Gadfly On The Wall™

Sinking into Depression

gadflyonthewall — Sat, 22 Aug 2009 03:11:09 +0000

Depression: The Economic Definition

In economics, a depression is a sustained, long downturn in one or more economies. It is more severe than a recession, which is seen as a normal downturn in the business cycle. Considered a rare and extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression.

Unemployment

The National Unemployment Rate is officially at 9.4%, an improvement of .1% from June. The real unemployment rate (calculated with the same methodology as during the 30s, which includes those who have run out of benefits as well as those who are underemployed) stands at 20.5%. In California, though, it is getting worse. The official July California Unemployment Rate is officially at 11.9%, up from 11.6% in June. The real unemployment rate is now 26%. Is this the bottom? According to the California Worker Adjustment and Retraining Notification Act (WARN) database, there are 5,889 statewide layoffs planned for August, with the actual figure actually higher because the estimate applies only to companies with 50 or more employees. Those of you who are employed, count your blessings.

The Government Economist

I enjoy watching how the government economists think. I mean, let’s say the country has 100 workers and it lays off 10 employees the first month. We are now at 10% unemployment. Let’s say the second month we lay off another 10. Unemployment is now at 20% and is up 100% from the previous month. In month 3, we lay off another 10. Now unemployment is 30%, but that’s only up 50% from the previous month. The government economist would say the economy is improving because the rate of new initial claims is slowing. To quote 1 Corinthians 1:27, God chose the foolish things of the world to shame the wise.

Math Quiz

Be careful to make sure that checkers give you the right price when you buy items at grocery stores or department stores, eg Safeway and Target. I bought some items and the checker scanned them and they rung up at full price. I pointed out that the items were on sale, that there was a big sign, saying 5 for $9. OK, so she brought out a piece of paper and a pen and proceeded to try to figure out what the per item price was. After struggling with the calculation, I volunteered to assist her, borrowed the pen and paper, and wrote down the calculation and answer for her. This is unbelievable that she couldn’t do simple arithmetic.

Bearish Pundits

Many bearish pundits have been pointing to the current chart of the stock markets and comparing it with the bounce in the stock market after the Crash of 1929. They point to the aftermath of the that bounce and the stock market’s subsequent selloff and L-shaped economic scenario that followed. Long lines at the soup kitchens and the look of despair marked the 30s. Will this be what the United States will look like as we enter the second decade of the 21st Century? I hope not.

Depression: The Human Definition

A mental state characterized by a pessimistic sense of inadequacy and a despondent lack of activity. Unfortunately, this definition of depression can be a result of the economic definition of depression.

This is Hell

I find it interesting that there are those who argue against the government’s stimulus and health care reform initiatives, to the point of calling them “evil.” But imagine that you have been sending hundreds of resumes out, many of which you are qualified for, and not getting any response. Imagine the feeling that you may never ever find another job ever again. Imagine also that you cannot qualify for or pay for health insurance coverage, that you are just one step away from losing everything. Imagine the feeling of seeing your travel and retirement dreams disappear. Imagine the look of your spouse as she wonders why you can’t get a job. And imagine your feelings as your confidence ebbs away and your life feels worthless. Imagine that ending it all seems like your only option, only to face the fact that the ones you are hurting is the family you love. This is despair; this is depression. You are stuck; there is nothing you can do. This is hell.

The Markets

The Chinese Shanghai market has dropped 20% since August 4th, officially entering in bear territory. Worldwide shipping is dropping precipitously. Copper continues to inch towards the $3 mark, but the rate of change is slowing. Lumber is starting to drop in price, possibly indicating a slowdown in building. Are we entering into another recession, the so-called W-shaped recovery, or will we enter an L-shaped scenario with very little recovery for an extended period of time? Only time will tell. In the meantime, we continue to hold on with white knuckles to our holdings with increasing nervousness.

I Apologize

I apologize for this dour report. The only silver lining is that the investment markets continue to march higher, making very good money for those who are invested. But the economic clouds cast a heavy shadow and we must be mindful of this. Risk management strategies are extremely important with regards to your investments. Without a strategy, you are just rolling the dice. We remain fully invested in all markets, except for bonds.

Stay tuned.

Falling in Love (ài qíng) 爱情

gadflyonthewall — Sat, 15 Aug 2009 21:38:08 +0000

The Rule About Falling in Love

We’ve heard it before and it is said in almost every investing or personal finance book out there; don’t fall in love with a stock. This same rule goes for categories of stocks, such as the Large, Mid-Cap, or Small Companies; areas such as Europe, Latin America, and Asia; or individual countries such as the U.S., China, India, Brazil, or Russia.

Falling in Love

My readers now know that when I went to China last year, I totally fell in love. I fell in love with the culture, history, people and yes, its stock market. Now the Chinese stock market has done well, but remembering the rule about falling in love and with Chinese stock market positions up from 70% to 300%, it appears that we may need to temper our positive outlook on investments in China. In fact, we may be looking at a classic bubble event, where there is too much money chasing these stocks. Granted, I still like the economic outlook in China; it’s just that it might be getting ahead of itself. As for the U.S. markets, it also appears to have gotten ahead of itself and when I hear that people are once again getting hopeful for the stock market, I start worrying. Big time.

The Economists

53 economists interviewed by Bloomberg…and those at the Fed too, say the stimulus is working and the recession was coming to an end. The Washington Post headline: “Fed views recession as near end.” “Even with Cash for Clunkers retail sales fall,” reports The New York Times. Retail sales were expected to go up in July. Instead, they went down. Economists expected unemployment numbers to go down. Instead, they went up in July…and last week, 558,000 people filed for unemployment benefits – up from the week before. That brings the total to 6.7 million jobs lost since the downturn began in December ’07. Oh…and foreclosures hit another record high in July…making the third new record in the last five months. But that’s OK, because the recession is over. Uh, yeah right.

The National Bureau of Economic Research

So let’s turn to our National Bureau of Economic Research (NBER). Having no interest in real-time forecasting, they won’t officially call an end to this recession until it’s long past. It took until December 2008 to tell us that this whole mess started in December 2007. Heh…by the time the NBER calls an end to this one, we might have begun another.

Getting Screwed by the Credit Card Companies

This week I got notices from several credit card companies. One lowered my credit limit on my card by 60% because I’ve been good with managing my credit charges (in other words, I didn’t charge enough on the credit card). What urks me is that your credit score has a factor whereas if you have very little debt in relation to how much you can spend (your credit limit), you FICO score goes higher and you are able to borrow at better rates. By lowering my credit limit, they effectively lowered my FICO score. @#$%$#% Then I got good news that several credit card companies are eliminating late fees as well as some other fees that I never pay anyway. Then in the same breath, they revised the interest charged from a fixed rate to a variable rate based on the prime rate, effectively raising the interest rate today by 4%. In other words, they are doing people a favor by eliminating that late fee, but on the other side, they are messing with you by charging huge interest on your average daily balance. Nice guys.

Community College Fees

I believe that education is an infrastructure investment. Building for the future. So when I calculated the increase in fees at my local community college, I was floored. You see, the cost for a 4-class per week course was $6.50 (half unit) 3 years ago. What they did was they split the class in half, so now you had to pay for one unit, or $13. Then they made each class one unit, so now you had to pay for 2 units for the same course, or $26. Then this semester, they raised the fee to $26 per unit, or $52 for the same course. So, in 3 years, they went from $6.50 to $52, not counting other fees or parking, which also increased. That, my readers, is a 700% increase in fees. And you still think inflation is a benign 3%.

The Investment Markets

Waiting for market indicators to tell me whether to hold current positions or to take profits and short the markets (shorting is an investment strategy where one bets that the market will go down; an example would be selling a stock at $100, then when it goes down to $50, you buy it to cover your short, thus gaining $50). Newest buy are gold mining stocks; probable upside breakout of gold over $1,000. We have no position in bonds. Bonds have not gone anywhere in the last 4 months, and looks vulnerable.

Stay tuned.

Me, Becoming More Cynical?

gadflyonthewall — Mon, 10 Aug 2009 02:28:51 +0000

Me, Becoming More Cynical?

Several readers commented that in my last Analysis, I was becoming more cynical. Me, cynical? Really? LOL. Gee, I must really watch myself that I don’t write any more Analysis that are less cynical. That might ruin my reputation.

Now it isn’t that I set out to be cynical, it’s just after many years of reading, studying, watching …. whether it’d be my professors, the media, our political and religious leaders, Wall Street …. I just have so much evidence that supports the opposite of what they tell us.

Only a few years ago, in early 2000, we were led astray by Merrill Lynch’s and Goldman Sachs’ analysts, telling us that internet stocks were a screaming buy, only to find out after the whole scheme fell apart, that they were talking amongst themselves (and laughing as well) that these stocks were garbage.

All these years, His Holiness the Pope had been telling us that he was infallible in all things spiritual, only to be told that indeed, there really is no Limbo, where unbaptized babies went. Maybe the Pope should declare himself fallible after all. Goodness, gracious, the Pope a mere man? God forbid. (Note: I apologize to my Catholic readers if I just assaulted your sensitivities, but being an ex-Catholic, I just can’t help it.)

When I was a new stockbroker, I was told that we are not in the business of making our clients money, but rather making money from our clients. By the way, the test for becoming a stockbroker was how well you can BS. Really, I kid you not. Recognizing the game for what it was, I passed with flying colors. ha ha ha

By the way, have you noticed how politicians cut everything from education, health, prisons, state workers, but not their own pay or staff? And California will now release 440,000 prisoners because they can’t meet federally mandated healthcare for the prisoners. Forgive me if I am scratching my head over this one, but how come prisoners have federally mandated free healthcare, while the ordinary citizen doesn’t.

Nah, no reason to be cynical.

Cash for Clunkers

Cash for Clunkers is the brilliant idea from California Senator Dianne Feinstein. By encouraging consumers to turn in their older non-fuel-efficient cars for newer more fuel-efficient cars, the government has figured out a new way to stimulate the economy. The problem is, it’ll all end by Labor Day. Then what? By the way, charities who benefit from people donating their old clunkers are hurting big time. Thank you, Senator Feinstein.

The Wall Street Journal backs me up here: “The subsidy won’t add to net national wealth, since it merely transfers money to one taxpayer’s pocket from someone else’s, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.”

The Economy
Right now, railroads are hurting. Railcar loadings are down about 20% from last year’s levels, railroads have abandoned half a million freight cars and idled over 5,000 locomotives. CSX Railroad has even closed a local freight yard and is using it entirely for storage.

Repeat after me. “I am not cynical about government statistics.” Uhuh.

Last But Not Least, A Prayer

‘Lord, if you can’t make me a better man, don’t worry about it. I’m having a real good time like I am.’

Stay tuned.

Since the stock market started rising in March, and the news from the housing market has improved, everyone’s talking about economic recovery and the end of the recession. Last week, the non-farm payroll numbers came out. They were stronger than expected, sending the stock market to a new nine-month high…

So why is business in the railroad industry still deteriorating?

This month’s issue of Trains Magazine features a study of the number of locomotives held in storage by the major, “Class 1″ railroads. The number of idled locomotives has increased 57% between March and June. 57% in 3 months!!

The Association of American Railroads released its weekly report on rail car loadings. For the first seven months of 2009, total U.S. rail car loadings were down 19%, while container and trailer transportation fell 17.2%. All 19 major commodity categories tracked by the AAR saw car loads decline in July. The biggest declines were metallic ores (down 58.9%), metals/metal products (down 47.7%), and crushed stone/gravel (down 25.8%), all commodities used in building and manufacturing. Clearly, the message from the railroads is that the economic recover is a mirage.

The Internet Weakens Democracy

gadflyonthewall — Sat, 08 Aug 2009 02:54:41 +0000

The Financial Protection Agency

Even though the government appears unable to run its own two mortgage companies [Freddie and Fannie], the President wants to create an entirely new regulatory agency to police the financial decisions you make. I am not making this up. The new agency – the Financial Protection Agency – will be led by a financial regulatory “czar,” who will determine if the financial products you’re offered (credit cards, mortgages, home-equity loans) are “fair.”

Government Designed Financial Products for You

According to the legislation that’s now proposed (Financial Protection Agency Act of 2009), the government will design a set of “standard” financial products that financial-products companies will be forced to offer. And the agency will have the power to forbid financial firms from making any competing offers if the government deems these products to be harmful.

The Czar
Who is the leading candidate for the position of financial regulatory ‘czar’? That person is an attorney named Cass Sunstein. He is currently the Felix Frankfurter professor of law at Harvard Law School. His newest book is Nudge: Improving Decisions About Health, Wealth, and Happiness. This guy clearly believes he knows what’s best for you.

The Right to Home and Health Care
His previous book, in 2004 was The Second Bill of Rights: FDR‘s Unfinished Revolution and Why We Need It More than Ever. In this book, Sunstein explains why every American ought to have a legal right to a home, health care, and protection against “monopolies.” We already have anti-trust laws, so no problem there. We saw what happened when everyone has a right to a home, even when they couldn’t afford, so there’s a problem there. Health care is an issue that continues to be discussed. Not having read the book, I do not know what kind of health care system he espouses, though looking at his other publications, I imagine he is leaning towards a government run health care system.

The Internet Weakens Democracy

He also believes the Internet weakens democracy (see his arguments in another book, Republic.com). He says the internet makes us stupid. The government, Sunstein believes, can provide you with everything you need. Uh, oh.

Consumer Protection

While I am all for consumer protection, I believe that the best way for the consumer to protect themselves is through education, and what better way to educate oneself than through research via the internet. Does the government think that Americans are dumb? Oh wait, maybe we shouldn’t answer that considering the thinking coming out of DC or Sacramento or talking to the average man or woman on the street.

The Markets

The markets continue higher and the headlines in the San Francisco Chronicle this week are that the market’s rise gives us new hope. It was on the front page rather than the front of the business page, and contrarians may take this as a sign that we are near the top of this current rally. We shall see.

Stay tuned.

Life, Love, and the Stock Market

gadflyonthewall — Thu, 06 Aug 2009 04:41:03 +0000

August 1, 2009

The Black Swan

The title of this Commentary comes from a discussion I was having with my contact at Fidelity about the The Black Swan, a book written by Trader Nassim Taleb. The Black Swan refers to events that are beyond the norm; difficult to predict; but events that we nevertheless need to acknowledge will happen.

Life

Imagine knowing how your life will turn out, not only from birth to death, but from year to year, month to month, week to week, day to day, hour to hour. I ask you, would that be boring? You wouldn’t have to even stretch your imagination or your thinking because you know what will happen. The exciting part of life is the surprises, the struggles and, of course, the triumphs. Thus the Black Swan event. Yes, I know that some of these events, such as losing a job that you thought you had until retirement, can be very painful. But as Taleb writes, they will happen. Not only bad, but good.

Love

Now imagine that you are this very handsome man or this very pretty woman, and that every man or woman you meet falls in love with you. What fun is that? You don’t even have to be charming since you know they’ll fall in love with you. Very boring. Now the Black Swan event of “love” is that you may not even be looking for it. Then it hits you. But though you are attracted to her (or him), sometimes you don’t even know if they look at you in the same way. A small acknowledgement sends you into pure joy, only to fall into painful despair because you just don’t know. You would hope that she (or he) would love you for you, and not for your looks or your money (of course, that may not be a problem for some, ha ha). The exciting part of love is finding it. The painful part of love is wondering if she feels the same way you do. The pain heightens the thrill, and vice versa.

The Stock Market

Now imagine if you knew every day what the stock market would do. You didn’t have to do anything. No studying. No looking at numbers. No looking at charts. You just know and you make lots of money. That would be boring. You would not feel the pain of losing, but then you would not have the satisfaction of winning. The Black Swan, of course, particularly applies to the investment markets. Who would have predicted the extent of the stock market correction in 2008? This is the reason we have risk management strategies in place; to hopefully protect us during a Black Swan event. Trailing stop losses are calculated and recalculated ad infinitum.

Adam and Eve

OK, OK, now I know what some of you are asking. If we were still naked running around the Garden, would we be happy? Or would we be bored out of our mind? Ha ha ha, now you see why Adam and Eve ate the apple. They were bored. I mean, here they had everything they needed; they didn’t have a commute, didn’t have to work, didn’t even need to go shopping for clothes. They didn’t have to worry about their investments; didn’t have to study the stock market. Adam looked liked Brad Pitt and Eve looked like Angelina Jolie. Of course, since they were the only two on earth at that time, they had no one to compare their mates to. Now how absolutely boring must that have been. And they had no tacos, no Chinese food, no sushi, no lasagna. There would be no newspapers since there would be no news. No David Letterman because what would his jokes be on? Imagine Eve telling Adam that she chose him because he was the only guy available. How would that make you feel if you were Adam?

Study

So the pain that you feel when you lose on your investments should only make you study harder, and do better next time. Before you invest, you must make sure that you have your risk management strategies in place. Be mindful that you will still lose some of the times. Even the best baseball players in history hit about one-third of their times at bat. But if you don’t swing the bat, you will not be rewarded.

Strive

In love, the anxiety you feel not knowing if she feels the same way you do, should only make you strive to be the most loving person in the world. But again, be prepared for pain and disappointment. Because, yes, when you open yourself up, you are very vulnerable. But nothing ventured, nothing gained.

Learn

Learn from other people’s mistakes as well as from your own. Study history. Those who do not learn from the mistakes from the past are bound to repeat it.

Yin Yang

My dear readers, life would be so boring without our sorrows and our triumphs. Without one, you would not have the other. Without bad, we could not define good. All you have control over is yourself. You can be angry and hateful or you could be understanding and loving. You could be ignorant and stupid or you can learn from your mistakes and make smarter decisions. This is especially true in investing.

Why the Black Swan

In my opinion, the Black Swan is a self governing mechanism to curb arrogance. Yes, when everything goes right in life, love, investments, politics, etc., there is a natural tendency towards arrogance. And arrogance is why lives, love lives, empires and stock markets collapse. Jesus made a point of attacking the Pharisees’ arrogance and self righteousness. Isn’t it interesting that we no longer hear of people called the Pharisees? But lo and behold, there are still many people today who still act like Pharisees, and they come from different religions, races, and countries. Do not become one of these.

People Treating Other People Badly

It has come to my attention that because of the high unemployment rate (California’s official 11.6% rate is really a 25.2% rate if calculated similar to the way they calculated it during the 1930′s; and the national is just a tad over 20%), employers are mistreating their employees. I’ve always believed in treating people with respect, employer-employee, teacher-student, parents-children, husband-wife, rich-poor, and white-black-hispanic-asian, etc. The way people are taking advantage of the fact that they now hold more power over other people is truly despicable. When I was Controller, I told members of my accounting team, that when a boss is a dictator and yells at you, that it is only because they are insecure. The more insecure, the more critical they are. Keep that in mind the next time your boss criticizes you. It is not you who are failing, but them.

The Markets

We are currently positive on all markets, except the U.S. Bond Market. However, this month we experienced a whipsaw. A whipsaw is when a signal is given, you take a position to take advantage of this signal, but it reverses and you get out too late to make any money, possibly losing. Well, it happened in our commodity, oil, and precious metals positions. We sold our positions, went short (betting that the prices will go down), watched as we made money, then it reversed, and we had to get out with (fortunately) small losses. It’s back to the drawing board for commodities for us; I suspect that we have to be a quicker trader when it comes to commodities as opposed to the stock markets.

Stay tuned.