When i bought the 1 google put i forgot to buy my 1 amazon put at that time. Fortunately today Mr. Market gave me an opportunity to buy 2 at a good price. Looking at the amzn after hours it looks like it will pay off. I have to admit the google put is a gamble. But i'm working with bear market rules which losely state good news is bad, bad news is horrible, and great news is just a lie.
We will see what happens but looking at the market sell-off of the post fed cut rally i believe i have a greater than 50/50 chance of it paying off.
It's looking to me like we had a little rally into the declining moving averages and as such the decline is to continue for now. We will see about tommorows job numbers. Whether they are good or bad my guess is the birth death model will have a heavy effect.
--
Wednesday, January 30, 2008
Monday, January 28, 2008
walking away PII
One point i forgot to make in my last posting was that, while the pundits and permabulls were dismissing any concern about a housing bubble, the sources i was paying attention too were highlighting the nature of the bubble and the consequences. Who was right?
Well the issue is there are always permabulls and permabears in any market, housing included. So who do you listen to? Well neither. You should read both sides and decide for yourself. But frankly i pay attention to those who see both sides of the issue. In this case Bruce Norris is the definitive resource about the housing markets, especially in Southern California. While he was recemmending sell, morons like Jim Cramer were pumping the home building stocks. Who knows more about it? Not Cramer.
This also highlighted for me an interesting thing. Cramer was pumping the homebuilder stocks basically out of a lack of understanding of the industry and many of the challenges it faced. One example was that Cramer was stating that builders only build what they sold. Well not true. What about the 40% cancellation rates? And why are they still building even now? The anwser is that they are stuck finishing a project due to commitments, insurance, and a myriad of other reasons pointed out by Norris.
While these minor little details seem unimportant to the big picture, they are. Why? Well the fact that builders must finish what they started means that they are forced to keep building inventory into a declining market which exaserbates the situation. It is a key in understanding when to buy real estate or the homebuilders.
In my case I got married and we ended up selling both our homes. We still have the nut there and we are renting. In this case we did not time the real estate market we just looked at the facts. Should i rent this condo? No it was a losing proposition because rents would not cover the mortgage plus taxes AND i could sell now two years after my wife bought for nearly twice what she paid. Should we buy this house (and moreover rush to submit an offer in 1 hour)? Well no. Because we can rent a better place for half as much money each month.
So in some ways you only need to use your own common sense. Run the numbers yourself and you will see the right thing to do. The numbers will tell you when it makes sense to buy a house. They will reveal that "hey i can buy for the same price i rent and get the tax benfits". That is when you buy (think how far we need to come). To summarize be very careful where you get your information from. It can really hurt you if you are not careful.
--
Well the issue is there are always permabulls and permabears in any market, housing included. So who do you listen to? Well neither. You should read both sides and decide for yourself. But frankly i pay attention to those who see both sides of the issue. In this case Bruce Norris is the definitive resource about the housing markets, especially in Southern California. While he was recemmending sell, morons like Jim Cramer were pumping the home building stocks. Who knows more about it? Not Cramer.
This also highlighted for me an interesting thing. Cramer was pumping the homebuilder stocks basically out of a lack of understanding of the industry and many of the challenges it faced. One example was that Cramer was stating that builders only build what they sold. Well not true. What about the 40% cancellation rates? And why are they still building even now? The anwser is that they are stuck finishing a project due to commitments, insurance, and a myriad of other reasons pointed out by Norris.
While these minor little details seem unimportant to the big picture, they are. Why? Well the fact that builders must finish what they started means that they are forced to keep building inventory into a declining market which exaserbates the situation. It is a key in understanding when to buy real estate or the homebuilders.
In my case I got married and we ended up selling both our homes. We still have the nut there and we are renting. In this case we did not time the real estate market we just looked at the facts. Should i rent this condo? No it was a losing proposition because rents would not cover the mortgage plus taxes AND i could sell now two years after my wife bought for nearly twice what she paid. Should we buy this house (and moreover rush to submit an offer in 1 hour)? Well no. Because we can rent a better place for half as much money each month.
So in some ways you only need to use your own common sense. Run the numbers yourself and you will see the right thing to do. The numbers will tell you when it makes sense to buy a house. They will reveal that "hey i can buy for the same price i rent and get the tax benfits". That is when you buy (think how far we need to come). To summarize be very careful where you get your information from. It can really hurt you if you are not careful.
--
walking away.
I remember only a few years ago the pundits and otherwise morons talking about how the resets in home mortgages, although a problem for some, would not be a problem in general. They claimed that most people could handle the increased payment and would do whatever it would take to stay in the home. Well 60 minutes just dispelled that myth last night. See this blog here for a good discussion: http://globaleconomicanalysis.blogspot.com/2008/01/60-minutes-legitimizes-walking-away.html
The crux is very simple. Even if you could pay the mortgage why pay it? Why struggle to pay it and sacrifice to hold onto a house which is loosing value? The answer for any rational person is you stop paying. Although it is difficult to determine the exact declines, for most people in this situation a quick back of the envelope calculation would reveal they lose more each month than the pittance that actual goes into equity. This assumes you are actually building equity, which does not apply to those in the interest only stage of their loan.
But some would counter what about your FICO score? Well the people in this situation have already done the analysis and figured the hit they take is worth it. Also they realize that their credit cards or at least some of them won't be canceled so they can still get by. But this brings up a very good point. These people realize a foreclosure will bring a mark on the record that may prevent them from buying a home for the next 7 to 10 years. And the point is they don't care. So they don't care and will not be in the market to buy a home again for 7 to 10 years. So what does this say about the recovery and next real estate market boom? It's a long way off!
I do not believe the 60 minutes story is an isolated incident. In our neighborhood we have the same situation. A family that certainly can pay the mortgage let the NOD get filed. I was not aware of this until recently, but my guess is they stopped paying the day they bought a nice new Cadillac SUV. Mind as well buy the car while it's easy ...
The crux of the matter is that this part of the American Dream is a lie. Ala Kiyasaki (Rich Dad Poor Dad) a house is not an asset but a liability. This episode in our history should teach people that. It's not that we should not aspire to own a nice home or a nice car, but we most aspire to truly afford a nice home or nice car. Only if we can actually afford it do we buy it. What is a good indicator of being able to afford a home? Well how about you can put down 20% and your income meets the 28% front end ratio (Monthly Housing Payments/Gross Monthly Income) and the 36% back end ratio (Total monthly expenses/gross monthly income). Oh is this not fair?
Well how about this. What happens to all these people who did not meet these requirements and bought homes only later to be foreclosed. How many lost ALL their retirement savings trying to save the house? See the next shoe to drop is the devastation this is doing to peoples preparedness to retire. There is only one way to sum this up.
It is really really bad.
--
The crux is very simple. Even if you could pay the mortgage why pay it? Why struggle to pay it and sacrifice to hold onto a house which is loosing value? The answer for any rational person is you stop paying. Although it is difficult to determine the exact declines, for most people in this situation a quick back of the envelope calculation would reveal they lose more each month than the pittance that actual goes into equity. This assumes you are actually building equity, which does not apply to those in the interest only stage of their loan.
But some would counter what about your FICO score? Well the people in this situation have already done the analysis and figured the hit they take is worth it. Also they realize that their credit cards or at least some of them won't be canceled so they can still get by. But this brings up a very good point. These people realize a foreclosure will bring a mark on the record that may prevent them from buying a home for the next 7 to 10 years. And the point is they don't care. So they don't care and will not be in the market to buy a home again for 7 to 10 years. So what does this say about the recovery and next real estate market boom? It's a long way off!
I do not believe the 60 minutes story is an isolated incident. In our neighborhood we have the same situation. A family that certainly can pay the mortgage let the NOD get filed. I was not aware of this until recently, but my guess is they stopped paying the day they bought a nice new Cadillac SUV. Mind as well buy the car while it's easy ...
The crux of the matter is that this part of the American Dream is a lie. Ala Kiyasaki (Rich Dad Poor Dad) a house is not an asset but a liability. This episode in our history should teach people that. It's not that we should not aspire to own a nice home or a nice car, but we most aspire to truly afford a nice home or nice car. Only if we can actually afford it do we buy it. What is a good indicator of being able to afford a home? Well how about you can put down 20% and your income meets the 28% front end ratio (Monthly Housing Payments/Gross Monthly Income) and the 36% back end ratio (Total monthly expenses/gross monthly income). Oh is this not fair?
Well how about this. What happens to all these people who did not meet these requirements and bought homes only later to be foreclosed. How many lost ALL their retirement savings trying to save the house? See the next shoe to drop is the devastation this is doing to peoples preparedness to retire. There is only one way to sum this up.
It is really really bad.
--
Friday, January 25, 2008
But what about my dog!
Now I'm reading stories about sending payments to retirees. It's not that i have anything against retirees, as my Dad and all my Aunts and Uncles who all participated in making me who i am, are retirees, but please why not send a check to my dog.
The crux of the matter is this money proposed in the stimulus package is being made up out of thin air. As such it devalues all the other money that was created out of thin air before it. The way to clearly see this is look at the price of gold in dollars and look at the dollar index. What you see is the consequences of making all this money. The cost of it is the rise in prices.
So will these checks make up for the steady rise in prices due to the declining dollar and the rise in commodities, which all are linked to the rapid creation of money? The answer is most likely not. If you have paid an extra $50 a month for gas and an extra $50 to heat your home and an extra $20 a month in food price over the last two years what did that cost you? 120 x 24 = $2880. So if you get $1800 back, assuming a couple, you are still in bad shape. And since the markets have responded to the announced stimulus with more rises in gold and more commodity price increases you can be sure that there is more inflation to come. My guess is the price increases to come more than offset what the average Joe gains from the rebate.
The point is you don't get something for nothing. There is a hidden cost to this stimulus package. You mind as well just admit it is insane and give checks to cats, dogs, and pet reptiles as well. Hey Petco needs to get some of the money too!
I suppose the thing that pisses me off the most about these checks is that the government is just plain asking you to do the wrong thing with it. They want you to spend it. They don't care if you are already in over your head in debt, your job is in trouble, or you are facing serious illness, they just want you to spend, spend, spend. I think it is pathetic that if you teach your children to take the governments advice they are doomed to bankruptcy ... well if they can still actually file for it. Disgraceful!
I will add the check to my rainy day fund which looks like I will need before too long with the clowns running the show right now.
--
The crux of the matter is this money proposed in the stimulus package is being made up out of thin air. As such it devalues all the other money that was created out of thin air before it. The way to clearly see this is look at the price of gold in dollars and look at the dollar index. What you see is the consequences of making all this money. The cost of it is the rise in prices.
So will these checks make up for the steady rise in prices due to the declining dollar and the rise in commodities, which all are linked to the rapid creation of money? The answer is most likely not. If you have paid an extra $50 a month for gas and an extra $50 to heat your home and an extra $20 a month in food price over the last two years what did that cost you? 120 x 24 = $2880. So if you get $1800 back, assuming a couple, you are still in bad shape. And since the markets have responded to the announced stimulus with more rises in gold and more commodity price increases you can be sure that there is more inflation to come. My guess is the price increases to come more than offset what the average Joe gains from the rebate.
The point is you don't get something for nothing. There is a hidden cost to this stimulus package. You mind as well just admit it is insane and give checks to cats, dogs, and pet reptiles as well. Hey Petco needs to get some of the money too!
I suppose the thing that pisses me off the most about these checks is that the government is just plain asking you to do the wrong thing with it. They want you to spend it. They don't care if you are already in over your head in debt, your job is in trouble, or you are facing serious illness, they just want you to spend, spend, spend. I think it is pathetic that if you teach your children to take the governments advice they are doomed to bankruptcy ... well if they can still actually file for it. Disgraceful!
I will add the check to my rainy day fund which looks like I will need before too long with the clowns running the show right now.
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The qqqq's apple problem ...
I'm not an expert on how the NASDAQ 100 index is calculated but the other day i looked at the "holdings" and was shocked to see the percentage of the index made up of apple. Checking here
http://www.powershares.com/products/overview.aspx?ticker=qqqq
we see that apple by far dominates the index by making up 10.74% of it currently (note this changes daily). We currently have the case where the qqqq is a slave to apple. When apple does good so do the Qs, but when it doesn't the Qs will have trouble overcoming the pressure applied by aapl.
Other NASDAQ-100 holdings
Apple Inc. 10.74%
Microsoft Corp. 6.95%
Google Inc. (Cl A) 5.34%
QUALCOMM Inc. 5.17%
From the NASDAQ website i see that they review the holdings quarterly, but given their criteria for doing a re balancing aapl would need to rise to 24% of the index before this would be done. I always thought of the qqqq's as being one of the more balanced ETFs, but this is not the case. It is almost like you should not bother with the qqqq's and just buy appl instead.
This highlights that for ETFs it is critical to check the holdings. They often are not as diversified as they sound. If you were for example under the belief that apple will continue to decline for company specific reasons, but all the other large cap tech stocks will do well and because of this belief you buy the Qs, then you will not perform as desired. That aapl component in the Qs you bought will restrain the gains you may see in the other stocks.
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http://www.powershares.com/products/overview.aspx?ticker=qqqq
we see that apple by far dominates the index by making up 10.74% of it currently (note this changes daily). We currently have the case where the qqqq is a slave to apple. When apple does good so do the Qs, but when it doesn't the Qs will have trouble overcoming the pressure applied by aapl.
Other NASDAQ-100 holdings
Apple Inc. 10.74%
Microsoft Corp. 6.95%
Google Inc. (Cl A) 5.34%
QUALCOMM Inc. 5.17%
From the NASDAQ website i see that they review the holdings quarterly, but given their criteria for doing a re balancing aapl would need to rise to 24% of the index before this would be done. I always thought of the qqqq's as being one of the more balanced ETFs, but this is not the case. It is almost like you should not bother with the qqqq's and just buy appl instead.
This highlights that for ETFs it is critical to check the holdings. They often are not as diversified as they sound. If you were for example under the belief that apple will continue to decline for company specific reasons, but all the other large cap tech stocks will do well and because of this belief you buy the Qs, then you will not perform as desired. That aapl component in the Qs you bought will restrain the gains you may see in the other stocks.
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A little bit of a gamble?
Or a sure thing? Today i purchased one Google put. My logic, or lack their of, was that they have been one of the annointed 4 horsemen of the market like apple, and given the beating apple took after they met numbers and lowered guidance i believe there is a reasonible chance Google is due for the same outcome when they report next week. It is also interesting that apple did get beaten up pretty bad before they reported, just like google is now.
Now given that buying or selling a stock right before they report numbers is more akin to gambling than trading i have bought only 1 lonely put option. But given that 1) we are in a bear market and as such bear rules apply, such as good news is bad news and bad news is horrible news; 2) Google is priced to perfection in terms of the expectations for growth and as such any lowering of the forcast will have a significant effect (see my earlier post about the PEG ratio); and 3) from a technical basis goog is breaking down and the rally yesterday looks like a great short entry because it rallied into the declining moving averages.
Check back next Friday for the results.
Now given that buying or selling a stock right before they report numbers is more akin to gambling than trading i have bought only 1 lonely put option. But given that 1) we are in a bear market and as such bear rules apply, such as good news is bad news and bad news is horrible news; 2) Google is priced to perfection in terms of the expectations for growth and as such any lowering of the forcast will have a significant effect (see my earlier post about the PEG ratio); and 3) from a technical basis goog is breaking down and the rally yesterday looks like a great short entry because it rallied into the declining moving averages.
Check back next Friday for the results.
Wednesday, January 23, 2008
the fear shows it's face today ...
It looks like the shorts got a little panicked today and rallied the market to the close. What? Don't you mean "bargain" hunters came in and bought the market? NO!
To understand this you must understand what it means to be bearish or a bear. A bear believes the market will go down and furthermore a bear usually positions himself to profit from this decline in the markets.
The current markets have been controlled by the bears and are STILL controlled by the bears. As a bear you tend to short the market. This means you borrow stock to sell. You hope to profit by buying back the stock at a lower price and hence profiting. This is a really hard thing for novice market players to understand, but critical to understand what is going on right now. You sell first, then buy back the stock. You must buy back the stock at some point and if the stock keeps going up your potential losses are infinite. So when you are shorting you must be careful and quick on the buy trigger. You do not short and log off your computer for a year.
My guess is the pace of recent declines had some wanna-be shorts enter late, like Friday and Tuesday. These shorts are in a risky position because we are nearing some major support levels and we have already had such a large sell-off we are very oversold. So my guess is that as today went on and there was no continued sell-off they realized we were not going to crash. Slowly as some of the longer term shorts started taking profits the short term shorts rightfully panicked. Hence the rapid 300 point rise in the last hour or so. Bargain hunters are more apt to buy a little over time and will try not to rally the market. They have big money and are not as agile. There is with no certainty that you can say this is exactly what happened but it is more plausible than saying bargain hunters rushed-in. You have the tape and that is all you have to try to figure out what is going on. The tape points to a short cover rally.
Why is this important? Why is it important to know that it was shorts covering vs. bargain hunters? Well if bargain hunters did come in that would be a more positive sign for sustainability of the gains. The reason is the true bargain hunters have a longer time frame in mind than the bears covering their shorts. The bears are just as likely to enter tomorrow again with more selling. The point being. True bargain hunters portend a stable sustainable bottom, shorts covering portend more declines to follow.
If you look at the fact that shorts face infinite losses, you can easily put yourself in their shoes and see how they could quickly be faced with the need to buy at ALL COST. Buying into a 200+ point rally is more likely to be someone covering a short, than a bargain hunter.
So what you are seeing is fear driven buying vs. fear driven selling. The reason there is a lot of volatility right now is that it is a bear market which by definition is controlled by the bears. Since the bears have very itchy trigger fingers they move the market very fast both ways. It's chasing greed on the way down and fear on the way up.
Don't get caught in false rallies. There are many people short now so i would expect a significant rise over the next week or so, but to me it is a shorting opportunity as this is not yet done. The bear market is just starting.
When it comes to being a bear, i frankly am an expert. I have been mostly bearish for many years and as such when i talk about what the "shorts" are facing I'm really talking about me.
--
To understand this you must understand what it means to be bearish or a bear. A bear believes the market will go down and furthermore a bear usually positions himself to profit from this decline in the markets.
The current markets have been controlled by the bears and are STILL controlled by the bears. As a bear you tend to short the market. This means you borrow stock to sell. You hope to profit by buying back the stock at a lower price and hence profiting. This is a really hard thing for novice market players to understand, but critical to understand what is going on right now. You sell first, then buy back the stock. You must buy back the stock at some point and if the stock keeps going up your potential losses are infinite. So when you are shorting you must be careful and quick on the buy trigger. You do not short and log off your computer for a year.
My guess is the pace of recent declines had some wanna-be shorts enter late, like Friday and Tuesday. These shorts are in a risky position because we are nearing some major support levels and we have already had such a large sell-off we are very oversold. So my guess is that as today went on and there was no continued sell-off they realized we were not going to crash. Slowly as some of the longer term shorts started taking profits the short term shorts rightfully panicked. Hence the rapid 300 point rise in the last hour or so. Bargain hunters are more apt to buy a little over time and will try not to rally the market. They have big money and are not as agile. There is with no certainty that you can say this is exactly what happened but it is more plausible than saying bargain hunters rushed-in. You have the tape and that is all you have to try to figure out what is going on. The tape points to a short cover rally.
Why is this important? Why is it important to know that it was shorts covering vs. bargain hunters? Well if bargain hunters did come in that would be a more positive sign for sustainability of the gains. The reason is the true bargain hunters have a longer time frame in mind than the bears covering their shorts. The bears are just as likely to enter tomorrow again with more selling. The point being. True bargain hunters portend a stable sustainable bottom, shorts covering portend more declines to follow.
If you look at the fact that shorts face infinite losses, you can easily put yourself in their shoes and see how they could quickly be faced with the need to buy at ALL COST. Buying into a 200+ point rally is more likely to be someone covering a short, than a bargain hunter.
So what you are seeing is fear driven buying vs. fear driven selling. The reason there is a lot of volatility right now is that it is a bear market which by definition is controlled by the bears. Since the bears have very itchy trigger fingers they move the market very fast both ways. It's chasing greed on the way down and fear on the way up.
Don't get caught in false rallies. There are many people short now so i would expect a significant rise over the next week or so, but to me it is a shorting opportunity as this is not yet done. The bear market is just starting.
When it comes to being a bear, i frankly am an expert. I have been mostly bearish for many years and as such when i talk about what the "shorts" are facing I'm really talking about me.
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It had to happen ...
Apple imploded yesterday. Fortunately i had no position in it. As one of the "four horseman" it is significant even though it had been getting pummeled for several weeks. The crux of the matter is that growth has slowed. When growth slows growth stocks get hammered. Why is this? Why do stocks with otherwise small outlook changes get hammered? The reason for this can be seen in the PEG (Price to Earnings Growth). The PEG Ratio provides the rationale for paying what seems an exorbitant price for current earnings. The "Annual EPS Growth" rate becomes a multiplier in determining price. Lets look at the PEG:
Price /Earnings
PEG Ratio = ----------------------
Annual EPS Growth
So let's say you have a stock trading at $100 per share that earned 2$ per share (trailing twelve months) P/E = 100/2 = 50, and is growing at 50% annual rate. The PEG ratio is:
PEG =50/50 = 1.
So in this case the market is willing to pay $50 per $1 of earnings because the growth rate is 50%. Another way to say this is the market will buy the stock to a PEG of 1.
Now let's say they meet the numbers but revise the outlook down such that the growth rate slows to 40%. What do we have. Note the P/E did not change as they met the numbers (a little bit simplified i admit).
the new PEG = 50/40 = 1.25
But the market still may only pay up for a PEG of 1 so now the stock is overpriced. What does the price go down to? We can solve for price and get this equation (note we use the orignal PEG the market was willing to pay aka 1, with the new Annual EPS Growth value)
P = Earnings x Annual EPS Growth x Orignal PEG = 2 x 40 x 1 = $80
So this is how a "rational" market gives a stock in a good company, that only guides down a relatively small amount, a big 20% haircut. If the PEG was used to value the stock lower and push the price higher on the way up in EPS growth it has to work the otherway around on the way down.
So we see that for growth stocks the Annual EPS Growth estimates are critical to what the current price of the stock is. It is literally a multiplier in calculating the current Price of the stock. As such it makes growth stocks highly subject to wide changes in price due to relative small changes in outlook.
Be careful.
--
Price /Earnings
PEG Ratio = ----------------------
Annual EPS Growth
So let's say you have a stock trading at $100 per share that earned 2$ per share (trailing twelve months) P/E = 100/2 = 50, and is growing at 50% annual rate. The PEG ratio is:
PEG =50/50 = 1.
So in this case the market is willing to pay $50 per $1 of earnings because the growth rate is 50%. Another way to say this is the market will buy the stock to a PEG of 1.
Now let's say they meet the numbers but revise the outlook down such that the growth rate slows to 40%. What do we have. Note the P/E did not change as they met the numbers (a little bit simplified i admit).
the new PEG = 50/40 = 1.25
But the market still may only pay up for a PEG of 1 so now the stock is overpriced. What does the price go down to? We can solve for price and get this equation (note we use the orignal PEG the market was willing to pay aka 1, with the new Annual EPS Growth value)
P = Earnings x Annual EPS Growth x Orignal PEG = 2 x 40 x 1 = $80
So this is how a "rational" market gives a stock in a good company, that only guides down a relatively small amount, a big 20% haircut. If the PEG was used to value the stock lower and push the price higher on the way up in EPS growth it has to work the otherway around on the way down.
So we see that for growth stocks the Annual EPS Growth estimates are critical to what the current price of the stock is. It is literally a multiplier in calculating the current Price of the stock. As such it makes growth stocks highly subject to wide changes in price due to relative small changes in outlook.
Be careful.
--
Tuesday, January 22, 2008
Big misstakes
Today i made serveral big misstakes. To start I was not positioned well going into the open because i had some call options from the Friday before. It was not a misstake to have these calls, as these were small reasonable bets given the previous week's action. The first misstake was to sell these immediately upon the open. I should not have done anything right away as given the size of the gap down the odds were that we would rally after the open. Frankly Mike Swanson called this perfectly last night here.
http://www.wallstreetwindow.com/content/node/5677
Next i tried to go short via some puts. This just obviously was chasing the markets, which is always bad. In my defence i was thinking i would not be able to get in on the short side if i did not move. I was concerned we would hit a circuit breaker. But in hindsight this was just not the right thing to do.
The one good thing about all this is that from the peak of 14000 or so on the DOW Industrials i have been able to make money and have dodged the entire decline. So while i took a 4% loss today i have dodged a larger 15% decline i would have taken if i had been blindly long and strong.
I also am hopefully now positioned a little better to deal with the potential snap back rally we should have.
Right now the shorts might be really annoyed if they did not take their profits yet. I know i would be. This opens the possibility of a short sharp, although temporary, rally from here.
--
http://www.wallstreetwindow.com/content/node/5677
Next i tried to go short via some puts. This just obviously was chasing the markets, which is always bad. In my defence i was thinking i would not be able to get in on the short side if i did not move. I was concerned we would hit a circuit breaker. But in hindsight this was just not the right thing to do.
The one good thing about all this is that from the peak of 14000 or so on the DOW Industrials i have been able to make money and have dodged the entire decline. So while i took a 4% loss today i have dodged a larger 15% decline i would have taken if i had been blindly long and strong.
I also am hopefully now positioned a little better to deal with the potential snap back rally we should have.
Right now the shorts might be really annoyed if they did not take their profits yet. I know i would be. This opens the possibility of a short sharp, although temporary, rally from here.
--
Really poor performance by the brokers today!
It's bad enough to have a tough day in the markets, one in which you have made some misstakes, but on top of that my broker just plain stunk. In this case the popular online broker here referred to simply as TD was just plain horrible. I was unable to login for nearly an hour. In addition some of my orders where just disappearing.
Now i understand the volume today was very large, but i had the same issues back in August during the last bottom/crash. You would figure they would get it together and be prepared. They certainly new this was going to happen given the overnight declines in global markets.
It is just plain unacceptable to have these problems given today's technology. I will seriously be looking for a new broker.
--
Now i understand the volume today was very large, but i had the same issues back in August during the last bottom/crash. You would figure they would get it together and be prepared. They certainly new this was going to happen given the overnight declines in global markets.
It is just plain unacceptable to have these problems given today's technology. I will seriously be looking for a new broker.
--
Monday, January 21, 2008
Protect yourself
While the market sell-off has been sever and has left us oversold by many indications, there is still potential for more disastrous declines. The global sell-off today highlights this risk. The global markets appear to be more correlated than ever with the US markets. What really is happening is that the world is losing some faith in the US financial system.
Why is this? Well it started with the sub-prime mess. At the root. The entire wallstreet machine setup a fraudulent system to make money at the expense of homeowners and investors. The homeowners were the chumps who went into debt and the investors were the chumps who bought the debt. In between wallstreet made billions packaging these debts. They profited by selling them here and more importantly abroad. The reality is that much of the housing boom was funded with foreign money via the sales of securities abroad.
As investors abroad realize the losses they lose faith in anything wallstreet has to offer. This is because they were lied to by wallstreet and the rating agencies who rated otherwise crappy debt as AAA. If wallstreet is capable of lying on this scale about these mortgage securities are they not equally capable of doing this in the stock market. Since the modern stock market is held together mearly by faith in the system, any distrust is a serious issue.
They tell you owning a stock is owning a piece of a corporation. On the surface this seems like a great thing. But in practicality due to the nature of today's markets and due to the fact that most stocks pay little if any dividend, what you are buying is virtually worthless. The only reason you pay so much money is that there is a belief that it is worth something.
Now i know these statements are almost heretical, but let me explain. If i make an investment i need to get a return on that investment. The return i expect is regular cash payments that over time will return my entire principal and a profit. Many years ago this is what you would get, in the form of dividend payments, from the purchase of a stock. Based on this you actually could invest in a stock and the stock market. But since most stocks pay very little in the way of dividends what should i pay for them?
Now you are told "but they will appreciate over time?" Well the answer is maybe. No one knows for sure and "past performance is no garuntee of future profits." In some ways the current stock market is not an investment vehical but a speculation vehical. We must remember that an increase of sales, earnings, or anything else like eyeballs (from the late 90s) does not directly translate into a return to the investor. Since you cannot buy the whole corporation you cannot get at the benefit the increase sales or earnings brings. Dividends are the only direct payout to the investor (and yes i understand the theory behind buybacks).
The simple point is that we have another lapse of trust in wallstreet. It will take time for it to blow over. As the crisis spreads from subprime to alt-A to prime to credit cards to car loans to cable bills you will only see more of this. In each case the defaults will rise and unethical games in how the system works will be exposed. The distrust will continue.
At this time i have a few long positions i took because we are at support on the dow 30. But i may need to reverse this depending on the opening action on Tuesday. The big picture i see is that it is still all down for now, so any rally is a short entry point with the caveat that there could be a big, although temporary rally, on an intra meeting rate cut. That is why i have some small long positions right now.
But back to the main point. Protect yourself! The risk is just too great to be sitting there long hoping things don't get worse.
I do find it interesting how this is playing out. When i look at valuations on the S&P i don't see them as overvalued. As such it would seem ludicrous to think we could have a market crash. But the key is that the E part of the P/E is totally open. With 20% of the market financials and financials being the life blood of all other industries, any drop in the E estimates can suddenly make the undervalued market look very overvalued.
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Why is this? Well it started with the sub-prime mess. At the root. The entire wallstreet machine setup a fraudulent system to make money at the expense of homeowners and investors. The homeowners were the chumps who went into debt and the investors were the chumps who bought the debt. In between wallstreet made billions packaging these debts. They profited by selling them here and more importantly abroad. The reality is that much of the housing boom was funded with foreign money via the sales of securities abroad.
As investors abroad realize the losses they lose faith in anything wallstreet has to offer. This is because they were lied to by wallstreet and the rating agencies who rated otherwise crappy debt as AAA. If wallstreet is capable of lying on this scale about these mortgage securities are they not equally capable of doing this in the stock market. Since the modern stock market is held together mearly by faith in the system, any distrust is a serious issue.
They tell you owning a stock is owning a piece of a corporation. On the surface this seems like a great thing. But in practicality due to the nature of today's markets and due to the fact that most stocks pay little if any dividend, what you are buying is virtually worthless. The only reason you pay so much money is that there is a belief that it is worth something.
Now i know these statements are almost heretical, but let me explain. If i make an investment i need to get a return on that investment. The return i expect is regular cash payments that over time will return my entire principal and a profit. Many years ago this is what you would get, in the form of dividend payments, from the purchase of a stock. Based on this you actually could invest in a stock and the stock market. But since most stocks pay very little in the way of dividends what should i pay for them?
Now you are told "but they will appreciate over time?" Well the answer is maybe. No one knows for sure and "past performance is no garuntee of future profits." In some ways the current stock market is not an investment vehical but a speculation vehical. We must remember that an increase of sales, earnings, or anything else like eyeballs (from the late 90s) does not directly translate into a return to the investor. Since you cannot buy the whole corporation you cannot get at the benefit the increase sales or earnings brings. Dividends are the only direct payout to the investor (and yes i understand the theory behind buybacks).
The simple point is that we have another lapse of trust in wallstreet. It will take time for it to blow over. As the crisis spreads from subprime to alt-A to prime to credit cards to car loans to cable bills you will only see more of this. In each case the defaults will rise and unethical games in how the system works will be exposed. The distrust will continue.
At this time i have a few long positions i took because we are at support on the dow 30. But i may need to reverse this depending on the opening action on Tuesday. The big picture i see is that it is still all down for now, so any rally is a short entry point with the caveat that there could be a big, although temporary rally, on an intra meeting rate cut. That is why i have some small long positions right now.
But back to the main point. Protect yourself! The risk is just too great to be sitting there long hoping things don't get worse.
I do find it interesting how this is playing out. When i look at valuations on the S&P i don't see them as overvalued. As such it would seem ludicrous to think we could have a market crash. But the key is that the E part of the P/E is totally open. With 20% of the market financials and financials being the life blood of all other industries, any drop in the E estimates can suddenly make the undervalued market look very overvalued.
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Sunday, January 20, 2008
The limiting factor
I was watching a TV show recently about the incredible increase in computing power and the concerns that someday computers could be smarter than us and destroy us. What i found interesting was one part that was referring to Moore's law, the statement that computing power doubles approximately every 2 years. But what everyone seems to miss is that by definition Moore's Law must come to an end. Why? Because at some point you cannot make things any smaller.
Being in the chip design business i have seen first hand the progression of Moore's law. But with each generation of process technology the problems get more difficult to overcome and the costs continue to sky rocket. The original law has changed from doubling every 18 months to the current 2 years. There is discussion the law will need to change to a doubling every 5 years. This pushing out of the "schedule" highlights the challenges involved and brings into question when and if it ends. But it needs to be noted the death of Moore's Law is both a technical issue and the financial issue.
On the technical issue. The dimensions of the devices are getting so small that the components being made on the chip must be measured in widths of atoms vs. nanometers. At this size quantum effects are the order of the day vs. conventional EM theory. Does a wire only 50 atoms wide act as a wire? The answer is maybe?
In addition can light be used to image the devices at these dimensions? Again the answer is maybe? Although in the lab we can move individual atoms with very expensive equipment, we cannot and most likely will not be able to manufacture the millions transistors at this scale.
The solution appears to be carbon nanotubes. They have the potential to solve some of the technical issues, but they are not yet mature. And if they do come into use, they do not scale. The size of the carbon nanotubes will not shrink significantly over time. Another problem with carbon nanotubes is revealed by recent studies of ill health effects (http://www.sciencedaily.com/releases/2007/03/070330185008.htm). This brings into doubt how quickly this technology can safely be deployed. The simple way to understand this is you cannot shrink an atom. So even if you magically got to the point you could make a transistor out of one atom, you could not go further.
Here is a link to the latest available road map. The challenges described to continue Moore's Law are very daunting in deed. http://www.itrs.net/Links/2007ITRS/ExecSum2007.pdf
The cost issue is the other limitation. Only Intel and a few other companies and groups can afford the latest 45nm fabs. At a 3-5 billion dollar cost they are the only ones that can make it pay. This will also limit the speed of integration as it will take longer with each generation to reach break even on your investment. Companies will be forced to stay at a larger generation longer even if they posses the technical skill to move on. In addition the mask costs continue to sky rocket. They currently are over a million dollars for the latest devices.
The crux of this is that i think there is a natural limit to the scale we can reach. Let's call this Mike's Law. My educated guess is that Moore's Law will fail no later than the year 2018 at the 18nm process node for technical reasons. However it may fail sooner for financial reasons. So what effect would this have on the semiconductor industry and all the other industries that rely on ever increasing advances in computing power.
At the expiration of Moore's Law the semiconductor industry will be mature. Therefore all industries that rely on it will also be mature. You will see the stagnation of the software, consumer electronics, and all Internet related industries. Fundamentally this ever cheaper and more powerful chip technology has driven growth in all the tech and consumer sectors. If the chip companies cannot provide more for less anymore then there can be no new computers, software, phones, and consumer products. Look why buy a new phone or computer if the new ones don't offer anything more than the current ones. These products cannot offer anything more since the underlying chip technology cannot advance after the end of Moore's Law.
I know this is a stretch for most people as we have been living with Moore's Law for so long, but it is just common sense to know it must change. As far as the replacement, there is none. Carbon nanotubes, quantum computers, can only offer a one time step down in size, one last burst of increased integration before there is no where else to go.
Going back to the doomsday scenario of machines out smarting us? Hopefully the Mike's Law limit will be reached before machines become self aware. I can only wonder if this limiting factor is God's way of saving us from ourselves.
--
Being in the chip design business i have seen first hand the progression of Moore's law. But with each generation of process technology the problems get more difficult to overcome and the costs continue to sky rocket. The original law has changed from doubling every 18 months to the current 2 years. There is discussion the law will need to change to a doubling every 5 years. This pushing out of the "schedule" highlights the challenges involved and brings into question when and if it ends. But it needs to be noted the death of Moore's Law is both a technical issue and the financial issue.
On the technical issue. The dimensions of the devices are getting so small that the components being made on the chip must be measured in widths of atoms vs. nanometers. At this size quantum effects are the order of the day vs. conventional EM theory. Does a wire only 50 atoms wide act as a wire? The answer is maybe?
In addition can light be used to image the devices at these dimensions? Again the answer is maybe? Although in the lab we can move individual atoms with very expensive equipment, we cannot and most likely will not be able to manufacture the millions transistors at this scale.
The solution appears to be carbon nanotubes. They have the potential to solve some of the technical issues, but they are not yet mature. And if they do come into use, they do not scale. The size of the carbon nanotubes will not shrink significantly over time. Another problem with carbon nanotubes is revealed by recent studies of ill health effects (http://www.sciencedaily.com/releases/2007/03/070330185008.htm). This brings into doubt how quickly this technology can safely be deployed. The simple way to understand this is you cannot shrink an atom. So even if you magically got to the point you could make a transistor out of one atom, you could not go further.
Here is a link to the latest available road map. The challenges described to continue Moore's Law are very daunting in deed. http://www.itrs.net/Links/2007ITRS/ExecSum2007.pdf
The cost issue is the other limitation. Only Intel and a few other companies and groups can afford the latest 45nm fabs. At a 3-5 billion dollar cost they are the only ones that can make it pay. This will also limit the speed of integration as it will take longer with each generation to reach break even on your investment. Companies will be forced to stay at a larger generation longer even if they posses the technical skill to move on. In addition the mask costs continue to sky rocket. They currently are over a million dollars for the latest devices.
The crux of this is that i think there is a natural limit to the scale we can reach. Let's call this Mike's Law. My educated guess is that Moore's Law will fail no later than the year 2018 at the 18nm process node for technical reasons. However it may fail sooner for financial reasons. So what effect would this have on the semiconductor industry and all the other industries that rely on ever increasing advances in computing power.
At the expiration of Moore's Law the semiconductor industry will be mature. Therefore all industries that rely on it will also be mature. You will see the stagnation of the software, consumer electronics, and all Internet related industries. Fundamentally this ever cheaper and more powerful chip technology has driven growth in all the tech and consumer sectors. If the chip companies cannot provide more for less anymore then there can be no new computers, software, phones, and consumer products. Look why buy a new phone or computer if the new ones don't offer anything more than the current ones. These products cannot offer anything more since the underlying chip technology cannot advance after the end of Moore's Law.
I know this is a stretch for most people as we have been living with Moore's Law for so long, but it is just common sense to know it must change. As far as the replacement, there is none. Carbon nanotubes, quantum computers, can only offer a one time step down in size, one last burst of increased integration before there is no where else to go.
Going back to the doomsday scenario of machines out smarting us? Hopefully the Mike's Law limit will be reached before machines become self aware. I can only wonder if this limiting factor is God's way of saving us from ourselves.
--
Understanding it.
As you will find out, much of my time is spent dealing with the stock market. I thoroughly enjoy trading and furthermore see it as a requirement to achieve my retirement goals. I started watching the stock market in the late ninties when the tech stock mania was in full force. I can remember buying a little superconductor tech company and watching the price go from $5 to $30 in a week. At that time you could buy anything and just wait. Sure enough it would be your turn to catch the wave. Like most i lost all of the gains and then some. Ever since i have traded, invested, and studied the markets.
I have gone through different "understandings" of how the markets work or how i thought they worked. I believe now i am finally starting to get it. To really "get it" you have to tune out most financial advice given on radio, tv, and print. Here are a few things i finally understand about the stock market and more importantly the advice you get about it.
The first thing to understand is most advisors are not advisors but salespeople. They really are only interested in selling you a product. That product being stocks in some form. It could be a solicitation to manage your money for a fee, to sell you a mutual fund, or to give you a stock pick. The real goal of any of these products is not to help you retire, but to make the seller and various associates money.
The second thing to understand is that most pundits you see or read consider themselves spokesmen. As such they feel they must always promote the market even when doing so will lose you money. Look at most of the shows on cnbc for examples of this. Also understand as well that all government officials from the president to the the chairman of the Fed will always lie to you and say everything is fine when they know it is not. This stimulus package is not happening because everything is fine. It is happening because they already have the preliminary numbers and know we are in a recession.
Third you must understand that stocks and the stock markets have cycles. These can run over very long periods, these cycles include periods of serious decline, and as such only buying is seriously restricting your potential gains and furthermore even threatening your ability to retire. If you think about it. It is nonsensical to think you should always ride out declines.
Fourth understand the truth about riding out declines. It is simple math to understand that if you lose 20% you need to earn 25% to get back to where you started (see chart below). This is because your increase is on a smaller amount of money. If you lose 50% you need to earn a 100% to get back to even. The question. Is it more important to make money or not lose money? Obviously it's more important to NOT lose money.
So what to do? When i hear advice i only pay attention to people who go both ways. What do i mean? If the person espousing advice is always short or always long i know they are dangerous. I only pay attention to those who are recemmending to go long and short, depending on what is happening in the markets. I only listen to people using technical analysis to make decisions. What i have found is that charts don't lie, people do. A great story will not stop a stock from imploding.
I have learned that most things in life do not come easy. It offends me that the entire financial investment community is telling you that it is easy. Just give us your money, keep giving it and everything will be fine. Everytime i see someone in their 60s or older working at a burger joint, i know the lie is exposed. My retirement and financial future is too important to blindly hand over to others.
--
I have gone through different "understandings" of how the markets work or how i thought they worked. I believe now i am finally starting to get it. To really "get it" you have to tune out most financial advice given on radio, tv, and print. Here are a few things i finally understand about the stock market and more importantly the advice you get about it.
The first thing to understand is most advisors are not advisors but salespeople. They really are only interested in selling you a product. That product being stocks in some form. It could be a solicitation to manage your money for a fee, to sell you a mutual fund, or to give you a stock pick. The real goal of any of these products is not to help you retire, but to make the seller and various associates money.
The second thing to understand is that most pundits you see or read consider themselves spokesmen. As such they feel they must always promote the market even when doing so will lose you money. Look at most of the shows on cnbc for examples of this. Also understand as well that all government officials from the president to the the chairman of the Fed will always lie to you and say everything is fine when they know it is not. This stimulus package is not happening because everything is fine. It is happening because they already have the preliminary numbers and know we are in a recession.
Third you must understand that stocks and the stock markets have cycles. These can run over very long periods, these cycles include periods of serious decline, and as such only buying is seriously restricting your potential gains and furthermore even threatening your ability to retire. If you think about it. It is nonsensical to think you should always ride out declines.
Fourth understand the truth about riding out declines. It is simple math to understand that if you lose 20% you need to earn 25% to get back to where you started (see chart below). This is because your increase is on a smaller amount of money. If you lose 50% you need to earn a 100% to get back to even. The question. Is it more important to make money or not lose money? Obviously it's more important to NOT lose money.
So what to do? When i hear advice i only pay attention to people who go both ways. What do i mean? If the person espousing advice is always short or always long i know they are dangerous. I only pay attention to those who are recemmending to go long and short, depending on what is happening in the markets. I only listen to people using technical analysis to make decisions. What i have found is that charts don't lie, people do. A great story will not stop a stock from imploding.
I have learned that most things in life do not come easy. It offends me that the entire financial investment community is telling you that it is easy. Just give us your money, keep giving it and everything will be fine. Everytime i see someone in their 60s or older working at a burger joint, i know the lie is exposed. My retirement and financial future is too important to blindly hand over to others.
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