Getting Good Businesses At Cheap Prices

May 19, 2010 by HWWProject Leave a Comment

By Dan Ferris in the Extreme Value Weekly Update:

Your letter is called “Extreme Value”. I don’t consider [blue chip stocks] to be generators of great value. How can they be. Extreme value occurs in the early stages of a stock’s growth. It’s a mathematical law. How can [these stocks] ever grow exponentially? – Paid-up subscriber H.M.

Ferris comment: I’m not sure what you’re describing, but it isn’t value investing. Nor is it Extreme Value investing. A company’s market cap has nothing to do with how much value it creates. Nor does value investing have anything to do with a focus on early-stage growth companies or exponential growth. Early-stage companies are risky bets and difficult to value. It’s highly unlikely any such company will never make its way into these pages.

Extreme Value means getting the best possible assets and businesses at the cheapest possible prices. When you’re buying [the No. 1 Extreme Value stock’s] cash and securities at a discount and getting its massive upside and the services of its stellar management free of charge, you’re doing Extreme Value investing. When you buy [the No. 2 Extreme Value stock], the most cash-generative business in the world, at 10 times free cash flow, you’re doing Extreme Value investing. When you recognize the substantial value created by dominating 80% of the global market for semiconductors and understand Intel sets the pace for innovation in its industry, paying 13 times free cash flow, that’s Extreme Value investing. When you buy a business like IMS Health, which has a one-of-a-kind database that’s been 50 years in the making, and now tracks 90% of the prescription drug transactions in the U.S., and you see it trading for less than five times free cash flow, you’re doing Extreme Value investing.

If you want a quick gauge of how much value a business generates, look at return on capital. World Dominator stocks generate high returns on capital. [Our No. 2 stock] requires little capital and generates more cash than perhaps any business on Earth. [Another of our World Dominators] is in a capital-intensive commodity business, and management still achieves high returns on capital. It’s impossible for the business to not generate huge amounts of value.

When the greatest businesses in the world trade at deep discounts to intrinsic value, the situation is the opposite of what you’re implying. Such stocks bought at such prices contain the potential to generate more risk-adjusted value to shareholders than any other stocks in the world. World Dominators are the most valuable businesses in the world. When you can get the most valuable businesses in the world for substantially less than they’re worth, it generates tremendous value for you as a shareholder.

You should read Joel Greenblatt’s book, The Little Book That Beats The Market. It’s a great way to learn what value investing is about: getting good businesses at cheap prices.

TD Aggressive Sequential

May 19, 2010 by HWWProject Leave a Comment

per a 2006 Bloomberg video, Tom Demark recommended using TD Aggressive Sequential and TD Aggressive Combo in order to “get in” more trades. You may not get in (or sell out) right at the bottom (or top) but it is still a low-risk entry or exit.

Description:
Normally the TD Countdown compares the Close to the Low or High (for Buy or Sell) 2 bars prior.

For TD Aggressive, compare the Low to Low, or High to High 2 bars prior. (ie. replace Close with Low or High)

Comments On TD Sequential Entry

May 19, 2010 by HWWProject Leave a Comment

DailyDeMark here… I want to make a comment that was made by Marie on the previous page. You absolutely must not trade the Setup 9 count based purely on the “perfection” setup. There is a 3rd requirement not discussed by anyone here: That requirement is that the current TD Setup must not break through the TDST line that was established by the previous TD Setup in the opposite direction.

I.E.
XYZ records a TD Sell Setup. The lowest low of that Setup period is $50/share – that puts the TDST price line at $50/share. Current price is $60 share. XYZ moves into consolidation mode and then shows weakness. A sell off occurs and a TD Buy Setup occurs. When the 9 bar closes, price is at $55 share. The new TD Setup (a Buy Setup) did not have sufficient momentum to break through to the downside of the TDST line at $50.

DeMark suggests that this is the only time you trade a Setup 9 count. He would suggest that there will be a reversal to the upside.

Remember, the TD Sequential is not only a price analyzer but a real-time momentum indicator. That is why you cannot trade a 9 count only. A TD Setup demands a high degree of momentum,an amount of momentum that rarely is followed by an immediate reversal. If you look at the NASDAQ ETF QQQQ since late May, there have been three completed setups. All of them were immediately followed by a very brief period of consolidation or weakness… followed immediately by another Setup. You would have lost money each time.

One more note… do not trade against the Sequential trend that is a factor of five above your trading time frame. If you are trading daily bars, check the trend on Weekly bars. If you are trading 15 minute bars, check the hourly bars for the trend. Do not trade against the trend. Common sense.

via Forex-Strategies-Revealed

The Demark Sequential Indicator

May 18, 2010 by HWWProject Leave a Comment

via “IMPRESSIVE SIGNALS FROM DEMARK”
THE TECHNICAL ANALYST
September/October 2004

“I recall that a recent backtest of the Sequential signals showed them to be around 70% accurate. DeMark is essentially a risk-reward strategy and its stoploss positioning means that even when the indicators occasionally underperform, losses are cut to a minimum. In my experience, the TD Sequential Indicator is more than 70% reliable; it is closer to 90%.” – Kurt Magnus, head of foreign exchange sales at Westpac bank in London

The DeMark Sequential Indicator

Magnus uses Bloomberg charts whose software automatically recognizes and displays TD Sequential Indicators as prices change from day to day. The Sequential is perhaps the most commonly used DeMark indicator and has an impressive record of identifying and anticipating turning points across the FX, bond, equity and commodity markets. Furthermore, the indicators provide signals not only on a daily, weekly
and monthly basis but also intraday. The Sequential Indicator identifies when a trend is becoming, or has become, exhausted. On daily charts, for example, DeMark identifies precisely which day to enter into a new position or liquidate an existing one. This total absence of ambiguity with regard to market timing makes the Sequential stand out. Using the indicator does require a leap of faith however, as signals often appear prematurely. As such, a buy signal may appear before a downtrend has completed so the trader may have a nervous ride before the market finally turns. Magnus warns that it is crucial the indicator is properly understood. “Unless you understand exactly the maths behind the signals, you can make costly errors. There are only two guys in the London FX market who can explain these signals with authority. Jason Perl at UBS in London and I often talk to make sure we get it spot on.”

Setups

The TD Sequential Indicator consists of two patterns, a TD Setup and a TD Countdown. Setups are the shortest in duration, lasting for exactly nine price bars when completed. For example, a buy Setup exists when there have been nine consecutive price bars in which each bar’s close is lower than the close four price bars earlier. When a price bar closes below that of four price bars previously a ‘1’ appears below the bar. If the next price bar also closes below that of four bars earlier a ‘2’ appears and so on. These appear in Figure 2 in green, a chart of EUR/USD from February to May ’04. If before price bar 9 is reached a price bar fails to close below that of four bars previously then the Setup is abandoned and the numbers are automatically deleted. Once nine consecutive price bars have been completed the trader will be looking for a “perfected” Setup; one that is now valid for trading. A buy Setup is perfected when the low of either price bar 8 or 9 is less than the lows of both price bars 6 and 7. Perfected sell Setups look for a high of either price bar 8 or 9 that is greater than the highs of both price bars 6 and 7. Figure 2 clearly shows perfected sell Setups in February and April marked with a red arrow.

Countdowns

A TD Countdown occurs after a completed Setup. A buy Countdown consists of thirteen price bars whose close is lower than or equal to the low two bars earlier. The corresponding numbers appear below the price bar. Unlike the Setup, a Countdown doesn’t have to consist of consecutive days. The Countdown is a bigger pattern than the Setup in that it can take months for a Countdown to form and often signifies a larger market move once the trend changes. Like the Setup, the Countdown also has “perfection” criteria. For a buy Countdown this requires that the low of price bar 13 be less than or equal to the close of price bar 8. Similarly, sell perfections require that the high of price bar 13 be greater than or equal to the close of price bar 8.

Note: Mistake under ‘TD Countdown – Sell Signal’: should read: “13 price bars where each close is greater than or equal to the HIGH 2 price bars earlier”

Applying TD Sequential To Intraday Charts

May 18, 2010 by HWWProject Leave a Comment

By DeMark, Tom
Publication: Futures (Cedar Falls, Iowa)
Date: Tuesday, April 15 1997

Originally designed for daily analysis, Tom DeMark’s TD Sequential indicator also works for intraday analysis. It is effective for especially targeting high- and low-risk entry points.

When I entered the investment business more than 25 years ago, volume on the New York Stock Exchange was approximately 6 million shares a day. Stock quotations appeared on a ticker tape, and futures quotes were on a large wallboard.

I did my market timing research by poring over weekly printed charts with a magnifying glass. Analysis was limited to conclusions regarding daily price activity because intraday price data were not available until the 1980s. As such, once it became available, I was pleasantly surprised to see that the TD Sequential worked on intraday price movements as well.

My research showed price movement of most markets displayed a natural rhythmic motion that could be measured by a combination of factors that either compared closing price levels or closing prices with extreme price highs and lows. Simply put, TD Sequential consists of three distinct stages: setup, intersection and countdown.

Setup

The initial setup phase consists of a series of at least nine consecutive closes less than the close four trading bars earlier for a buy setup and at least nine consecutive closes greater than the close four trading bars earlier for a sell setup. Setup establishes the environment or the context for the market and determines whether a trader should be looking to buy or sell the market.

I have added a caveat to the phrase “The trend is your friend.” It is “…unless the trend is about to end.” At that point it is not prudent to trade with the trend. Most of my market timing indicators, as is the TD Sequential, are designed to anticipate trend reversals.

Intersection

Once the setup series has been defined, I review price activity beginning on day 8 of setup to determine whether the setup process has been perfected and countdown can begin. To accomplish this, I require a phase I refer to as intersection.

Intersection requires the high of bar 8 of a buy setup be greater than or equal to the low of bars 5, 4, 3, 2 or 1 of the buy setup. If this requirement is not met, then the high of bar 9 of the buy setup must be greater than or equal to the low of buy setup bar 6 or any other price bar back to bar 1 of the buy setup. If this is not fulfilled, then each successive price bar is compared until its high is greater than or equal to the low of the price bar three or more price bars earlier back to bar 1 of the buy setup.

For intersection to occur in a sell setup, the low of setup price bar 8, 9 or the first subsequent bar must be less than or equal to the high three or more price bars earlier all the way back to bar 1 of the sell setup.

Intersection is a required step because it assures that the rate of decline or advance is decelerating sufficiently to enter the final phase, which is countdown.

Countdown

TD Sequential buy countdown consists of a series of 13 successive closes less than or equal to the low two price bars earlier. Once that has been accomplished, the market generally is in a low-risk buy entry zone. The TD Sequential sell countdown consists of a series of 13 successive closes greater than or equal to the high two price bars earlier. This generally indicates a low-risk sell entry zone.

Whereas setup requires the price comparisons be maintained consecutively, countdown does not apply such restrictions. To prevent high-level, low-risk buy countdown 13 entries and low-level, low-risk sell countdown 13 entries, I’ve installed the requirement that day 13 of a buy countdown be postponed until it occurs below day 8 of the buy countdown and, conversely, that day 13 of a sell countdown be postponed until it occurs above day 8 of the sell countdown. “Recycling” is a concern that could arise in a strongly trending market. Generally speaking, if a subsequent setup occurs prior to completion of countdown, then a new countdown process must begin.

TD Sequential in action

The TD Sequential is versatile over various time frames. The charts of the March 1997 S&P 500 Index futures contract on Jan. 23 (“Market fall,” left) show the contract declined from approximately 800 to 773, roughly a 27-point collapse, in 1 1/2 hours.

To demonstrate the sensitivity of the TD Sequential to identify the exact high and low on the chart to the minute, I’ve applied it to this time period. The respective sell count-down 13 and buy countdown 13 are not levels of entry; rather, they accurately define levels of low-risk entry. “Market fall” provides you with a perspective of how the price top and bottom were formed.

“Closer look #1 and #2” (left) magnifies the sell setup period and the buy setup period to illustrate the simplicity in calculating the respective price setups and countdowns. Note that, in the case of the market advance, I insert both setup and countdown numbers above the price bar and, conversely, in the case of a market decline, the numbers appear beneath the respective price bars.

Furthermore, it is apparent in “Market fall” that, coincident with the completion of the ninth bar of the sell setup (a series of nine or more consecutive closes greater than the close four price bars earlier), price has a tendency to retrace. A similar occurrence is observed at 1:45 p.m. when the ninth price bar of sell setup is recorded.

Buy setups demonstrate a similar behavior only in reverse. At approximately 1:15 p.m. the ninth price bar of buy setup (a series of nine or more consecutive closes less than the close four trading bars earlier) was recorded, and prices subsequently rallied. A similar event took place at 2:10 p.m.

However, not every setup elicits such a response, as you can readily see at 2:35 p.m. when the ninth bar of a buy setup failed to generate any price movement to the upside.

To demonstrate the application of TD Sequential to other markets and time periods, I’ve included a five-minute chart of May 1997 coffee futures in “Coffee TD Sequential” (right), which identifies a TD Sequential high-risk buy countdown completion just prior to the Feb. 20 early morning price peak before a 10-point plus decline.

Also, in “Longer count” (right), the March S&P 500 Index futures chart on a 10-minute basis, I identify the TD Sequential nine-13 high-risk buy indication on Feb. 19, coincident with the price peak.

Although TD Sequential has worked effectively on a daily basis for more than two decades, only within the last five years has it become apparent that this technique can be applied to intraday price charts as well. Because it originally was designed to be applied to longer time periods, its ability to identify high- and low-risk entry zones on an intraday basis is a testimony to its adaptability and dynamic design.
Tom DeMark is president of Market Studies Inc., a provider of indicator software for most major quote vendors, a consultant to large fund managers and author of The New Science of Technical Analysis

A Gold Mania Could Be Just Around The Corner

May 10, 2010 by HWWProject Leave a Comment

via Brian Hunt in Daily Wealth

On February 18, 2009 the Financial Times published one of the most important articles nobody read.

The article’s headline was Gold primed to become “mania asset.”

The gist of the article was something I’ve been telling people for a long time: Gold – more so than any asset right now – has the potential to experience a mania phase… one like we saw in Internet stocks from 1997 through 2000.

A mania phase is a period in an asset’s lifecycle marked by leaps of 10% or 20% in a month… 100% or 300% in a year… and 500% or more over the course of several years. Get in early with a big position on a mania phase, and you’ll make a fortune. Remember one Internet-mania darling, JDS Uniphase, climbed more than 30-fold in about two years… which would have turned a stake of $20,000 into $640,000.

As that little-read article mentioned, an asset must have one key ingredient to enter mania phase: It must have the “new era” factor… a set of conditions folks can point to and say, “This time is different… The old, conventional methods of valuing assets are useless in this case.”

Take Internet stocks. In the late ’90s, Wall Street analysts chucked classic valuation measures – like price-to-cash flow and price-to-book – out the window. The Internet was growing too fast for these old measures, they figured. Instead, they used crazy metrics like web traffic (and often pure fantasy) to justify valuations. Companies with little chance of turning a profit sported market caps of hundreds of millions of dollars simply because they had good stories… and because that time was “different.”

Now let’s get to gold. As we’ve noted many times in DailyWealth, you can make a good case that this time is different. Never before has the nation with the world’s reserve paper currency – which is backed by nothing but faith in a bankrupt government – promised so much to so many people (Social Security, Obamacare, unlimited military commitment).

We’re funding many of these promises with borrowed money… so crushing interest payments are on the way. The U.S. government could pay as much as 20% of its tax revenue to service the national debt in just three years. Imagine working your tail off just to pay the interest on your credit cards.

For a picture of what could happen, consider that Europe – which in aggregate has made the same crazy promises… and is under a similar debt load – is watching its paper currency union experience a slow-motion train wreck. The chart below shows what gold’s action looks like in the eyes of a European. It’s looking a lot like a mania phase.

How high can gold go? I can’t say. Nobody can.

Despite what many gurus will tell you, we simply cannot properly value gold. It’s not a stock, so you can’t say, “I’ll pay 10 times cash flow for this.” It’s not a rental property, so you can’t say, “I’ll buy this for eight times annual rent.” Gold’s chief use isn’t in the manufacturing process, like copper and iron ore.

Nope… gold is the odd man out in the asset family.

Gold represents real, intrinsic wealth. Greece can’t debase it. The U.S. government cannot debase it. There’s no way to know what people will pay for gold in a big crisis. This is precisely the reason it is a candidate for mania phase. People can tell themselves, “This time is different. It’s a new era of currency crisis, so gold can and should trade for $2,000… $3,000… or $6,000 an ounce.”

I’m no “the world is going to hell in a handcart” guy. I simply look around for assets with extraordinary potential to rise. I’m indifferent to whether it’s gold, stocks, homebuilders, uranium, or Malaysian palm oil.

I’m not saying a gold mania will happen next week… or even six months from now. I actually believe gold needs to pull back and “catch its breath.” I am saying gold is an asset folks can justify paying any price for.

The same sort of analysts who claimed the Nasdaq would go to 50,000 are the same sort of analysts who will claim gold will go to $25,000 an ounce. The sober among us will be shouted down… because “this time is different.”

This is the chief requirement of a mania. It is in place for gold.

A Bear, A Bull And Banking Problems

May 10, 2010 by HWWProject Leave a Comment

The Bear: Richard Russell
via Prieur du Plessis

With stock markets tanking around the globe, one would be remiss not to take note of Richard Russell’s view of the selloff. The 85-year-old dean of newsletter writers and author of the Dow Theory Letters, said:

“… something dramatic lies ahead. I believe we’ve been experiencing a rally within a continuing primary bear market. Over recent months, I’ve warned that the rally shows signs of topping out. If or when a bear market rally tops out, the losses can be horrific. At this time, because of the profusion of ‘rosy’ news stories about the economy, many amateurs and ignorant fund managers have loaded up again with stocks, thinking that they can recoup some of their 2008–09 losses.

“If this entire bear market rally is fated to fall apart, the losses and troubles will be fearful and traumatic. This is true because I’ve never seen a time when so many people were unprepared to withstand a crumbling market or a sinking economy.

“From what I gather, most players believe that yesterday’s [Thursday’s] ‘sell-off’ was a direct result of the mess in Greece. Maybe so, but that seems too simple and obvious to me. The far more important question is whether the entire advance from the March, 2009 low is fated to be wiped out. At this time there’s no way of knowing, but I suggest that we play it safe. My suspicion is that the stock market is back in the grip of the bear. If so, we could be entering the Elliott C or the second major wave down. I hope I’m wrong on this, but if I’m right I don’t want to find out while holding even a few stocks.

“Hope for the best, but be prepared for the worst. If this is the bear market’s final wave down, we’re going to see one of the worst markets any of us has ever seen. Just as bad, it will be a forecast of hard times ahead, and a nasty resumption of the recession (or depression).

“The boy scouts motto – ‘Be prepared.’ Better believe it.”

Although stock markets now appear oversold as far as short-term indicators are concerned, weak markets can stay oversold for a while. Looking at longer-term (monthly) data, it is premature to argue that the end of the U.S. cyclical bull market has ended, but a worrying picture emerges when considering the Shanghai Composite Index. Not only has the Index broken below its key 10-month (200-day) moving average, but the momentum oscillator (ROC) in the bottom section of the chart below has fallen below the zero line which indicates a primary bear signal. The Chinese stock market was the first to turn the corner after the credit crisis sell-off – a full five months before the majority of indices bottomed in March 2009 – and could also now be leading global markets lower. Be careful out there.

The Bull: John Paulson
via CNBC

John Paulson, the hedge fund manager who made billions by calling the U.S. housing market plunge, now sees good times ahead for U.S. home prices and corporate profits. And he says the country is in the midst of a strong V-shaped economic recovery.

According to CNBC, Paulson has told investors he expects housing prices to rise 3% to 5% in 2010 and another 8% to 12% in 2011. He says that homes are the most affordable they’ve been in 50 years, and that residential real estate is 60% more affordable than it was at the housing bubble’s peak.

Paulson “also sees buying opportunities in U.S. and European equities, even though the consensus about Europe is generally downbeat,” CNBC reports, adding that Paulson predicts “very strong” corporate earnings growth in the months ahead. And his fears of a double-dip recession for the U.S. have sharply decreased since the start of 2010.

Banking Problems..
via John Hussman

With regard to credit issues, some remarks by Meredith Whitney from a Bloomberg hedge fund conference last week are notable (if familiar):

“If you look at what happened last year, I would say a vast majority of the banking sector’s profits and capital creation was government induced. In the first quarter, it’s highly arguable that certain companies wrote up assets. People lowered their provisions on losses.

“What has kept home prices stable – and make note that politicians and banks are eating their own cooking because they really believe home prices are stable – they’re stable because there’s been a ton of inventory kept from the market. So if you control the supply, you can control the price without controlling the demand.

“Here’s a statistic that I find fascinating. This is just for the top four banks. If you look at nonperforming assets – that’s loans that haven’t paid over 120 days – the size of that is 1.5 times all of the chargeoffs that banks have incurred since 2005. So you think credit has stabilized, mortgages have stabilized? Non-performs have ballooned so they’ve more than doubled since the beginning of 2009, and that’s just stuff that has to start going on to the market, and interestingly, this quarter you’re starting to see housing supply reach the market. That to me triggers another down leg in housing, so to me, I’m steadfast in my belief that there’s going to be another double-dip in housing
“There’s huge growth in non-performing assets. These are numbers, apples-to-apples, on the four big banks. The issue is when does that stuff that’s not paying come to market, and when do banks recognize the chargeoffs? I think you’re going to see more of that in the second quarter and the third quarter. Does the supply move in the second quarter and then you report it in the third quarter? The timing may be weighted more to the third quarter. I just don’t know. I think you see a huge leg down in asset prices when you see the supply reach the market. So no, it’s not factored into valuations. No, it’s not factored into bank guidance. And yes, I think it’s going to be a big problem for the banks.”

Why Government Bailouts Don’t Work

May 10, 2010 by HWWProject Leave a Comment

via John Hussman weekly commentary

Greek Debt and Backward Induction

On Sunday, the IMF approved its 30 billion portion of the 110 billion euro bailout package for Greece – the remaining funds to come from the European Union. The reason for all of this cooperation, of course, is that Greece has enormous debt that is owed in the euro, a currency that it cannot devalue. For many years, Greece has allowed government spending and wage agreements to grow rapidly, thanks to ability to borrow in euros as if it were little different from Germany or France. Unfortunately, the Greek economy faces a debt burden that its economy is now unable to service. If Greece were not part of the European Monetary Union and its debt was denominated in drachmas, it would be able to satisfy its debts by devaluing its currency, essentially making Greek goods, services and wages worth less in terms of foreign goods, services, wages and currencies. In other words, it could alter the relative price of Greek labor and output, imposing extreme cuts in government spending, and without inducing what amounts to an internal deflation. Since this is not possible, keeping Greece as part of the European Monetary Union requires it to impose extreme austerity toward its own citizens, which has predictably led to strikes and rioting. Greek debt problems also predictably imply problems for the European banks that have lent to the country.

The bailout package for Greece should keep it from having to tap the open market for capital for about 18 months. Yet it is hard to look at the possible trajectories of Greek output, deficits and debt without concluding that a debt restructuring will ultimately be necessary – meaning that owners of Greek debt are likely to receive only a portion of face value. What European leaders seem to be attempting is to buy Greece more time, essentially to smooth the potential amount of this restructuring and its impact on the banking system, perhaps three or four years from today when, hopefully, Greece has smaller deficits and the ability to operate without new borrowing.

While this is a hopeful scenario, backward induction is not kind to it. In Game Theory, there’s a technique called “backward induction” that is often used to identify the likely outcome of a game that is repeated again and again for multiple periods. Essentially, you evaluate what would be the best move for each player that would be optimal in the very last period, then assuming those moves, you evaluate what the optimal moves would be in the next-to-last period, and so on to the beginning of the game.

Put yourself in the position of a holder of Greek government debt a few years out, just prior to a probable default. Anticipating a default, you would liquidate the bonds to a level that reflects the likelihood of incomplete recovery. Working backward, and given the anticipated recovery projected by a variety of ratings services and economists, one would require an estimated annual coupon approaching 20% in order to accept the default risk. For European governments and the IMF to accept a yield of only 5% is to implicitly provide the remainder as a non-recourse subsidy. Even then, investors are unlikely to be willing to roll over existing debt when it matures – the May 19th roll-over is the first date Europe hopes to get past using bailout funds. In the event Greece fails to bring its budget significantly into balance, ongoing membership as one of the euro-zone countries implies ongoing subsidies from other countries, many of which are also running substantial deficits. This would eventually be intolerable. If investors are at all forward looking, the window of relief about Greece (and the euro more generally) is likely to be much shorter than 18 months.

Still, for Greece, it appears that the IMF and EU will provide the funding for the May 19th rollover of Greece’s debt, so there’s some legitimate potential for short-term relief. The larger problem is that Portugal and Spain are also running untenable deficits (think of Greece as the Bear Stearns of Euro-area countries). European officials deny the possibility of contagion that might call for additional bailouts, but my impression is that Greece is the focus because its debt is the closest to rollover. The attempt to cast Greece as unique is a bit strained – Christine LaGarde, the French finance minister suggested last week “Greece was a special case because it reported special numbers, provided funny statistics.”

In other words, Greece gets the bailout because it had the most misleading accounting?

The bottom line is that 1) aid from other European nations is the only thing that may prevent the markets from provoking an immediate default through an unwillingness to roll-over existing debt; 2) the aid to Greece is likely to turn out to be a non-recourse subsidy, throwing good money after bad and inducing higher inflationary pressures several years out than are already likely; 3) Greece appears unlikely to remain among euro-zone countries over the long-term; and 4) the backward induction of investors about these concerns may provoke weakened confidence about sovereign debt in the euro-area more generally.

Despite the potential for a short burst of relief, the broader concern about deficits in the euro-area make it unlikely that global investors will be appeased by a large bailout of Greece, or will go forward on the assumption that all is back to normal once that happens.

Lending information source: https://www.sambla.se/samla-lan/

Restructure, Restructure

Looking at the current state of the world economy, the underlying reality remains little changed: there is more debt outstanding than is capable of being properly serviced. It’s certainly possible to issue government debt in order to bail out one borrower or another (and prevent their bondholders from taking a loss). However, this means that for every dollar of bad debt that should have been wiped off the books, the world economy is left with two – the initial dollar of debt that has been bailed out and must continue to be serviced, and an additional dollar of government debt that was issued to execute the bailout.

Notice also that the capital that is used to provide the bailout goes from the hands of savers into the hands of bondholders who made bad investments. We are not only allocating global savings to governments. We are further allocating global savings precisely to those who were the worst stewards of the world’s capital. From a productivity standpoint, this is a nightmare. New investment capital, properly allocated, is almost invariably more productive than existing investment, and is undoubtedly more productive than past bad investment. By effectively re-capitalizing bad stewards of capital, at the expense of good investments that could otherwise occur, the policy of bailouts does violence to long-term prospects for growth. Looking out to a future population that will increasingly rely on the productivity of a smaller set of younger workers (and foreign labor) in order to provide for an aging demographic, this is not a luxury that our nation or the world can afford.

“Failure” and “restructuring” mean only that bondholders don’t get 100 cents on the dollar. We can continue to bail out the poor stewards of capital who voluntarily made bad, unproductive investments, and waste our future productivity in order to make those lenders whole, or we can turn the debate toward deciding the best strategies for restructuring existing debt.

PLUNGE! 1987 Style Sudden Drop in US Stocks Driven by Program Trading and a Ponzi Market Structure

May 6, 2010 by HWWProject Leave a Comment

“Lasciate ogni speranza, voi ch’entrate.”
[Abandon all hope, all Ye who enter here]
Dante Alighieri, The Inferno, Canto III, 9

US equities were gripped by panic selling as the Dow plunged almost 1,000 points driven by a cascade of 100 share high frequency program trading, estimated to have been about 80% of volume. Gold rocketed higher to $1,210.

The stock exchange circuit breakers do not effectively apply after 2:30 PM NY time unless the market declines over 20% and they close the exchange for the day.

A bit of a detail perhaps, but it serves to enhance the convenient artificiality of today’s market break.

This is highly reminiscent of the 1987 crash driven by a flawed market structure based on automated trading and bad theories.

The entire stock market rally which we have seen this year off the February lows resembles a low volume Ponzi scheme, and formed a huge air pocket under prices.

Click Here To Continue Reading PLUNGE!

Eric Janszen: The Next Crash – How the First Bounce of the Debt Deflation Bear Market ends

April 29, 2010 by HWWProject Leave a Comment

Eric Janszen has gotten the big picture right on the economy/stock market since 1998. He thinks the current rally is just a Bear Market bounce, and will soon be over.

The First Bounce of the Debt Deflation Bear Market has gone on for four months longer than we expected. Will it end with a down-for-the-count crash or a correction followed by quick recovery? What will end it? Rate hikes by the Fed? The escalating sovereign debt crisis in Europe? A banking and financial crisis in China’s credit bubble economy? The next Peak Cheap Oil recession? Our answer: All of them, and pretty much all at once. If you thought the 2008 crash was bad, wait until you see the next one.

Click to Continue reading: The Next Crash – How the First Bounce of the Debt Deflation Bear Market ends

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