here’s how I think, right or wrong: I can always work (I ignore the fact that I might be too frail, or doing so might be too uncomfortable). Plus, a good portion of the world wants to blow up the city where I live, and our leaders are doing everything they can to encourage that. Not to mention the lingering memories of September 11th, etc… etc… The conclusion: Life is short and I’ll always be able to make money if I need to. At 29 I don’t have to think about saving.

    Now I KNOW that this perspective is shared by many people in my generation. And it’s quite different from how my late-1940’s-born parents felt at my age.

    And that’s just one example of the value shift.

    Now once people have SLACKERNOMIC values, they can act in a perfectly rational manner with respect to those values. This way of acting would be seen as “irrational” with respect to the old-fashioned financially conservative values. For instance- Why shouldn’t I max myself out in debt and buy the house I want? I’ll just be scrapping by every month, and saving nothing, but I’ll be “happy”. And happy is what I want, certainly more than “savings”, so it’s perfectly rational for me to do what I think will bring me to my happy goal.

    Another thing is what this means for real estate. Because there’s another change in values with respect to real estate: your house can be your substitute for other things you are lacking in life. A new house will make you happy, fast, or so the thinking goes.

    So combine this with the overall financial complacency, and you start to see how real estate values could have risen so quickly. In fact, what they have done over the last few years is MAXXED out- they rose as fast as possible (there’s a limit because of the “appraised value” needed by lenders). And then mortgage products were developed to meet the SLACKERNOMIC need and allowed prices to continue to rise more than they otherwise would.

    What this all means now is that real estate prices are held up by some pretty strong pillars: (1) the value change regarding financial complacency; (2) buying a home or maintaining an unaffordable one in order to be “happy”; (3) the new financial products and low interest rates that keep people buying at the maxxed-out prices.

    None of this is going away quickly. I don’t think real estate prices are going up, but a 10% nominal “correction” over two years followed by a long, long nominal stagnation (10-15 years?) looks like a real possiblity.

    That will cause a LOT of pain (think chineese water torture) and is quite conguent with Barry’s “Slow Motion Slow Down” thesis.

  32. M.Z. Forrest commented on Sep 28

    Mr. McCoy,

    While your theory is interesting, it is the common error of youth (I’m actually your age, so this is not meant to be insulting) to believe that we live in unique circumstances. 20-year-olds have always had notoriously awful savings and retirement plans. There is a reason why the old saying “you could sell an American an elephant as long as you made the payments easy enough” is an old saying. And we certainly aren’t slackers in this country. We work more hours and more days than darn near any 1st world country.

  33. KirkH commented on Sep 28

    Maybe Slackernomics is a side effect of the deflationary forces of technology which manifest themselves as imbalances in an inflationary world.

  34. Mike commented on Sep 28

    To Sherman,

    The flaw in your argument is that you think finding a job is so easy. For most Americans regardless of skill level, finding a job is no easy task. Let’s say you are skilled. You still need to find a company in need of your skills, make yourself known to them, agree on wages, relocate, etc., etc., and then you might not even be there for long if it doesn’t work out. If you are too complacent about the future that translates into your performance now. A little complacency and you can easily get lazy, and in turn become antiquated in your skill set.

    A recession and depression will cause loss of jobs, and not all the people that lose their jobs will be dumb people. If you lost your job tomorrow, would you be o.k. with your credit card debt and your mortgage payment and the cost of living for an extended period of time? When that happens to a mass of Americans, loans of all kinds will default and people’s credits will be tarnished. The adherents of slackernomics today will be the hardest hit tomorrow. You are being too complacent.

  35. James Blunden commented on Sep 28

    Look out below. The stock market is near an all-time high and is very over-bought. The economy is sinking fast, and headed for a recession in either October or November of this year. Don’t believe me? Let’s wait until the Business Cycle Dating Committee of the National Bureau of Economic Research issues its report on just when this coming recession started. Investors should either go short now or buy bonds and sell their stocks.

  36. Richard commented on Sep 28

    Barry hope you get a chance to see Thomas Friedman (Bull) vs. Senator Byron Dorgan (Bear) at 9:50 your time tonight on the News Hour on PBS. Its a fascinating synopsis of “the debate” moving forward, granted Dorgan is an isolationist in comparison but frankly it FELT odd taking sides with him noting how often I find myself agreeing with Friedman per his frequent visits on Charlie Rose’s program. They appear to have similar goals, however its in the getting there that they differ on. As I have said here before, the only raise I have received in the last few years is via my dividends with blue chip stocks I own in my IRA.

  37. whipsaw commented on Sep 28

    I think that Sherman makes some good points and I am not a 20 Something punk, I came of age during Vietnam. Of course there’s no urgent need for him (as an example only) to save for retirement, the primary incentive for saving at his age is for the education of kids if you have any. And that can take many forms.

    My personal approach was to get a 15 yr mortgage when I was about his age with the expectation that shortly after it was paid out, I’d mortgage again to scare up the cash for college expenses. And that’s what happened, only this time a 10 year mortgage for less than half of appraised value. From a tax standpoint and a lack-of-discipline standpoint, that was a good plan.

    But that still leaves the retirement issue. In my case, I had an expectation that The Miracle of Inheritance would offset my lack of discipline and that worked out ok, but I am still getting nervous even tho my wife accumulated a boatload of HCA stock back when she worked in one of their hospitals years ago. If you don’t have a 401M (Miracle of Inheritance) in your portfolio, then you probably do need to get serious about investing and compounding in something besides property when you are around 35.

    But I will close by saying that I am thoroughly ashamed of my generation of hippies who sold out entirely and created this entire mess, whether you define “mess” as economic, social, or political. If we had not succumbed to greed and stupidity during the 80’s, many of our current problems would not exist.

  38. j d ess commented on Sep 28

    heh. along those lines, i just witnessed dennis hopper hawking some retirement “solution” or whatever. my mouth literally dropped open watching him seriously try to tell people to put their money in the trust of company that thinks he’s some sort of spokesman for personal responsibility…

  39. ari5000 commented on Sep 28

    WHY IS THE MARKET GOING UP?

    Answer:

    The Fed prints money. The Fed lowers rates.

    Consumers buy stuff on credit cards. Consumers max out mortgages.

    Big companies reap enormous profits. The Rich make billions. The Rich give money to hedge funds. The hedge funds take enormous risks to make the Rich richer. They pile on because they have Fed money and they know not even an intellectual like Barry will dare sell/short because he’s scared.

    Thus: The markets keep going up. And up.

    Until? Unexpected event.

    The up-cycle is broken. Funds have $2 trillion (with margin) in markets and no one to sell to.

    There is the worst kind of crash about to emerge from this market. Barry and the rest of the cynics won’t even get to benefit because they’re too scared to short. The rest of the shorts have already been burnt. The longs will lose 50% of their profits in a week.

    Isn’t that incredible? A bull market / a bear market — and EVERYONE LOSES OUT.

    That’s how the market works.

  40. steve commented on Sep 28

    DOW 6800. GO TO CASH AS IN WEEKS AGO. NOT.

  41. whipsaw commented on Sep 28

    per j d ess:
    “heh. along those lines, i just witnessed dennis hopper hawking some retirement “solution” or whatever.”

    Dennis Hopper as in Easy Rider? That’s hilarious.

    As I said, my entire generation somehow morphed from idealistic saps into plunderers. Remarkable in its own right, but devastating when it means that that there is at least a grain of truth in most of the things that OBL says about us.

    By the time that this so-called war on terror comes to a head, I’ll be riding to the liquor store on my Hoveround with dirty diapers, so don’t count on me for much except cheering on a coup d’etat by the army because it will be the final institution to fight for the Republic that I was born in.

  42. brion commented on Sep 28

    “I am thoroughly ashamed of my generation of hippies who sold out”

    a few hippies…mostly i see a “revenge of the nerds/squares/mba’s at work these days”
    …Ken Star, Karl Rove,Rumsfeld,Cheney,Wolfowitz,Perle,Bush,Condi,Gonzales, Rush, O’Reilley etc etc

  43. whipsaw commented on Sep 28

    per ani5000:
    “Barry and the rest of the cynics won’t even get to benefit because they’re too scared to short. The rest of the shorts have already been burnt. The longs will lose 50% of their profits in a week.”

    What BR presents as a market call may or may not reflect what his personal actions are, that’s a different issue and none of our business. But if you are under the impression that all of the bears are running for the exits, you are wrong. Those of us who are not day trading and have not been foolish with position size can take a punch in the short term.

    I sold off some of my QQQQ calls today because I thnk that this will start to unwind soon. But I’ll keep the rest and the DIA calls until after the elections as a hedge- as Richard Russell noted today, the Fed has been inflating like crazy even while it has been posturing as tightening and that will continue at least until the election stuff is over with. We live in a world of corporate whores and that should not be a surprise.

    But the pool that is sloshing around now is too big to be managed, so I am staying the course on March puts.

  44. permabull commented on Sep 28

    What a pleasure to read some of these posts.

    Thoughtful, articulate, well reasoned.

    I might add that when the times change, people will adapt.

    Let’s leave aside the 1930’s. The 1973/74 recession was devasting, just devasting. I was lucky. I had no debt and could hold onto my portfolio, but seeing good companies at fair value – and then seeing them halve again six months later was horrific. It felt like the world was ending – and many friends lost their jobs.

    The great curiosity was that this episode didn’t lead to a new generation having a pathological hatred of debt as it had when I was a child.

    I’ve never understood that and it may be that when the Slackernomics generation – what a great expression – faces its horrendous few years, that they will be able to shrug it off as so many were able to do after 1973/74.

    At least, I hope so.

    Again, wonderful reading in this post today.

  45. erik commented on Sep 28

    anyone guess what the markets did in 73 right before they imploded?

    almost made a new all time high after the peak in the late 60’s. We are near or at the top of the “B” in a very classic “A.B.C” pattern.

    i think the market will run it’s legs for a while, perhaps even a few months, but i can’t see much more than that. if i’m wrong, the fed and the treasury and the investment banks may have figured the beast out and it will be roses for another 20 years.

  46. ari5000 commented on Sep 28

    Anyone care to comment on derivatives?

    I don’t understand this concept as well as I’d like. Is this just referring to options and futures?

    If so – wouldn’t they just cancel each other out — all the puts and calls. Wouldn’t longs just keep buying put options with borrowed money so they wouldn’t have to panic sell. All those shorts — as someone mentioned — are protected by call options.

    Is there a possibility that a market crash is now incredibly unlikely — everyone’s been wondering why there’s been so little volatility. Do derivatives –contrary to theory — actually make the market safer?

    I’d appreciate some thought on this issue as I will be the first to admit — I don’t understand all the implications.

  47. alexd commented on Sep 28

    Great, great, great. So much to think about.

    Also because of the gloom and doomers I am updating my stop losses as trailing stops with both % and set amount according to where I am relative to both time in the position and gains already acheived (or not). I have learned that mental stops don’t work if you are not right on top of things. Plus computers don’t really care if I think I am right or not.

    Ari: based on my perceptions of markets, times of low volatility are like coiled springs, they don’t tend to move much, but have the potential to unleash a great amount of energy quickly if suddenly released from their constraints.

    “Is there a possibility that a market crash is now incredibly unlikely — everyone’s been wondering why there’s been so little volatility. Do derivatives –contrary to theory — actually make the market safer?”

    Gee this sounds like the summer of 1987 before the crash.

    I suggest you peruse “Fooled by Randomness by Naseem Taleb. He mentions extreme events whoose frequency and magnitude are usually and incorrectly assesed by most people.

    On that note anyone have an idea in both what market and percentage that things might go to? Might want to take some of those outside option positions
    myself. I am not joking.

    I do know if I get stopped out of my long positions that I will go short and also sit on a % in cash for at least a month or longer and let the market play it self out.

    but as long as my long positions are working out I am not inclined to panic. I also suspect that the most heavily traded issues will be most affected by any irrational selling. Hmmm gold …….

  48. Eric A. commented on Sep 29

    “I am thoroughly ashamed of my generation of hippies who sold out”
    “…entire generation somehow morphed from idealistic saps into plunderers…”

    How about: “hippiecrits”?

  49. jkw commented on Sep 29

    It’s hard to know for sure how derivatives will affect the market. Put/call parity is maintained by some amount of arbitrage, but I doubt there is little actual trading involved because the bid/ask spreads on options are too wide for the arbitrage trade to actually exist very often. Which means that most options trades are not fully hedged – they are to some degree a directional bet on the market.

    You can’t be fully hedged and still make money (except for the arbitrage trades, and those are so well known that almost nobody can get in on them). Options and futures allow you to create any profit/loss graph you want, except that there has to be some price movement which will create a loss for you.

    Longs can buy puts, but if the market goes up they lose whatever they payed for the puts. You get a basically equivalent investment if you just buy call options.

    What options really let you do is adjust your exposure level in multiple ways. For example, if you are long and decide that there is likely to be a decline, you can buy puts, sell stock, or sell futures. There may be tax or liquidity advantages to doing one of them instead of the others. Options have limited risk in once direction. Option spreads generally have limited total risk.

  50. permabull commented on Sep 29

    alexd,

    The late 60’s, 1987, and 1997 to 2000 were quite distinctive. The overvaluations were quite clear. There were the usual small group of good companies – but all were well above fair value.

    There was nothing to do but wait it out.

    My sense is that good companies are not overvalued at present. Not cheap – and one has to pick around carefully – but – no – the current valuations in general don’t seem to fit those earlier periods.

    Can I suggest one option you didn’t mention?

    Take a smallish amount of unleveraged money and buy two companies that seem sound to you, and are at fair value now.

    Unless the reasons for buying change, just hang onto them – and see how you go over the next few years.

    Inevitably there’ll be a good shakeout at some stage.

    Then you can buy a few more good companies at fair value. There’ll be lots of choice at that point, so if you’ve made your shopping list now – you’ll be ready.

    If your first two companies are selling for less than you bought them at – that in itself should not be a concern.

    If those two companies are still growing their earnings and dividends nicely above the rate of inflation and the business operations still look sound – well -you might even buy a bit more.

    The current fad amongst younger investors for wanting instant satisfaction solely through a rising stock price is a mystery to me.

    There is an unforgiving, and enduring, relationship between price, earnings and dividends that is much more satisfying than merely price alone.

    And as for Gold – over many decades I’ve yet to meet a person who said to me that they owed their wealth to buying and holding physical Gold.

    And I’ll warrant not one poster here has either.

    Lastly, I do hope you are right about a crash – sitting around waiting for things to be good value is such a waste of time at my age.

  51. other_ss commented on Sep 29

    “And as for Gold – over many decades I’ve yet to meet a person who said to me that they owed their wealth to buying and holding physical Gold. ”

    Not sure about building wealth, but I have known people in India who have preserved their wealth by holding phycial gold. Whenever Indian rupee devalued against dollar ( ~16 INR/$ in 1990 to ~45INR/$ today), gold acted as “real money” in terms of purchasing power. I guess it depends on the streangth and quality of local currency.

  52. whipsaw commented on Sep 29

    per permabull:
    “And as for Gold – over many decades I’ve yet to meet a person who said to me that they owed their wealth to buying and holding physical Gold.”

    you know, I’d have to agree with you about that, but maybe we just run in the wrong circles or something?

  53. Mark commented on Sep 29

    BUBBLE WATCH

    From my work in the industry I would not be a bit surprised if we don’t look upon commercial real estate as a secondary bubble that has been forming for some time. We aren’t creating high level jobs but we are building shiny new office buildings. We are giving high net worth shoppers a whole new format of their own to shop in: the” lifestyle center”. Municipalities, especially suburbs, are all trying to recreate “downtowns” through “town centers”. We already have more sf of retail per person than anywhere else in the world by a factor of two. Credit is still flowing fast and easy. Execs that I work with are only now thinking that a pause might be in the cards.

    I see that everyone has been piling into this sector chasing the returns. Look at IYR for example. It’s been on a tear. While I do think that spending from The high net worth part of the population will hardly miss a beat during any slowdown, I think that on the other side the rich will be richer and the middle class even smaller.

  54. lurker commented on Sep 29

    hippiecrit is brilliant! and alexd I like your strategy.

  55. KP commented on Sep 29

    I am a total newbie to these discussions, so please bare with me. Isn’t the pervasive problem on the macro scale excessive leverage via debt and way too much fiat floating around? Will these excesses not lead to rampant inflation and will this inflation not lead to hikes in interest rates and thus make even the most heavily-greased bb’s unable to squeeze through either the butt of the consumer or corporation in the years to come? Isn’t this the point afterall? Forget about how fair valued the stocks ‘look’, etc. The dollar is sick and it will get sicker before it gets better.

  56. fred hooper commented on Sep 29

    “And as for Gold – over many decades I’ve yet to meet a person who said to me that they owed their wealth to buying and holding physical Gold.”

    The growth of the debt-money supply is compounding at a rate greater than the rate at which it can be invested on fixed interest debt instruments, causing numerous equity bubbles.

    I expect you’ll get a chance to meet someone who owes the preservation of their wealth to gold and silver fairly soon.

  57. brion commented on Sep 29

    we have an old family friend. Really nice guy-WWII marine vet-Conservative Catholic(Latin mass)-HUGE gun collection-highly suspicious of Government-(can u see where i’m going with this?)-
    Holding lots and lots of physical gold going back to the 1960’s. About 2 or 3 months ago you COULD say he owed his wealth to Gold. He’s still up owing to the longevity of his interest in aux but HE is the man who introduced me to the volatility of the stuff…..sheesh

  58. eli commented on Sep 29

    ari5000,

    Why can’t someone protect their long position by purchasing puts with borrowed money? It could work for awhile.. but.. it will only protect you from the drop that’s occurred during the lifetime of the option. Also, how do you pay off the borrowed money? What about the entity that sold you the option? They lost money. What if they get a margin call? What positions will they be selling?

    Options make people feel safer maybe.. but in the end, people get greedy and want to make unhedged bets. It’s a cycle:

    1. People feel safer.
    2. Volatility decreases
    3. People short puts/calls and make free $.
    4. Safer! Less Vol! Short more options!
    5. Volatility decreases!
    6. ?

    What happens if credit tightens? This is a closed system. If loans start going bad due to the flight of $ from housing, then some investors will get squeezed. They will have other positions that will unwind.

    Banks feel safe because they got their fees and the just sold off these risky loans in itty bitty pieces. But, who’d they sell to? Do those entities borrow money from banks? Do those entities sell options? futures?

    Anyhoo, short answer: derivatives seem to make people fell safer these days. Some, like myself, think this is a bad thing. Or a good thing if you’re buying way OTM puts.

    e