Covered Call Writing is called the Grandmother's Option, because it is so conservative---one is in the "Banker's positon" versus a gambler. The odds for the astute trader can be quite high for success. It does take practice to get the swing of it however.
Consider the following example.; You have bought 100 shares of AAPL at 130 and it has risen to 190. You really do not want to sell, but on the other hand, you would like some income from the investment. You are older and in a perfect world you could get excellent income and then leave the stock for the grandkids. You bet that in the summer doldrums it will not move higher. After all---it has risen from 130 to 190 in just months. You remember the famous "bathing suit rule"-----when summer approaches, the traders are thinking of what? bathing suits. As anyone who has been to Wall Street is aware of---when Friday comes, most have left town to sail in cooler lakes. Trading volume is usually low.
You also know that the summer quarter is the slowest for high tech stocks usually----and you have noticed that few people are on their computers in the heat of the summer. And that translates to low purchases of tech stuff and that in turn might translate into lower earnings.
So---you look at the call option table.: (May 22, 2008
You decide that selling the July 200 Call priced at $540 is attractive ---ie at the strike price of $200 or if Apple stocks gets to 200 between now and July 18 you would sell it for $200 and keep the $540 or buy back the call, which would cost say for example purposes, $800.
The way this works ideally is that Apple stock holds even or drops and the call price gradually drops to zero or you buy it back for $50 say and then repeat the process, and sell a call for october 2008 for another $500----This process creates continuing income and hence provides a method of a senior who does not want to cash in one's "chips" and suffer the capital gains from such a huge capital gain, to get continuing monthly income.
As an investor, you are saying "Show Me" to the market optimists---show me that the market can move higher in the current situation of rising commodity prices and rising unemployment and recession. The covered call writer is the essence of the conservative investor.
Stay tuned for another episode of the Traders little black book which will cover "Short Interest---and why it is not interest in short people. Stay tuned.
Wednesday, May 28, 2008
Tuesday, February 5, 2008
"Cold Calling Cowboy"----The Wild West ; The Deregulation of Wall Street
Over the past thirty years there has been a transition from a structured investment environment to one that is "deregulated"---it has been marked by the end of the era of salaried brokers with higher commissions and research, to a world of $7 trades and computer simulations. It has been a movement from wise older traders to young, churn and burn robots.
"Where has been the saving,?" you might ask. I like to compare the situation to the airline industry. Years ago, when airfares were higher, and Northwest Airlines had ZERO debt, the transportation industry and financial services industry was seen as a public sector, where the government had a say in an organized and supervised code of conduct for all participants----those days are gone. When I fly, I always feel more comfortable when I know there has been maintanance done on the engines. The cheapest fare is not consoling if I see flames coming from the engines. Ditto for the financial services industry.
When investment just becomes a transaction, when people just become a transaction, and when "churn and burn" becomes the overriding element in business, the customer always loses. Consequently, I reject the notion that nostalgia for the good old days of regulation is senile and old fashioned. I believe it just makes economic sense for the investor.
Recently a lone French trader for a bank, using "proprietary trading funds", in the throes of breaking up with his girlfriend, took enormous options risk and....despite the bank even knowing about his risks, but not understanding it or choosing to ignore it for fear they would impede some gains, caused a 7 billion dollar loss.
Imagine what would happen worldwide if just a dozen or so financial professionals broke up with their girlfriends. Yes. Girls that is something to consider. You may think you are just breaking up....but you might just be causing a global catastrophe. Be True to your man....o.k.
In summary. The incredible catastrophe of ENRON was not just ENRON. The real catastrophe was that as a nation we have modeled our financial institutions on ENRON. And we have the major tactic of DELAY, the verb, not the noun.
"Where has been the saving,?" you might ask. I like to compare the situation to the airline industry. Years ago, when airfares were higher, and Northwest Airlines had ZERO debt, the transportation industry and financial services industry was seen as a public sector, where the government had a say in an organized and supervised code of conduct for all participants----those days are gone. When I fly, I always feel more comfortable when I know there has been maintanance done on the engines. The cheapest fare is not consoling if I see flames coming from the engines. Ditto for the financial services industry.
When investment just becomes a transaction, when people just become a transaction, and when "churn and burn" becomes the overriding element in business, the customer always loses. Consequently, I reject the notion that nostalgia for the good old days of regulation is senile and old fashioned. I believe it just makes economic sense for the investor.
Recently a lone French trader for a bank, using "proprietary trading funds", in the throes of breaking up with his girlfriend, took enormous options risk and....despite the bank even knowing about his risks, but not understanding it or choosing to ignore it for fear they would impede some gains, caused a 7 billion dollar loss.
Imagine what would happen worldwide if just a dozen or so financial professionals broke up with their girlfriends. Yes. Girls that is something to consider. You may think you are just breaking up....but you might just be causing a global catastrophe. Be True to your man....o.k.
In summary. The incredible catastrophe of ENRON was not just ENRON. The real catastrophe was that as a nation we have modeled our financial institutions on ENRON. And we have the major tactic of DELAY, the verb, not the noun.
"The Syndicate"---or why you never can get the hot issues; On Allocation Rules, Theory and Practice
When a brokerage firm, through competitive bidding, has secured part of a "syndicate" to sell an IPO, it also secures for the firm, should it choose, to elect to keep some shares in lieu of commission, allocate shares to the preferred investors of the branch etc. These rules have been in some dispute over the years, and usually the dispute occurs on an initial public offering where the stock is a very popular offering that the public might bid up the stock right away and lots of money could be made quickly---the rules of allocation tend to favor those investors that have been the "best customers" of the firm, or have generated the most commissions. So. One way of testing this is to identify a public offering that you think will be very hot, and then try to get some of the stock. You might be frustrated with the fact that this might be very difficult to do, and you might be in line, and a very long line.
The IPO' or "Stop Reading and Start Selling" a true story
One of the glorious days for a corporation is the day it begins trading on the New York Stock Exchange or the NASDAQ. All the years of private financing and struggle to succeed come to a high point---and a big payday for original founders hopefully.
The essential facts of the IPO, or Initial Public Offering can be found in a google search. However, on an initial offering, there is no specific commission charge listed----it is paid by the offeror and the customer sometimes thinks it is a special deal. Not so.
Because of the lack of history on the new company, the stock exchange has rules that a prospectus must be prepared that details all the risks to the investor of purchase. One might think that this would be pretty educational....reading all the prospectuses and such. It is. However, one could spend all day reading them. The brokerage business is 99.99 about selling and .01% about analysis and reflection. I always loved reading the tech stocks prospectuses since there was usually some interesting stuff revealed that was heretofore not public knowledge.
The group of brokerage firms that have bid to handle the IPO are called the "syndicate." I have always loved that little info bit. There are so many ways the word syndicate can be used. In fact, if there is a really, really hot stock, you as a customer will probably never get your hands on any of that stock...cause it has been secured by the "syndicate", s slightly different meaning. More on that later.
The essential facts of the IPO, or Initial Public Offering can be found in a google search. However, on an initial offering, there is no specific commission charge listed----it is paid by the offeror and the customer sometimes thinks it is a special deal. Not so.
Because of the lack of history on the new company, the stock exchange has rules that a prospectus must be prepared that details all the risks to the investor of purchase. One might think that this would be pretty educational....reading all the prospectuses and such. It is. However, one could spend all day reading them. The brokerage business is 99.99 about selling and .01% about analysis and reflection. I always loved reading the tech stocks prospectuses since there was usually some interesting stuff revealed that was heretofore not public knowledge.
The group of brokerage firms that have bid to handle the IPO are called the "syndicate." I have always loved that little info bit. There are so many ways the word syndicate can be used. In fact, if there is a really, really hot stock, you as a customer will probably never get your hands on any of that stock...cause it has been secured by the "syndicate", s slightly different meaning. More on that later.
On Day Trading: The Football Game in Overtime
Some years ago, there was a craze among middle aged men. The video ads promised a course available by cassettee or cds that would teach the art of day trading---and furthermore, the promise was held out that you too could be truly independent through day trading.
Remember. I said it was a craze. The reality as I see it is that the average American does three roundtrip (6) trades a year. The average active day trader does 3 roundtrip or six trades a DAY.
Whether you are a writer, a musician, or a surgeon, repetition is important, and there is a learning curve with day trading. One gets better with experience, hopefully. It is an art that requires dedication, skill, speed and intelligence.....oh yes and nerves of steel. And it requires one to be prepared to be wrong 50% of the time....or more.
The most I have daytraded is 300 trades in one year. These were very small trades and done for educational purposes. To test out the odds of being right, and the odds of being wrong. My conclusion is that options and day trading are for the very rare few. The notion in the popular media that both these strategies are appropriate for the masses seems to be wrongheaded in the least and misrepresentation at the worst.
Remember. I said it was a craze. The reality as I see it is that the average American does three roundtrip (6) trades a year. The average active day trader does 3 roundtrip or six trades a DAY.
Whether you are a writer, a musician, or a surgeon, repetition is important, and there is a learning curve with day trading. One gets better with experience, hopefully. It is an art that requires dedication, skill, speed and intelligence.....oh yes and nerves of steel. And it requires one to be prepared to be wrong 50% of the time....or more.
The most I have daytraded is 300 trades in one year. These were very small trades and done for educational purposes. To test out the odds of being right, and the odds of being wrong. My conclusion is that options and day trading are for the very rare few. The notion in the popular media that both these strategies are appropriate for the masses seems to be wrongheaded in the least and misrepresentation at the worst.
On Investing; The football game
Last week was the Super Bowl. (2008) The entire week was filled with analysis and speculation. Lots of statistics on past. Line play. Passes attempted and completed. Psychological analysis. And yes the usual hype. There was not too much dispute really. The New England Patriots were destined to win the game...very clearly.
The Giants won.
The reason was simple. The game was played in the future not the past. And on that night, the Giants were better.
The question I have. Why so much analysis on football, and so little analysis by most folks in investments? Investing has all the same elements. And. I would suggest that a little less fanaticism on football and a little more on trading...would produce dramatically better trading results.
The Giants won.
The reason was simple. The game was played in the future not the past. And on that night, the Giants were better.
The question I have. Why so much analysis on football, and so little analysis by most folks in investments? Investing has all the same elements. And. I would suggest that a little less fanaticism on football and a little more on trading...would produce dramatically better trading results.
"The Gap; or Why Traders hesitate to use "Sell Stops"
Recently I have conversed with my younger brother, Denis, about the matter of "The GAP" ; We call him "the Northern Wolfman" because he lives in the cold Minnesota tundra. At first, Denis thought that "The GAP" was the store---and one he did not frequent much because the clothes did not fit real well.
"The GAP" is the when a stock opens trading up sharply or lower sharply and because the trading is not orderly, it gaps down leaving a blank spot in the "chart". This "gap" becomes visual notice that something is up. This would be like you noticing that your neighbor has 25 cars in the driveway. Something is up. It might be a party. Whatever.
The gap results from an inbalance in orders and by very definition this is where traders can make money. Volatility is opportunity.
The transition of the markets to being "global" has led to a problem-----if markets gap down overnight in Europe or Asia, if an investor has placed a "sell stop" order below the trading price of his investment, the sell order will execute, but not at the price intended, but at the "first trade" of the day on the exchange. Because that could only be a momentary plunge, many experienced brokers do not recommend use of sell stops, or at least resist the impulse to use "tight stops" because there might be an unintended result---the stock could plunge on opening, taking the investor out of the stock, and then go back up, leaving the investor a needless loss and needing to buy back in.
Technical traders who follow graphs and such ascribe all sorts of inferences to "gaps" and if one is interested in volatility, it is worthwhile reading up on this.
"The GAP" is the when a stock opens trading up sharply or lower sharply and because the trading is not orderly, it gaps down leaving a blank spot in the "chart". This "gap" becomes visual notice that something is up. This would be like you noticing that your neighbor has 25 cars in the driveway. Something is up. It might be a party. Whatever.
The gap results from an inbalance in orders and by very definition this is where traders can make money. Volatility is opportunity.
The transition of the markets to being "global" has led to a problem-----if markets gap down overnight in Europe or Asia, if an investor has placed a "sell stop" order below the trading price of his investment, the sell order will execute, but not at the price intended, but at the "first trade" of the day on the exchange. Because that could only be a momentary plunge, many experienced brokers do not recommend use of sell stops, or at least resist the impulse to use "tight stops" because there might be an unintended result---the stock could plunge on opening, taking the investor out of the stock, and then go back up, leaving the investor a needless loss and needing to buy back in.
Technical traders who follow graphs and such ascribe all sorts of inferences to "gaps" and if one is interested in volatility, it is worthwhile reading up on this.
Sunday, February 3, 2008
The Morning of Chernobyl
One of my favorite memories in the investment business was the Morning of Chernobyl. I got into the office early and reviewed my senior citizen clients who had purchased some utility trusts. I wondered what would happen at the open. I then wandered over to my guru broker's office, Bruce, of whom I have written earlier. He never came into the office that early so I figured something was wrong.
"What are you going to do this morn," I asked. "Well," he responded, while everybody is pretty scared about the Chernobyl deal, I will probably buy some utilities that I like if they correct at the open. "
Then he went on, " This is just life, in that we have to figure out the meaning of it all, only in this business, we have to do it by 8:30am. There is an urgency here so just get used to it. "
One of the things that I do miss about the investment business is that if you had an idea, there was always one of your competitive peers that would think you were nuts and disagree with you. That was very helpful. Believe me, there are some crazy things I have done, but there are a whole bunch that I avoided cause I listened to someone argue with me that the idea was crazy....so.
In many ways, in the morning, I am still doing what I did back in the 80's. I am going over what is in the news, trying to see what it means and COUNTING ON the readers to pick out the ideas that are just crazy so I avoid them. The farmers always had the morning coffee in town to chat---I always wondered what they talked about. It was really whether October beans were too high at 1.55. They argued over the issue. Is it best to close the position or hold? Out of the talk they avoided some solo crazy ideas.
In many ways, this is what the Observer is all about. And it is ok to talk and argue about ideas before action. In fact, it is far preferable to acting and then dimly realizing several years later that the plan of action was very, very, very wrong.
"What are you going to do this morn," I asked. "Well," he responded, while everybody is pretty scared about the Chernobyl deal, I will probably buy some utilities that I like if they correct at the open. "
Then he went on, " This is just life, in that we have to figure out the meaning of it all, only in this business, we have to do it by 8:30am. There is an urgency here so just get used to it. "
One of the things that I do miss about the investment business is that if you had an idea, there was always one of your competitive peers that would think you were nuts and disagree with you. That was very helpful. Believe me, there are some crazy things I have done, but there are a whole bunch that I avoided cause I listened to someone argue with me that the idea was crazy....so.
In many ways, in the morning, I am still doing what I did back in the 80's. I am going over what is in the news, trying to see what it means and COUNTING ON the readers to pick out the ideas that are just crazy so I avoid them. The farmers always had the morning coffee in town to chat---I always wondered what they talked about. It was really whether October beans were too high at 1.55. They argued over the issue. Is it best to close the position or hold? Out of the talk they avoided some solo crazy ideas.
In many ways, this is what the Observer is all about. And it is ok to talk and argue about ideas before action. In fact, it is far preferable to acting and then dimly realizing several years later that the plan of action was very, very, very wrong.
Saturday, February 2, 2008
P/E Matters
About twenty years ago, one of the hallmark technical indicators that folks looked at was the P/E ratio, or the price/earnings ratio. It was one of the key things folks talked about. Then, as has happened in every boom since the 1920's, it became inconvenient to look at the number. People were in the frenzy. They needed a new thing to concentrate on. So---they looked at future PE ratio and made up dreams of future earnings to justify buying higher and higher, and higher.
One of the stocks that comes to mind in this regard is QCOM, or Qualcomm. They were manufacturing, or in the process of developing the technology for the current cell phones that could transmit video and pictures. The P/E as I recall was 85 times earnings. The pundits always said that that was no longer important.
When the tech stocks imploded, everyone learned the rest of the story. P/E does matter. In every mania, the tendency is for folks to deny what has always been accepted valuation, and in time, those very folks become shocked when they discover that the old rules do matter.
One of the stocks that comes to mind in this regard is QCOM, or Qualcomm. They were manufacturing, or in the process of developing the technology for the current cell phones that could transmit video and pictures. The P/E as I recall was 85 times earnings. The pundits always said that that was no longer important.
When the tech stocks imploded, everyone learned the rest of the story. P/E does matter. In every mania, the tendency is for folks to deny what has always been accepted valuation, and in time, those very folks become shocked when they discover that the old rules do matter.
The Covered Call---the grandmother's option
Ed.note: The following is just a reflection and not a recommendation or advice in any way.)
Option trading is for the few. I say that even though in today's media pronouncements on options, mostly hyped by the options exchanges themselves, one would think that anyone who could lift a beer glass could also trade options. From my experience, options are for the young, the wealthy, and those with steel cold nerves.
As a person who was licensed in options, I quickly realized my background of midwest conservatism did not qualify me as an extreme risk taker. Yes. There was the thing about steel nerves, and even yes...age. Anyway. I wanted a way to learn about options and the way to do that was "The grandmother's option, or formally, "The covered call."
One trainer explained it me this way: On the opposite of every trade is a different risk. On the other side of the gambler is either the banker or the "grandmother." In the covered call, you are the grandmother. It is a calculated conservative risk. Yet it can be played aggressively and one can get the sense of the fast paced world of options.
The first part of the investment is the stock. You own the stock. Hopefully, you own it bought at a lower price. And it is a high quality stock. That is key. If it is a stock with three letters----it is a New York stock and that always meant higher liquidity for me. Another part of the game is that is is fun if the stock is one where there is some mystery about the future--maybe a buyout or such. And maybe there have been recurrent rumors over the past years, and the stock has spiked up and then down. When the stock has gone down, you buy the stock. And when it spikes up, you sell the covered call and get some money for the call. Then you buy the call back when the stock comes down and pocket the difference, or just let the call expire. For every call option there is a strike price and a month and year. Time and price interact daily on each call value.
The effect of playing with covered calls is kind of like riding a surf board. One has to judge the waves and time the transactions. You are never betting the farm on any transaction.
So. If you are conservative. And if you are not a wild gambler. You may have the temperment for the covered call. Any options exchange booklet can explain the details. Enjoy.
Option trading is for the few. I say that even though in today's media pronouncements on options, mostly hyped by the options exchanges themselves, one would think that anyone who could lift a beer glass could also trade options. From my experience, options are for the young, the wealthy, and those with steel cold nerves.
As a person who was licensed in options, I quickly realized my background of midwest conservatism did not qualify me as an extreme risk taker. Yes. There was the thing about steel nerves, and even yes...age. Anyway. I wanted a way to learn about options and the way to do that was "The grandmother's option, or formally, "The covered call."
One trainer explained it me this way: On the opposite of every trade is a different risk. On the other side of the gambler is either the banker or the "grandmother." In the covered call, you are the grandmother. It is a calculated conservative risk. Yet it can be played aggressively and one can get the sense of the fast paced world of options.
The first part of the investment is the stock. You own the stock. Hopefully, you own it bought at a lower price. And it is a high quality stock. That is key. If it is a stock with three letters----it is a New York stock and that always meant higher liquidity for me. Another part of the game is that is is fun if the stock is one where there is some mystery about the future--maybe a buyout or such. And maybe there have been recurrent rumors over the past years, and the stock has spiked up and then down. When the stock has gone down, you buy the stock. And when it spikes up, you sell the covered call and get some money for the call. Then you buy the call back when the stock comes down and pocket the difference, or just let the call expire. For every call option there is a strike price and a month and year. Time and price interact daily on each call value.
The effect of playing with covered calls is kind of like riding a surf board. One has to judge the waves and time the transactions. You are never betting the farm on any transaction.
So. If you are conservative. And if you are not a wild gambler. You may have the temperment for the covered call. Any options exchange booklet can explain the details. Enjoy.
An Introduction to Power
It was a hot Saturday night in New York in 1985. The young brokers in training were in second week of three, and mostly their money had run out---the suite of rooms at the swank mid town Manhatten hotel were paid for, but the real test of toughness was surviving on the small allowance. The very first day had been the eye opener. Flush at surviving the subway system returning from Battery Park, the brokers had ventured to have a quick cocktail at the Hyatt on the way home. After getting the bill, we realized.....at $10 a glass, the living allowance was going to last a week at that pace. So....beginning the third week, we were cooking spagetti in our room.
Hours afterward, as the brokers were getting ready for bed, the lone broker who had gone to the Broadway theatre came in----we all knew that somehow he had managed to pay the ticket price and now as he walked through the door, we noticed a stunning blond on his arm. He introduced her quickly as one of the actresses in the play he had seen. Then a quick hushed conversation with one of the brokers, and the two headed to the corner suite.
The broker was all smiles as he explained that this guy had given him $200 to sleep on the couch. Wow. What a windfall.
Just when I was about to ask who this guy thought he was, one of the guys told me.....he was the son of the owner of the World Trade Center. Over the years, the scene has made more and more sense to me.
Hours afterward, as the brokers were getting ready for bed, the lone broker who had gone to the Broadway theatre came in----we all knew that somehow he had managed to pay the ticket price and now as he walked through the door, we noticed a stunning blond on his arm. He introduced her quickly as one of the actresses in the play he had seen. Then a quick hushed conversation with one of the brokers, and the two headed to the corner suite.
The broker was all smiles as he explained that this guy had given him $200 to sleep on the couch. Wow. What a windfall.
Just when I was about to ask who this guy thought he was, one of the guys told me.....he was the son of the owner of the World Trade Center. Over the years, the scene has made more and more sense to me.
Tuesday, January 29, 2008
The 5% Rule for Options; A distant memory? Enron as the Model for the Global Economy
Twenty years ago, folks when they opened a stock market account, chose a cash account, called a type1 account, or a margin account, a type2 account. As the name suggests, the securities in the cash account were paid for, and the ones in the margin account were "Margined" or they may or may not have some of the equity in the account be borrowed funds. The rules of the stock exchange were quite specific on the opening margin amount, and the maintanance amount, respectively 50% and 20%. To use a simple example, if one had $3000 one could buy $6000 worth of stock. Then if the stock declined, the minimum amount of equity one would have to have on a daily basis was 20%.
The other element was that on the very top of each account opened was a PURPOSE. The purpose had to mirror the type of account. Normally, retired folks had cash accounts. They did not trade on options, or use margin. It was the duty of the manager of the office to supervise each broker to see that the details of each account matched the purpose on top.
If a person who had been quite conservative and was 60 for example, would want to simply dabble in options, a separate account would have to be opened, and there was a 5% Rule. If the investor was to lose everything in the option account----this "TOTAL" loss could not exceed 5% of the total liquid net worth of the investor, and this may have been 5% of the liquid net worth that the firm could verify or had under management.
Here is a story to illustrate the point. One day one of my old school chums called up and asked whether I could go for coffee. He was a very successful lawyer. I was a stockbroker at the time. After ordering a coffee, as usual in the Minnesota Viking mug with the extra sugar and whipped cream, I asked how things were going.
He said, "Not too well. One of my major clients just lost a million dollars." It seems that during a market swing, he had been invested in options and had simply lost his entire account at a major brokerage house in St. Paul.
I replied, "That simply cannot be so."
Then I explained the 5% Rule. After explaining that when each account on Wall Street is opened, the client is given a booklet with the rules in it, by law, and the 5% rule was in it. The broker in this firm had broken the rule and the investor should get his money back and be made whole for the excess over 5%.
After the coffee, he smiled. "I'll be happy to pick up the check", he said.
Later I passed him in the street and he laughed and said that the client had been made whole.
Over the past 20 plus years, with the blurring of cash and margin accounts, and with the relaxation of the barrier between banks and brokers, and with the global marketplace and the absence of supervision over both products and the brokers that sell them, not only the individual investor is at risk by complicated products that the banks and the investors and the regulators do not understand...entire nations are at risk. That is the lesson of the recent trader losing 7 Billion in the French Bank.
The other element was that on the very top of each account opened was a PURPOSE. The purpose had to mirror the type of account. Normally, retired folks had cash accounts. They did not trade on options, or use margin. It was the duty of the manager of the office to supervise each broker to see that the details of each account matched the purpose on top.
If a person who had been quite conservative and was 60 for example, would want to simply dabble in options, a separate account would have to be opened, and there was a 5% Rule. If the investor was to lose everything in the option account----this "TOTAL" loss could not exceed 5% of the total liquid net worth of the investor, and this may have been 5% of the liquid net worth that the firm could verify or had under management.
Here is a story to illustrate the point. One day one of my old school chums called up and asked whether I could go for coffee. He was a very successful lawyer. I was a stockbroker at the time. After ordering a coffee, as usual in the Minnesota Viking mug with the extra sugar and whipped cream, I asked how things were going.
He said, "Not too well. One of my major clients just lost a million dollars." It seems that during a market swing, he had been invested in options and had simply lost his entire account at a major brokerage house in St. Paul.
I replied, "That simply cannot be so."
Then I explained the 5% Rule. After explaining that when each account on Wall Street is opened, the client is given a booklet with the rules in it, by law, and the 5% rule was in it. The broker in this firm had broken the rule and the investor should get his money back and be made whole for the excess over 5%.
After the coffee, he smiled. "I'll be happy to pick up the check", he said.
Later I passed him in the street and he laughed and said that the client had been made whole.
Over the past 20 plus years, with the blurring of cash and margin accounts, and with the relaxation of the barrier between banks and brokers, and with the global marketplace and the absence of supervision over both products and the brokers that sell them, not only the individual investor is at risk by complicated products that the banks and the investors and the regulators do not understand...entire nations are at risk. That is the lesson of the recent trader losing 7 Billion in the French Bank.
Thursday, January 24, 2008
The Odds of Being Right: On Planning to Be Wrong;
Some years ago, I worked as a registered representative for E.F. Hutton, in the Madison office. Yes, it was always reassuring to work for a company that had as its slogan, " When E.F. Hutton speaks, people listen."
In this office were competitive and hard working brokers. In fact, overworking brokers. It was hard not thinking of the business 24 hours a day. Mornings began about 7:30am with the telephone report from New York and ended after dinners of pizza, pizza and pizza, and cold calling new prospective clients about investment ideas.
There was one exception to all the brokers. His name was Bruce. Bruce came in when he pleased. He drove a BMW. He had a beautiful wife. He met his clients like a physician would a patient. Sometimes he would not come in to work at all! And when he did come back he would be all tan and tell us of a wonderful trip. He seemed very relaxed all the time. He seemed able to laugh at things that all of us did not think were too funny. All of the other brokers were not pleased with Bruce. It seemed totally unfair.
At this time, I had two young daughters, 5yr. and 3yr, and was working about 60 hrs a week and it occurred to me that Bruce knew something that I did not. So, one day I went in and simply asked him, " Bruce, how do you do it. I just don't understand?"
He smiled and said, " Well, you must understand that everyone here is very bright and has good ideas. But even so, if you honestly plot your ideas and hold the record for a month, you will discover that you will be right only 50% of the time. Try it and you will see. Being bright is not enough. My secret is that I plan on being wrong and use options to prepare for it. He then proceeded to show me on a $1,000,000 investment for his clients how he had protected the investment from the possiblity that he could be wrong. Then he smiled and laughed.
I have never forgot the lesson that Bruce taught me, nor the BMW, the model wife and the style of work that Bruce enjoyed. The crash of 1987 came. Bruce did just fine. His clients were protected. He went on to be a very successful mutual fund manager.
I tell this story for those on the comment line. The good news is that we keep the comments online for review for a year. The bad news is that we keep the comments online for a year.
E.F. Hutton thought it knew so much. In a heartbeat when the market plunged 500 points it was over. Instantly. On the phone from New York, senior staff were urging brokers not to jump from windows, but to get some perspective on what they valued in life. I was in Madison. On the first floor. No place to jump.
As you comment on the blog calculate the possiblity that you might be right? Might be wrong? What are the odds? Is it better than Babe Ruth? Is it better than 50%. Plan accordingly.
In this office were competitive and hard working brokers. In fact, overworking brokers. It was hard not thinking of the business 24 hours a day. Mornings began about 7:30am with the telephone report from New York and ended after dinners of pizza, pizza and pizza, and cold calling new prospective clients about investment ideas.
There was one exception to all the brokers. His name was Bruce. Bruce came in when he pleased. He drove a BMW. He had a beautiful wife. He met his clients like a physician would a patient. Sometimes he would not come in to work at all! And when he did come back he would be all tan and tell us of a wonderful trip. He seemed very relaxed all the time. He seemed able to laugh at things that all of us did not think were too funny. All of the other brokers were not pleased with Bruce. It seemed totally unfair.
At this time, I had two young daughters, 5yr. and 3yr, and was working about 60 hrs a week and it occurred to me that Bruce knew something that I did not. So, one day I went in and simply asked him, " Bruce, how do you do it. I just don't understand?"
He smiled and said, " Well, you must understand that everyone here is very bright and has good ideas. But even so, if you honestly plot your ideas and hold the record for a month, you will discover that you will be right only 50% of the time. Try it and you will see. Being bright is not enough. My secret is that I plan on being wrong and use options to prepare for it. He then proceeded to show me on a $1,000,000 investment for his clients how he had protected the investment from the possiblity that he could be wrong. Then he smiled and laughed.
I have never forgot the lesson that Bruce taught me, nor the BMW, the model wife and the style of work that Bruce enjoyed. The crash of 1987 came. Bruce did just fine. His clients were protected. He went on to be a very successful mutual fund manager.
I tell this story for those on the comment line. The good news is that we keep the comments online for review for a year. The bad news is that we keep the comments online for a year.
E.F. Hutton thought it knew so much. In a heartbeat when the market plunged 500 points it was over. Instantly. On the phone from New York, senior staff were urging brokers not to jump from windows, but to get some perspective on what they valued in life. I was in Madison. On the first floor. No place to jump.
As you comment on the blog calculate the possiblity that you might be right? Might be wrong? What are the odds? Is it better than Babe Ruth? Is it better than 50%. Plan accordingly.
"On Losing Other People's Money----the advantages"---a true story
Senior Partner in a New York brokerage firm addressing young broker trainees.
"Ladies and Gentlemen. One of the unfortunate things about this business is that you are going to take some people down."
(Silence in the room.)
"Yes. I am sure that you will make some folks a lot of money. Lots. But the unfortunate and ...something that you have to consider and come to terms with is that your advice will be wrong sometimes, and people will lose."
And....when you think about learning in general. You may have thought that in your life you learned best from your success.....In fact...I would propose that you in fact learn more....far more...from failure.....Failure builds champions.
The problem of course is that in this business, as I reckon, one has to lose about $100,000 just to become savvy.
And of course one of the reasons you are a broker....is that it is cheaper for you to lose the money of others....than your own money......."
(Nervous laughter......)
His words are something that every investor has to consider when one looks for a broker.
"Ladies and Gentlemen. One of the unfortunate things about this business is that you are going to take some people down."
(Silence in the room.)
"Yes. I am sure that you will make some folks a lot of money. Lots. But the unfortunate and ...something that you have to consider and come to terms with is that your advice will be wrong sometimes, and people will lose."
And....when you think about learning in general. You may have thought that in your life you learned best from your success.....In fact...I would propose that you in fact learn more....far more...from failure.....Failure builds champions.
The problem of course is that in this business, as I reckon, one has to lose about $100,000 just to become savvy.
And of course one of the reasons you are a broker....is that it is cheaper for you to lose the money of others....than your own money......."
(Nervous laughter......)
His words are something that every investor has to consider when one looks for a broker.
Whenever Possible,....buy from dead people
One of the nice parts of buying in an estate sale, is the simple fact that the owner is not there to haggle with you about the price.
Even more attractive is the survivor principle----which says that wherever there is a man with extensive weight equipment, or auto equipment, or xxxx insert here) there is a spouse who, upon his death, says, "Get rid of this xxxx".
Your mission is to be there to pick up the bargains.
Even more attractive is the survivor principle----which says that wherever there is a man with extensive weight equipment, or auto equipment, or xxxx insert here) there is a spouse who, upon his death, says, "Get rid of this xxxx".
Your mission is to be there to pick up the bargains.
"Have A Nest Egg"---Mom's rule
Mom always had a little nest egg of money that she stashed away and over her lifetime she made an obsessive task of using every trick in the book---coupons, special sales, senior discounts, etc. to get this nest egg. She always used to say to me," Dick, I wish you had a nest egg."
So did I.
So did I.
"The Golden Rule"---the trader's version
Years ago there was a series of books on "Thinking of Numero Uno"--or the benefits of self, self, self. Self obsession or greed was touted as in a nutshell a powerful economic tool.
Recently in an interview with one of the "Hedge Hunters" a group of super traders, there was a profile of T.Boon Pickins, one of the famous oil speculators of all time. The author of the book on these people stated that the key quality of T.Boone Pickins was that he was "SANGUINE" on the market at all time.
To be sanquine, is to be detached. Whether you use ZEN or whatever meditational technique, being sanquine is key. One must know one's position, but also know the position of everyone, and most importantly, the party who is in the opposite side of each trade. If you have a tremendous understanding of that person and the position, when the facts change, you can adjust in a heartbeat. If, on the other hand, one is emotionally invested in a position, one is destined to lose.
Thus the irony--when you are your brother's keeper....or at least have compassion....or maybe even knowledge of the opposite---one has the ability to be a great trader.
Recently in an interview with one of the "Hedge Hunters" a group of super traders, there was a profile of T.Boon Pickins, one of the famous oil speculators of all time. The author of the book on these people stated that the key quality of T.Boone Pickins was that he was "SANGUINE" on the market at all time.
To be sanquine, is to be detached. Whether you use ZEN or whatever meditational technique, being sanquine is key. One must know one's position, but also know the position of everyone, and most importantly, the party who is in the opposite side of each trade. If you have a tremendous understanding of that person and the position, when the facts change, you can adjust in a heartbeat. If, on the other hand, one is emotionally invested in a position, one is destined to lose.
Thus the irony--when you are your brother's keeper....or at least have compassion....or maybe even knowledge of the opposite---one has the ability to be a great trader.
"Just Like Jesse James"
In one of those old Cher crooning songs, she sings that she will shoot him down in flames, "Just like Jesse James." Yes. You would have to find an old Cher cassette to get that track, but I did have one for the trip to Northfield this weekend. And---it brought back memories of the fate of Jesse James----and why each year in Northfield, Mn., they celebrate "The Defeat of Jesse James Days" as the centerpiece of their historic heritage. Yes. They have the bricks. They have the historic homes. They celebrate the Defeat of Jesse James.
In the old days, the banks were not insured. You lose your savings and it is curtains for your family. Jesse James had made quite a name for himself as a bank robber. He was feared nationwide.
On that fateful morning as word spread that Jesse was robbing the bank, each man went and got his gun. They waded in and made a celebrated accounting of themselves. The Jesse James Gang was over.
Singlehanded, no one of them could have managed it. Together they got the job done.
We need to get back to the old days, when folks considered it THEIR money in the bank, and when folks did not just buy insurance and some complicated legal bundle of securitization, but rather felt a stake in their finanical institutions.
It seems we have just a whole lot of Jesse James look alikes these days. And it is true with concealed carry, folks could just protect their banks like in the old days.
In the old days, the banks were not insured. You lose your savings and it is curtains for your family. Jesse James had made quite a name for himself as a bank robber. He was feared nationwide.
On that fateful morning as word spread that Jesse was robbing the bank, each man went and got his gun. They waded in and made a celebrated accounting of themselves. The Jesse James Gang was over.
Singlehanded, no one of them could have managed it. Together they got the job done.
We need to get back to the old days, when folks considered it THEIR money in the bank, and when folks did not just buy insurance and some complicated legal bundle of securitization, but rather felt a stake in their finanical institutions.
It seems we have just a whole lot of Jesse James look alikes these days. And it is true with concealed carry, folks could just protect their banks like in the old days.
"The Great Bank Robbery of 2005"
The Great Robbery of 2005; Or, a modest proposal for the historical revision of the tales of armed robbery; OR, Book Review: “The best way to rob a bank is to own one.” By William K. Black.
Recently right in the midst of our local bank moving to its new location, a bold, young man strode in and robbed it in broad daylight. Because of the bank relocating, the cameras had been disabled and in the aftermath, the local rumor was that probably the robber would never be caught. Hopes faded for a solution to the crime.
As days passed, the rumor spread that this master of mischief had used such deceit as bandaids on his fingers to do the evil deed. He was rumored to change his clothes as fast as Superman and that he had a lot of tatoos on his back. The number of the tatoos seemed to grow as the days passed.
And then, just when the legend was starting to pick up speed, the robber was caught. By his own large mouth.
It seems that the robber, had spoken to another person while the FBI videotaped his discussion of robbing six banks in four states in seven months. In the process of these crimes, he netted $40,000. If convicted, he faces 20 years in prison for each robbery. Like 120 years in prison for $40,000.
I know what you are thinking----- that this guy just could not do the math. Robbers of earlier days in the 1930s were a lot smarter. Like Jesse James who the folks in Northfield, Minn still celebrate with Jesse James days. Those were the days! Those were the smartest of the smart! Wrong. Nothing has changed. The math was the same or worse in those days of yore. Who then ARE the “ GREATEST “of the bank robbers?…..Read on.
I am currently reading the book, “The Best Way to Rob a Bank is to Own One,” by William K. Black. Mr. Black was the lead regulator during the Savings and Loan Crisis of the 1980’s. In all, over 1000 individuals were convicted of felonies for what is called “control fraud.” This is essentially the white collar version of armed robbery. However, you might be interested to know that nobody counts it as robbery. Huh?
Mr. Black points out in his book that the lessons of the robbery of the S&L’s of the 1980’s has been lost on folks today, and today the same technique is being used to loot corporations. Mr. Black says ,” In 2003, the United States Department of Justice reported that property crimes had continued their trend and fallen to an all-time low. In fact, property crimes have surged to an all-time high since Enron collapsed in late 2001. The reason for the contradiction is that the Justice Department does not count serious crimes because it excludes white-collar crimes from its data keeping. A wave of frauds led by the men who control large corporations, what I term”control fraud,” caused the massive losses from property crimes.”(pp13)
So there you have it. All about the Great Robbery of 2005. Oh, by the way, it wasn’t the guy with the tatoos.
Recently right in the midst of our local bank moving to its new location, a bold, young man strode in and robbed it in broad daylight. Because of the bank relocating, the cameras had been disabled and in the aftermath, the local rumor was that probably the robber would never be caught. Hopes faded for a solution to the crime.
As days passed, the rumor spread that this master of mischief had used such deceit as bandaids on his fingers to do the evil deed. He was rumored to change his clothes as fast as Superman and that he had a lot of tatoos on his back. The number of the tatoos seemed to grow as the days passed.
And then, just when the legend was starting to pick up speed, the robber was caught. By his own large mouth.
It seems that the robber, had spoken to another person while the FBI videotaped his discussion of robbing six banks in four states in seven months. In the process of these crimes, he netted $40,000. If convicted, he faces 20 years in prison for each robbery. Like 120 years in prison for $40,000.
I know what you are thinking----- that this guy just could not do the math. Robbers of earlier days in the 1930s were a lot smarter. Like Jesse James who the folks in Northfield, Minn still celebrate with Jesse James days. Those were the days! Those were the smartest of the smart! Wrong. Nothing has changed. The math was the same or worse in those days of yore. Who then ARE the “ GREATEST “of the bank robbers?…..Read on.
I am currently reading the book, “The Best Way to Rob a Bank is to Own One,” by William K. Black. Mr. Black was the lead regulator during the Savings and Loan Crisis of the 1980’s. In all, over 1000 individuals were convicted of felonies for what is called “control fraud.” This is essentially the white collar version of armed robbery. However, you might be interested to know that nobody counts it as robbery. Huh?
Mr. Black points out in his book that the lessons of the robbery of the S&L’s of the 1980’s has been lost on folks today, and today the same technique is being used to loot corporations. Mr. Black says ,” In 2003, the United States Department of Justice reported that property crimes had continued their trend and fallen to an all-time low. In fact, property crimes have surged to an all-time high since Enron collapsed in late 2001. The reason for the contradiction is that the Justice Department does not count serious crimes because it excludes white-collar crimes from its data keeping. A wave of frauds led by the men who control large corporations, what I term”control fraud,” caused the massive losses from property crimes.”(pp13)
So there you have it. All about the Great Robbery of 2005. Oh, by the way, it wasn’t the guy with the tatoos.
Wednesday, January 23, 2008
Begin at Zero
A note for buyers----begin at ZERO.
My friend, Marvin, told me a story once to get the point across. A man wanted to buy a bed. He saw one advertised in the paper and went to look at it. It was a beautiful four poster bed in a very high attic.....and he noticed that the seller seemed anxious. The buyer said he would have to think it over further. About a month later, the buyer called and asked to see it again. Again the seller told him the selling price....but the buyer said he would have to think it over further.
Finally...the buyer stopped in to see the bed one more time and after going over the selling price again, the buyer asked why the seller was selling such a beautiful bed. the seller was exasperated and said, "Well, my lease is up tonight at midnight and I have to have everything out of here. I cannot imagine what else you need to know about this bed." ....To which, the seller replied that now he had the information he needed. He proceeded to offer a mere pittance for the bed and the seller accepted. He had no choice.
When you are the buyer....you wait till you have ALL the information. Secondly...you begin at ZERO...Yes...ZERO....
My friend, Marvin, told me a story once to get the point across. A man wanted to buy a bed. He saw one advertised in the paper and went to look at it. It was a beautiful four poster bed in a very high attic.....and he noticed that the seller seemed anxious. The buyer said he would have to think it over further. About a month later, the buyer called and asked to see it again. Again the seller told him the selling price....but the buyer said he would have to think it over further.
Finally...the buyer stopped in to see the bed one more time and after going over the selling price again, the buyer asked why the seller was selling such a beautiful bed. the seller was exasperated and said, "Well, my lease is up tonight at midnight and I have to have everything out of here. I cannot imagine what else you need to know about this bed." ....To which, the seller replied that now he had the information he needed. He proceeded to offer a mere pittance for the bed and the seller accepted. He had no choice.
When you are the buyer....you wait till you have ALL the information. Secondly...you begin at ZERO...Yes...ZERO....
The Story of Marvin:or; When you are buying, buy; When you are selling, Sell; Never Confuse the two
I have always loved books. But at one point, I was curious as to the BUSINESS of books. I knew little about the art of buying, so I asked my friend, Marvin, a liquidation specialist, to keep his eye out for an opportunity for me to learn something about and possibly purchase a book inventory.
On July 31st, it was one of the hottest days of the year, with temps well over 100 degrees. Marvin called. He said he had an opportunity I might be interested in and to meet him at the warehouse of a notable publisher downtown at 4:00PM sharp." O.K.", I said.
As I entered the warehouse, I noted that the temp inside was about 130 deg. and quickly discarded my suitcoat and tie. When I met Marvin, he said, "Just listen, and let me do the talking."
We met the warehouse manager and in his cramped office the temperature seemed to get even worse. He explained he had some "remainders" of computer books and gave us a list of titles and numbers. They totaled almost 20,000. When I saw the numbers, I thought that Marvin was nuts. No way did I have enough to purchase all these. But I remembered his words. I remained silent.
The meeting dragged on forever. Marvin had questions, and questions and questions. Finally, the warehouse staff came in and punched out and left. It was after 6PM. Frustrated, the manager said, "Well, Marvin, I need to do something with all these books. My lease expires on Sunday, and I really need to do something."
Then Marvin spoke. " I am pleased that Dick and I can be of help in this matter. We will see that all these books are removed at no charge to you by Monday morning. The Manager was stunned, but quickly agreed.
When we were outside the building, Marvin took me aside and said, " When you are buying, you are buying; When you are selling, you are selling; Never confuse the two. When you buy, you begin at zero. Now go and rent a truck. We have our work cut out for us. "
Posted by Evansville Observer at 1:39 PM
On July 31st, it was one of the hottest days of the year, with temps well over 100 degrees. Marvin called. He said he had an opportunity I might be interested in and to meet him at the warehouse of a notable publisher downtown at 4:00PM sharp." O.K.", I said.
As I entered the warehouse, I noted that the temp inside was about 130 deg. and quickly discarded my suitcoat and tie. When I met Marvin, he said, "Just listen, and let me do the talking."
We met the warehouse manager and in his cramped office the temperature seemed to get even worse. He explained he had some "remainders" of computer books and gave us a list of titles and numbers. They totaled almost 20,000. When I saw the numbers, I thought that Marvin was nuts. No way did I have enough to purchase all these. But I remembered his words. I remained silent.
The meeting dragged on forever. Marvin had questions, and questions and questions. Finally, the warehouse staff came in and punched out and left. It was after 6PM. Frustrated, the manager said, "Well, Marvin, I need to do something with all these books. My lease expires on Sunday, and I really need to do something."
Then Marvin spoke. " I am pleased that Dick and I can be of help in this matter. We will see that all these books are removed at no charge to you by Monday morning. The Manager was stunned, but quickly agreed.
When we were outside the building, Marvin took me aside and said, " When you are buying, you are buying; When you are selling, you are selling; Never confuse the two. When you buy, you begin at zero. Now go and rent a truck. We have our work cut out for us. "
Posted by Evansville Observer at 1:39 PM
The Risky World of Bonds; or "With a Ginny Mae, You Lose in Every Way."---the story
If you are an experienced investor, or simply older person, you know that there are many ways to lose money in this world. Life is simply about "risk" and "risk assessment". Usually in times of economic stress, folks rush to secure investments. Or, more precisely, what they "think" are secure investments. That rush can be dangersous if the risk is not viewed properly.
So, I wanted to share a little jingle I learned on Wall Street many years ago. The jingle goes, "With a GinnyMae, you lose in every way."
The jingle highlights the perils of investing in bonds in a rising interest rate environment. This may or may not be the world you face right now. Usually bond investors are folks like my father, who invested monthly in bonds, and had a bond guide next to the Bible on the night stand. A child of the depression and WWII years. Back in 1973, it became necessary to review these bonds as interest rates skyrocketed in the Jimmy Carter years. It was not a pretty picture. Bonds took huge losses. It was a lesson I have never forgotten. It is one you need to know.
If you buy a bond as interest rates rise, say at 7%. You are pleased. The rate seems high. The next day, the rate goes to 7.5% Now if you hold the bond to maturity, you will get your principal plus interest, if the company does not default. However, make a note of it, most people sell prior to maturity. So if you wanted to sell that bond on the following day you would lose. After all, who would buy one at 7% when the 7.5% were available.
You may wonder about the GinnyMae jingle. The phrase "every way". In a decreasing interest rate market, people refinance the underlying mortgages and the bond trust usually gets paid off early--just what you don't want. Now you have money to invest with rates lower. So you have investment rate risk. So either in rising or dropping rates you tend to lose..That was the point of the jingle.
The overall point of the jingle is that you CAN lose with bond investments. If you don't understand how this can happen, ask your investment advisor. The purpose of the jingle is just to get your attention.
So, I wanted to share a little jingle I learned on Wall Street many years ago. The jingle goes, "With a GinnyMae, you lose in every way."
The jingle highlights the perils of investing in bonds in a rising interest rate environment. This may or may not be the world you face right now. Usually bond investors are folks like my father, who invested monthly in bonds, and had a bond guide next to the Bible on the night stand. A child of the depression and WWII years. Back in 1973, it became necessary to review these bonds as interest rates skyrocketed in the Jimmy Carter years. It was not a pretty picture. Bonds took huge losses. It was a lesson I have never forgotten. It is one you need to know.
If you buy a bond as interest rates rise, say at 7%. You are pleased. The rate seems high. The next day, the rate goes to 7.5% Now if you hold the bond to maturity, you will get your principal plus interest, if the company does not default. However, make a note of it, most people sell prior to maturity. So if you wanted to sell that bond on the following day you would lose. After all, who would buy one at 7% when the 7.5% were available.
You may wonder about the GinnyMae jingle. The phrase "every way". In a decreasing interest rate market, people refinance the underlying mortgages and the bond trust usually gets paid off early--just what you don't want. Now you have money to invest with rates lower. So you have investment rate risk. So either in rising or dropping rates you tend to lose..That was the point of the jingle.
The overall point of the jingle is that you CAN lose with bond investments. If you don't understand how this can happen, ask your investment advisor. The purpose of the jingle is just to get your attention.
The Simple Math; or The Coming Disconnect
he Janesville Gazette lead with a story today on the impact of rising utility costs over the past decade. If you just do the math, it just does not add up. There is a big disconnect coming.
The baby boomers that will enter retirement have a social security benefit that will average $1100 per month. It is easy for utilities and gasoline and meds to eat all that up, leaving nothing to eat or living expenses. It is time for all you independent types out there to review your IRA and 401K results for the past 10 years. O.K. That was a short review. I was refering to the statements that you have been unable to even open for years cause the results were so bad.
Despite 5 or 6 hurricanes, folks are heading to Florida. Down South. Out West. Anywhere. To avoid the energy crisis. And companies are relocating to the West and South to avoid the coming distress of the Northeast and Midwest. This does not bode well for those communities that are on a "growth bicycle". Growth is needed. Government investments cannot be wasted in nonproductive pork. Tax increment is important. Jobs are important. Tax base is important.
Jimmy Carter wore his cardigan sweater and told America 30 years ago that we needed to be energy independent. America just laughed at him. Now, America is paying the price.
The baby boomers that will enter retirement have a social security benefit that will average $1100 per month. It is easy for utilities and gasoline and meds to eat all that up, leaving nothing to eat or living expenses. It is time for all you independent types out there to review your IRA and 401K results for the past 10 years. O.K. That was a short review. I was refering to the statements that you have been unable to even open for years cause the results were so bad.
Despite 5 or 6 hurricanes, folks are heading to Florida. Down South. Out West. Anywhere. To avoid the energy crisis. And companies are relocating to the West and South to avoid the coming distress of the Northeast and Midwest. This does not bode well for those communities that are on a "growth bicycle". Growth is needed. Government investments cannot be wasted in nonproductive pork. Tax increment is important. Jobs are important. Tax base is important.
Jimmy Carter wore his cardigan sweater and told America 30 years ago that we needed to be energy independent. America just laughed at him. Now, America is paying the price.
The Sheep Rule: "The Many are the Sheep; Follow the Few"
(As a very young man, the Observer worked for the IRS during tax season. )
At the beginning of the tax season, it was depressing to key returns, because alas it was the many poor people who typically rush to file returns. Of all of America, the rich comprise about 1%. Maybe you have noticed the disparity of wealth in America......like the largest disparity since the 1920's.
If you do not believe this, begin calling people and asking them to invest $5000 in an attractive investment. 99% of people simply don't have the money. And as a corollary, one of the ways of getting in trouble as a financial professional is to persist in marketing to these folks.
At the beginning of the tax season, it was depressing to key returns, because alas it was the many poor people who typically rush to file returns. Of all of America, the rich comprise about 1%. Maybe you have noticed the disparity of wealth in America......like the largest disparity since the 1920's.
If you do not believe this, begin calling people and asking them to invest $5000 in an attractive investment. 99% of people simply don't have the money. And as a corollary, one of the ways of getting in trouble as a financial professional is to persist in marketing to these folks.
"Have You considered the Possibility that you May be WRONG?
The very first rule of all investments.....
"Old School Ties"--; or The Good, The Bad, The Illegal"
OpEd: Old School Ties: The Good, the Bad, The Illegal---commentary
On Saturday, June 9, 2007, I had the pleasure to meet an old alum from high school. It was back in 1963 when "M" was an ace photographer, and we had worked together on some articles for the school yearbook. In a reflective moment recently, I had reviewed all the classmates of yore, and his name popped up--I knew he was a writer. So---one Saturday night I started cold calling names that looked similar and ran across his father, now 92, who helped me get in touch. Now at the Caribou Coffee at Hwy 101 and Hwy 7 we had a moment to step back in time.
The very first thing "M" did after shaking hands, was to hand me the Business Day article from the New York Times that read " Quantifiying the Role of Old-School Ties In Investing." Click on the post for the full article.
At first I thought it was nothing really new. It's who you know not what. It was the "prestige" of the school not the content that mattered. Yes. Those were the rules of the few. Back applying for grad school, I had learned all this---just by filling out the graduate school application for Harvard. Pretty straightforward. Two or three small lines for academic awards to be listed. Then a huge space. "List the relatives, alums and donors of Harvard from your family. If you need additional space feel free to attach additional sheets."
It has always been there. The cozy bars off Wall Street where the traders congregate after hours telling tales of victory and defeat. That is what I had thought. Maybe it was making plans for victory in the future not the past that was being discussed.
The Business Day article in the New York Times suggests that "alums" and their connections had a dramatically better investment performance than ....regular investors. Regulators now are beginning to use that vast computer power to compare the trading records of investors and use "alum status" as one of the things to review.
Kind of a shock. I should have been prepared. After all, if Alums can launch wars abroad with little thought as to the factual basis, I guess investing is fair game.
The next time you get a call from an alum with a great stock tip---remember---it is always best to do the research yourself. Sophisticated crime is still......crime. Make a note of it.
On Saturday, June 9, 2007, I had the pleasure to meet an old alum from high school. It was back in 1963 when "M" was an ace photographer, and we had worked together on some articles for the school yearbook. In a reflective moment recently, I had reviewed all the classmates of yore, and his name popped up--I knew he was a writer. So---one Saturday night I started cold calling names that looked similar and ran across his father, now 92, who helped me get in touch. Now at the Caribou Coffee at Hwy 101 and Hwy 7 we had a moment to step back in time.
The very first thing "M" did after shaking hands, was to hand me the Business Day article from the New York Times that read " Quantifiying the Role of Old-School Ties In Investing." Click on the post for the full article.
At first I thought it was nothing really new. It's who you know not what. It was the "prestige" of the school not the content that mattered. Yes. Those were the rules of the few. Back applying for grad school, I had learned all this---just by filling out the graduate school application for Harvard. Pretty straightforward. Two or three small lines for academic awards to be listed. Then a huge space. "List the relatives, alums and donors of Harvard from your family. If you need additional space feel free to attach additional sheets."
It has always been there. The cozy bars off Wall Street where the traders congregate after hours telling tales of victory and defeat. That is what I had thought. Maybe it was making plans for victory in the future not the past that was being discussed.
The Business Day article in the New York Times suggests that "alums" and their connections had a dramatically better investment performance than ....regular investors. Regulators now are beginning to use that vast computer power to compare the trading records of investors and use "alum status" as one of the things to review.
Kind of a shock. I should have been prepared. After all, if Alums can launch wars abroad with little thought as to the factual basis, I guess investing is fair game.
The next time you get a call from an alum with a great stock tip---remember---it is always best to do the research yourself. Sophisticated crime is still......crime. Make a note of it.
"Past Results Do Not Guarantee Future Performance."
If you do not remember this phrase, you are probably too young to read this post.
In virtually every mutual fund brochure or prospectus for a unit trust of whatever investment, there is the caution...... after of course the investment representative has gone over the wonderful result if..... in theoretical terms..... you had invested ....$1....at the Crash of 1929 and invested that in this particular investment....you would have had the wonderful result listed above....." and after speaking of those wonderful theoretical results, there is the caution about ...."Past Results do not guarantee future performance..."
Recently, in Evansville, in our own school projections for future school demand for facilities, whether we looked at population projection or building permit historical data, nobody wanted to read the warning----"Past results do not guarantee future performance."
Even in the Evansville City budget, the city financial consultant, Greg Johnson, from Ehlers and Associates stated that "proceeding forward with no further General Obligation debt, the future seems to be no problem with debt capacity." The problem, of course, was pointed out by Fred Juergens, who counted 5 million in dreams that were penciled in on the capital investment budget for the year around 2009.
It seems we always, as human beings, want the pro forma future not to include the unfortunate expenses of the reality of the things on the horizon.
I could go on about flashing lights from dashboards of cars re warnings, but.....I think you get the jist. As a stress reliever, it is important to manage stress and ...a little denial is good. Sometimes....the denial gets too large.
In virtually every mutual fund brochure or prospectus for a unit trust of whatever investment, there is the caution...... after of course the investment representative has gone over the wonderful result if..... in theoretical terms..... you had invested ....$1....at the Crash of 1929 and invested that in this particular investment....you would have had the wonderful result listed above....." and after speaking of those wonderful theoretical results, there is the caution about ...."Past Results do not guarantee future performance..."
Recently, in Evansville, in our own school projections for future school demand for facilities, whether we looked at population projection or building permit historical data, nobody wanted to read the warning----"Past results do not guarantee future performance."
Even in the Evansville City budget, the city financial consultant, Greg Johnson, from Ehlers and Associates stated that "proceeding forward with no further General Obligation debt, the future seems to be no problem with debt capacity." The problem, of course, was pointed out by Fred Juergens, who counted 5 million in dreams that were penciled in on the capital investment budget for the year around 2009.
It seems we always, as human beings, want the pro forma future not to include the unfortunate expenses of the reality of the things on the horizon.
I could go on about flashing lights from dashboards of cars re warnings, but.....I think you get the jist. As a stress reliever, it is important to manage stress and ...a little denial is good. Sometimes....the denial gets too large.
"The Case of the Punk Driver"; On "Due Diligence vs. Rating"
Imagine yourself the parent of a young teen. You have enrolled that teen in the best of driver training programs. Spent additional time riding with that teen in teaching to merge to the speed of I90. Maybe occasionally clutching the door handle. You have been lucky. No accidents. And today is the day of the driver test. The great news. Your child has passed. You are both relieved and anxious. You make the insurance call and add the driver and put the additional premium on your Mastercard or Visa. Now you are ready for the trip home. You decide to let the new driver drive.
As you leave the city limits, and get up to speed on HWY 14, or HWY 90, ( insert your own highway here) you notice that something has changed. Your new driver accelerates up to 85 mph and ......very quickly. And seems almost giddy in the way and style that he/she changes lanes. Finally. Noting a little chest pain. You simply say: "Please pull over. I will drive the rest of the way"
All the way home, you ask that young driver what was in his/her mind. The youngster simply says, "Dad, you have the risk insured. What is the big deal? We have it covered!!!!!"
You then go over the simple truth, one that all of us know....maybe......that paying auto insurance for the risk, is not a substitute for prudent driving.
This mistake has also been made in our banking system--in our mortgages, in our securities,.....well in everything. The banks simply took some low grade mortgages and got insurance on them, and then marketed them.....with additional leverage....so that while the junk was 10%, with leverage, the entire investment was endangered. This strategy....the strategy that all of our best financial minds are trying to lie their way out of with successive notices of write offs of bad loans and then cell calls to the Asian or Saudi nations to get additional loans....is shameful....But the key point is that the original "DUE DILIGENCE" was not done. That was a point that our Federal Reserve Chairman Ben Bernanke made over a month ago. The audio is on the blog.
Now locally---some very well educated pundits have said that with respect to building on a flood plain---it is really "No Problem. "Just buy the insurance." However----just remember the Punk Driver.
"DUE DILIGENCE" and "Insurance RATING" are different. One of the major problems in America, from Malibu to locally, is building in locations where development should not happen. And also one of the major problems nationwide, is governments unable to say NO.
So--there it is. The story of the "Punk Driver." Who did not know the difference between insurance premiums and sane driving. Ditto mortgage banking....Ditto site selection for major public projects. Boards know that due diligence requires more than simply getting an insurance quote. Stay tuned.
As you leave the city limits, and get up to speed on HWY 14, or HWY 90, ( insert your own highway here) you notice that something has changed. Your new driver accelerates up to 85 mph and ......very quickly. And seems almost giddy in the way and style that he/she changes lanes. Finally. Noting a little chest pain. You simply say: "Please pull over. I will drive the rest of the way"
All the way home, you ask that young driver what was in his/her mind. The youngster simply says, "Dad, you have the risk insured. What is the big deal? We have it covered!!!!!"
You then go over the simple truth, one that all of us know....maybe......that paying auto insurance for the risk, is not a substitute for prudent driving.
This mistake has also been made in our banking system--in our mortgages, in our securities,.....well in everything. The banks simply took some low grade mortgages and got insurance on them, and then marketed them.....with additional leverage....so that while the junk was 10%, with leverage, the entire investment was endangered. This strategy....the strategy that all of our best financial minds are trying to lie their way out of with successive notices of write offs of bad loans and then cell calls to the Asian or Saudi nations to get additional loans....is shameful....But the key point is that the original "DUE DILIGENCE" was not done. That was a point that our Federal Reserve Chairman Ben Bernanke made over a month ago. The audio is on the blog.
Now locally---some very well educated pundits have said that with respect to building on a flood plain---it is really "No Problem. "Just buy the insurance." However----just remember the Punk Driver.
"DUE DILIGENCE" and "Insurance RATING" are different. One of the major problems in America, from Malibu to locally, is building in locations where development should not happen. And also one of the major problems nationwide, is governments unable to say NO.
So--there it is. The story of the "Punk Driver." Who did not know the difference between insurance premiums and sane driving. Ditto mortgage banking....Ditto site selection for major public projects. Boards know that due diligence requires more than simply getting an insurance quote. Stay tuned.
Technical Trader: A bit on "Margin"
One of the interesting aspects about today's plunge on Wall Street is that it is all about "safety" and "security" and the margin calls have not begun yet----margin calls are based on the closing values, and the last time the markets in the US closed was on Friday. The Martin Luther King holiday prevented margin calls this morning which would have been a more realistic situation.
Professional traders anticipate their margin calls but many private investors do not. Hence, the first forced trading if the markets close at sharply lower levels will be at tomorrow's opening. To the best of my knowledge there are no interday margin calls---although there is a case that there should be...this is a technical loop hole as I surmise...and it can lead to traders getting in trouble in very volatile trading sessions if they abuse the margin levels intraday.
In forced margin selling, one can see the "baby thrown out with the bathwater." The trick is if one can determine which is which, to focus on it.
Lazlo Berrini mentioned on Bloomberg this morning that it is best to buy with the wind at one's back, and his tendency is to observe till that happens.
He also mentioned something interesting: The two golden rules of Wall Street are "Don't fight the Fed" and the second being "Don't fight the Market Trend. The Trend is your Friend." The problem of course is that those two traditional platitudes are suggesting different courses of action for traders. So much for platitudes.
Stay tuned to The Evansville Observer. Where we suggest that active traders sip ice water during today's action. I have switched to Starbucks bold, since I am not in the market.
Posted by Evansville Observer at 8:48 AM
Professional traders anticipate their margin calls but many private investors do not. Hence, the first forced trading if the markets close at sharply lower levels will be at tomorrow's opening. To the best of my knowledge there are no interday margin calls---although there is a case that there should be...this is a technical loop hole as I surmise...and it can lead to traders getting in trouble in very volatile trading sessions if they abuse the margin levels intraday.
In forced margin selling, one can see the "baby thrown out with the bathwater." The trick is if one can determine which is which, to focus on it.
Lazlo Berrini mentioned on Bloomberg this morning that it is best to buy with the wind at one's back, and his tendency is to observe till that happens.
He also mentioned something interesting: The two golden rules of Wall Street are "Don't fight the Fed" and the second being "Don't fight the Market Trend. The Trend is your Friend." The problem of course is that those two traditional platitudes are suggesting different courses of action for traders. So much for platitudes.
Stay tuned to The Evansville Observer. Where we suggest that active traders sip ice water during today's action. I have switched to Starbucks bold, since I am not in the market.
Posted by Evansville Observer at 8:48 AM
"Errors Cost You Money"
Many years ago, I was a financial consultant for a major Wall Street firm. Shortly after passing my Series 7 Exam, I was working a public offering for a new series of bond funds, which were in fashion at the time. It was just before lunch. I had a stack of "tickets" or orders and carried them to "the wire", which is what we called the teletype operator that sent the orders to New York. As I presented the orders to the operator, I noticed on the very bottom of each ticket the words:
"Errors cost you money."
Just then the branch manager, who was excited about the effort of everyone during that week, offered to buy lunch at the local pizza place. I thought that was a wonderful idea. On the way over to the pizza place, I asked him, " What's the deal with the "Errors cost you money," on the bottom of every ticket."
"Well," he smiled, "If there is a stock symbol error or quantity error on the ticket, and the stock has to be sold out to remedy the error, the difference due to the error is taken from your paycheck. Also, if someone promises to pay for something.....and then does not.....and the stock or bond has to be sold......the difference is taken from your paycheck."
"What if someone lies," I asked.
"You have to hear and know the customer," he replied. "That is your first responsibility. Don't worry; You will learn quickly."
He was right. When lies cost you money, and the money comes out of one's paycheck....one learns quickly....to hear quite precisely.
This is what all bankers call the "Know Your Customer Rule." It is the very first rule of banking. In a small town, it is pretty easy. On the telephone it gets harder.
In the recent Evansville School Board Forum, Tris Lahti was heard to remark that "Who cares if we built a few too many sports facilities and the numbers are a little out of line with our peers."
Who cares?
One has to care because errors in planning cost everyone---taxpayers....students...parents...business....and teachers.......
The reason that it is important to involve the community in any decision about our schools is that we have a huge stake in the plan. Conflict of interest, whether it is in the form of an architectual firm who gets fees for building doing the planning..........or in the form of board candidates who have relatives on the school district payroll....is a detriment to objective review of our community needs.
Now more than ever, we in Evansville need experienced citizens who are committed to avoiding conflict of interest to run for our Evansville School Board. That is why I am running. I do need your vote on April 3rd. Every vote will count. It is spring break. Don't forget to vote.
Posted by Evansville Observer at 7:58 AM
"Errors cost you money."
Just then the branch manager, who was excited about the effort of everyone during that week, offered to buy lunch at the local pizza place. I thought that was a wonderful idea. On the way over to the pizza place, I asked him, " What's the deal with the "Errors cost you money," on the bottom of every ticket."
"Well," he smiled, "If there is a stock symbol error or quantity error on the ticket, and the stock has to be sold out to remedy the error, the difference due to the error is taken from your paycheck. Also, if someone promises to pay for something.....and then does not.....and the stock or bond has to be sold......the difference is taken from your paycheck."
"What if someone lies," I asked.
"You have to hear and know the customer," he replied. "That is your first responsibility. Don't worry; You will learn quickly."
He was right. When lies cost you money, and the money comes out of one's paycheck....one learns quickly....to hear quite precisely.
This is what all bankers call the "Know Your Customer Rule." It is the very first rule of banking. In a small town, it is pretty easy. On the telephone it gets harder.
In the recent Evansville School Board Forum, Tris Lahti was heard to remark that "Who cares if we built a few too many sports facilities and the numbers are a little out of line with our peers."
Who cares?
One has to care because errors in planning cost everyone---taxpayers....students...parents...business....and teachers.......
The reason that it is important to involve the community in any decision about our schools is that we have a huge stake in the plan. Conflict of interest, whether it is in the form of an architectual firm who gets fees for building doing the planning..........or in the form of board candidates who have relatives on the school district payroll....is a detriment to objective review of our community needs.
Now more than ever, we in Evansville need experienced citizens who are committed to avoiding conflict of interest to run for our Evansville School Board. That is why I am running. I do need your vote on April 3rd. Every vote will count. It is spring break. Don't forget to vote.
Posted by Evansville Observer at 7:58 AM
"The Theory of "Double Down"; The Math of the Double Down
(Ed.note: This piece was written on a Tandy 1000 almost 20 years ago. Nothing like a declining stock market to bring back the nostalgia. )
Some years ago, in high school, right after Algebra II was completed in the semester, we had a time to study probability. Or more specifically, studied how probability is expressed in gambling and algebra.
The very first class, I remember the instructor asking whether if one rolled a dice, and had lost, whether the odds of winning on the second roll were increased. Most of the kids in the room, including myself, felt that the odds got better with each passing loss. What a blow to learn that it was not so.
Over the years, beginning in the 1960's, I remember some whispered discussions within our family on whether, even though Control Data stock had been falling, whether one should "double down" to lock in the magical "basis" and thus be prepared for a large win if and when-- and of course it must-- go higher ---eventually-- if one lived long enough.
What we learned in the 60's, it seems has to be learned all over again each decade. I know that even though I learned it well, I promptly forgot it in a moment of optimism later.
I even went further. It was not good enough to "double down"----the numbers did not work out fast enough. One had to be prepared to "Triple Down" in cases where the bold could win. Yes. That theory had flaws too.
The problem. In declining markets, in the 60's, 70's, 80's, 90's and on, if a stock goes to ZERO, nothing works. And indeed, if funds go down, and even seemingly slowly, diversification alone does not work....at least for stocks. Make a note of it.
Posted by Evansville Observer at 9:41 AM
Some years ago, in high school, right after Algebra II was completed in the semester, we had a time to study probability. Or more specifically, studied how probability is expressed in gambling and algebra.
The very first class, I remember the instructor asking whether if one rolled a dice, and had lost, whether the odds of winning on the second roll were increased. Most of the kids in the room, including myself, felt that the odds got better with each passing loss. What a blow to learn that it was not so.
Over the years, beginning in the 1960's, I remember some whispered discussions within our family on whether, even though Control Data stock had been falling, whether one should "double down" to lock in the magical "basis" and thus be prepared for a large win if and when-- and of course it must-- go higher ---eventually-- if one lived long enough.
What we learned in the 60's, it seems has to be learned all over again each decade. I know that even though I learned it well, I promptly forgot it in a moment of optimism later.
I even went further. It was not good enough to "double down"----the numbers did not work out fast enough. One had to be prepared to "Triple Down" in cases where the bold could win. Yes. That theory had flaws too.
The problem. In declining markets, in the 60's, 70's, 80's, 90's and on, if a stock goes to ZERO, nothing works. And indeed, if funds go down, and even seemingly slowly, diversification alone does not work....at least for stocks. Make a note of it.
Posted by Evansville Observer at 9:41 AM
Dateline August 2007: Technical: Tale of Three Graphs
edd.note: Data compliments of Yahoo Finance:)
Advances & Declines
NYSE NASDAQ
Advances 1,302 (39%) 1,393 (43%)
Declines 2,023 (60%) 1,731 (54%)
Unchanged 44 (1%) 90 (3%)
Up Vol* 2,738 (123%) 1,117 (33%)
Down Vol* 3,749 (168%) 2,208 (65%)
Unch. Vol* 42 (2%) 53 (2%)
New Hi's 12 36
New Lo's 1,080 395
*in millionsmore...
Young students of the market will note all three graphs sharply down. These three graphs are plotted on a weekly cumulative basis in Barrons's magazine sold at the Citgo at 51 and 14 in Janesville every Saturday.
In some trading circles, when, and only when, all three of these charts are positive on a cumulative basis, has the market recovered. However, from my observation, most folks cannot wait that long. Kind of a "are we there yet" thang.
Is this a real valid rule of trading? I do not know. What a good rule is---is beyond me.
Advances & Declines
NYSE NASDAQ
Advances 1,302 (39%) 1,393 (43%)
Declines 2,023 (60%) 1,731 (54%)
Unchanged 44 (1%) 90 (3%)
Up Vol* 2,738 (123%) 1,117 (33%)
Down Vol* 3,749 (168%) 2,208 (65%)
Unch. Vol* 42 (2%) 53 (2%)
New Hi's 12 36
New Lo's 1,080 395
*in millionsmore...
Young students of the market will note all three graphs sharply down. These three graphs are plotted on a weekly cumulative basis in Barrons's magazine sold at the Citgo at 51 and 14 in Janesville every Saturday.
In some trading circles, when, and only when, all three of these charts are positive on a cumulative basis, has the market recovered. However, from my observation, most folks cannot wait that long. Kind of a "are we there yet" thang.
Is this a real valid rule of trading? I do not know. What a good rule is---is beyond me.
OpEd: "JawBoning"-----Effective Method or Cruel Hoax
Sometimes when policy makers do not want to take concrete steps to solve problems, they indulge in an exercise called "jawboning." This "jawboning" has risen to a high art in financial and political circles, whether you are the Federal Reserve Chairman or the President of the US or whomever.
Last weekend I went to Wisconsin Dells to join my editor brother in a doubles game of tennis with two younger...and faster tennis players. My bro and I only had age and .....whatever wisdom we called "experience" to work with. Speed, vision and deft of hand has been slipping for some time. O.K. You understand the situation we were in.
It was a furious paced game with lots of net play. Just the kind of game Denis and I have always loved. At a critical point, Denis hit from the baseline a direct ball toward the opposing net player, who hit it with his backhand, and popped a weak lob in the air, which I smashed for a winner.....one of the few of the day for me.
As I walked to the other side of the net, celebrating, I cheered my bro on and said, "Let's go big guy.....they may be losing their arm strength."
On the next play, the opponent smashed the ball at me and although I was ready for it, it came on the backhand and I blew the shot. The "Jawboning" had worked. I had the shot I wanted....just not the skill needed.
So------"Jawboning" as a rule of thumb is always the mark of weakness.
Think of President Bush "jawboning" the mortgage industry to "work with" the holders of the mortgages that are going to be set to new higher interest rates---over a million of them this coming year. He has the power to take effective administrative action to modify the rules of handling, but instead uses "jawboning." That indicates weakness and .....portends trouble.
"Jawboning" in the mortgage case is his way of distancing himself from the problem---a problem that he cannot distance himself from since the Treasury supervises or.....should have supervised....the industry.
In fact.....over the past 30 years whether it has been the savings and loan industry in the 80's, the bond fiasco, the stock market crash, the techno bubble, or the current situation---- money.....special interest campaign money has impaired the proper functioning of our government in the financial sector.
For years, the government has been trying to weaken the barrier between banks and the stock brokerage industry---the Glass Stiegel Act of 1933. To the extent that they have weakened this barrier, banks too have become vulnerable to the downdraft of bundled mortgage products they are financially tied to.
So---the problem: Right when we need effective decisive action from our government we get just "jawboning." Kinda like we got with Hurrican Katrina.
Today the stock market seems to be responding to the "jawboning."----and seeing right though it. That is how I see it.
Stay tuned.
Last weekend I went to Wisconsin Dells to join my editor brother in a doubles game of tennis with two younger...and faster tennis players. My bro and I only had age and .....whatever wisdom we called "experience" to work with. Speed, vision and deft of hand has been slipping for some time. O.K. You understand the situation we were in.
It was a furious paced game with lots of net play. Just the kind of game Denis and I have always loved. At a critical point, Denis hit from the baseline a direct ball toward the opposing net player, who hit it with his backhand, and popped a weak lob in the air, which I smashed for a winner.....one of the few of the day for me.
As I walked to the other side of the net, celebrating, I cheered my bro on and said, "Let's go big guy.....they may be losing their arm strength."
On the next play, the opponent smashed the ball at me and although I was ready for it, it came on the backhand and I blew the shot. The "Jawboning" had worked. I had the shot I wanted....just not the skill needed.
So------"Jawboning" as a rule of thumb is always the mark of weakness.
Think of President Bush "jawboning" the mortgage industry to "work with" the holders of the mortgages that are going to be set to new higher interest rates---over a million of them this coming year. He has the power to take effective administrative action to modify the rules of handling, but instead uses "jawboning." That indicates weakness and .....portends trouble.
"Jawboning" in the mortgage case is his way of distancing himself from the problem---a problem that he cannot distance himself from since the Treasury supervises or.....should have supervised....the industry.
In fact.....over the past 30 years whether it has been the savings and loan industry in the 80's, the bond fiasco, the stock market crash, the techno bubble, or the current situation---- money.....special interest campaign money has impaired the proper functioning of our government in the financial sector.
For years, the government has been trying to weaken the barrier between banks and the stock brokerage industry---the Glass Stiegel Act of 1933. To the extent that they have weakened this barrier, banks too have become vulnerable to the downdraft of bundled mortgage products they are financially tied to.
So---the problem: Right when we need effective decisive action from our government we get just "jawboning." Kinda like we got with Hurrican Katrina.
Today the stock market seems to be responding to the "jawboning."----and seeing right though it. That is how I see it.
Stay tuned.
"The Limbo Rock"--or when to Buy
One always wonders when there are large stock market corrections.....when the "Limbo Rock Rule" applies. When to buy.
Usually you can see lots of stories by financial professionals these days with various theories. Usually they are based on a large....very large perspective.
I like to look at it from a very small perspective. Where there are entry level workers, A, married to entry level workers, B, who desire to purchase a home, C, -----How much do their wages have to be increased to allow them to qualify to purchase that home at fair value, using traditional mortgage ratios?
Just reflecting on that question brings one pause as to what percentage house prices might have to fall....... and on the other hand,....... how much wages might have to be increased to allow traditional lending to be restarted.
This equation and question will not be discussed in any of the pundit articles today, and yet, until it is discussed, nothing will be solved.
That is how I see it. From the small perspective of my world.
And you?
You make the call.
Usually you can see lots of stories by financial professionals these days with various theories. Usually they are based on a large....very large perspective.
I like to look at it from a very small perspective. Where there are entry level workers, A, married to entry level workers, B, who desire to purchase a home, C, -----How much do their wages have to be increased to allow them to qualify to purchase that home at fair value, using traditional mortgage ratios?
Just reflecting on that question brings one pause as to what percentage house prices might have to fall....... and on the other hand,....... how much wages might have to be increased to allow traditional lending to be restarted.
This equation and question will not be discussed in any of the pundit articles today, and yet, until it is discussed, nothing will be solved.
That is how I see it. From the small perspective of my world.
And you?
You make the call.
"Sipping Ice Water"
Saturday, September 22, 2007
During Times of Crisis----Drink Ice Water
It was the stock market crash of 1987. On the telephone squack box the senior brokers from New York were advising the younger brokers not to jump----in our office, as I looked around I saw all the older brokers sipping ice water. It was no time for nerves now. Use lots of ice. Stay cool.
The last time I had seen such ice sipping was in the room of a patient close to death who could only sip ice water.
So---sip ice water. Stay cool. And pray that when the opportunity for decisive action comes you will have the cool to make the clear headed decision.
During Times of Crisis----Drink Ice Water
It was the stock market crash of 1987. On the telephone squack box the senior brokers from New York were advising the younger brokers not to jump----in our office, as I looked around I saw all the older brokers sipping ice water. It was no time for nerves now. Use lots of ice. Stay cool.
The last time I had seen such ice sipping was in the room of a patient close to death who could only sip ice water.
So---sip ice water. Stay cool. And pray that when the opportunity for decisive action comes you will have the cool to make the clear headed decision.
OpEd: A bit on Fear/Greed
This sell off from the opening is bringing just a little deja vu for the Observer...... since I did trade through the Crash of 1986. The problem with the plunge overseas that triggers the market lower at the opening, is that any stop loss orders are triggered but at the lower price of market or the limit price-----It becomes a cascade of lower and lower prices as things keep going. Fear breeds on itself.
In each panic, the opposite of the panic is the greed---the bonds are going higher. ...and bond interest rates are going lower. Which means that for those who have have bonds or have mortgages, and have perfect or very good credit, one can sell the bonds at the top or look to refinance at the lower rates. So---in the market panic, there is always an opportunity to make a wise transaction on the other side--stay calm and look for it.
Click on the post for the current municipal and corporate bond rates, for various ratings and compare to last month, and yesterday. Enjoy.
Posted by Evansville Observer at 3:59 PM
In each panic, the opposite of the panic is the greed---the bonds are going higher. ...and bond interest rates are going lower. Which means that for those who have have bonds or have mortgages, and have perfect or very good credit, one can sell the bonds at the top or look to refinance at the lower rates. So---in the market panic, there is always an opportunity to make a wise transaction on the other side--stay calm and look for it.
Click on the post for the current municipal and corporate bond rates, for various ratings and compare to last month, and yesterday. Enjoy.
Posted by Evansville Observer at 3:59 PM
"The Pea Green Carpeting"---a true story
There is a philosophy of buying that one must concentrate on like a Zen monk. One must strive in all things--to reverse the pattern of human emotions.
When fear is in the street----One must concentrate on greed.
When everyone is gasping with delight on how high the stock market has gone and how much they are worth---giggling like they have been sipping fine whiskey-----
Sell.
My brother-in-law---Mark Hector--gave the family a great example when he purchased his first home in Hopkins. It was just a simple rambler---but it had been neglected....big time. The front room was carpeted in a dark pea green that made even the most ardent buyer vomit on entrance to the home.
What turned overyone else off---got Mark excited. He could visualize the new gold carpeting and the fireplace roaring and his wife and he celebrating the remodeling.
He made the owner an offer---a ridiculously low offer. He pointed out all the things that needed to be corrected. The seller refused the first offer. That was good. Left him a little pride. Then Mark made him an offer, just a bit higher.
Bingo.
Even today, when my wife an I are out shopping or looking at homes and I see some pea green carpeting----she just smiles and says------"No way." She knows that given the killing Mark made on that home, I will always have a weakness for pea green carpeting.
When fear is in the street----One must concentrate on greed.
When everyone is gasping with delight on how high the stock market has gone and how much they are worth---giggling like they have been sipping fine whiskey-----
Sell.
My brother-in-law---Mark Hector--gave the family a great example when he purchased his first home in Hopkins. It was just a simple rambler---but it had been neglected....big time. The front room was carpeted in a dark pea green that made even the most ardent buyer vomit on entrance to the home.
What turned overyone else off---got Mark excited. He could visualize the new gold carpeting and the fireplace roaring and his wife and he celebrating the remodeling.
He made the owner an offer---a ridiculously low offer. He pointed out all the things that needed to be corrected. The seller refused the first offer. That was good. Left him a little pride. Then Mark made him an offer, just a bit higher.
Bingo.
Even today, when my wife an I are out shopping or looking at homes and I see some pea green carpeting----she just smiles and says------"No way." She knows that given the killing Mark made on that home, I will always have a weakness for pea green carpeting.
"The Plenty Rule"
While many a man would like to puke hearing women constantly go over, "Well how did that make you feel," ad nausaum, the one area that it is appropriate----is the one area that it is least applied----namely money and the sense of security or plenty.
Too often those revered financial planners---mostly men---possibly only folks that have passed some sort of exam that equates security with amounts of life insurance and mutual funds in hand--pontificate in a very abstract way that makes customers wonder---and rightfully so.
I would suggest that it is talked about in such mathematical terms since the investment in insurance and stocks is so high that one must begin at the age of 7 in order to make the numbers come out.
Phil Laut, famous author of "Money is My Friend," went over the essential rule in a Saturday morning seminar held at the St. Paul Hotel some 20 years ago. His rule was that if a person did not have a sense of plenty, even though lots of money was accumulated, that person was destined to lose it. This concept shocked me. Being a rational guy and all.
The feeling or anxiety of scarcity would cause that person to screw up and make inappropriate investments and lose. On the contrary, the person who had a sense of plenty even though poor had a better foundation for gaining a great wealth and keeping it----and being wealthy in every sense of the word.
So.
Is Plenty a feeling? Or is Plenty a fact?
You make the call.
Too often those revered financial planners---mostly men---possibly only folks that have passed some sort of exam that equates security with amounts of life insurance and mutual funds in hand--pontificate in a very abstract way that makes customers wonder---and rightfully so.
I would suggest that it is talked about in such mathematical terms since the investment in insurance and stocks is so high that one must begin at the age of 7 in order to make the numbers come out.
Phil Laut, famous author of "Money is My Friend," went over the essential rule in a Saturday morning seminar held at the St. Paul Hotel some 20 years ago. His rule was that if a person did not have a sense of plenty, even though lots of money was accumulated, that person was destined to lose it. This concept shocked me. Being a rational guy and all.
The feeling or anxiety of scarcity would cause that person to screw up and make inappropriate investments and lose. On the contrary, the person who had a sense of plenty even though poor had a better foundation for gaining a great wealth and keeping it----and being wealthy in every sense of the word.
So.
Is Plenty a feeling? Or is Plenty a fact?
You make the call.
"Volatility"---the song
(Ed. note: Click the post for some information on Gas Spot Prices compliments of Platts.)
Some years ago, I had the pleasure of working in a brokerage firm, and while I was selling conservative bonds and stocks, the gentleman in the office next to me, Elvin R, was a very heavy options player. Mostly the S&P 500 options. In that option, on very volatile days, one could lose thousands in just a few minutes.
Whenever there would be an extreme period of volatility, Elvin would go to the entrance of his office, and intone " VoLLLa TiLLLLa TTTTT". Just that short one word song would put terror in the hearts of rookie traders, including myself.
If you review the chart of natural gas spot prices in the past year, it resembles a very high tent. In summary, the natural gas prices have spiked from $6 a 1000 btu to $16 a 1000 btu and then back to $6. Why does this matter to you?
Each fall, school districts have to plan ahead. They lock in an option but that price only locks them to January, when they have to lock again. For safety sake because it might go higher and they have only so much money.
The problem is that with the lack of regulation currently, with the locking process, the tent indicates to this Observer that schools, kids and taxpayers may be getting ripped off. The governors of Minnesota and Wisconsin have called for an investigation. So does the Observer.
The Observer thinks that school districts should be able to have enough regulation in matters of natural gas pricing so they do not have to pay excessive amounts for a product and be held hostage to speculation. This may bring back memories of Enron. Yes, and other energy trading schemes.
This especially rubs The Observer when school districts have to make cuts that in fact might not have been necessary if a fair energy price had been available.
I will leave it up to the experts to decide whether the markets were the "most efficient". My gut feeling is that they were NOT.
What do you think? You make the call.
http://www.platts.com/ProductList/NaturalGas/Trader/
Some years ago, I had the pleasure of working in a brokerage firm, and while I was selling conservative bonds and stocks, the gentleman in the office next to me, Elvin R, was a very heavy options player. Mostly the S&P 500 options. In that option, on very volatile days, one could lose thousands in just a few minutes.
Whenever there would be an extreme period of volatility, Elvin would go to the entrance of his office, and intone " VoLLLa TiLLLLa TTTTT". Just that short one word song would put terror in the hearts of rookie traders, including myself.
If you review the chart of natural gas spot prices in the past year, it resembles a very high tent. In summary, the natural gas prices have spiked from $6 a 1000 btu to $16 a 1000 btu and then back to $6. Why does this matter to you?
Each fall, school districts have to plan ahead. They lock in an option but that price only locks them to January, when they have to lock again. For safety sake because it might go higher and they have only so much money.
The problem is that with the lack of regulation currently, with the locking process, the tent indicates to this Observer that schools, kids and taxpayers may be getting ripped off. The governors of Minnesota and Wisconsin have called for an investigation. So does the Observer.
The Observer thinks that school districts should be able to have enough regulation in matters of natural gas pricing so they do not have to pay excessive amounts for a product and be held hostage to speculation. This may bring back memories of Enron. Yes, and other energy trading schemes.
This especially rubs The Observer when school districts have to make cuts that in fact might not have been necessary if a fair energy price had been available.
I will leave it up to the experts to decide whether the markets were the "most efficient". My gut feeling is that they were NOT.
What do you think? You make the call.
http://www.platts.com/ProductList/NaturalGas/Trader/
The Dialectic of the News; or; The Niacin Press Process
As an admitted "news junkie" I have observed over the years that within minutes of adverse, negative news in the financial press, there is a carefully orchestrated release of stories of just the opposite persuasion to calm the waters.
If you click on the post, you will see an article by a reporter who is described as an AP business writer who tells you that the plunge of the Nikkei stock market in Japan is really no problem when one looks back to the history since 2000. This is really reassuring for the American investor who these days is heavily invested in international stocks.
If one reads the recent stories of the problem in Iran, and that Iranian finance ministers are pulling their money from the West in preparation to avoid a repeat of the problem they faced when the US froze the assets in the Jimmy Carter days, one can see that this is exactly what the US treasury does not need, folks moving money out of dollar denominated investments, and even worse, out of US treasuries. A full scale panic could cause interest rates to skyrocket. Bad for everyone.
The effect of the "niacin" press is to calm, and freeze investors. However, folks need to be aware of the risk of investment and not be frozen from appropriate action. When we are children, we might have adult folks place a hand on our shoulder and tell us "everything will be ok." When we are adults, we need to make up our own mind.
If you click on the post, you will see an article by a reporter who is described as an AP business writer who tells you that the plunge of the Nikkei stock market in Japan is really no problem when one looks back to the history since 2000. This is really reassuring for the American investor who these days is heavily invested in international stocks.
If one reads the recent stories of the problem in Iran, and that Iranian finance ministers are pulling their money from the West in preparation to avoid a repeat of the problem they faced when the US froze the assets in the Jimmy Carter days, one can see that this is exactly what the US treasury does not need, folks moving money out of dollar denominated investments, and even worse, out of US treasuries. A full scale panic could cause interest rates to skyrocket. Bad for everyone.
The effect of the "niacin" press is to calm, and freeze investors. However, folks need to be aware of the risk of investment and not be frozen from appropriate action. When we are children, we might have adult folks place a hand on our shoulder and tell us "everything will be ok." When we are adults, we need to make up our own mind.
Differences Make Markets: Or, The story of "Frug"
Some years ago when I was in the stock brokerage business, we were informed at the office that the "big kahuna" or "big boss" from Chicago was coming to the office for a review. A review of what was not made clear. He had a notorious reputation for being tough to please. We naturally cleaned our offices so it looked like we never even worked with paper. He was flying in from Italy we were told where he owned a vineyard just as a hobby. Yes, he did look a bit like Don Corleone. I was more than nervous and did not know what to expect. I wondered what we might chit chat about.
We were told to have our prediction for the best performing stock for the next year, as well as our prediction of the strongest sector and the final S&P 500 value for the year. He was to give us his view of the coming year.
When the morning arrived, we all gathered in the conference room. Then he said, " Well, let's go around the room and you each can tell me what your prediction is for the next year." As each broker stood and recited, I grew more and more impatient. I was well aware of all these guys and what they thought. I needed some answers please. I needed some guru stuff. Then I gave my speech and could relax.
When we all finished, it was time for "Frug" to speak. "Well" he said, I see you all have some real differences, and that is wonderful." There are certainly a lot of trades right here in the conference room. Dorthea loves medical, and Denis hates it; Denis likes technology and Dick hates it for next year. Dorthea loves utility stocks and I don't.
This is very healthy. In fact, these differences and your ability to see them quickly and act on them, is the very skill you need to nurture in order to be successful in this business. Do not for a moment be discouraged when you see differences. Differences are what make America great. Differences make markets!
The meeting was over. It was nothing like what I had expected. " What a waste of time ," I thought.
Over the years I have never forgotten a word of his speech, and yes I am very happy I did not go over my expertise in Boone's Farm Apple Wine.
We were told to have our prediction for the best performing stock for the next year, as well as our prediction of the strongest sector and the final S&P 500 value for the year. He was to give us his view of the coming year.
When the morning arrived, we all gathered in the conference room. Then he said, " Well, let's go around the room and you each can tell me what your prediction is for the next year." As each broker stood and recited, I grew more and more impatient. I was well aware of all these guys and what they thought. I needed some answers please. I needed some guru stuff. Then I gave my speech and could relax.
When we all finished, it was time for "Frug" to speak. "Well" he said, I see you all have some real differences, and that is wonderful." There are certainly a lot of trades right here in the conference room. Dorthea loves medical, and Denis hates it; Denis likes technology and Dick hates it for next year. Dorthea loves utility stocks and I don't.
This is very healthy. In fact, these differences and your ability to see them quickly and act on them, is the very skill you need to nurture in order to be successful in this business. Do not for a moment be discouraged when you see differences. Differences are what make America great. Differences make markets!
The meeting was over. It was nothing like what I had expected. " What a waste of time ," I thought.
Over the years I have never forgotten a word of his speech, and yes I am very happy I did not go over my expertise in Boone's Farm Apple Wine.
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