Friday, December 30, 2005

Everyone Have a Happy New Year

Everyone, except for the guy who keeps calling me names. Everyone except the name caller and any other perma-bears who will make themselves miserable anyway worrying about anything and everything. Everyone except them and that's all. Everyone else. Except anyone who wanted to sell Unocal to the communist Chinese. Everyone except the name caller, the perma-bears, and commie lovers. And greedy corrupt corporate thieves. Not the name caller for sure. Especially not the name caller. Everyone except the name caller, the perma-bears, commie lovers, greedy corrupt corporate thieves, and any other bad people in the world. Everyone except all of those people have a Happy New Year.

posted at 5:21 PM 3 comments   

Yield Spreads

Here's a couple of charts I worked up showing the 2-year and 10-year spread and the actual rates for both going back to 1976, which was the earliest data on the 2-year note. What's interesting is how narrow the spreads were for six straight years from 1994 through 2000. When the spreads were very wide in the early nineties and again a couple years ago it was due to the Fed dropping short rates. From 1994 through present have been relatively economically prosperous years, despite the recession. That coincides with the obvious trend towards lower interest rate that can't go unnoticed in the second chart.

posted at 4:45 PM 0 comments   

Yield Curve Resources

Here's what other people have been saying about the yield curve. The links are reasonably randomly selected from the many sources that come up in Google searches. Given that the majority of the material I'm now seeing is more rationally saying that a yield curve inversion doesn’t necessarily mean a recession is coming, it's clear that six months ago when Greenspan called yields a conundrum the mainstream media went out of their way to paint gloom and doom picture. Now they are backpedaling.

First is a post found on my arch nemesis blogger's site The Big Picture, which in my opinion consists mainly of little picture perma-bearish views. And though Barry Ritholz didn't write the post I have to give him credit for posting it because it is a good post. But better yet are the comments made by Spencer in which he points out, as I have, that it's the corresponding economic problems that are causal, not the slope of the yield curve. Think of it this way. What if the Fed, in its effort to stem inflationary pressures, didn't raise short-term interest rates enough to invert the yield curve? Would we still have had a recession anyway? I think yes, even in 2000. In several cases we probably would have had runaway inflation and a recession, or stagflation as it's called. Here's the link: Implications of inverted yield curve for equities

And just so I can't be accused of making empty accusations (and note that I don't go on his blog and make negative comments without backing them up, as he has on mine, rather I just generally don't read his blog) take a look at Barry's post P/E vs S&P 500 (50 Years), which he quite narrow mindedly uses to present a bearish picture for stocks. In the comments Erik Alberts presents a more open-minded and analytical interpretation. Barry argues that stock prices will fall as PEs revert to the mean and then overshoot to the downside.

But the mean is constantly changing and is very different depending on the time horizon. If you take the mean of the last twenty years, which, as Erik points out, is probably more relevant for the reasons he describes, then PEs are actually below the mean and therefore stock prices are more likely to rise than fall. You get the exact opposite conclusion. In other words you can play with the data to make it say whatever you want to believe it says, which is what Barry has done. You can also look at the price-to-earnings chart and equally argue that PE ratios are on an uptrend that started 25 to 30 years ago. In that case reversion to the mean would be to the trend line, which the current average PE is well below. Another argument for higher prices. Understand that I'm not arguing that prices will go higher for the reasons I just countered with, rather I'm pointing out how a person can lie with statistics.

That is typical of Barry's consistently bearish statistically ignorant posts in which he seeks out data to support a conclusion he's married to.

Moving on…

Here's a link to what Lacy Hunt and others had to say in the WSJ, which was referenced in the comments. You probably have to subscribe to get this. The online rate is reasonable and worthwhile: Examining an Inversion

One interesting tidbit I noted in Lacy's comments was that he called 1995 a major business slowdown. To the best of my recollection that was barely a blip. There weren't any major layoffs or any really noticeable economic troubles that year.

This is TheStreet's Greg Greenberg: Little Concern About Inverted Curve

Yield inversion? Not so fast, CNNMoney

A Known Unknown: Curve Inversion At Low Yields, ING Investment Weekly

Inversion Humbug, Daily Speculations
George Zachar has a lot of smart things to say about the yield curve. First hit Control-F on the dailyspeculations.com page and search for Zachar to get his most recent comments. Then go to Google, click Advanced Search, put Zachar in the search box and dailyspeculations.com in domain box, hit enter. It's worth the effort.

What's With the Yield Curve?, Mises.org 2000

Here are some Fed white papers (PDFs) on the subject:

How Reliable Are Recession Prediction Models?, 1999
"The article concludes that these models have demonstrated some ability in the past to predict recessions. When judiciously interpreted, the models can help resolve uncertainty about the possibility of future recession."

Predicting Real Growth and Inflation With the Yield Spread, 1997
This is a good paper. It categorizes low yield spread conditions into whether they are caused by rising short rates or falling long rates. It notes that low yield spreads in 1995 were followed by neither recession nor an economic slowdown and that the low yield spread that year was caused by falling long rates. The current inversion is more similar to 1995 than other inversions, which came when short rates were very high. The yield curve is inverting, as the Fed raises short rates. But the curve is inverting because long rates are remaining stubbornly low, which is economically actually a good thing, not a bad thing. So this time is more like 1995 than like the flat periods that preceeded recession. "Since 1955, every recession has been preceded by a period in which the yield spread has fallen considerably below its historical average. Nevertheless, low spreads were not always followed by significant economic slowdowns. For example, the low spread observed in late 1995 was not followed by a significant decline in real economic growth."

Forecasting Recessions Using the Yield Curve, 2001
"…there have been have been numerous changes in the market for U.S. Treasury debt over the last two decades. For example, recently the Treasury has been buying back debt leading to a reduction in the supply of long-term Treasury bonds."

The Yield Curve as a Predictor of U.S. Recessions, 1996
"With a glance at the ten-year note and three-month bill rates on the computer screen, anyone can compute a probability forecast of recession almost instantaneously by using a table such as ours." Note that this article specifically talks about comparing the 3-month bill (4.08%) to the 10-year note (4.39%), which is not inverted. Only the 2-year (4.40) has inverted with the 10-year, and just barely.

posted at 3:16 PM 2 comments   

Thursday, December 29, 2005

More on the inverted yield curve myth

A reader writes:

I have to respectfully disagree with you regarding your statement "They [inverted yield curves] are NOT an indicator of recession." Estrella and Mishkin wrote a good paper on variables that forecast recessions. They concluded that the yield curve was the best leading indicator going out two to four quarters. You are absolutely on point though that the recessions have occurred with higher short-term rates and larger inversions. So if the Fed continues to hike rates up to 4.75% or 5% and the 10-year doesn't budge from 4.40%, the probability of recession (using Mishkin's old numbers) is roughly 40% to 50%.

I appreciate the reference. I haven't read the work yet, but will dredge it up.

There's a subtle distinction here. Any research making a correlation between yield curve inversions and recessions is automatically of limited value due to the small sample size. There's only like six data points to go off of. You can't rely on statistics and probabilities alone in this case. You've got to look at the inner workings.

Every time, except 2000, that an inverted yield curve led recession there were many serious economic problems already in the works when inverted yield curves led to recessions. You didn't need an inverted yield curve to indicate that a recession was looming.

Another point is that economically speaking an inverted yield curve means something very different now. In the past the high rates associated with yield curve inversions shut down the consumer and caused banks to fail. But banks were far less diverse and weather resistant than they are today, a point that I made here first, then Greenspan made just a couple of weeks later. So today the curve can invert without collapsing our financial system. Another misunderstanding about interest rates is that people seem to think that the 10-year note is what banks are getting. The banks aren't even close to inverting. They're paying 3.78% on a six-month CD, but they're getting 5.7% on a 30-year fixed mortgage, 6.82% on a HELOC, 7.82% on a home equity loan, and 6.44% on a five-year car loan. People aren't making the connection between bank profitability and all the home equity loans.

In 1981 the prime lending rate hit 20.5%, but the most banks paid on a six-month CD was 18%. So even then the average bank wasn't inverted. The problem, however, was that no one is going to want to borrow at 20%. The high interest rates shut down the consumer.

We don't have that problem today. A fed rate of 5% isn't going to shut the consumer down. Lending rates are stable. Banks can take them up a percent or two without breaking the backs of the consumer. All the talk about rising variable rates is nothing but fear mongering. It won't mean anything unless we start getting high lending rates of 10% and up again for an extended period of time.

Also, the curve is inverting for very different reasons than in the past. It's inverting today not so much because of what the Fed is doing, but because of what international investors are doing. They want to own our bonds. Our bonds are in limited supply, a part of the equation that regular people regularly over look. They'd own 30-year bonds if we were still putting them out. Why do you think the government is planning on bringing back the 30-year bond again so soon? To solve the yield curve inversion conundrum, of course. There's too much pressure on the 10-year.

The dynamic today is that foreign investors will want to hold 10-year notes even if the 2-year note pays a higher yield. They want the longer-term debt. It's a better store. They don't want to have to deal with replacing more volatile 2-year notes every two years.

So basically the inversion of the 2- and 10-year notes is meaningless except to people like the bond king and certain kinds of REITS who are getting squeezed. What does a low yielding 10-year note mean to the consumer? Absolutely nothing. What does a short rate of 5% mean to the consumer? Absolutely nothing so long as prime lending rates remain reasonably stable. The historical average prime rate is 7.62%. The current rate of 7.25% is hardly anywhere near dangerous territory and it's not at all recessionary.

So to say that an inverted yield curve alone implies that a recession is coming is like being both blind and deaf. When a blind guy steps up to a curb at least he can listen for the cars to get some idea about what he's heading into. But people who want to believe this nonsense about yield curve inversions want to just step off the curb without any information at all. They don't know whether they're stepping into traffic or an empty parking lot.

It's always better to have more information than less, despite what most traders will have you believe. Too many traders actually believe that less information is better. Some of them believe this because they are lazy or are easily overwhelmed by too much information. The 'smart money', the big players that know better, the hedge funds employing dozens of scientists, would like them to keep believing it.

So the correlation made between inverted yield curves and recession is both coincidental and spurious, blown up to mythical proportions by people with little or know understanding of statistics.

posted at 3:57 PM 9 comments   

A year in blogging...

In the past week I've been called a plagiarist (we don’t know what it was that I plagiarized other than it must be somewhere in either the WSJ or the NYT) and a retarded joke who's misleading people (by someone who can spell neither yield nor deficit, and can't tell us why I'm retarded, why U.S. stocks stink other than that they won't break out, what's wrong with the deficit and housing markets). Believe it or not this is probably a good thing. I typically get these kinds comments after the blog gets mentioned somewhere new. I weed out a few whackos, and then I'm left with new readers that have something intelligent to say and want to contribute to the site. I don't care whether or not people disagree with me. Obviously, you can't do this day in and day out and care about that. I do care about growing my readership because that's job security. But I don't believe that the best way to accomplish that is by telling people what they want to hear. I believe in setting myself apart.

I do care about misleading people. I think about that a lot. I've made it a theme in my writing to point it out when I see other market watchers trying to mislead people, which is most of the time. The analysts that come on TV tow whatever line their companies want them to. Typically, the line follows the path of least resistance. And that path is the one that brings in the most assets. Over the past year that's been in commodities trading and international stocks. They've told listeners what they want to hear. Mr. Rogers is one of those people telling people what they want to hear. Mr. T has been one of them. If you think not consider that Mr. T. is now saying that oil prices will fall because there's too much oil, but last spring and summer he was saying that prices would rise. Well inventories were consistently rising about the same amount then as they are now. Nothing's changed except Mr. T's tune and the speculative trend.

I do care about misleading people. I think about what I've said in the past. And when I look back at the work I've done over the past year I'm comfortable and pleased with the information I've put out. I know that I've steered people right to the best of my ability.

There's a guy out in middle of nowhere, swattin' flies, sittin' on an old diner chair backed up against the wall of a rundown filler-up station. People come up to him lost asking for directions. They don't like the way he gives directions. They laugh at him when they leave. But they don't realize that he could have totally screwed them over giving them bad directions. But he doesn't. He points them in the right direction, knowing they are laughing at him.

What does he know? He lives there. He knows the roads. He knows them in his sleep. When the people come they are lost. They are out of their element. They come in fancy cars, gold cards, and want change for a hundred. But what do they know out there in the middle of nowhere? They are lost. He can get them even more lost or he can get them back on the highway. He gets them back on the highway. He does the right thing.

When people read my blog they don't know what kind of guy I am. All they have to go on is my work. If I've steered them right enough times in the past they will become loyal readers who will refer my work to other people. If I steer them wrong they will move on. I'm no saint. It just makes good common sense for me to do the right thing. As it turns out there are so many greedy people out there trying to make a quick buck that a provider of accurate and honest financial information is somewhat of a rarity.

In looking back over the past year at the work I've done I started out with my introduction to see if I'm still on track with my original intentions and I think that I am. Moving through the year I started out explaining to readers how the dollar could rise much faster than most people realize and that it would probably rise over time. At that time most people—including Warren Buffet—were still down on the dollar.

The dollar has strengthened 12% this year! Have you any idea what kind of return that amounts to in the leveraged currency and futures markets? If you listened to the Oracle of Omaha you got screwed. When the Oracle was quietly unloading his foreign currency holdings last summer because he was wrong and losing too much money his cult followers were taking the other side of the trade. The dollar improved against the euro from $1.35 to $1.18 throughout the year. This nobody blogger had it right. The Oracle misled people.

All throughout the year I've countered the bears. The S&P 500 is only up 5% on the year. But that 5% is heck of a lot better than what you would have gotten shorting the markets, as the pessimists would have had you done. If you shorted the market and lost 5%, then you really had an opportunity cost of 10%. I also told readers that earnings would be better than expected and to buy into any dips early into earnings seasons. That has been true all year long.

I've warned repeatedly about small sample sizes and spurious correlations in data analysis. This is just one of the problems with the inverted yield curve myth.

Even going back to January I offered up a reasonably rational perspective on the oil markets. If you don't bother to follow any of the other links this brief post Oil Prices and Profits is worth reviewing. Up to that point I knew very little about the oil markets and from time to time I probably said some things that were wrong, but the topic has captivated me and I've become quite a bit more knowledgeable throughout the year. More importantly I've been right. Finally, the tide of nonsense has turned and traders are now net short believing there is too much oil. The current trend to the downside is likely to continued for some time to come as the long positions of hedge funds unwind and they choose not to get back in again and traders keep pressure on prices from the short side.

I've said a lot about oil throughout the year, mostly having to do with dispelling the many myths about the economics put out by the mainstream media, analysts, GS, Mr. T., and Mr. Rogers who have stood to benefit from hype and lies. Note that I never put readers on the wrong side of oil prices. I just dispelled the myths so they could be on the right side when the time came for the truth to come out.

Over the course of the year I adopted the motto that Markets Regress to the Truth. That has turned out to be both accurate and profitable time and time again. The oil markets are finally over most of the insanity we had to endure and prices are now in the process of regressing to the truth about he economics of oil. Short and long interest rates have collided, but the economy is still in decent shape and there's no reason to believe that we must now proceed into some sort of fate driven recession just that's what we always do when yields invert. The truth about the yield curve is coming out. The truth about the dollar has come out and if you don't see that the Oracle of Omaha wanted you on the other side of his trades, then you haven't learned anything.

What happened to Social Security reform? It's not important anymore? It was the hot topic last winter and spring. It's just vanished. I told people why they should be leery about putting S.S. money into the markets. Some people thought I was whacked. Some thought I was a democrat. But I said what I thought before the democrats had even taken a stance on the issue, which naturally had to be the opposite of whatever stance the republicans took. It doesn't really matter what the issue is. The republicans and the democrats will always inevitably polarize.

There was one unusual exception this year. That was when CNOOC tried to buy Unocal. Everyone except our business leaders and a few radical free trade cultists thought that was a bad idea. I stuck to my guns saying that was a bum steer of a deal.

I haven't written much about individual stocks. I've not wanted anyone to think I'm hyping or pumping and dumping here. But the few that I have specifically recommended have done exceptionally well. In the spring I told you that Cramer was wrong to tell you to sell cyclical stocks. I said that if a stock is cyclical and everyone is selling it, then it's as sure a thing as can be had that the stock will come back in your favor. Cramer said sell CAT. I said buy CAT. It was a great trade. I also said that CAT was a great buy and hold stock. I still feel that way. And Cramer has even been recommending it for some time now. It's up more than 20% since I first started writing about it.

On April 7 I wrote, "… the reason that Adobe’s stock is doing so well and will likely continue to, is that collectively people see the advantages the company has with industry standard products, a loyal following of users, and little competition. It’s a solid company with a solid line of products. What more could investors ask for in a company when so many major tech have been rife with controversy and scandal."

Since that time the stock has gone up from $34 to $37. Oooh, big winner, up a whopping 8%! But here's what I did for the subscribers of The Market Spectator letter I publish once a week. I suggested buying stock and even some options on three separate occasions throughout the summer, as it fell and fell. Then a couple of weeks ago the stock jumped about 10% and I said to sell some of those shares and lock in the profits. The locked-in and paper gains are pushing 40%. I have no qualms, whatsoever, about buying the stock of good companies on the way down.

Later in the summer I began to tell readers that Fed watchers and Fed Funds futures traders had it all wrong and that they were misinterpreting the Fed's statements and meeting minutes. I said they would keep right on hiking rates through the end of the year. When just about everyone, traders included, thought the Fed would pause after the hurricanes I told readers they were wrong and said that I thought the Fed would keep on hiking rates and that if anything the hurricanes were inflationary, not recessionary. That's been on the money, literally.

When have I yet to mislead my readers? I'm generally not one to gloat, but all I've got to go on is being right. I think those readers that have followed the blog throughout the year know that my track record has thus far been pretty darn good. If I'm wrong no one would want to read what I have to say and I've have to get a more traditional job.

In the newsletter I take what I write about in this blog and turn them into specific trading ideas. They have worked very well. I've tracked every idea put forth in the letter through a reasonably realistic model hedge fund. The model fund has always included a number of hedging positions and a cash percentage varying from about 10% to as much as 50% early on to limit risk. I've used stocks, options, commodities, index and other futures contracts, but have been careful to manage position size. And the return has risen steadily. Last week the fund broke through a gain of 50%, or more than 80% annualized. Even without implementing some of the more risky strategies and those requiring larger cash outlays subscribers should be finishing the year with very respectable gains far exceeding the major indices and recouping the modest subscription fees many times over.

So I can confidently laugh at anyone who has the gall to tell me that I'm misleading my readers. And I make no apologies for the arrogance.

posted at 2:36 PM 4 comments   

Wednesday, December 28, 2005

Inverted Yield Curve Myth

I haven't said anything recently about inverted yield curves. The 2-year and 10-year bond yields are flatter than a flapjack and briefly inverted, sparking the kind of media attention reserved for when the major indices hit round numbers like 11,000 on the Dow. Not surprisingly the consensus has regressed to the truth that inverted yield curves are coincidental to recessions. They are NOT an indicator of recession.

I searched the blog on the key words "yield curve" and got back three Google pages of links to posts on the subject and there are eight pages of Google links to the combination of my name and "yield curve". Earlier in the year just about every one was saying that an inverted yield would lead to a recession. I did a lot of data crunching, discovered, and shared the point that when an inverted yield curve has presaged a recession it has been at much higher short term rates and large inversions. The average Fed funds rate during inversions is 10%. What all the previous recessions led by inverted yield curves, except 2001, have had in common was inflation. Inflation and high, volatile short-term interest rates were the underlying problems—which we too easily forget about—that led to recession. The yield curve inversion was mostly coincidental.

CNBC's economics reporter Steve Liesman, whose commentary I enjoy, has been pointing these things out recently. Directly or indirectly that shift in understanding of yield curves came out of my work and this blog. I first wrote about it when Greenspan was called it a conundrum. Almost no one was saying what I was saying. Steve, how 'bout throwing this blog a bone?

If I were a big time speculator I might have hesitated to share that information and gone on letting people believe the yield curve myth. There's a lot of money to be made off of people misunderstanding the markets. I know of at least one hedge fund operator that likely would have appreciated my letting people go on believing that a yield curve inversion would lead to a recession.

I'll have more to say about this in future posts.

posted at 1:09 PM 4 comments   

Economics of digital music

I was reading this article Spitzer Subpoenas Music Cos. on Pricing and something occurred to me. What purpose do the record companies serve? What do they do for musicians? Basically, they market and distribute the musician's product. But the music industry is infamous for being ruthless with musicians and absorbing most of the profits. I suddenly realized that as digital music grows in popularity and the cost storing music on portable devices continues to fall, the companies distributing digital music will begin to serve the same function as the major record labels.

Artists might be able to skip signing with a 'label' to put out a CD, if the digital music distributor marketed artists in order to sell digital songs. Artists might not have to sign contracts at all. And in the long run the whole system might actually become more efficient. Artists could focus on putting out good songs independent of one another instead of packages of songs consisting maybe two good ones and ten bad ones. Music would improve over all, as artists spent their time going from one good song to the next instead of putting out garbage so the record companies could put together a package.

It could turn out that on digital music sales the artists could take a substantially higher percentage of profits on per song sales distributing directly through the digital distribution channels, and prices could come down such that volumes on the sale of a single popular song would go up enough so that artists actually made more money than they did signing contracts with the labels and putting out CDs. Then the tables would be turned, and the CD packagers would have to come to them and beg their permission to cut CDs. It could turn out that more artists could make comfortable livings off of their talents.

Obviously, the digital and CD mediums will exist simultaneously for some time to come. I suspect that for a while digital music will even be packaged and distributed on digital media cards such as SD and MMC. Instead of buying a CD we'd buy digital memory cards with two good songs and ten bad ones put out by the major labels and sold through Wal-Mart. After heading over to sporting goods to buy a big knife if we managed to get the package open without slicing a hand open, we'd pop the card into the slot on our car stereo, get home pop it in to the digital music player that's plugged into the home stereo, then later dump the cards content onto a PC, or copy the content onto memory cards with more space. Memory cards will likely replace CDs the way CDs replaced tapes and tapes did for eight tracks and albums. For a while CDs, digital cards, and Internet downloading would coexist simultaneously.

From an economic standpoint if the price of music comes down, demand for music will go up. The market for music will grow. If people spend about the same amount of money, but just get more for their money, then roughly the same amount of money goes into the music business. Now if you cut out a middleman—the record labels—and commoditize the distribution, again you've got roughly the same amount of money going into the system, which equates to more money for artists.

It's similar to advertising dollars going to small websites. If companies have relatively fixed ad budgets, then most of the advertising dollar being taken in by small and mid sized Websites is a dollar lost by larger ad distributors. I say most because, as I said with music, having cheaper ways to advertise serves to grow the market for advertising. In other words people that might not have advertised before will consider advertising when prices come down.

Conclusion: In the long run the economics of digital music, despite rampant music stealing, will probably be good for everyone except the major record labels except for those that reinvent themselves by crossing over into digital music distribution. There will always be a market for packaged music, however, just as there is for packaged stocks such as with mutual funds and ETFs. It's just that the distribution method is changing.

The digital music distribution business should keep growing, as these businesses get more into marketing artists and introducing music to their customers, taking the place of CDs put out by traditional labels. But the digital music distribution business will become increasingly commoditized and competitive going through a typical cycle of initially increasing interest, then a consolidation phase, with a few key players eventually remaining or even emerging.

This is similar to the process that Web browsing software and search engines have gone through. I can imagine that after several years of the current players battling it out a newcomer might come along and stand the competition on their heads the way Google has done to other search engines.

In terms of investing in these companies they don't seem like great investments to me, yet. The digital nature makes it possible for technologies, distribution methods, and therefore market share to shift from one company to another quicker than most people probably realize. The dynamics seem more closely related to that of web portals, search engines, and especially online brokers rather than the traditional media company, which to me makes them unnerving and unstable investments. I'm willing to turn my back on a lost opportunity and not look back. I'd just enjoy the music and maintain a sort of separation of music and markets.

posted at 11:39 AM 0 comments   

S&P to add 3 cos. to benchmark 500 index

S&P to add 3 cos. to benchmark 500 index
Standard & Poor's said Tuesday it will include both companies that now comprise media conglomerate Viacom Inc., along with natural-foods supermarket chain Whole Foods Market Inc. in its benchmark 500 index.

posted at 10:48 AM 0 comments   

Tuesday, December 27, 2005

Regulators Threaten to Liquidate Refco Unit

Regulators Threaten to Liquidate Refco Unit
WASHINGTON (AP) -- Regulators threatened to liquidate a unit of Refco Inc. that isn't under bankruptcy-court protection, expressing "serious concern" about the language of a recent court order that directed the unit to transfer customer assets.

posted at 4:39 PM 0 comments   

Somebody has to be the goat

Lot of talk on the TV about natural gas today, as it's dropping like a rock. Do you recall that I commented on natural gas prices about a month ago? The post was The Natural Gas Trade on December 1. You can go read that and come back if you care anything about the topic. To summarize, I said that I thought that the chances were better than 50% that natural gas prices would be lower in three months from that point. Looking back at where prices have been since that post I see that natural gas closed at $13.03 on December 1, peaked out at $15.78 as a cold spell descended upon the NYMEX because that's the only place the weather really matters near-sighted traders, and has since fallen all the way back down to $11.14 today. That's heady volatility. Prices went up by more than they have fallen overall thus far. But overall is all that counts if you can stand the pressure of prices going against you. It's been less than a month, but if I had taken this trade I think I'd take my profits (hint, hint) on half or all my contracts on today's big sell off. I wouldn't be too greedy.

But I might like to save some of the profits to short natural gas on some longer-dated contracts, say going out say nine months or more, if we get another weather related spike in prices later in the winter, which is very likely to happen though at the risk of coming at a lower low given the current trend. It's interesting to compare the price action across all months. Today every single contract is trading lower going out even through December of 2011. Natural gas is trading lower supposedly because of warmer weather being forecast for the near future. One energy trader on CNBC this morning blamed T. Boone Pickens' (Mr. T. to blog readers) bearish comments last week more than anything else. And I noted that this trader appeared quite dejected and embarrassed because I've seen him come on the air many times and he's been a consummate bull. He was eating crow, presumably both in his trading account and with viewers. His save face was to call for much higher prices to come several months from now. He was none to happy with Mr. T.

But most interesting was what this trader's reaction said about how much of an influence a persona like Mr. T. can have on the markets. In general people don't want to believe that one person can have such an influence on our markets. They don't want to believe that Jim Rogers (Mr. Rogers to blog readers) could have had any significant influence on the commodity markets with his book Hot Commodities putting commodities on the pedestal as the "World's Best Market". Why don't they want to believe such things? Because everything they believe about the markets goes out the window. Fundamental analysis, gone! Technical analysis, gone! Quantitative algorithmic trading, gone! It all ceases to mean anything if you believe that a single person can step up to the mic, open his mouth, and suddenly everything you thought was true, right, and just about the markets proving to be dead wrong.

Of course that's a bit of an exaggeration. Those things do matter. But they don't matter as much as people would like to believe they do. It's easier to view the markets as black and white, though in reality they aren't at all black and white and lots of things affect prices. Markets are ruthless and uncaring. To the extent that they are fair is partly coincidental. To the extent that markets regress to some mean is mostly coincidental. Markets regress to whatever the truth is. If there is no major disruption the truth at that moment might be the mean. But when Mr. T. steps up to the mic there's a new truth. The new truth is traders now have to factor in the reality that a major player is probably shorting energy to the tune of billions and few traders want to take the other side of those trades at current prices. Who's going to take the other side then? Probably naïve new hedge fund managers buying on the way down. Somebody has to be the buyer on the downside of a bursting bubble. Somebody has to be the goat.

posted at 12:50 PM 0 comments   

The Lagniappe

That wasn't a bad lagniappe.

Oil opened Friday at $58.26 and closed at $58.43, a modest gain on the day of $0.17. If my theory is correct that gain indicated that traders were net short and bought oil to go into the weekend flat. Oil opened 58.30 this morning and is now trading at $57.66. So say you shorted oil near the close last Friday at about $58.40 you'd have a gain of $0.74 right now. That's a gain of $740, more than 15%, per contract, essentially in a half a day's trading.

But just as importantly we had it confirmed that traders are indeed net short oil.

posted at 10:59 AM 0 comments   

Oil, Heating Oil and Gas Fall as Warm Weather Cuts Fuel Use

Oil, Heating Oil and Gas Fall as Warm Weather Cuts Fuel Use
Dec. 27 (Bloomberg) -- Crude oil, heating oil and natural gas fell on speculation fuel consumption will plunge amid forecasts for rising temperatures in the U.S.

posted at 10:26 AM 0 comments   

Friday, December 23, 2005

A Holiday Lagniappe

It's hard to get a read on which way the majority is leaning day-to-day. However, what happens today will be telling. Longer-term investors won't likely make much change. Traders worry over weekends and worry a lot more over long weekends. Markets are closed the next two Mondays. What trader wants to be worrying their positions over Christmas? So they get flat.

Getting flat will be the primary market mover today and again next Friday. The great thing about that is that it tells us a lot about where traders are positioned in the market. If, for example, oil ends the day lower, then traders are still net long because they will have to sell long positions to get flat. So what does that tell us they will do on Tuesday? Naturally, they will want to buy back the positions they sold. They will go long again and prices will rise. This would be true for all markets, not just energy. But traders tend to worry more about oil than most other markets due to the potential for geopolitical events and terrorism especially given the significance of the religious holiday and differences of opinion in that regard.

This affect would be offset by any traders willing to go against this tendency by taking the other side and holding through the weekend. I doubt that would be too much the case this weekend, but as quick as traders are to pick up on any pattern the New Years weekend might see heavier contrarian trading. If position size is managed properly one should be able to turn their backs to the markets and not worry too obsessively. What I would / will do is get a read on the markets as the end of trading approaches then take a position before the day ends and reverse the position sometime Tuesday.

Consider this your holiday lagniappe and for icing on the cake here's a definition of lagniappe by Mark Twain that I lifted from an excellent out of cookbook Mississippi Memories: Classic American Cooking from the Heartland to the Louisiana Bayou, which I found at a library book sale yesterday for $2.

We picked up one excellent word—a word worth traveling to New Orleans to get; a nice, limber, expressive, handy word—'lagniappe.' They pronounce it lanny-yap. It is Spanish—so they said. We discovered it at the head of a column of odds and ends in the Picayune the first day; heard twenty people use it the second; inquired what it meant the third; adopted it and got facility in swinging it the fourth. It is the equivalent of the thirteenth roll in a 'baker's dozen.' It is sometimes thrown in, gratis, for good measure. When a child or servant buys something in a shop—or even the mayor or governor, for aught I know—he finished the operation by saying: 'Give me something for lagniappe.' The shopman always responds; gives the child a bit of licorice-root, give the servant a cheap cigar or a spool of thread, give the governer—I don't know what he gives the governor; support, likely.

What trader doesn't want an extra bit of profit for Christmas? Have a nice holiday.

posted at 12:46 PM 0 comments   

Thursday, December 22, 2005

Consumption vs. Stockpiling

In the brief post China, India Firms Said to Buy Oil Assets I said, " If these countries are in fact securing foreign energy supplies to fuel their 'booming' economies, then it makes sense that they would be doing the same with a various other nonperishable commodities. If there were a valid reason for higher commodities prices a race to control the world's resources, more so than consumption, would be it."

I put booming in semi quotes for a reason that was far too subtle. We are told that China's economy is booming and the belief that China is demanding more commodities to feed its growing economy is constantly used to explain higher prices. We are told that China's economy is growing at about 9%. But China's growth isn't at all what it seems.

It occurred to me that China's high level of growth is probably related to our own growth. Year-over-year the GDP of the U.S. has grown from $11.82 trillion to $12.61 trillion, or 6.7%. The difference is $790 billion. Meanwhile, China has a GDP of $1.98 billion at the current exchange rate. At 9% growth China's GDP will increase $180 billion to $2.16 trillion. So just our growth alone amounts to roughly 37% of China's entire GDP.

This gets a bit tricky. I'll do my best to explain it as clearly as possible. Please do ask questions if I'm not clear enough. I then looked at trade data and found that that the value of all goods and services we import from China increased from $152.4 billion in 2003 to $196.7 billion. That's a gain of $44.3 billion, which equates to 25% of China's GDP growth.

What this means is that 25% of China's economic growth has came directly from our increase in imports. Obviously, the U.S. is the largest importer of Chinese goods and services. According to the CIA FactBook China's exports are valued at $583 billion with the breakdown as follows; US 21.1%, Hong Kong 17%, Japan 12.4%, South Korea 4.7%, Germany 4% . Not surprisingly, those numbers don't jive with the trade numbers above. Part of the difference might be related to shipping costs, as the total export data is calculated FOB, or Free on Board, which doesn't count shipping costs. But I believe that the import trade data would. Anyway, the $583 billion in exports is 30% of the countries entire GDP. The growth in value of all countries imports added together would make up a very large part of China's economic growth.

What I'm driving at is that China's demand for commodities is mostly being driven by the rest of the world's demand for their products, mostly industrial and manufacturing related. In other words the countries demand for commodities is not so much related to internal growth. Therefore, when you look at the very big picture of the world's consumption of commodities the growth rate should be closely tied to the GDP growth rates of the world's largest countries such as the U.S. and the rate of growth in commodities consumption should be relatively stable between 3% and 6%. China's economic growth is mostly irrelevant in the bigger scheme of things.

This further evidenced by the fact that Chinese workers aren't fully participating in the countries GDP growth. The country has 20% unemployment, 4% inflation, and the average wage is falling as a percent of GDP. The reason is simple. The communist government sets wage caps on manufacturing jobs so that government is the main beneficiary of their increase in exports. If unemployment is still very high and the Chinese people are only making a little more money then they wouldn't be consuming much more commodities and therefore most of the increase in commodities consumption would be going right into the manufacture of the goods we buy. Hypothetically, if we had zero growth, but more of our stuff came from China, then China's increased demand for commodities would just be a shift from some place else. But since we're growing on average between 3% to 6% then that's roughly how much we should expect net commodities consumption to increase, which is fairly stable and consistent. So I don't at all believe the story that the world is suddenly consuming a lot more commodities. The world is consuming more, but the rate shouldn't have increased. But obviously, commodities prices have been anything but stable and consistent.

What I alluded to being more concerned about is what the Chinese communist government is doing with all that money. One thing we know is that they have to spend money to support a weak currency. Another thing they've done is stockpile copper. They're also adding oil interests around the world. And I seriously doubt that copper is the only commodity that the country is stockpiling massive quantities of.

In yesterday's WSJ there was an article describing China's plans to build their own commodities market. Of course, it's China such a market wouldn't be independent of the communist government. In fact it wouldn't be a free market at all because the state-owned enterprises (SEOs) that would be buying the commodities are also owned by the government. So indirectly the companies buying and selling commodities would own the exchange, a serious conflict of interest.

Everywhere I look the evidence points to a China that has a long-term goal of cornering and controlling the world's commodities as manipulatively as the country controls its own economy. If that were true, that would be a much more legitimate reason for higher prices than the phony baloney consumption story we've been fed. And there's much more evidence to suggest that this is true than not. What concerns me most is the possibility that leading governments around the world could end up in a race to acquire control over the worlds commodities much like they once did with land. I think it's eventually inevitable. It would be ugly and the U.S. would likely find itself behind in the race because as democratic capitalists we believe that the government shouldn't be involved in such things, leaving it to companies that are lacking in long-range goals and foresight. We would likely react to a problem, rather than be proactive.

So I am making a case for the possibility that non-perishable non-renewable commodities could be a good investment for the long-term, but for very different reasons than most experts have told us. Substitution and invention can react in time to counter shortages when the growth rate of consumption is modest and consistent. But these counter balances wouldn't likely occur rapidly enough to offset a rush to control commodities.

posted at 2:50 PM 3 comments   

Apples and Oranges

The article Risky investments don't always offer biggest rewards is worth reading. It compares the results of funds with high volatility to those with lower volatility. But it left me wondering if there's a bias towards more volatile funds being less diversifies. For example, a gold fund would be closely correlated to the price of gold. Naturally we could expect that if the price of gold tends to be more volatile than the S&P 500, then a gold fund would be more volatile than the popular index. In other words, in just comparing all volatile funds to less volatile funds might be comparing apples to oranges where the volatile funds tend to be focused on niche sectors and possibly small and micro cap stocks. Is this right? Without extensive statistical research I can't say for certain, but it's a good hypothesis and there's a good lesson in not taking such information at face value. It might just be that relatively more volatile funds containing stocks with comparable market caps and a comparable level of diversification actually outperform a less volatile fund. I suspect that would turn out to be the case.

posted at 1:07 PM 0 comments   

Wednesday, December 21, 2005

An Ersatz and Wayward Economist

When you take in news analytically, as I did in the Statistics 101 post, you start seeing statistical flaws everywhere you look. Within minutes of publishing the fore mentioned post a TV segment caught my ear. Charles Wheelan, Ph.D. is a public policy lecturer at the Harris School of Public Policy at the University of Chicago, contributes the Naked Economist column to Yahoo! Finance, and authored a book of the same name, which is yet another targeting the armchair economist.

He was interviewed about a survey of Yahoo! Finance readers on various topics such as what they thought about energy prices, housing, etc… I was unable to locate the survey or any related articles. Wheelan had this to say about the survey with regard to housing prices, "Those folks that said there might be a correction in the housing market, we then followed up and said, 'Alright if there's a correction in the housing market is it time for you to jump in and buy?' And surprisingly a very low fraction of folks said they could jump in the markets, only about 10% to 12% said they would use a correction in the housing market to buy."

The commentator then took full advantage of this information to justify their slowing housing market hype saying, "Well, there you have it! I mean if you look at exactly what people are saying, that's an average individual saying, 'Well, I'm done. I'm not going to try and do the condo flipping fever at this point.'"

Thank goodness for being able to rewind live TV, which enables me to go back and get down precisely what was said and transcribe it for the posterity of a page in the history of pseudoscience. Being able to rewind live TV is right up there with when the microwave came along. I recall how we used to stand back a good five feet and over to the side so as not to get radiated, or is it irradiated? A common concern at the time, I found it ironic that they put windows on them enticing us to put our faces right up to the glass. Whoops lost my page.

After having used the live rewind for a while am I the only one that finds myself wanting to rewind the radio every time I listen to it, and now even things people say? I don't want to invade their privacy, but I just don't want to have to ask them to repeat themselves partly because when it's my wife she never, ever says the same thing again. It's always something completely different the next time, leaving me frustratingly trying to piece together what she actually said the first time. And I'm neurotic about being factual, so it nags at me like a deer fly and I can't just let it go. If I could just rewind what people said, then if we're fighting about something stupid and I say to her that that's not what you said the first time, well then I could just play back what she said. Of course, that would just make her madder. But, boy wouldn't be a hoot. It would be worth it, for sure.

It's no wonder the TV commentators despise us bloggers. We're making their life miserably accountable with our rewind buttons. They'll have to actually start thinking about what they're saying.

Anyway, this Wheelan, Ph.D. guy shouldn't have let the commentator get away with that. He should have known better. I couldn't tell if he meant to be deceptive, or just didn't get it himself. But, immediately questions after question came upon me from whatever well it is from which springs forth my desire to be an antagonist. I'm thinking how can we conclude from that tidbit of information without any relative perspective. Maybe only 10% of people said they would buy a home if there were a price correction because the other 90% liked the home they had. Maybe at any given time only 10% of the people want to buy a home regardless of price. Maybe most people buy homes for reasons other than profit. Then too if there is a correction it seems obvious that less people will be interested in speculating on homes because they wouldn't have any way of knowing when the market would stop correcting or how long it might take for house prices to rise again. What was the percentage of people speculating on homes at the height of the supposed housing market mania last summer? I suspect it was very low, a few people with a lot of money speculating on multiple properties simultaneously. Has that number really changed any? These are just a few of the relevant questions that would have to be answered before one could logically conclude from the data provided that it was evidence of a slowdown in the housing market.

If you're thinking, 'yeah, but there is evidence of a slowdown', then you're not getting the point. That may very well be true. But it's irrelevant. The point that I'm making is that this is how the media trumps up the story they want you to believe. In this case it's a slowdown and they fit every bit of irrelevant information into the story to make it seem more compelling than it actually is, just as the in the USA Today article in my Statistics 101 post used irrelevant and inclusive data to back up his message. The meaningless information presented by this Ph.D., which isn't saying much for our educational system, tells us absolutely nothing about peoples' relative propensity to speculate on homes.

Last summer they hyped the housing market speculation. Now they're hyping a slowdown. Reality is somewhere in between the two extremes. There probably wasn't nearly as much speculation going on in the first place as the media wanted us to believe, and the slowdown probably isn't as significant as they want us to believe now.

It's like creative accounting. The true numbers don't just disappear. They're there somewhere. It's just that the accountants manipulate and massage the numbers, pulling the ones they want you to see up front and center to paint a picture that leads you to come to a different conclusion from the truth. Maybe they didn't lie, but they let you fool yourself. The media uses creative journalism and paint by numbers to get you to deceive yourself.

posted at 2:08 PM 0 comments   

China, India Firms Said to Buy Oil Assets

China, India Firms Said to Buy Oil Assets
The leading oil companies of China and India have agreed to jointly acquire a Canadian firm's petroleum interests in Syria in their first collaborative venture, a Chinese government news agency reported Thursday.

The announcement comes as China and India, longtime rivals, are aggressively expanding their efforts to secure foreign energy supplies for their booming economies, sometimes in direct competition with one another.

What about other commodities? That too subtle? If these countries are in fact securing foreign energy supplies to fuel their 'booming' economies, then it makes sense that they would be doing the same with a various other nonperishable commodities. If there were a valid reason for higher commodities prices a race to control the world's resources, more so than consumption, would be it.

posted at 12:57 PM 1 comments   

They wouldn't do that!?!?

Alaska sues BP, Exxon Mobil over natural gas
An antitrust lawsuit filed against Exxon Mobil Corp. and BP PLC claims the two oil giants are restricting the nation's supply of natural gas and keeping prices at record highs.

posted at 12:46 PM 2 comments   

Statistics 101

I was cleaning up some newspapers from my office floor and skimmed over a USA Today article Optimism puts rose-colored tint in glasses of top execs from last Friday. It was a great article! A crowning example of how the media abuses statistics.

"When 50,000 workers were asked, 54% of senior managers said they viewed their organization as 'healthy,' according to a Booz Allen Hamilton survey released last month. But just 33% of middle managers and less than 30% of the rank and file echoed the sentiment."

"Senior managers are overly optimistic, even about their own careers." the next paragraph began.

Seeing what's wrong with this analysis? The author uses literary trickery to make the data seem to fit the conclusion they wanted you to believe. Let's rephrase the statement.

50,000 workers were asked if they felt the company they worked for was 'healthy'. 54% of senior managers answered in the affirmative, 33% of middle managers agreed, and just 30% of everyone else thought their company was 'healthy'. Which is the most likely answer.
A) Senior managers are overly optimistic.
B) Rank and file employees are too pessimistic.
C) Senior managers are realistic.
D) Senior managers are more optimistic because they get paid a lot, lot, lot more.

'Healthy' is an extremely subjective term. It could mean different things to different people. The survey included 13 companies. That means the companies had at least an average of nearly 4,000 employees each. However, it could be that the companies had many more employees, but only a cross section was surveyed. I don’t know the details of the referenced survey, but that's irrelevant. The point I'm driving at is that the companies surveyed were large enough such that the senior management would be enjoying fat salaries, bonuses, and stock options. Naturally, these same executives told their employees that they didn't meet sales goals and therefore they would only receive modest bonuses.

Are the executives going to feel differently about the 'health' of the company than the employees? Are the employees going to take 'health' to mean something different than the executives? No company I ever worked for had a good year when it came time to hand out bonuses, but they had a great year when the 4th quarter earnings and annual reports were being handed out down on Wall Street like flyers for a new lunch place.

The whole premise of the lengthy article is that the data concludes senior executives are overly optimistic. What is healthy? Positive earnings? Chances are that in a survey of 13 randomly selected companies with an average of 4,000 employees each, all, or nearly all, of them would be financially healthy, as opposed to failing and being on the verge of bankruptcy. From that perspective even the senior executives are overly pessimistic.
As evidence of how senior managers are overly optimistic about their careers the author says, "When executive job search firm ExecutiveNet this year asked 1,500 executives how long they expected to be at their present job the average answer was 5.4 years. In reality their tenure has slipped to 3.6 years on average from 4.1 years in 2002. Last month there were 118 CEO departures vs. 46 in November 2004, according to outplacement firm Challenger Gray & Christmas."

The multiple-choice question was fun. Let's do it again.

1,500 senior managers expected to stay at their jobs an average of 5.4 years. They actually stayed an average of 3.6 years. Last month 118 CEOs left their companies, compared to only 46 a year earlier. Which is the most likely answer.
A) The executives were overly optimistic about their careers.
B) The executives left 'unhealthy' failing companies behind.
C) The executives were fired.
D) The executives were offered more money to work for another company.

You can't come to the conclusions that the author does without knowing more about why executives left their companies, nor can you conclude that just because executives are more optimistic than rank and file employees the executives must be overly optimistic. It is no wonder so many people believe so many wrong things about the markets.

posted at 11:36 AM 0 comments   

Tuesday, December 20, 2005

The Exchanges

I don't talk about individual stocks very often here. Today I want to suggest a group that I'm very bullish on long-term, and I do mean long-term. Consider it my Christmas present for reading the blog. I really like the exchange stocks; CME, BOT, AX, NDAQ, and ICE. The reason is simple, but perhaps not obvious to all. Do you see a pattern in these recent headlines?

CBOT, Singapore mart to launch commodity exchange
CME has made contact with NYMEX
NYSE begins rollout of hybrid market
Nasdaq's Instinet acquisition complete
Nasdaq sees growth in Chinese listings
NYSE Seat Holders OK Archipelago Purchase

Consolidation, expansion, and globalization. American exchanges taken public have access to the capital needed and the technological know how to become large international companies. I envision that these companies will open up, partner, and improve markets around the world. Many countries will be willing to do deals with these exchanges in order to get their markets on the right track. This will mean tremendous growth and little competition for these companies for many years to come. The CME and CBOT are particularly well positioned to take advantage of international growth opportunities. Fair warning these stocks will no doubt be highly volatile and often relatively expensive. But I believe that the long-term trend will be mostly up.

posted at 12:56 PM 0 comments   

China Rhetoric

Did you hear that China revised its 2004 growth rate up 17%? What can we make of that? I think it says that they don't have a clue. We're supposed to believe that the Chinese economy was much stronger than previously thought. But what the magnitude of the adjustment says to me is that the data cannot be trusted. That shouldn't be new news to anyone, but apparently it is since whenever we get big numbers from China the cockroaches crawl out of the woodwork to sell us China funds and ADRs. They take the path of least resistance to getting as much of our assets under their mismanagement as they possibly can.

posted at 12:26 PM 0 comments   

Switch Hitter

Speaking of CNBC. T. Boone Pickens, or Mr. T. as I like to refer to him, was on this morning saying that oil prices will likely fall because there is too much oil! If you've been an oil bull, and you know who you are, then you've probably been inclined to defend Mr. T's predictions for higher oil prices in the past. Take notice of your emotional state and your interest only in data that tells you what you want to hear if your not so quite so keen on his latest forecast.

It's been interesting to see how his opinion has gradually shifted over the past several months. About a month ago he came on and simply backed off of his prediction for continuously rising oil prices. This time he's reversed course. About the time a person might take to swing an oil tanker or a multibillion-dollar hedge fund from the long side over to the short side. Guessing I'd say he's now long longer dated contracts and short shorter dated contracts, as I've suggested one would do if they believe oil prices will rise over time. That trade would net a decent return on the risk premium provided by the backwardization of the market.

What the heck did I just say? A backwardized market is one in which the longer dated contracts tend to be cheaper than short dated contracts, which has been the case with the oil markets. When the opposite is true the market is said to be in contango. Generally, all things being equal, a market will be backwardized and future months will rise as they become the time to expiration approaches. In other words it's typical that if the front month contract is say $50, then a contract set to expire one year from now might be say $45. Therefore, all other things being equal, the person willing to hold such a contract for one year would reasonably expect the contract to rise in value from $45 to $50. The return is essentially a risk premium derived from the fact that since traders don't want to be exposed to that risk for an entire year, there is less demand for the longer dated contract than for the front month contract.

So the normal structure for the market is for it to be backwardized somewhat. Typically, when a market is significantly backwardized its because there's a near term shortage that isn't expected to continue into the future. But there's another reason why a market might get increasingly backwardized. Speculation. What we've seen over the last year or so is a substantial increase in speculative interest in the oil markets and that interest has been focused primarily on trading front month contracts. In other words the demand for front month oil contracts has increased over the past couple of years.

Meanwhile, analyst after analyst, usually working for some fund or another that's been long oil, has told the public over and over that the world is demanding more oil and supply is diminishing. Even the oil companies have jumped on the bandwagon suggesting this in their marketing. But the market action hasn't reflected this expectation at all. From what I've explained you should see that such a market should be in contango, not backwardized. Future prices should be higher than current prices because a barrel of oil five years from now should cost more than a barrel of oil today and therefore traders and hedge fund managers should be bidding up longer dated contracts more than they have.

The way I see the market is that analysts and fund managers have mostly been full of it and saying whatever is in their best interest at any given moment in time. Mr. T. isn't going to go on TV saying oil prices will likely fall if he's long several billion worth of front month oil contracts. That would be idiotic and we know he's no idiot. For him to say that oil prices will likely go lower can reasonably only mean one thing, that he's now net short the close month contracts. No doubt he's had no trouble finding buyers for his long contracts or finding traders willing to take the other side of his shorts. It feels to me like the top of a bubble. We're at point where there's been a great deal of public buzz generated over the returns oil has brought investors over the past couple of years and as is typical average Joes are finding ways to get into the market, while the Mr. Ts of the market are taking the other side and trying to influence prices lower.

Now I give Mr. T. some credit for his ability to turn the ship around. His commodity bull cohort Jim Rogers cannot do that because he's committed. He published Hot Commodities just a year ago purporting that the commodities market was the best market in the world and citing all sorts of reasons, illogical and otherwise, for why commodities were a great investment. So he's committed to being a commodity bull, or at least to keeping up a facade.

posted at 11:18 AM 0 comments   

Monday, December 19, 2005

Problems With CNBC's New Format

I'm not too crazy about the new CNBC format. Ok, I can't stand it. I don't like the sci-fi Matrix look and annoying futuristic beeps that sound like doors opening on Star Trek. But worst of all their new display doesn't fit on my TV. I spent, no wasted, a good hour this morning trying to figure out how to squeeze the display to fit all the content onto the screen. The TV in my office is a flat screen Sanyo only a year old. When I push the display down as far as it will go I can only read half the top ticker and none of the bottom ticker. Going in the other direction I can't see any of the top ticker. If they don't fix those things, Bloomberg will be my default financial channel.

posted at 4:10 PM 10 comments   

Fundamentally Managed Index ETF

An interesting new ETF began trading on the NYSE today. The new ETF straddles the line between a managed and passive fund. It's a formula driven fundamentally weighted index. It's still an index fund from the perspective that the formula used to determine the weightings is fixed, but given that the weightings are driven directly by various fundamentals makes the fund like a managed fund because the formula itself is inherently subjective. Someone decided what fundamentals to use and the parameters of those fundamentals. It is an interesting new direction. I like the new choices ETFs are offering and the heat they are putting on the mutual funds in terms of competition.

posted at 3:24 PM 0 comments   

The Freakonomics Debate

I don't suppose it would surprise any of you that my writer's block lasted less than an hour.

If don't get the Wall Street Journal online I highly recommend doing so. It's well worth the reasonable cost. Just suck it up and get it. After you're signed up check out Debating 'Freakonomics', which delves into a debate over a chapter on abortion in the popular Freakonomics book. I've not purchased the book because I wasn't all that impressed with what I saw at first glance. It seemed to be written too much with the New York Times Best Seller crowd in mind for my taste. I suspect the somewhat similar book The Undercover Economist is a better choice for learning to understand economic concepts in fun way.

However, putting the thorny topic of abortion aside, the debate kicked off by a working paper written by Boston Fed economists is interesting from the perspective of understanding spurious correlation and other relevant economic topics.

It's an odd thing for a Federal Reserve Bank to be writing on, I'll grant you, perhaps falling outside their scope. But, I do want to give the Fed economists in general credit where it's due for doing some of the best economic research freely available. I read or skim a heck of a lot of Fed papers and find many of them to be worthwhile and educational.

posted at 3:02 PM 0 comments   

What's really moving the markets?

What's moving markets today? Nothing. The markets are quite dead, as is the news and my own insight into the action. For the first time in a long time I'm finding myself at a loss as to what to write about. Typically, at any given time there's always something that strikes me as worthy of comment. You can sense that the holiday season is upon us.

Previously, a reader asked me if I would comment on my thoughts on the markets for next year. A good suggestion, which I'll work on and look to publish sometime between now and the end of the year taking the time to provide reviews of relevant information that's apt to move the markets.

But I won't be tuning out the markets or signing off the blog through the holidays. Some of our most volatile market days come when Wall Street goes on vacation, volume falls off, and retail investors take command of the action. I am reflecting on the work I did over the past year and will also be pondering the direction I want the blog to go over the next year and how I can improve on the information I'm providing. Today, I'm catching my breath and enjoying a sigh of relief with this lull. Or is it the calm before the storm?

posted at 2:15 PM 0 comments   

Friday, December 16, 2005

Book Review

A book I've currently been enjoying on the treadmill is The Undercover Economist. I haven't gotten far enough into it yet to judge the author, but I can say that so far he's been thought provoking on the subject of how prices are set, which relates back closely to my own interest in how futures and spot prices are connected and the implication of speculation on markets and prices.

If you like the free blog, maybe you'd like to know what I'm reading, and maybe I can make enough extra money, via my Amazon account, to fund my own addiction to books, or take my wife out to dinner.

posted at 1:58 PM 0 comments   

Friday Fun

I've been completed inundated by emails pouring in telling me to "GET SERIOUS".
Kidding again of course. I do think a healthy dose of humor, sarcasm, and skepticism about the markets is a good thing. I don't know any better way to keep reasonably sane and cope with the minute-by-minute lunacy the market, mainstream media, pundits, and analysts throw at us. I'd rather laugh at it than shut it out altogether.

A reader sent this link to camphone pictures of the 'melee' that erupted after the $335 million Mizuho trading mistake.

Just having a little fun on a Friday. Little too much coffee perhaps.

posted at 1:14 PM 0 comments   

Spitzer Plans to Spit

BDEEP, BDEEP, BDEEP DEEP DEEP, CHNK,CHNK,CHNK…

BREAKING NEWS ALERT

This just in from the wires.

Spitzer reportedly plans to spit on Greenberg's grave. An anonymous source is reported as having heard Spitzer say, while simultaneously going cross-eyed, buggy-eyed, googly-eyed, and gaa gaa (Spitzer, not the anonymous source), quote, "When he is gone I will go to his funeral and spit on the thieving bastards grave!" Also said the anonymous source, "He was frothing at the mouth while he was telling this to me, and spittle got in my eye. I figure that's where he got his name. He must be from a long line of spitters. Do you think I should see a doctor or lawyer about that?" End quote.

posted at 12:28 PM 0 comments   

The Adobe Bunch

In honor of Adobe's earnings to the tune of the Brady Bunch theme song:

The Adobe Bunch
by Mark Mahorney

Here's the story of a lovely company,
Who was selling many very lovely products.
Most of them had books of gold, like their mother,
One of them had a cult.

Here's the story, of a company named Adobe,
Who was busy with many products of its own.
They were a suite of products, living all together.
Yet they were all alone.

Till one day Macromedia met Adobe,
And they knew that it was much more than a hunch.
That this group would somehow form a family.
That's the way they all became the Adobe bunch.
The Adobe bunch. The Adobe bunch.

That's the way they became the Adobe bunch.

posted at 12:00 PM 0 comments   

Thursday, December 15, 2005

Book Review

Instead of telling you about all the great and complex books I read to make myself look smart and expert I'll tell you about one you can probably get something out of.

Statistical Analysis with Excel For Dummies

I was just flipping through this book at Border's yesterday and why I didn't buy it I don't know. I guess because it covers a lot of stuff I do all the time and already know how to do. But it goes far enough beyond my normal routine to be a good resource on the basics. It covers probabilistic modeling and hypothesis testing. It took me a long time to start learning how to analyze market data in a meaningful way. This book would be a good start place for anyone wanting to educated themselves or improve their skills in that area. It's an important tool to analyzing markets that books specifically about the markets don't cover.

One of the best resources on the Internet for free economic data is the St. Louis Federal Reserve's FRED (Federal Reserve Economic Data). All the data there will export right into Excel and that's what I use a lot of times to compare two data series and create the charts I post now and again.

I can give a primer on how to do that in a future post. There's nothing proprietary about that. The hard part is knowing what data to compare and drawing relevant conclusions from the data.

posted at 2:11 PM 0 comments   

What really moves the markets...

More boring econ stuff for you.

CNN had the headline CPI posts biggest drop since 1949, which illustrates well why outside of the mainstream media we focus in on the core rate, its relationship to the headline rate, and what the individual components. Overall energy prices fell 8% and the petroleum based energy component fell 15%. Obviously, nearly all of the headline CPI decline was due falling energy prices. So that wasn't anything we didn't already know. And most of the volatility in energy prices was related to coming off the disaster related spike. So the largest decline in the CPI since 1949 is an aberration.

Traders know this, however, otherwise if they followed the overly upbeat headlines the major stock indices would be up sharply today. There was plenty of indication in the data that the Fed will be remaining on inflation watch for some time to come.

We also got Capacity utilization data today, which crossed over the 80% threshold. That's a measure the Fed has expressed concern about. Any rise in the capacity utilization rate is a sign of a strong economy and is seen as inflationary.

posted at 1:35 PM 0 comments   

What if?

The core rate of inflation, which excludes volatile food and energy prices, held steady at an increase of 0.2%. The number referred to as the headline number fell 0.6% due to an overall decline in energy prices in November. Indeed that is the number still most commonly reported in the headlines. A quick glance over the headlines this morning shows that most are reporting inflation as being sharply lower. And with gasoline prices well below the post hurricane spike they actually do feel lower.

But I want to posit a "what if?" for you. What if energy prices hadn't fallen off so drastically? Where then would the core rate be? What if the core rate is being rounded down from data that taken to the hundredths would be a more specific rate of say 0.24%, then just a hundredth of a percent change higher would have caused the core rate to be rounded up to 0.3%. As I've laid out for you, that number could have been a problem for the markets.

So what I'm suggesting is that inflation might be a little dicier than the either the headline or core rate for November are indicating. I believe the December data will show energy prices ticking back up again. Will that be enough to notch the December core rate up to 0.3%? It just might be.

I've said that I didn't think we would hit 0.3% in the core rate of inflation for November because I thought lower energy prices would help keep higher prices from trickling down into the core rate. To be more specific, consider how companies pass on higher prices. Some companies, particularly in transportation, segment their prices into a core price and a fuel surcharge. But they don't move the surcharge rate around with every twitch in fuel prices. Rather they make announced surcharge raises after prices have been elevated for some time. In other words the surcharge changes are less volatile than energy prices and they'll stick around for a while after prices back off. Prices of other goods and services are even less sensitive to energy price changes.

It's much harder, for example, for Wal-Mart to pass on higher energy prices via raising the prices of its goods. Well maybe not that hard. Wal-Mart could probably make tiny changes to a few key products that would be enough to offset energy price changes while going unnoticed by consumers. And they might have done just that, because Wal-Mart has weathered higher prices much better than economists have expected it too.

In general, however, companies without surcharge pricing schemes tend to have less flexible pricing power. Consequently, companies aren't going to raise surcharges when energy prices are falling and other companies are going to be less likely to raise prices too. Thus we saw the October core rate tick up to 0.2% after many months of being stuck at a 0.1% rate, then instead of going to 0.3% in November the core rate of inflation held steady at 0.2%. But so far energy prices have been higher in December. And there's another factor to consider. Many companies price their products by catalogues, many of which are updated annually. Last January the core rate rose 0.2% for the fourth month in a row, then ticked up to 0.3% in February. I think there's a very good chance the core rate will go to 0.3% in January or February, which could stall out stocks.

The good news is that I don't think that investors and pundits will be looking this far out, nor will they be seeing the "what if" scenarios I've laid out here with regard to the November numbers. So I remain cautiously bullish for the time being.

posted at 10:59 AM 0 comments   

Wednesday, December 14, 2005

Reminder

The CPI data is due out at 8:30 ET tomorrow. I've recently expressed how critical the core data will be to the markets. The last report showed the core CPI ticking up 0.2% after a long string of 0.1% increases. If the uptick is an uptrend and tomorrow's core CPI data shows an increase of 0.3% that could really spook the markets, as it would mean more Fed rate hikes than currently are being anticipated and more burden on the consumer. But that's a big if. I doubt that will be the case. I think that even though the core rate doesn't include energy, the 0.2% was the result of producers finding ways to pass on higher energy costs to consumers. But energy prices have backed off or stalled overall, so that should help offset the trickling down of costs into the core data.

posted at 4:05 PM