Zero Beta

Today’s Afternoon Selloff – April Buying brings May Crying?

After a week of unrealistic gains and dare I say irrational exuberance, a morning of interesting data, and a day of trading through a narrow range with the S&P 500 testing the 1500 mark, the markets, which until know were on a dangerous combination of LSD, heroin, and Viagra (Thanks Pfizer!), came back from its 1 month bender and checked into rehab.

I am sure tomorrow and tonight, we will hear words like "profit-taking", "healthy correction", "nervousness". I will agree we saw all of those (except for maybe a healthy correction). But this market tumbled quite quickly, and I believe it will begin tomorrow where it left off. These are the reasons I believe that this was no minor correction and the sign of something more.

1. There is a global asset bubble. While this may not be news to some, every asset class in this country, world, galaxy has been inflated during which money was thrown at that would take it. . Barry Ritholtz mentions a letter from fund manager, Jeremy Grantham to the GMO investors. Grantham describes this bubble and believes it may be time for it to pop. Now this is a well-respected fund investor with close ties. In fact, this man manages Dick Cheney's money so my money is on this guy. I know all about Blind Trusts, and quite frankly they are a joke. Dick Cheney – although not my favorite VP of all time, is good at a few things: 1) Manipulating the market - see his Energy Legislation, HAL, the Iraq War, and of course his bid on Ebay for a Jem Lunchbox Thermos (Dick, I know it's you!). 2) Not giving a damn – this guy shot his buddy, told Howard to "Go f*ck himself", and just has a pissed off look on his face at all times. Dick Cheney will get out of the market when he wants to and at the top. At this point people need to put politics aside and look at the facts. The economy is tanking, earnings are terrible, and Dick Cheney is selling. Tomorrow may not be a very good day
2. After the market close, Circuit City basically became "Nobody Beats the Wiz". They revised guidance, posted terrible 1^st Quarter numbers, and basically screamed "Get out now!" They were hurt mostly by flat screen TV sales and were down 8% after hours before they pulled it from trading. When I think of the last few years of the Shakespearean tragedy of the American Consumer, i-Pods and Flat Screens are items that immediately come to mind. Them and Best Buy benefitted the most from cheap Asian goods, easy money, and Consumers on crack and should be the first to fall. More importantly, business at Circuit City affects Asia, and
   with what is going on right now in China and Japan investors don't need any more bad news. This is not a one time thing or something that will be intrinsic to Circuit City alone. It will be an all too familiar sight for the months to come and may spread like a contagion before.
3. China appears primed for a '87 style crash. After the infamous sell-off of February 27, 2007, China has been on fire. Although most recently it seems to be breaking trend a bit. See the chart below:

   

   Source: Yahoo Finance!

    

   Today they tried to cool things down and increase margin rates – just as they did back in February. This weekend I read an article in the WSJ about what is going on there, and it is reminiscent of a few other investment bubbles – namely, Japan in 1989 and the US about 10 years later. Seeking Alpha discusses this here. Fortunately, half their mainland markets were closed and practically all of Asia is on holiday for part of this week. Hong Kong (and Asia in general) dropped 2%, and the markets here basically shrugged it off. Tonight when the well rested and spooked Asians get back to the markets, things may not go as smoothly. I would not be surprised to wake up tomorrow to a huge Asian sell-off. I truly believe that China wants a correction (but on their terms) in which time they will revalue the Yuan to appease us, and focus on their domestic economy – taking advantage of the new currency weakness. During this bubble the only asset class that didn't fare so well was the currency which all these assets have been denominated – the US Dollar (see below). I would expect any correction to be dollar-related, as the divergence corrects.

   

   Source: Yahoo! Finance

At the end of the day, I have been proved wrong before and the momentum behind this latest rally has been enormous. That's why I always take my own ideas with a grain of salt. But then again, reality must soak in sometime and I believe April Buying will bring May Crying.

 

 

The Dow 13,000 vs. Paris Hilton

If you know me, you know that I think the U.S. markets and their participants have resembled spoiled brats for some time.  Far from her youth (1982-1998), Sweet Sixteen brought out the Brat in her as Daddy (Greenspan) would spoil her and give her money every chance he got.  This led me to think, who better than Paris to illustrate this point.  Below is a list I came up with of similarities and differences between the two:

            VS.            

	The Dow	Paris Hilton
1.	Has had a long standing relationship symbolized by DIAMONDS (DIA).	Every relationship is symbolized by diamonds.
2.	Can go down on you quite quickly when you are not looking	This one is too easy…
3.	Rallied past 13,000 points this week.	Tallied up 13,000 Frequent Flyer points on the Black Card this week.
4.	Latest attempts at reality flopped.	Latest attempts at reality TV flopped.
5.	Uncle Hank gives it an allowance regularly.	"Ummm I put the card in the machine and Daddy's money comes out?"
6.	Made people rich overnight	Made Nicole Ritchie overnight
7	Currently quote w/ an 18 P/E	Has been quoted saying "When Paris has to pee, Paris has to pee."
8.	Calculated by the daily average of thirty large cap stocks.	Calculated that daily on average she thirty

 

 

Not only can they be compared on this basis, stock price movements and market psychology during certain periods of time can be explained by Paris Hilton Quotes.  Let's compare some Dow Quotes to Paris Hilton Quotes:

	The Dow	Paris
1.	Oct 2002 – Present: 13,120 + 5620	"Every woman should have four pets in her life. A mink in the closet, a jaguar in the garage, a tiger in her bed, and a jackass who pays for everything."
2.	DJIA, Mar 4, 2007 - Present: 13,120 + 316	"I don't really think, I just walk"
3.	DJIA, Oct 2002 – Present: 7,500-13,120	"You don't have to be an heiress to look like one, if you act like one then everyone will just presume you are one."
4.	DJIA, Apr 24 – Present: 13,120 + 1030	"No matter what a woman looks like, if she's confident, she's sexy."
5.	DJIA, Feb 27, 2007: 13,120 + 15.44	"The way I see it, you should live everyday like it's your birthday."
6.	DJIA, 1997: WMT added to DJIA	"Wal-mart…do they like make walls there?"

 

 

 

 

Sources:

Thinkexist.com
http://en.thinkexist.com/quotes/paris_hilton

Yahoo! Finance
http://finance.yahoo.com

Whether You Agree with his Politics or not, We Need More Joe Bidens

Last night was the first of I'm sure many debates we are going to have to watch in the next year and a half.  I am a political junkie so I try to watch them all, but I'm not too sure if I can take a year and a half of egomaniacs saying so much and saying nothing at all.  Since the Kennedy-Nixon Debate, the debate has become less of a debate and more of a beauty contest.  Lately, it has begun to resemble American Idol.  Last night's debate was more of the same except for Senator Joe Biden's refreshing style and candor.  I have been watching Biden for a while and always admired him.  He is the only Democratic nominee I would vote for at this moment (Sorry Hillary..Call me!?!).  He has the type of brash, anti-establishment pragmatism that the Democratic Party really needs if they want the Republicans to stop stealing their lunch money on the way to the White House. 

Michael Hirsh of Newsweek posted an article on him today which detailed his view on Iraq and examples of the type of talk that will actually bring progress to this country:

And for a guy best known for putting his foot in his mouth—the very day Biden announced his candidacy, he almost sunk it with some ill-considered comments on Obama that rankled African-Americans—the Delaware senator has mustered some real eloquence about Iraq. Consider what he said in his floor speech this week on the spending bill:

“History suggests only there’s only a couple … ways to keep together a country driven by sectarian strife. And it’s not to put American troops into a city of 6.2 million people to try to quell a civil war. Throughout history four things have worked. You occupy the country for a generation or more. That’s not in our DNA—we’re not the Persian Empire or the British Empire. You install a dictator. Wouldn’t that be the ultimate irony for the United States—to go back after taking one down and install another one? You let them fight it out until one side massacres the other—that’s not an option in that tinderbox part of the world. Or lastly, you make federalism work for the Iraqis. You give them control over the fabric of their daily lives. You separate the parties. You give them breathing room. Let them control their local police, their education, their religion and marriage.”

This type of rational, intelligent dialog is what Americans are starving for.  Everything he said above is correct in my eyes.  I don't take party stances.  In fact I hate our two party system and believe G-Dubs  was correct in his Farewell Address when he warned against party systems - that a party system would be the downfall of everything that was just built.   I don't care what he said about Obama.  Yes, it was politically stupid, but I still do not care.  I don't believe he meant it in a derogatory way and that just means that he doesn't walk on eggshells.  I will go as far as saying I love that he said it.  I hate Bush and what he has done to our Constitution, but I love that he says whatever the hell he wants (be it out of ignorance or hatred of the press).  It's too bad he has a 24/7 spin squad erasing most of it. 

Last night when asked about the Obama statement he delivered the most meaningful and intelligent response that would even make Dick Cheney smile: (note: the only things that make Dick Cheney smile are clubbing baby seals, bathing once a week in tub filled with light sweet crude mixed slightly with a 9-Year old Iraqi's blood, and Mad Libs).

Sen. Joe Biden demonstrated an uncharacteristic ability to keep it brief during the Democratic presidential debate on MSNBC tonight.

NBC Moderator Brian Williams noted "words have gotten you in trouble in the past," and asked whether he could reassure voters that he would have verbal discipline on the world stage.

"Yes," the Delaware Democrat said, drawing a laugh from the crowd.

Biden smiled at Williams as he awaited further response and then moved on to the next question.

He probably won't win because the American public doesn't want to face reality (For further reference see The Dow Jones Industrial Average).  But, if he can gain some supporters and ruffle some feathers - eventually loosening up the process, he will most likely accomplish more for this country than than whatever P.R. Spokesman for the American Idiot gets elected.

Sources:

Joe Biden is Dead Right on Iraq
Newsweek
Michael Hirsh
April 27, 2006
http://www.msnbc.msn.com/id/18339254/site/newsweek/

Biden, Dems bash Iraq policy in presidential debate
The News Journal
Nicole Guadiano
April 27, 2006
http://www.delawareonline.com/apps/pbcs.dll/article?AID=/20070427/NEWS/70426093

Caveat Empt...or Maybe Not

Today at about 8:30 am, my eyes were glued to the TV as if it were the Super Bowl, Sopranos finale (although not as much since Season 2), World Series, NCAA Finals, all rolled into one.  The irrational exuberance of the past few weeks, has left me confused, frustrated, and downright scared.  I know the economy and the market are two different entities, but I figured a economic release like GDP would be a number that would wake up the market to things to come.  So, when GDP came in at 1.3% with 4% inflation, I thought this may be the day.  Slower growth AND inflation?  Isn't this the Anti-Goldilocks?  Isn't this what Ben Bernanke would think as the ultimate Armageddon?  Apparently not. 

As both the indexes were making new highs mid-afternoon, I was thinking:  Who is out there buying at this moment?  Who could sit back and say, "Wow that report foretells great things to come in the next few months."  I don't care if you are bearish, bullish, dovish, hawkish, cattish, doggish, or goldfishish - what causes someone to create a new long position on a day like today?  Now I have my opinions and I don't claim to be right that we are heading for something awful, but I will admit that I am so utterly confused that I don't want to take the risk to find out.  It's like hiking in the woods in the summer.  If I see something that could potentially be poison ivy, I assume that it is and stay the hell away.  This led me to think, who was buying today?  Who saw something that could be poison ivy and and rubbed it all over their skin like it was aloe leaves?  And if nobody in particular than WHY?

Suspects

1.  Joey Odd-Lot - The Odd Lot investor may have been getting into the market today.  He may have just gotten his tax-return (as I did today), or maybe he put his Christmas bonus to use. Sources of cash aside, let's be honest here Joey Odd-Lot isn't that familiar with some of the market leaders the past few years.  Names like Google, Amazon, Microsoft, Apple, and Texas Instruments, are much likelier targets for his investment dollar.  So when he starts to see them move coupled with the Dow 13,000, emotions cause  him to take Cramer's advice and Buy.  I hope this isn't the case, as every day I meet someone who bought into the market in 1999 during the last push and are still hurting. 

2.  Neo-Contrarians - The term "contrarian" is thrown around all too loosely these days.  American Culture is obsessed with the Cowboy, so when investors see some of the success of the best Contrarian Investors, they start to put on their cowboy hat.   This has led to the emergence of the Neo-Contrarian  - the Contrarian investor who goes against everything even his own logic.  It is Literal Contrarianism and would very reasonable explain the market movements the past few weeks in such a low-volume environment.  The other day I sat back and and said to myself, "What would be a contrarian play on this market at the moment?"  One can argue both bullish or bearish.  In the recent low volume sessions - this Contrarian school of thought could move the market against reality.

3. Nobody - There was no real discernible buyer, just some light trading on a rainy Friday, when everyone was tired from a busy week. The phones in my office barely rung - all week actually seemed quiet.  Those who were bearish have gotten out, those who were bullish are already in and most traders just didn't feel like tackling the idea of slowing growth and rising inflation today (I hear ya, me neither). 

4. Black-boxes - I am starting to put together a post on black-box investing and its implications so I will be brief.  We have no idea what these Nuclear Physicists given billions of dollars are coding in Midtown and Connecticut - and to be quite honest we may not want nor even comprehend it.  Just as Gary Kasparov had a hard time understanding Deep Blue, we may have a hard time understanding a slew of them with a major bankroll.  My computer is not logical when it starts shutting down with 5 minutes of battery life left and me still typing something up, but that's what it is programmed to do.  We need to understand this.      

Lowered Expectations: Some Thoughts on this Weird Week

This week was very strange, caught many traders by surprise, and was dominated by two words "Dow 13,000".  I remember a few years back "Dow" followed by a much larger number was being uttered throughout the land from the same Financial Pornographers who brought you "Goldilocks", "The New Economy", and "Blame it on China".  Now, some people believe that this has been a long time coming and this is merely something to look at out the window on our trip to Dow 30,000.  Through all the nonsense and hoopla, what I saw this week was the bull market at a bar at 4 a.m (we've all been there), standing around mumbling something about 13,000, looking for someone to go home with, and eventually succumbing to lower standard.

Lowered expectations. 

Barry Ritholtz, in his discussion of equities and earnings growth, posted the chart below from the New York Times.  Notice which stocks had dynamite earnings this week and what sector they are in. 

As you can see earnings are not only on the decline but some industries are really on the decline - the ones that are very consumer sensitive.  All the "great" earnings this week were just beating a number that has since been slashed.  It's like the Senior Tour for stocks.  Barry also mentions that buying low earnings growth is fine if its on an uptrend but on a downtrend like this it is disastrous. 

Multiple Expansion?

I had an argument with a colleague today about multiple expansion.  He said thats what he thinks we're going to get as if its some sort of "phenomenon".  Multiple expansion only has grounding in higher growth rates, therefore maintaining PEG ratios.  An investor is willing to buy a stock at a premium because they believe that the earnings will grow. This is not an economy that is going to go through that scenario, the only multiple expansion phenomena that will occur is that people will buy stocks that are already expensive and that will cause multiples to increase.  Multiple expansion is the earnings equivalent of "Goldilocks" and is not going to happen.

Deeper Meaning

From a financial perspective, all this appears to be a desperate last rally for the Bulls.  Investors are trying to eek out some gains before they go to the Hamptons, and bought into the momentum.  I expect by this time next month things will be quite different.

From a much larger perspective, this whole idea of "lowered expectations" is becoming all too familiar in our country - and quite frightening.  From prison abuse, to reality TV, to educational standards, we are lowering our expectations in all forms of everyday life for reasons of greed, fear, ignorance, and boredom.  We are so consumed by noise, greed, and national self-deception that we are led to believe that our country is very healthy.  We think we can swim just because we can drift outside the shallow end of the equity pool - only when we are thrown Swimmies.  It is the attitude of a collective little bratty kid - and one that needs to grow up. 

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