Archive for July, 2009

Don’t ask me……I have no clue!!!!!

I have said on many occasions to students that you must be prepared for the fact that you may do the right thing, in the right way, at the right time and still be wrong. This statement led me into a discussion of the concept of the market being a totally gray area. In the market, there is no black and white. Although based on math in many ways, especially options, the market cannot be explained by an algorithm. This is why black boxes and computer algorithms do not work. Trading the market, as I have stated before, is an art form based upon mathematics. In the same way Mozart and Tchaikovsky created incredible music but saw music as a progressive flow of numbers, the market moves!

The problem with this is that we now know that the market, being a form of art, does not respect the logic of mathematics. It does not acknowledge the progressive flow and relationships of numbers. In short, the market is going to do whatever the market wants to do; rational and logical or not. Right now, the market is trading “not.” It is not trading rationally by any stretch of the imagination nor is it trading logically.

Proof, they say, is in the pudding. Right now the market is irrational! Nine of the last eleven days have been up days for the DOW; a record setting streak. From roughly 8100 to 9063 is over 900 points in only eleven days. Damn chart is parabolic for the love of Mike! The S&P is up over 100 points in the last 10 days…..8 of which were up. Finally, the NASDAQ has been up 12 straight days encompassing over 200 points!

Further, the market is illogical! Earnings estimates were purposely way too low especially for the financials! Hell, all the financials crushed estimates! And that was a surprise…..to whom? All of their profits came from trading as well it should. They were trading with billions of dollars of free money and caught a three month to the day bullish quarter which led the DOW up 900 points for a total of 10%. All the while, these financials were reporting increases in credit market losses which showed that the original trouble spot, the source of all of this trouble, is still a problem! Meanwhile, just about every other firm in the S&P was beating earnings estimates but on lower revenues. This means that the increase in profitability was coming from cost cutting, not sales increases: from contraction, not expansion. This is what recession is. These numbers show we are still in recession!

The economic data was showing that we are not turning things around from negative to positive but simply from very negative to only plain old negative. The downturn has not changed to upturn; the downturn has just slowed its pace. Well, of course it has! Most of the bad things that have happened have already happened….of course the rate of this decline is slowing! But the market has gone on a historic tear!!

So, what is next? Like the rate of the decline of the economy, the overly optimistic emotion that is moving this market has to end too! The reality of the numbers must be acknowledged right? The question is when. The market has already run up way more than I thought it could. From a standpoint of real analysis of the real numbers, this market should not rationally or logically be here at this level! I just do not understand how it can be here! Yet here it is! How can you explain it? Maybe the explanation is in the article I just wrote. I guess I should go back and read it!!

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Lean and Mean and Miniscule: The Downsizing of America

The recent “surprise earnings” that have led to this recent market rally may have surprised most, but not all. Some of us knew that this round of earnings would be good because of several factors.                                                                                                                                               The first is the fact that the financials, which are responsible for starting this whole rally, made money by trading during a three month run-up while using a crap load of free capital given to them by you (taxpayers). This is a topic for another blog entry to be sure.
The second factor is Wall Street’s ability to get investors to believe in the significance of these “earnings estimates” instead of looking for real earnings growth. Instead of real, positive increases in earnings, all you have to do is to do better than the analysts expect you to…..even if you still do badly! And the worst part is that the people who are doing the estimating have a vested, financial interest in the company beating the estimates. Talk about a conflict of interest!
But the real factor that gets me is how most, if not all of the companies in the US increased their earnings per share (EPS), not their revenues! They did this by cutting back expenses including labor and ultimately increasing earnings by decreasing their size. I hear so many analysts talking about these companies getting “lean and mean” and how good it will be for the future of the company…..what a laugh! American companies are downsizing to generate better earnings results but they may potentially be damaging their ability to compete on the global level. Eventually, this will have to be bad. Currently, we can begin to see the error in this concept by looking at the US automotive industry and the US banking industry.
The demise and downsizing of GM and Chrysler and the weakening of Ford have allowed foreign car makers to gain significant chunks of market share not only in the US but globally as well. Plant closings and massive layoffs have shrunk our car makers. This is creating a competitive disadvantage for the US car makers. Meanwhile, the banks have had to sell off assets to meet capital requirements and pay down losses in the credit markets. US banks are nowhere to be seen in the ranks of the top ten banks in the world!  When it comes to competing in the global financial markets, size matters!
My father once told me that in basketball, a good big man will always beat a great little man. The saying goes that you can’t teach size. And size (asset base) matters a great deal in this game too….the game of global business. Bigger is often better when in competition. Economies of scale really pay benefits to the companies big enough to exploit that scale. By diminishing the size of our companies here in the US, we lose the advantage of economies of scale and thereby hurt our pricing ability which is already hampered by US law as compared with other countries.
Lean and mean is one thing…..miniscule is another. The US could wind up having trouble competing globally with the big boys in the future because we may no longer be a “big boy” ourselves!

Ron

The Four Horsemen

Recently, I have been getting a bit nervous to the downside again. The appearance of my Four Horsemen leads me to believe another major drop is in the cards. The first Horseman is the Obama statement made last week “full recovery is a ways away.” The eternal (irrational) optimist is starting to question his thoughts that the end of 2009 will be the beginning of the recovery. He is the leader, and when the leader wavers in his confidence, it creates a full lack of confidence in the followers (consumers).

The second horse comes in the shape and form (or more appropriately lack of form) of one Timothy Geithner. The Treasury Secretary’s statement last week, “the size and scope of the derivatives problem blindsided us!” scares the hell out of me! The ex-chairman of the NY Fed was around and took part in the development when these mortgage based instruments of financial destruction were created! How the hell could he have been blindsided. I know a little about risk…enough to know that someone considered a “true expert” in their field will never be “blindsided!” A real expert may lose on a bet for or against, but never does a true expert get beat from not being aware of a potential situation. When I risk manage a position or portfolio, I start with the question “where is my risk?” After I identify where my risk lies, I next say “what events can occur to bring my worst case scenario to fruition?” My first answer is always the same, “a giant rogue comet hits the earth and destroys the entire planet completely!” It may sound stupid but it is a little drill I use to remind myself to look at every possible event or situation that could negatively effect my position or portfolio. I may choose to ignore the potential risk, but I know it is there…..big difference!

The Third Horseman is the rumor, or actually more than a rumor, that congress wants or at least feels the need for ANOTHER stimulus package. Simply put, the previous stimulus package is not having the speed of effect government wants. Not only is it not happening fast enough, to my calculations dating back to when it was passed, it wasn’t big enough to work no matter how long they gave it! The first  was TARP and all that did was to prevent most banks (more accurately the entire US Banking system) from failing. It did nothing in terms of staving off the recession. The fact that they are looking at another one tells me that not only did the others not pull us out of the recession but they aren’t likely to in the future. Further, the fact that they are looking at proposing another one with over 60% of the populus against it leads me to believe that Big Brother is getting desperate…….which is NEVER a good thing. The biggest mistakes are made in desperation!

The Fourth Horseman is the technicals. Now I have been the first to say that this market is NOT trading as technically as it is trading fundamentally. However, the technicals still play a major roll. Right now the technicals are looking very bad. If this market trades and closes down below 8100 on the DOW, then we could be looking at a major drop pending. At that level, the other majors (S&P and Nasdaq) will have taken out all recent lows and will have failed to put in a higher high established in the last up move. This would be very bad and will deal a death blow to the markets as the Fourth Horseman always does.  “And when he had opened the fourth seal, I heard the fourth beast say, Come and see. And I beheld, and lo a pale horse; and he that sat on him was called Death, and Hades followed with him.” From a standpoint of the technicals, a bad week this week and the market is going to hell!!!

Ron Ianieri

ION Options

Are we ever gonna learn?

Well, it is yet another earnings season and some big name companies beat the Street estimates, the DOW runs up 280 points or so and the recession is over……again! How many times do we need to play this game and not learn anything from it? How stupid are we? Every earnings season sees the market trading up as these companies beat estimates and then down once the ballyhooed fanfare of fantasy land is over. Time after time this has happened during this recession and people keep on buying into this crap and lose money doing it!

The question is why? The answer is hope! And the powers that be know it! Wall Street knows that you want things to go up. Hell, they are the ones who brain washed you into thinking that way! They know you want things to be good. So what do they do…..they give you exactly what you want. They do this by constantly lowering earnings estimates to such a ridiculously low level that the company can’t help but beat it. Then, using the media as an unwitting accomplice, they sound the bugles, act happy, and you act like the family dog and run out and fetch. You go out and buy everything in sight. Hey butthead, who do you think is selling you this stuff? I will give you a hint….the same guys telling you to buy it!! And then it craps out and we are stuck with yet another loss!

The Government knows what you want also! They tell how great the economy is and how all of their plans and projects are doing the trick. They throw a headline out there that says that the latest economic data is positive…or at least in the headlines. Read through to the bottom of the story (as so few of us do) and get the real info! Seems like the real story never lives up to the headlines. No bother, using the media as an unwitting accomplice, the headline is shouted out from the highest mountain, filled with joy and happiness….exactly what you wanted to hear. Optimism reigns supreme and then runs amuck! You run out like a dog (named Pavlov) and fetch up everything in sight. And the moment where you are long the world, the bottom falls out! Now, the real story is uncovered and the headline losses it luster. Reality comes back to take charge and the market sell off…..losses again!

Are we ever gonna learn?

Ron Ianieri

ION Options

Crank It Up!!!

Ok guys and gals, it is time to get this thing up and running!! So, starting now, start checking every day. I will be posting my thoughts along with what I believe are pertinent articles with my commentary on it. I hope many of you will also let your opinions be voiced here !! Well, enough talking….lets crank it up !!!!!!

Ron Ianieri