World Of Wallstreet

My Profile As Sent To Stewart Thompson, Graceland Updates

What follows is an email I wrote to Stewart Thompson, proprietor of the Graceland Updates subscription service.

Covered Call Options For Gold/Silver... Skip If Busy

Stewart, your service is freeing up a lot of my time to do some actually creative and productive engineering. Thanks much. 

At this point my main strategy for 2013 is to hold a bunch of Dec $1500 gold call options (but not so much I can't take a fall to $1432 or lower) and to hold a bunch of gold miners.

Anyway, I'm thinking about using your HSR resistance points to sell gold call options (covered by the Dec gold call options). Might you comment on that as a way of doing short term trading in an upcoming update?

Thought you might like a profile of one of your subscribers (skip if too busy):

• Became a Christian during the 70s Jesus freak days as a teenager. Am now a father of 6 with 3 in college and 2 to go.
• Been an engineer doing satellite communications my entire career at Hughes. Inventor of around 60 patents mainly about making the Internet go faster over satellite. 
• Was team leader over 50 engineers at one point, but that wasn't much fun. Found myself sitting in meetings deciding which problems were worth working on and who should work on them.
• Got a twenty-bagger aggressively trading over the last ten years after my 401K rolled over to an IRA in 2003 and I received a six-figure retention bonus. Started knowing nothing about investing, read dozens of books, thousands of Internet articles, wrote and operated a non-profitable automated trading system, ended up making the big bucks with Jr base metal miners and Jr gold miners mainly between 2007 to 2011. 2011 got that final double using a kicker of gold and silver call options. Much of my learning history is on my website, www.worldofwallstreet.us, that I don't expect you to visit.
• The twenty-bagger is now down to a 10-bagger. I have too high a risk tolerance. 
• After making the big bucks and accumulating much more than enough I discovered that it didn't really change much. Didn't help my marriage, make new friends, help me have "fun", etc. Furthermore, giving big chunks away, while a good thing, was not really very satisfying. I found that what I really wanted to do was write code and create new networking solutions. 
• I am now a full Vice-President, but with no one reporting to me. I wrote every line of code in the drive-train of a new kind of networking router in the last two years. I often spend all day in my office "playing legos" without speaking to another person. I guess it takes all kinds.
• I'm relying on your service to help keep me from turning my ten-bagger back into a five or less bagger and to free up some of the 30+ hours a week I was spending on investing/trading for engineering and family. Your approach and service is a big part of helping me to fulfill my real calling(s). I am still taking complete responsibility for my own investing decisions and do not follow your service blindly.

Warm regards,

MontyHigh, www.worldofwallstreet.us

It Can't Happen Here? Can It?

Another saturday hat tip to Harvey Organ:

MontyHigh, www.worldofwallstreet.us

Waxing And Waning: A Review Of Subscription Investing Services

I thought it might be of use to you to hear which subscription investing services seem of value to me and why. Please take a moment and leave me (and your fellows) a recommendation for a service you find valuable and why its valuable. I'm particularly looking for a service which does asset class allocation based macro-economic fundamentals (e.g. leading economic indicators). I'm also looking for an energy sector (Peak Oil) stock-picking service.

Here, in order of greatest interest first, are the subscription investing services I am subscribed to or have recently subscribed to:

Highly Rely Upon:

• Stockcharts.com - pretty valuable way of doing technical analysis and maintaining dozens of charts. Not very expensive.
• Stewart Thomson's GracelandUpdates.com - very nice daily service with a strong viewpoint on how to invest called the pyramid generator (steadily buy into real assets as they decline to successively lower points of support, sell lightly as they rise to successively higher points of resistance). Comes with a daily commentary written in a darkly funny voice and pretty cool video of charts with voice-over. This is the service I am most learning from now. Not very expensive.
• Bob Hoye's Institutional Advisor - a written weekly commentary giving Bob's market outlook which is mainly based on the idea that we are going thru a repeat of the 1870s and 1930s great depressions. That part is entertaining and seemingly insightful, but is not directly actionable. The way you make money is from the work of Bob's partner, Ross Clark. His analysis of individual situations (e.g. gold, crude oil, S&P500) comes out intermittently and is based on his historic parallels method of technical analysis. Ross' work is the inspiration for the best work I've put on this blog. I carefully consider a trade based on each of Ross's reports. Quite expensive, but worth at least 1% of portfolio value, I think.
• John Doody's Gold Stock Analyst Top Ten - I subscribed to this simply as a low-effort way of stock-picking gold miners. I'm using this simply to replace my GDX holdings with a portfolio containing a subset of Doody's top-ten. Its too early to tell whether this subscription will really make me money.

Still Follow Closely:

• Gary Biiwii's Notes From The Rabbit Hole - a weekly commentary that uses technical analysis (with a lot of ratio charts) to create a macro view of the overall markets and individual markets. Often ends up with a summary of "I'm not sure what's going on". I think I've learned a lot from Gary, but I do not closely follow his individual calls. However, if I'd paid more attention to him last year I would have had a much better year because he correctly perceived that Gold was way, way overbought last August and I didn't. So, I'm still hanging around learning.
• Otto Rock's Inca Kola News (IKN) - excellent micro-market cap Latin America mining stock picking. Most of his picks are too small for me to trade now, but his top pick of Rio Alta Mining (RIO.V) made way more money for me last year than the subscription cost or time spent reading it. If I wasn't still playing high-tech with my day job, I'd be doing a lot more of this kind of stock picking.

Still Follow:

• Bill Murphy's LeMetropole Cafe - provides a daily summary and commentary on the precious metals markets from the GATA conspiracy viewpoint. My best short-term trading setup was inspired by his commentary. Murphy is a perma-bull, so you won't get any trading signals from him. I have trouble finding ways to backtest and trade his "They Always Hit The Metals When...". The main value that I get from his posts is the ability to quickly scan (and dig into) the set of precious-metals related headlines.

 Discontinuing When Subscription Expires:

• James Dines The Dines Letter - have learned some significant things from Mr. Dines, but have never made any money with his news letter. I should have made money on his Rare Earths call, but somehow missed the boat. His most lasting contribution that I have gleaned is his insight that investing must be based on four factors: Fundamentals, Technicals, Mass Psychology and Personal Psychology.
• Metal Augmentor - I subscribed to this as another mining stock picking service, but never found the time to make use of the service. 

Recently Discontinued Services:

• John Williams Shadowstats - I think John Williams is making a valuable contribution with his review and analysis of government economic statistics, but after subscribing to his service I failed to find a way to utilize it to make investing decisions.

Not So Recently Discontinued Services:

• David Morgan Silver-Investor - I was a subscriber during the 2008 panic. He did not provide a way of dodging that situation. His silver stock picks took huge down moves during that episode. 
• Ted Butler - Never got enough value as far as using his material to make money trading to continue the subscrption.

Hope you found this useful. Please take a moment and leave me a rec for something I should try.

MontyHigh, www.worldofwallstreet.us

 

This Is The Way They Talk About You Behind Your Back

"“We give the investor the rope, we put it around his neck, and after he’s standing on the chair, we even kick the chair out from under him!” – One broker on the phone with me describing their “service” to leveraged traders."

They (the financial industry) aren't your friends.

MontyHigh, www.worldofwallstreet.us

This quote from "gracelandupdates.com", a subscription service I'm finding a lot of value in.

To Serve The Pre-Retirement Baby-Boomer

This Fidelity Investments advertisement (masquerading as a news story) reminds me of the twilight zone. But first let me paraphrase: "You should stop trying to beat the market and instead be a sucker putting your savings where we (along with the rest of the financial industry) can siphon off an annual percentage".

As you will recall, the book entitled "To Serve Man" was a cookbook. One of the first and most important lessons of investing is: "THEY (the mainstream financial press and its advertisers, in fact all those large-cap financial corporations) are not your friends. At best, they are there to get a percentage of every transaction. Usually they are there to take an unfair advantage of the retail investor."

MontyHigh, www.worldofwallstreet.us

Discipline Lapse On Friday: Bought Without Looking At The Chart

Well, after waiting for weeks and doing some quite good trading based on my technical and fundamental analysis of precious metals, I increased my long gold and silver positions on Friday. That's good.

Then, feeling overconfident after having gotten a good entry point Friday morning, I dove into some GDJX and SLW options without even looking at their charts. That's a stupid mistake. I need to polish up my "Before You Enter A Trade" checklist, have it handy and use it. 

 

Looking at the above charts I see that the entry points were not very good having occurred right at resistance after a pretty good multi-week rise. I also see that there were better entry points if I had been diligent about following these charts earlier. 

If they don't crash thru that resistance on Monday, I expect I'll admit my mistake, close the trade and look to reenter on the gaps being filled. 

Live and learn,

MontyHigh, www.worldofwallstreet.us

 

Trading Vs Long-Term Investing

I've been running part of my 85 year-old mother's retirement money. She turned over to me around 20% of her savings and in less than 2 years it is up over 150%. Its now almost 50% of her networth. We had a meeting with her TOO BIG TO FAIL BANK account reps who are running the rest of the money (very conservatively about 50% corporate bonds and 50% US large-cap equities which are "buy and hold") with over half of it in an untouchable trust. 

They tried to explain to me that:

• What I was doing was "inappropriate" for an 85 year old woman because I was concentrating investment positions and thus taking on too much risk, even though I started with just 20% of her networth. 
• Short term trading was no good because of the tax hit. 
• That I was lucky and the only reason I got those gains was because I took on excessive risks. 

They said that if the current situation persisted they would have to handle the rest of her money more conservatively still (to account for my risk taking) as they would assume that my portion had all the BETA. I explained that I thought I was bringing some ALPHA (excess returns over the market average) and they explain that ALPHA is pretty hard to find (implying they certainly can't find it for a client like her). 

I think that's emblematic of the entire mainstream, big-name financial industry's approach to retail customers (even those with reasonably large savings). They don't expect to beat the market average for their customers. They expect to make sure everything is widely diversified (to avoid law suits if money is lost) and to take a percentage in fees for not doing much. 

Still it got me thinking about what the impact of those extra taxes are and so I put together a spreadsheet that compares trading (where taxes are short-term capital gains) with higher returns against buy and hold for 10 years (where taxes take place at the end of 10 years and at the long-term capital gains rate. 

I live in Montgomery County, Maryland (thus the moniker MontyHigh) which has substantial state and local income taxes. The first table I present shows the results based on:

• Believing government inflation statistics are fair and that inflation will stay steady. 
• Long-term returns are triple that of the US 10 year treasury yield. Seems optimistic for what the TOO BIG TO FAIL BANK guys will do for their retail clients. 
• Then I fudge the extra returns needed of short-term trading to match the long-term gains.
• 33% Federal Short-Term Capital Gains Tax + 8% State And Local Tax for trading being applied annually. 
• 15% Federal Long-Term Capital Gains Tax + 8% State and Local Tax for long-term investing applied on all gains at the end of the 10 year period. 

Rows 3..8 give the assumptions discussed above. 

Column D shows the compounded loss from inflation if you just hid cash in a safe-deposit box. Pretty alarming isn't it?

Row 19 shows that with the above assumptions you need to make about 3.5% more trading to make up for the extra taxation from trading. That seems like chump change to me. If you think (like I do) that good traders who aren't managing too much money can make at least 25% a year then such a trader should go for it. They will do way better than following the standard expert advice. NOTE: If you assume that long-term investing can produce 14%/year before taxes then trading needs 6% more to match the long-term investing. 

The table above illustrates this. Now 175% gain after 10 years seems pretty good, but its worth keeping in mind that your 25% nominal annual gain is reduced to approximately 10.5% after taxes and inflation. 

Now, let's triple the inflation rate to simulate what "THEY" (in this case the government) is/are probably planning as far as dealing with the government debt/overspending situation. Let's further see what kind of trading gains you need to simply break-even with that inflation rate and let's see what happens to someone who is planning on living off nice corporate bonds that yield twice the current 10-year treasury bond. 

 
As you can see, you need to make more than a nominal 20% a year trading (before taxes and inflation) to simply maintain your purchasing power.

And... the government STEALS just about half the nice "conservative" investor's savings IN JUST 10 YEARS. That's their plan, I believe: To steal, over the next 10 years, about half of all of the middle-class's savings (401Ks, IRAs, pension funds, equity in housing) via inflation to fund their governement programs. Remember the way the government causes inflation is to create money out of thing air by borrowing it from the Federal Reserve and then to spend it themselves. They get to use this "created" money just as effectively as if they had taxed the public for the same amount. The borrowing is basically a tax on all of savings of the middle-class who don't have any real protection against inflation. When they raise the debt ceiling by 2 trillion dollars that is basically approving another tax of 20K$ per household. Now this tax hits middle-class households harder than 20K$ per year since they are the ones with the savings that are being diluted. The truly wealthy protect their wealth via off-shore tax shelters and by trading to win using investing methods (hedge funds and their methods) that are out of the reach of the middle class. 

Its worth mentioning that John Williams of Shadowstats.com claims that adjusted to pre-Clinton methodologies that inflation is already at 6.9% and adusted further back to the way CPI was calculated in the 70s that inflation is running at 11.1% (more than simulated above). 

Guess that explains why I am trading to win and not following Mr. TOO BIG TO FAIL BANK guy's financial advice. 

Hope you found this useful and not too obvious. Feel free to check my numbers (or plug your own assumptions in) or leave me comments on my assumptions. The spreadsheet (OpenOffice .ODS format) is found here (click Download Tradingvsinvesting). 

MontyHigh, www.worldofwallstreet.us

 

 

 

 

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Learning To Invest And Trade: Twelve Things I've Learned

Its the end of the first half, so a little look back is probably in order. I started posting on the web site around 4/1/2011. I started really trying to learn to invest well in 2004. Before that I was a "sheeple" buy and hold equity mutual fund sucker. The above graph records my results from when I first started tracking my progress daily.

Here's some important things I learned along the way (in the order I remember learning them), with references to their sources:

1. You either have to minimize fees paid to middle men and make what the general market will give you (ala Vanguard low-cost, highly diversified, no-load mutual funds) OR play to win where you are competing against some of the smartest, best connected minds on earth.
2. The markets (in 2004 and also now I think) have elevated P/E ratios and you won't make much going the no-load mutual fund route. At this point I decided to play to win. Source: John Mauldin's Bulls Eye Investing.
3. The mainstream financial industry exists to take a percentage of your money. At best they want to manage your money where their main goal is to keep you happy enough to allow them to continue to small percentage each year. If they had a real edge, the would be using it to make real money and would not be sharing it with you.
4. The mainstream financial media are controlled and fed by the financial industry. They exist to help the financial industry take your money (either thru "management fees") or by selling you stuff for more than its worth.
5. Diversification is for "not losing money" when you don't have an edge. Concentration is for making real money when you do have a real edge. In the long run, having made a pile of money by concentrating when you have a real edge is a lot less risky than having experienced the smaller ups and downs that come from diversification without having made money. The whole idea that the historical size of previous up and down moves is equivalent to risk is one of the common mainstream investing misunderstandings.
6. A good way to make money with stock investing is to find hated industry groups that are making money hand over fist. Before I caught on to this, oil companies fit the bill. I finally caught on in early 2001 with the hated base metal mining stocks. After going down with the ship with these in late 2008, I then discovered precious metals and precious metals miners. 
7. The mainstream financial industry hates precious metals because they are direct competition to all of that "paper" stuff they want to over-charge you for. The central banks, which hate precious metals because it unmasks the impact of their printing money and giving it to their bankster friends. Together they have been trying to keep precious metals off the every-day Joe's investment radar screen, partly by suppressing the price of gold and partly by causing larger and more violent downmoves than would occur without their intervention. As a result, precious metals are perhaps the most undervalued and hated industry sector and thus a great place for investing. The work of the Gold Cartel follows patterns which can be traded profitably. SOURCE: GATA/ Bill Murphy, etc. 
8. Those who are skilled can make real money, beating the snot out of the general stock market, if they don't have to run too much money. 35% per year on average seems very achievable. You don't have to be smarter or better connected than the Wall Street hot-shots, you just have to be able to move into and out of the right kind of less-liquid investments that the giant 30B$ plus pension funds and mutual funds (that hold the sucker's retirement money) can't touch. SOURCE: Watching skilled guys make their moves on the investing message boards.
9. Technical Analysis, which I originally considered to be equivalent to Astrology, actually "works" and can give you an edge. If nothing else it can keep you from falling off a cliff when your fundamental outlook is wrong. The use of technically based stops is my primary mechanism for avoiding the catastrophic losses I endured in 2008. SOURCE: Toby Hansen and others. 
10. Buying Options Gives Unlimited, Leveraged Upside With Limited Downside - If you have a real edge, options may be the tool (depending on how they are priced) for turning that edge into great profits.
11. Junior Canadian Mining Stocks Are Illiquid - its costs a certain significant percantage (10% or more) to move six-figure money into or out of these stocks, especially when there is fear or greed. If you have real money, you cannot trade these.
12. Traders make money by having an edge, managing risk, accepting frequent small losses.

Hope this is of use to you. Leave me a comment with important things you've learned that I've left out.

MontyHigh, www.worldofwallstreet.us

Cheat To Win: Budget Talks Include Changes To CPI Measurement

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201106211841dowjonesdjonline000414&title=change-to-inflation-measurement-on-table-as-part-of-budget-talksaides

Here's the money quote from a little item that isn't getting much play in the mainstream news:

"... the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically. ...It is a rare proposal in that it would likely lead to both lower benefits paid to seniors and higher taxes paid by most people who pay federal income tax."

THEY are about to "change the rules" to cheat all of those retirees out of much of their cost-of-living increases and it gets no coverage. This is going to SCHWACK most of those who have the sweet fixed-benefit retirement setups, especially government and union workers and those at the bottom of the barrel depending on Social Security [all major democratic party constituencies].

This is a clear tell how corrupt the mainstream news is as far as reporting what is truly important to  readers/viewers. After all, who is that still reads a news paper or watches network and cable news? Old people. And what could possibly be of more importance to old people, with no chance for other increases in income, than Government sponsored income cuts?

So, how are you going to play it? I guess if you are reading this web site you're not surprised and you are trying hard, going out of the mainstream, to find information that might actually be important and actionable.

MontyHigh, www.worldofwallstreet.us

P.S., This is also a way of automating income tax raises for the middle class by pushing them into higher tax brackets as this newly adjusted CPI measurement is used to account for inflation. So, when some politician starts talking about taxing "the rich" (over 200K$/year) its worth noting that only takes 7 years of 15% inflation to push a real income of 75K$ over into that "rich guys should get taxed to death" 200K$/year nominal bracket.

P.P.S., This is also a major tell of how "in trouble" the USA is. When was the last time the USA had a significant problem where which its leaders addressed honestly? I remember first thinking the Soviet Union would collapse back in the 80s upon reading a Washington Post analysis piece saying that everyone in the Soviet Union had to lie to get by. This lack of honesty is a core problem for the USA and there will be no recovery until that moral problem is addressed. 

A Data Point Against My Plan: WSJ Says Investors Don't Get Better With Age

One of the reasons I started really taking investing / trading serious is because I thought, unlike just about everything else, it was something I could get better at even as I pass beyond middle age.

Maybe not. 

Here's the money quote: "

All told, the point at which we make the best financial choices is 53 years old, according to his data. “Of course there are exceptions,” Prof. Laibson said.  

Many seniors end up in a state called cognitive impairment without dementia that isn’t quite dementia, but still (as the name implies) a deterioration of memory. In spite of this, people still may make financial decisions on their own. Prof. Labison estimated that 16% of those 71-79 years old, 29.2% of 80-89 year olds, some 38.8% of those over 90 years old are in such a state. ... 

"

Read the whole thing. http://gregor.us/solar/global-energy-use-by-source-in-2010/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Gregorus+%28Gregor.us%29

MontyHigh, www.worldofwallstreet.us

Stockcharts.com Let's Me Down...

www.stockcharts.com no longer provides candlesticks for $gold, $silver, $copper, $wtic, $usd, etc. These are the main charts I've been using for trading, so I'm scratching around for an alternative. 

I just opened a tradestation account as they advertize the deepest historical futures data. Any thoughts on other good alternatives? Leave me a comment. 

Thanks much, 

MontyHigh, www.worldofwallstreet.us

 

Nuclear Meltdown Trading Strategy, Take 2

Well, its time to ponder the Nuclear Meltdown again (click here for the previous unsuccessful attempt). I'll start by jotting down some observations and then organize them into a plan. 

OVERVIEW: 

Here's the recent price action (from before the Japan earthquake) for the Uranium miners that are on my radar-screen:

Throwing out MAW.TO, MGA.TO and UEC we see pile of stocks that are down between 18% and 28% with the largest, CCJ down 21% having bottomed at down 25%. CCJ would have to rise 25% to get back to where it was before the Japan earthquake. It hard to picture these stocks going above their Mar 10 closing price any time soon. So, the question is is: How much of an approximately 25% gain (to get back to where they started) might these companies get as the situation in Japan becomes clearer and the panic subsides?

FUNDAMENTAL ANALYSIS:

The best case (and likely in my view) scenario going forward is as follows:

• The situation in Japan calms down.
• The situation in Japan basically leaves the public consciousness (that news story is so "yesterday" what with the war in Libya and everything). 
• The politicians initiate a bunch of "studies" but nobody actually shuts down any nuclear powerplants. 
• Sharply reduced (or no) nuclear plan construction in OECD countries. 
• China, India and other emerging markets resume nuclear plant construction after a discreet waiting period (and with designs that are in-fact much, much less susceptible to Japan type disasters). 
• Existing Uranium producers continue to mine and sell Uranium and the price of Uranium remains around where it is now.
• The price of Uranium remains relatively elevated as power plants still need to be fueled, as Chinese stockpiling (for continued construction) continues and as the Russians (via Khazakstan) maintain a demand/supply balance. 
• Longer-term, more energy scares (global warming, scary Russians bullying customers, problems in the Middle-East, peak-oil) continue making nuclear power seem maybe not all that bad. 
• The global stock market does not crash as enough money printing is performed to keep the current stagflation going. 

CCJ is currently trading with a 23 annual trailing PE (not that cheap) and with a growth story of doubling production (and perhaps profits) by 2018 (7 years from now is a 10% approximate growth rate). 

TECHNICAL ANALYSIS:

The CCJ chart shows quite a gap down:

The volume has spiked higher but is falling now. The low of the move is at $28 which 5% below the current price. This represents a reasonable stop (somewhere a bit above that to avoid the sudden broken support downdraft). There seems to be resistance at the bottom of the gap (around $33), but that the market will support that price if the situation in Japan stabilizes. 

I wish I could find some charts of similar situations. I would say the closest I could come up with was this one of the Exxon Valdes oil spil (Mar 23, 1989). 

When the volume peaked the bottom was in. 

I'm expecting quite a relief rally tomorrow morning at the open. There's been no news out of Japan and there's been guys like Jim Puplava blogging away to the retail about how overdone this is. I expect I will:

• Look to pick up a few shares pre-market open if available under $30. 
• Look to enter around later in the day if shares are available under $30. In either case this will be a small trade because I just don't have a big enough edge. 
• Stop at $28.20 (6% loss if enther is at $30)
• Target exit at $32.75 (9% gain if enter is at $30). I would consider reentering thereafter once the gap is definitely penetrated (above $33) and waiting to see if the gap gets filled.  

I'm not real anxious to get into this trade as I can't claim I have a real edge. I'll probably put a little money into it to partly make up for the fact that I just wasted a perfectly good spring afternoon working this post and partly because the trade has such clearly visible exit prices. 

MontyHigh, www.worldofwallstreet.us

 

James Dines Four Keys To Investing

I've been obsessing over investing since roughly 2003 and have been voraciously reading tonnes of material. Gladwell claims that it takes 10,000 hours to develop a mastery of a skill. I'm now roughly 12,000 hours into mastering investing (that's eight years X 50 weeks per year X 30 hours per week).  

James Dines' Four Keys to investing is the best conceptual framework for how to think about and win at investing that I've found, so far. Click Here for a quick sound bite summary of these four keys from this King World News interview by the master himself. James Dines is an brilliant, quirky and arrogant thinker (with a great delivery). Its pretty rare to go back to old investing MP3s, but this is one (even with its flaws) is worth another listen.  

I've adapted this model to my purposes. As I think about it now, the Four Keys to investing are:

• Fundamental Analysis - understanding the economic realities that affect the underlying value of an investment (stock, commodity, bond, etc.). 
• Technical Analysis - understanding the market price and volume history related to an investment. This tool can provide great insight into the Fundamentals and the Mass Psychology. 
• Mass Psychology - what the psychology (especially the emotions) of "the herd" related to an investment. 
• Personal Psychology - understanding your own psychology (especially your emotions) and how that relates to an investment.  

To maximize investing success, a deep understanding of each of these is important and that understanding must take place across a two dimensional landscape where the dimensions are:

• Time - from short-term (for me less than a month), intermediate term (multiple months) and long-term (years). 
• Scope - from micro (an individual stock or commodity), industry, sector, country and global. 

The events in Japan and the Uranium miners provide a decent case study of how these fit together [square brackets indicate timing/scope considerations]:

• Fundamentals - long-term the fundmentals of Uranium mining include the following factors:
  • A global increasing need for electricity [global, especially emerging markets]
  • A global increasing desire to avoid the use of coal for electricity due to its CO2 emissions [developed countries]. 
  • The end of the nuclear weopons recycling supply of uranium sometime around 2013 [industry]
  • The emergence of a cartel-like Uranium mining market led by the Russians controlling the Khazakstan uranium supply [industry]. If anyone knows how to leverage a dominant position in an energy market, its the Russians. 
  • The general fear of nuclear radiation and the risk that another Chernobyl-type disaster politically limits nuclear power-plant construction [country-specific, but especially developed countries]. 
  • How big a nuclear disasters is the Japan situation? There's a lot of uncertainty here. [short-term and industry specific]. 
  • Mining company specifics - Various companies are more or less exposed to the Japan situation. Cameco (CCJ) is a profitable producer with long-term contracts (not much short term exposure here). Low-cost producers are in better shape against power-plant construction suspension than high-cost producers. Various Uranium explorers will need financing, etc. Wow profitable are the producers at current and forseeable Uranium prices. There's a lot of work to be done here. 
• Technicals - all of the uranium miners have taken a big hit, especially the Jrs. What does TA have to say about similar, event-driven (with lots of panic) industry takedowns?
• Mass Psychology - The mass psychology of the general population is near panic over Nuclear radiation. This has now peaked (with the arrival of the Libyan war which has taken over the headlines). The mass psychology of institutional investors is that they don't want to be in any way associated with uranium mining. The mass psychology of those who are already invested in Uranium miners is that the current situation is overblown and this represents a buying opportunity and that they certainly aren't going to panic out. 
• Personal Psychology - My personal psychology includes a lot of uncertainty-based fear (including not knowing how bad it is at the Japanese nuclear powerplant and not really knowing a lot about the long-term uranium fundamentals (supply and demand) or much about individual miners. There's also the recency bias associated with having attempted a quick trade and having taken a loss and gotten stopped out. 

Whether I actually enter a position in Uranium mining (and in what form) is one of the things I'll be pondering a lot today, tonight and tomorrow morning. My goal is to dig into things and come up with a plan based on clear thinking rather than letting emotions (my personal psychology) take over cause a rash decision. 

I would say that I have been overly depending on technical analysis lately and I'd like to spend more time on Fundamental analysis. If I were trading/investing fully time I would have a discipline where I consistently spent allocated amounts of time on all four of the above keys. 

Leave me a comment regarding this "four keys" model: Whether you find it useful and which of the four keys you have been depending on the most lately. 

MontyHigh, www.worldofwallstreet.us

 

Macroeconomic Situation: Let The Charts Talk

I've been looking at the charts steadily and this is the first time recently that I've seen something that smells like a significant change (excepting the Silver/Gold correction that began right after New Years). I'm going to post a bunch of charts with one-line commentary and we'll let them talk (with some filtering thru my own internal subsconscious bias).

I think that this use of looking at multiple charts to examine what's happening across the board is among the best uses of technical analysis and the best way for those of us who are not true experts to get a feel for what is happening with the world economy.

The message these charts give me are:

• There is good reason to be quite concerned about the general markets (including the emerging markets and commodities). They aren't in a confirmed correction yet, but I expect we might well see one start this week. With, what are for me, the two biggest fundamental stories of the week being quite bearish: An Official UK GDP Double-Dip Beginning and The Egyptian Uprising, I am very cautious on the general stocks market.
• There is good reason to think the gold correction (and even the silver correction) has completed. On the other hand, there are clear stop levels which, if violated, will trigger both my own and a lot of other selling. Another downturn could be ugly. At this point, I'm leveraged long but am not going to put up with much more downward motion.

This is going to be quite an exciting week, I expect.

Friday is the first big down day since this summer. It looks a lot like that first big down day since the runup that started in Feb 09. That big down day was exactly one week before the flash crash. My view of market cyclicality is that if the past repeats, it repeats a little earlier in the cycle than the previous one. I'm expecting another low before the end of next week and intend to go short the general markets on the next sizable bounce up and to close that short out if a new low does not occur next week. 

This is my adopted, credit to Gary Biwii whose news letter I recommend, "the Powers-That-Be are losing it" graph. If that red line gets taken out then the inflation genie is officially out of the bottle. I suspect that we'll get a whiff of "deflation" in the form of falling stock prices to get this back under control.

The transports have rolled over and now have crossed under the 50-day. This is the first of several non-confirmations of continued steady upward movement for the general market that I'm going to show.

Is that a double-top in the leading semiconductors I see? We'll see, but its only 2% away from a new post-crash high which gives us a nice stop if we go short and the end is not yet nigh.

The leading banking stocks have been soft for more than a week and are threatening to break down. Compare the current MACD and RSI situation with what preceded last May's Flash Crash. 

Brazil, another leader, has topped and just crashed thru two moving average supports, including the 100 day which has been quite a good detector of significant trend changes for this one.

Leading China looks similar to Brazil.

South Africa looks worse than either Brazil or China (and my recent trade should have been stopped out but I've got completely illiquid call options that can't be sold [never again]). South Africa is about to cross significant support around 65.

Moving onto commodities, the previously explosive CCI is showing a loss of momentum in the form of RSI and MACD bearish divergence.

Crude oil has been spared a serious breakdown events in Egypt. I expect I'll use this pop to take profit on the last of my 2015 crude oil futures. Renewed strength in the crude oil is quite threatening to fragile recoveries world-wide.

Uranium is one commodity that looks quite bullish to me. That looks like a cup and handle breakout and retest. Looks like a nice place to enter with an upside target over $11 and a nice stop at the 50 day moving average. Perhaps my bias is showing on this one, but I need to free some capital to play the uraniums.

On to precious metals. This chart says the 10 year bull market is neither over nor in a bubble. It also says the current correction is not that ugly. Finally how many cases of more than one red candle in a row do you see and how bad was what followed that first candle, anyway?

While this correction is a little steeper than other post-crash corrections, the RSI bounce off of 30 indicates it may very-well be over and the shape of the correction looks a lot like the one from last summer.

This chart says I got a good entry on Thursday and that there is a clear stop for my call options. A new low for this correction and I'll admit a mistake and back out. On the other hand, the Egypt situation might give this bounce some legs and the "10 million dollar gold hedge fund collapse" (which probably happened with a lot of help from the Gold Cartel which knows what cards all the players are holding) being over may provide some additional short-term fundamentals for a gold price pop.

The Candian Jrs, representative of the kind of gold miners I'm holding, has had quite a run since last summer and didn't really suffer very badly so far in this correction. Its in a trading range and a breakout in either direction is probably significant and I'll consider lightening up considerable if it turns out to be a break-down.

This chart shows the basic fundamentals controlling the profitability of gold miners as it compares the price of gold with a proxy for the price of mining gold. While softening quite a bit since Spring 09 the profitability of gold miners remains well above pre-crash levels. This probably has a lot to do with the strength of the gold Jrs.

Large cap gold miners has formed a double-bottom providing a nice entry. Again, a breakdown would probably cause me to take profit on my gold miners (and leave me down pretty hard year-to-date 2011).

The Gold/Silver ratio has retouched the 20-day moving average. After similar downward runs in this ratio a touch of this moving average has signaled the end of a gold correction. The other time this happened this quickly was early 2006. What followed was quick a dramatic rise for both gold and even more so for silver. Rather bullish if the pattern repeats.

Again, the message these charts give me are:

• There is good reason to be quite concerned about the general markets (including the emerging markets and commodities). They aren't in a confirmed correction yet, but I expect we might well see one start this week.
• There is good reason to think the gold correction (and even the silver correction) has completed. There are clear stop levels which, if violated, will trigger both my own and a lot of other selling.

This is going to be quite an exciting week, I expect.

Best wishes to you and your trading, dear reader.

MontyHigh, www.worldofwallstreet.us

 

 

One Of The Pleasures Of Trading Your Own Money

Is that you get make decisions of some importance with complete autonomy. No review before or after. No getting approval, permission or explaining yourself to anyone.

Where else do you have that kind of freedom? Certainly not at your day-job ("That's a good idea as long as you change it completely around to be my idea". Do you ever get this at work?).

Certainly not at home.

Its good to be king (click here).

MontyHigh, www.worldofwallstreet.us

 

News Paper Industry Looks Like A Lung-Cancer Patient On Its 15th Chemo

   

Just scanned the New Year's Sunday New York Times, Sunday Washington Post and this weekend's Barrons looking to hear what the elite is trying to feed the college educated sheeple regarding the economy. This is the first time I've done this in years.

 

Its a wasteland, but a much, much thinner wasteland than it used to be just in number of pages. I guess Craigslist, Ebay and Google is the incurable cancer that has these papers in a "Brave Fight To The End". 

 

The washington post looked the worst. Basically no articles in the business section and no "outlook for the year ahead" in the outlook section. Nothing.

 

The New York times was similar (no outlook anything) except the lead editorial observed that the recovery was weak, that the economy is "growing" but nobody can feel it. To keep it going, it needs:

(a) More stimulus - the recent tax deal's stimulus will offset local/state budget tightening, but more is needed including

(b) Fostering industries which can grow employment while...

(c) Preparing to get the budget in order, but no specifics and certainly not doing anything anytime soon. 

 

Oh, the New York times had a couple of articles about how dangerous it is to trade in and out of ETFs and to try and time the markets. The best you can do is buy and hold.

 

And then it had an article showing the outcome of every possible combination of buying the S&P500 one year and selling another year (wish I had the graphic) and they basically most combinations sucked (with some of the better combinations ending with 4%/year after inflation). And that's for the decades when the USA was by far and away the dominent world economy relatively untouched by the Wars that ravaged the competition. Here it is:

 

 

In other words, same old STUFF on a substrated of unstated gloom. What the USA needs is more of the status-quo and maybe things can sort of get a little better.

 

Barrons seems to be on the same page as the NY Times editorial. Last year was easy, this one won't be as easy, but you should buy companies like GM, Pfizer, Intel, etc. Pretty darn lame. 

 

Nobody, but nobody is mentioning the possibility of either a double-dip recession or significant inflation (or any other kind of extreme anything). No mention of PIIGS, China dependency, rising long-bond interest rates, financial fraud, insolvent too-big to fail you name it, commodity inflation, currency depreciation wars, unfunded health-care/retirement liabilities, insolvent pensions, anything really threatening.

 

Everyone one is expecting a boring 2011. Not me.

 

Think those rags could possibly be more wrong? And this is the best the establishment can come up with? Maybe Dmitri Orlov is onto something. It does read like a 1987 Pravda.

MontyHigh, www.worldofwallstreet.us

P.S., I forgot to mention that a Sunday NY Times cost 6$! But, inflation is contained at 1% isn't it?

South Africa Now BRIC Null Member

Here's a tradeable news story, I think (click here): "The Republic of South Africa (RSA) is now a full member of the Brazil, Russia, India and China (BRIC). Chinese Foreign Minister Yang Jiechi says said the group plans to invite RSA leader, Jacob Zuma, to its meeting to be held next year in Beijing, China."

Ok, let's go through our variant perception two minute story (click here for background): 

1. Idea: Go Long A South Africa ETF.
2. Consensus View: South Africa is just some emerging market country with a history of political risk for investors.
3. Variant Perception: South Africa, as the gateway to and financial capital of all of sub-equatorial Africa, has grown up and now is at an equal level with the best of the emerging market countries that are the engine for world economic growth going forward. It is now in the same league with Brazil, China, India and Russia. 
4. Catalyst: This announcement of its membership in BRIC. As the masses come back from the holidays and start seeing stories about BRICS (insteand of BRIC), as a whole, investment in  South Africa will increase. There should also be quite a buzz surrounding South Africa's first attendance at a BRICS summit this summer.

Technical Analysis: EZA, the South Africa ETF, is already very strong run having closed at an all-time high yesterday. Its in a nice rising channel, is only a little overbought on the RSI, has left a gap behind but has two decent levels of support (at 70 and 65) not too far below. 

Macroeconomic Analysis: South Africa, a major commodity producer, is part of the inflation / global recovery trade. This seems long in the tooth, but who knows how much longer it can run? The trend is definitely with this trade.

Leveraging Up: Here's how Yahoo finance shows the options situation for next July, which is about right given that we expect quite a bit of buzz about South Africa leading up to this BRICS summit. 

Now, here's the rather primitive way that I look at options (mainly in terms of how big the spread is, as a measure of liqudity and how big a price gain is needed to "break even"). The target price gain ("final price" in the spreadsheet) is based on six more months of that channel from the chart continuing to ascend. You may need to click thru to see enough detail.

I like the 67$ strike price better than the $72 strike price as it has a smaller spread and has a low final price to break even and yet still offers significant leverage to the underlying security. The spread (at over 23%) is just to large for me though. Unless I see a smaller spread I probably will have to avoid options for this trade. Of course, the thing I like about buying call options is that you are leveraged up and even if a civil war breaks out in South Africa you can't lose more than your initial bet.

As I consider this, the big question is: Can the world economy keep itself together thru the spring (and early summer) so that the inflation trade can stay on until I hope to exit this trade? That is a big question. I know what Gary Biwii would say (way too risky), so this one needs some real pondering. The variant perception and the expected mass psychology aspect of this trade is very interesting though (if the global economy can just hang in there another few months).

What do you think?  

MontyHigh, www.worldofwallstreet.us

P.S., Having pondered this a little further I have, despite the enormous illiquity, opened a rather small position in the EZA July 67$ calls.

P.P.S., Like everything else on World Of Wallstreet, this post does not constitute any kind of investment advice. Rather it is a way of sharing my own thinking as a way of helping others with their own investment thinking.

USA's Homeless: You'd Be Hearing A Whole Lot More About This

if Bush or McCain were president. Click here for some links.

Ok, you could call this an example of being off topic political bias, but the real message I want to pass along is: If the mainstream media can keep the plight of the homeless off the public's radar screen, they can keep a whole lot of other vitally important topics off as well.

If you are going to win at investing you've got to have an edge. To have an edge you'll need information a lot better than what the mainstream media provides.

Finally, what's one of the main points of "winning at investing" if its not gathering the means to help those in need.

MontyHigh, www.worldofwallstreet.us

Good News (Maybe): The Markets Just Don't Care...

They don't care if you are:

• Over the hill.
• Overweight.

They don't care if you aren't:

• Athletic.
• Tall and good looking.
• Smooth talking.
• Friendly.
• Likeable.

That's good news to some of us who don't have a lot of those things that mean so much to other endeavors.

Maybe trading/investing is for some of us who would never had a shot at being an Fox info babe.

MontyHigh, www.worldofwallstreet.us

 

Ninestreams: The Butcher Is Coming, A Retrospective

Well, I'm reminiscing about the most shocking, best message board post I ever read (click here), posted 3/13/2007 by the no longer posting Ninestreams. Here's the text:

"The butcher is coming

to the metal bulls.

I'm now pretty sure that we will have a recession starting sometime in Q3. non-residential construction in the US is rolling over in y-y comparisons. In a few months, it will go negative. This is going to put a second down leg on metals demand.

The US recession will transmit to the Chinese as inventories of finished goods build. Eventually, it will transmit to the metals market - but that will be the last in the chain.

I'll also note that if the chinese are restocking the current demand is above the actual flow through demand. That means at some point, the demand will drop as they get close to finishing restocking. This dynamic is currently supporting the copper market,but when it reverses in conjunction w/ the less demand from the US slowdown, the downward impact will be double and we should break the last lows.

So it may take some time for the transmission to actual impact demand, but the market will forecast it. I have no idea of the timing, but I expect copper to take another big leg down - its only a matter of time. Nickel should also follow. I'm no expext in the supply-demand of the industry,and so my analysis is based on common sense.

Once we get throug the cycle,we should have another big leg up as india and china keep growing, but for now I'm out of the market. I have a tiny bit that I need to finish selling on a bounce. We amy even get a decent bounce in the next couple of months, but I expect by the summer we will have the sell-off. I just don't see the risk reward to hold since the butcher can come to hack the bull anyday."

Let's look at this retrospectively. Here's the copper chart:

This message was posted just as we were really getting going making tonnes of money (crazy good) in nickel and other base metal miners. From the chart you see that Ninestreams was right, but was over a year early as far as the price of copper goes. But from my experience, the Butcher came just four months later as the top was in for Jr base metal miners at the end of July 07.

Lesson 1: Its better to be right and early than to be late or wrong. I'm sure Ninestreams, unlike myself, dodged the whole crash of 2008.

Let's take a look at some of the predictions contained in the above post:

"I'm now pretty sure that we will have a recession starting sometime in Q3." - it actually started in Q4, I believe.

"Eventually, it will transmit to the metals market - but that will be the last in the chain." - this was right and, of the base metals, copper was about the last to fall.

"I expect by the summer we will have the sell-off." - In the context of the board in question, Jr producing base metal miners, this was exactly correct.

"Once we get through the cycle,we should have another big leg up as india and china keep growing" - again, precisely correct. I've done quite well since the bottom of 2008 with precious metals, but I could have done better if I'd had the guts to go with base metals at the same time.

This board message was intensely villified and mocked. The chief mocker ended up "blowing up" and losing a tonne (who knows how much) as many of his skyrocketing picks on the way up went flat-out bankrupt at the end of 2008. He had quit his day-job to invest full time (moving to panama) and had to go back and find another job in the middle of the financial crisis. No fun.

Lesson 2: Investing is a lonely, lonely activity. But, I remember getting a private message from Ninestreams begging me to get out before it was too late. Even though I got creamed in 2008, that private message did keep me from losing more. There are some good ones out there on the Internet.

Tomorrow will not be a lonely day. There are many things to be thankful for.

Best wishes to you dear reader,

MontyHigh, www.worldofwallstreet.us

 

Sucker Alert: Mainstream Financial Headlines Bias

Here's the headline on finance.yahoo.com as of the time of this writing:

Get it? S&P up 1.38% is "Sharply Higher".

But yesterday, when the S&P 500 was down the same amount the headline was: "Stocks Down One Percent" (wish I had a screen capture for that).

So, what's the lesson?

• The mainstream financial press is the agent of the Wallstreet insiders.
• Wallstreet insiders want you to think you can make money when you enter their casino and play the "mainstream way" [Modern Portfolio Theory, Asset Allocation, Passive Investment Without Having An Edge, Buy And Hold Big Mutual Funds]".
• The mainstream financial press has a clear bias to make things look better than they are. Today's and yesterday's headlines are solid proof.

Don't be a sucker. Have an edge or don't enter the casino.

MontyHigh, www.worldofwallstreet.us

 

Investing Rule Number 1: The Mainstream Financial Press Exists To Help Wallstreet Insiders

If you are paying attention to banner-ad advice from any mainstream outlook you are a sucker. Wallstreet makes a lot more off of mutual funds than just the management fees and the brokerage fees associated with the mutual fund's buying and selling. With high-frequency trading they make a decent percentage everytime a big slow old mutual fund buys or sells its holdings.

As far as gold goes, they hate gold (because they can't hide ongoing fees like they do with mutual funds).

Don't be a sucker, be nimble, get an edge, play to win,

MontyHigh, www.worldofwallstreet.us

Government Intervention: Good For Traders, Bad For Index Investors...

Here's a thought for you.

Government Intervention is bad for investors because it causes distortions to the economy lowering its growth. Investors, at least highly-diversified, passive, index investors, can expect their investments to growth the general economy. So lowered growth means lower gains for Index Investors.

Government Intervention is good for traders because it takes the economy further and further away from the "Efficient Market" and inefficiencies are what traders feed on to make their profits. Now:

• Being small enough that you can identify and trade these inefficiencies without affecting prices can work well.
• But if you are humonguous, you better have connections to allow you to front-run the interventions (also known as criminal insider trading), or you'll get run-over holding positions which don't make sense after an unexpected intervention takes place.

Am I right? Is there anything to this?

MontyHigh, www.worldofwallstreet.us

This Week's Interventionals: Stormy Wednesday

Its been a while since I've put up an interventional related post because during this run up interventionals have not seemed to have been making much of an impact.

As I'm preparing to reenter leveraged precious metal long positions it seems like its worth taking a look at these. The week is full of interventionals (and election day is a week from Tuesday) and my buy signal is probably going to be signaled just before today's 4PM close. Not sure at all how I'm going to play it. At this point I'm inclined to wait until after the GDP number comes out.

Here's my this of next week's scheduled market events (BOLD CAPs for events which the Gold Cartel traditionally uses as an excuse hit the price of gold) that I consider noteworthy.

• Mon 8:30AM, Bernanke Speaks - but not to congress. 
• Mon 10:00AM, Existing Home Sales - mildly useful for tracking the US economy
• Tues, 8:30AM, S&P Case-Shiller Home Price Index - useful for tracking the US economy and for predicting how aggressive the Fed will be loosening money.
• Tues, 10:00AM, Consumer Confidence - mildy useful for tracking the US ceconomy.
• Tues, 1:30PM, November Gold And Silver Options Expiration - the buzz is that gold and silver are "taken down" for this and at least one or two days afterwards. This deserves more study.
• Wed 8:30AM, Durable Goods Orders. A useful leading indicator for the US economy. 
• Wed 1:00PM, 5-Yr Note Auction - the buzz is that gold and silver are taken down when they are selling long-term treasury paper. This is also for further study.
• Thur 1:PM, 7 Yr Note Auction- the buzz is that gold and silver are taken down when they are selling long-term treasury paper.
• Fri, 8:30PM, GDP - another really important day where gold and silver are taken down to maintain the public's confidence in the existing economic system. This number is going to come out just before the mid-term election. It is going to be manipulated hard to make things look good. Perhaps gold and silver will be spared since the number will be good. 
  

Leave me a comment if I'm missing something or if there are better data sources that you know of for this kind of thing.

Think "they" will intervene to pull gold and silver down this week?

MontyHigh, www.worldofwallstreet.us

Sources: I like Bloomberg's economic calendar (click here) and little better than yahoo's (click here) because it covers the treasury auctions. The best one I've found for international is here, but I usually don't have the time to follow it.The next options expiration date is: 3/25/2010. Here's a link to a good 2010 calendar (click here).

Best Of The Web: Jesse Summarizes A Ben Davies Speech

Perhaps, dear reader, you getting annoyed with me for posting so much. Part of my prolixity comes from an email from Jesse encouraging me to post more. Part of it comes from the increased intensity of study that comes from a correction. There really isn't much to talk about when you are following the dictum: "Be right, Sit tight" and making lots of money.

Anyway, here's a link to a post on Jesse's Cafe Americain's site that I though had a lot of juicy content. Here's the bit that was valuable enough that I thought I should keep a permanent record of it here:

"The theory of variant perception is best explained when I recount Steinhardt's own words. He said:

'A summer intern reminded me years later of the advice I had given him on his first day at work. I told him that ideally he should be able to tell me, in two minutes, four things:
1. The idea.

2. The consensus view.

3. His variant perception (a well-rounded view that is meaningfully different from consensus view).

4. A trigger event.'"

If I didn't have my day-job (which I continue to genuinely enjoy) and were trading full time, I would divide my day into different periods of time for things like inidividual company fundamental analysis, technical analysis, macro-economic outlook, etc. One segment of the day would be spent revisiting short bits investing wisdome like the above bold print. I think the 65 James Dinesisms are part of that store of investing wisdom that bears revisiting.

MontyHigh, www.worldofwallstreet.us

A Quick Momentum Chasing Trading Lesson

Here's a note to myself: If you are chasing momentum (e.g. entered gold or silver anytime after mid-September), you need to have the discipline to get out before "the jig is up". There's quite a traffic jam when the crowd finally heads for the hills. If you are chasing momentum, set a target exit date or price and exit even if the price is still rising.

If you want to sell silver options right now you are going to have to take 22% less than you would have if you had gotten out at yesterday's close. Yikes!!!

If you got in near the bottom you can ride the momentum all the way until the top is in.

MontyHigh, www.worldofwallstreet.us

 

Hope For The Small Investor: Small And Micro-Cap Stock Picking

I recently received this from one of my favorite people: "I'm not a fan of high frequency trading because I'm not on the inside. Its all rigged. Oh well, guess normal folks have to figure out a back door".

I agree that the average small-time investor (following standard advice and investing in big mutual funds) is a sucker and is going to get fleeced.

But..., about the same time I was listening (click here) to a GoldSeek radio interview with, Peru Saxena, a medium-sized money manager who has an edge by living in Hong Kong and understanding what's going on in China better than most. He was making a pretty good fundamental case for investing in gold mining stocks when I caught this sound-bite (click20101017saxena1).

He says, to paraphrase, he only invests in the very largest gold mining stocks because smaller companies are so illiquid that when he buys or sells his buying (or selling) moves the stocks price in the wrong direction by so much that its just flat-out impractical to even try to own these stocks.

He goes on to recommend Goldfields (GFI) and Newmont (NEM) which have an average daily volume of 6 million dollars (more if you include London and South African trading) and 60 million dollars respectively. My own rule of thum is that I try to avoid accumulating a position bigger than 1 day's trading volume or else it will cost to much (lower the stock price more than say 10%) to sell out over the course of a week.

He can't do what the little guy can do which is to invest in small and microcap gold miners. To avoid blowing my own horn, lets compare year-to-date how a handful of top stock-picker's precious metals picks have done year to date compared to these two large-cap names.

• First up is the Inca Kola News (IKN) news letter I subscribe to. In his first of the year newsletter he had Troy Resources (TRY.TO) with an average daily volume of 70K$ (more in Australia) and Fortuna Silver (FVI.TO) with an average daily volume of 600K$ as his top picks.
• The let's dig thru my favorites mining stock picker message board and find the first post (click here) in 2010 where the very respected Bobwins announces that he has bought a stock (click here). Its Timmins Gold (TMM.V) with an average daily volume of 1.5 million dollars.
• Finally here's another top stock picker's first couple of rec's in 2010 from the Investor Village precious metals board: CGA Mining (CGA.TO) with an average dialy volume of 1.2 million dollars and Medusa Mining (MLL.TO) with an average daily volume of 50K$ (more in Australia).
  

So, none of these stock picker stocks have a volume big enough to put real money into (say > 5 million dollars). Believe it or not, I have not "cherry picked" these stocks and I don't know what the next chart is going to look like. I do know, from listening to the picks on the message boards, that the skilled stock pickers can definitely make a significant amount of money, year after year. Let's see how the small-time stock pickers did relative to the big-money manager's picks.

If you average out the big money guy's picks (GFI and NEM) you get a return of around 25% year-to-date. If you average the stock picker's picks you get a return of roughly 50% (twice as good). So, a skilled little guy can clearly do twice as well as a fully concentrated big guy. This does not include any trading in and out that is so much easier for a little guy than a big.

The advantage for a dedicated, skilled stock picker is even greater when compared to the average pension fund or general equity fund (the kind the general population has their 401ks invested in). These big guys are restricted and cannot concentrate their funds in narrow sectors (like precious metals). The S&P 500 (which only 4% of these stock mutual funds beat over time) is up around 6% year-to-date. This means the stock pickers are doing more than 8 times better than the general population's 401Ks.

I think that being up 50% per year on average for a skilled stock picker is achievable, but a bit high and that someone who has spent (and is spending) a lot of time honing their skills can definitely achieve 30% per year by studying the macro situation carefully, concentrating in sectors that seem best, picking the best small-cap and micro cap stocks within the sector and using technical analysis to avoid disasterous losses.

So, as far as high-frequency trading is concerned (and the markets in general), YES, it is a rigged game and the average guy is going to get fleeced.

But the skilled small-time investor (running less than, say, 10 million dollars) can even so do substantially better than the real suckers in the casino (the general population listening to standard advice and investing in big mutual funds).

While this post is not scientific, I do believe it is representative. That's how I see it. How do you see it?

MontyHigh, www.worldofwallstreet.us

I'm Bearish The US Stock Market, But I'm Not Suicidal

I got creamed from from the summer of 2007 thru late 2008 by sticking with positions based on two faulty fundamental-based outlooks:

• First that my base metal miners were so undervalued at current metal prices that they would be fine even if base metal prices turned down. Instead, the stock prices got murdered in anticipation of metal price declines that, when they came, far exceeded my expectations.
• Second that gold would rise as a safe have pulling my undervalued Jr gold producers up with them. Instead, gold got hit because gold traders were leveraged up and needed to liquidate and Jr gold producer got hit worse than other stocks because, being Jr, they were considered "riskier".

Now, we seem to be in a similar situation: My my fundamental outlook is for the US to go thru an economic contraction pulling the general stock market down with it as the deleveraging from the credit bubble continues. Instead, the general market is going higher.

This time, I'm using technical analysis to keep my possibly-flawed fundamental outlook from turning into another massive money-losing disaster. When the S&P 500 crossed 1130 today, I closed my bearish positions: S&P 500 put options and retail ETF (XRT) put options for a smallish (around 1% of portfolio value) loss.

Here's the chart which made me close those shorts. As you can see, the S&P 500 broke thru that resistance at 1130. This is a perfect example of the Technical Analysis Maxim: double-tops usually hold, triple-tops are usually broken. From here there is just minor resistance after another 3 or 4 percent rise (say 1176) and really no significant resistance until the year-to-date high at 1220.

Its possible we'll get whipsawed and the S&P will fall back below that resistance, but I'm not going to let a losing position get worse and worse on that kind of hope. I'm going to use Technical Analysis to keep me from the kind of big losses I experienced in 2007 and 2008. 

This leaves me with some cash (not much), but mainly long precious metals (Gold and Silver call options) and Jr gold producers both of which have been jumping into overbought conditions. I have my finger on the sell trigger for these as well, especially the silver options. Its going to take at least 2 down days to get me to sell because there seems to be so many buyers waiting for a dip get increase their positions.

Well, that's what I'm doing. So far, adding Technical Analysis to my arsenal seems to have not reduced my upside much but seems to have helped limit my downside quite a bit. How do you keep an error in judgment from turning into a disaster? Leave me a comment.

MontyHigh, www.worldofwallstreet.us

Glad To Hear It: Stock Pickers A Dying Breed

There's a headline I'm glad to see. The fact that nobody is spending any effort to pick individual stocks means the markets are getting more efficient making stock picking of individual stocks (when done well) even more profitable.

Seems to me that you want to find companies that are too small (too low a market cap) to get the interest of the "big boys" running hundreds of millions of dollars (or more), but which are profitable and should be able to grow up to the point where the "indexers" have to buy in. 

This week we had a perfectly good example of who has more influence on a stock price. Over the weekend Oceana Gold (OGC.TO) [one of my top holdings]:

• Announced that its CEO had resigned "for personal reasons" - a 5 to 15% stock price drop ordinarily goes along with such an announcement as stock pickers get scared and sell.
• Announced that it was being added to a couple more indices - good for a +5% pop, usually, as indexers have to start buying.

You can see from the chart who had more influence. All the better for stock pickers.

MontyHigh, www.worldofwallstreet.us

Possible "Short The Retail Industry" Trade

The outlook for the USA economy looks pretty dismal to me. Here's a nice very long, very bearish economic outlook: http://theautomaticearth.blogspot.com/2010/09/september-10-2010-no-economic-growth.html

And here's the money chart from the article:

Ok, so imagine the economy is getting worse, that the US consumer is heavily retrenching. That means the the USA's overbuilt retailers are due for a good smacking. The question is, how to make a trade which takes advantage of this "insight" without really having an edge as far as individual retail stock picking is concerned?

This post represents an attempt to do that wherein we consider purchasing December 2010 puts on retail ETFs. The two really nice things about buying puts are:

• you make a lot of money if you are right about the big downturn you expect
• and if your outlook is wrong, you can't possibly lose more than you put at risk when you bought the puts.

The main downside to buying puts is that you need a bigger downturn in the underlying security than the guy who sold you the puts was expecting. The options game is a zero-sum game and you are dueling with experts. In other words, you have to have a genuine edge in your bearish outlook.

So, here's how my thought process goes:

• Find some retail ETFs.
• Whittle them down based on how they have moved relative to the general stock market during the crash of 2008 and the recovery therefrom and on how liquid they are.
• Look at the charts to see which have the most clearly defined resistance against a big up-move (so you know where to place your stops).
• Look at the options to see if any offer better value.

A little quick googling brings us to the following list of retail ETFs: XRT, VCR, PEJ, FXD, RCD.

Here's how they did recovering from the Mar 2009 lows relative to SPY (proxy for the S&P 500):

You've got to like that basically 2 to 1 leverage relative to the S&P 500. Here's how they did on the initial part of the 2008 crash:

A more than 30% downdraft in one month is pretty impressive although the leverage to the S&P500 isn't nearly as pronounced.

So, how do these ETFs look from a liquidity standpoint:

• XRT has an average volume of 500M$ (plenty liquid) with options. Very promising.
• None of the others is very liquid or has options.

So, its XRT or nothing. Let's look at its chart a little closer:

The chart has formed a positively bullish flag formation, but with considerable resistance at the top of the flag. There is additional resistance in that it has been a long time since the RSI has exceeded its current value. Seems like the technicals are ok provided one keeps a tight stop on any confirmed close above 39$.

So, let's look at the December puts that are near or in the money. Why the december puts? Well we are expecting a downturn between now and the end of October and the rule of thumb from the options text books I've been reading is to not hold options within a month of their expiration because the time value is too high and disappears rapidly. 

The 40 puts (in the money) and the 38 puts (out of the money) have the largest open interest (and thus are the most liquid). I'm going to concentrate on them. Here's what they look like when I plug them into my rather primitive options spreadsheet:

I guess things start getting interesting in this spreadsheet around column M.

• Column M provides a hypothetical target price for XRT at the option expiration.
• Column N shows that this hypothetical target price is 10% lower than the current price.
• Column O gives the per option contract profit / loss at the target price.
• Column P start allowing us to normalize contracts by considering what happens when 10,000$ are used to buy contracts.
• Column R shows the percentage profit / loss should the target price be achieved. Surprisingly to me, the profit is higher on the $40 puts (which are in the money).
• Column S shows the leverage to the underlying XRT should the target price be achieved. In this case, the $40 puts get nearly 6 to 1 leverage. This illustrates on of the big upsides of buying puts. You can make a lot of money if you can be right about even a 10% move in the underlying. 
• Column T gives the break-even price at expiration.
• Column U gives the percentage decline in XRT that must occur in order to break even if the option is held thru expiration. This shows how much you have to "be right" about the underlying XRT's price direction to be right. This illustrates the downside of buying puts. The stock price has to move considerably in your direction to make money. 5% is a pretty big change and leaves me wondering about whether this kind of trade makes sense. Of course, the price does not have to fall this far to make a profit if you don't hold to expiration. 

Well, at this point I'm going to have to ponder this some more before I put on the trade. I consider this kind of preparation to be the bare minimum (in addition to having some kind of edge on the underlying) prior to buying puts or calls. I will probably buy at least some of these with a stop of a close around $39.5 as I have a lot of profits to protect this so far year and this trade doesn't risk that much of that profit and should hedge it against a general stock market downturn pretty nicely. I also like the way I am entering right at the top of a trading range. If I put the trade on, I'm either going to get stopped out quickly for a loss or make some real money.

Here's another chart (which I looked at after writing all of the above) that makes me want to put the trade on.

Just this summer XRT exceeded its all time high! Seems pretty ludicrous doesn't it? The consumer is never going back to "normal" given the huge deleveraging that has to take place and the aging demographics. And... XRT has hit an all-time high and is consolidating in the same trading range that it consolidated in after its 2007 all-time high. And... its price now has as immediate resistance that 100 day simple moving average that I like. So, I'm probably going to put a couple percent of my overall portfolio at risk buying these puts.

I admit I'm pretty naive when it comes to trading options. I hope this kind of walk-thru showing my thinking is helpful to those like me who are beginners at buying naked options (or those who have never traded options).

Leave a friendly comment if you have something helpful to say about how I could step up to the next level on trading options.

MontyHigh, www.worldofwallstreet.us

What Can I Do For You...

As you may have noticed, I've been posting less often of late. I'm still spending at least 30 hours a week investing and my own portfolio is up more than 20% year-to-date, but, as I've been focused on investing heavily for almost 7 years, I find less and less that is novel that I need to write down to better understand myself.

So, if you would like a little more posting, leave me a comment on what you'd like to see more of:

• Case studies of individual trades giving the reasons for entering, exit criteria, etc.
• Individual stock picking (which I haven't been doing as much of lately).
• Links to analysis I've found useful.
• More simple, clear, unspun economic data analysis.
• Something else?

Without any comments, I'll continue to write down whatever I find helps me to think more clearly about what I'm doing.

Best wishes,

MontyHigh

Are You A Target For Predators?

I love this sound bite from this weekend's King World New Broadcast interview with Chris Whelan.

Chris Whelan Sound-Bit Click Here

What I love is not the revelation that major institutional investors are not all that saavy. Its the way he takes for granted (as if everyone in the financial industry sees it this way) that retail investors are suckers with "no capacity to make investment decisions" and "targets for predators".

That's what you are if you follow mainstream investment advice (buy and hold, diversification thru mutual funds, 401k, etc.)

Who do you know and care about (mother, brother, sister, friends) who are targets, dear reader? What are you going to do about it? Is there any decent alternative for the middle-class guy who can't obsess over the markets and play to win like I do?

MontyHigh, www.worldofwallstreet.us

Leisure Gentleman Investor: Mohnish Pabrai

Here's an excellent interview with the author of my favorite introductory investing book "Dhando Investor". This is the book I wish I plan on giving as a Christmas gift to my 20-something nephews next year.

Here's a few take-aways:

• Look for high-upside, limited and low-downside risk situations. 
• What prevents investors from making money is their inability to contentedly sit in a room and do nothing.
• Likes check-lists. Before he pulls the trigger on any investment he runs down an 80 item checklist. He claims this is key to avoiding investing mistakes. If he's done his homework properly before being ready to pull the trigger then going thru even an 80 item checklist only takes 10 to 30 minutes. 
• The ideal investor is the Leisure Gentleman investor - enjoys leisure and is content doing nothing most of the time. When others are scared to death he goes to work.

Now ask yourself, would you like to be like this guy? I guess I'm glad I still have my day-job, because I don't think I can be content sitting in a room doing nothing.

MontyHigh, www.worldofwallstreet.us

Exclusive News Story: Pension Benefit Guaranty Corporation Executive: "The PBGC is really a giant ponzi scheme"

I was recently at a lunch-time seminar and happened to be sitting next to a senior executive within the PBGC.

As you probably known: "The Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of more than 44 million American workers in more than 29,000 private-sector defined benefit pension plans." It runs a portfolio of assets of 60B$ with which to cover insurance claims when a pension fund can't meet its obligations. The PBGC is to pension funds what the FDIC is to bank deposits.

Anyway, I asked this executive about the PBGC and within the first two sentences the following came out of the executive's mouth (exact quote): "The PBGC is really a giant ponzi scheme". This person made this statement in the hearing of a table full of complete strangers! I (and my friend sitting next to me) were dumbfounded by this statement. When I asked if I could quote them on the record, the exec demurred.

The executive further went on to say that whenever the PBGC takes on a new pension fund it always enters significantly underfunded. The executive stated this several times (I guess subconsciously highlighting its importance and universality). Nothing that will bite the pension fund immediately but after a few years look out.

I'm sure you dear reader can add a little little color commentary at this point. Feel free to leave a comment.

I also asked this person about the IOUSA movie's claim that there were 70 trillion dollars of unfunded liabilities in social security and medicare and they immediately confirmed that this was true and accurate.

I asked what this person thought the outcome of this underfunding would be and they were speechless.

So, I guess its clear for you and I dear readers that we better have another plan lined up for retirement other than a defined benefits pension and/or social security.

MontyHigh, www.worldofwallstreet.us

Are You Tired Of Being A Sucker? CNN Money On The Price Of Oil

http://money.cnn.com/2009/12/03/news/economy/cheap_oil/index.htm

 

This is a perfect example of how you can't trust the conclusions reached by any article from the mainstream press.

This post is all about demand, spun to arrive at falling demand. It says demand has been falling in the USA (without highlighting the biggest economic downturn in 70 years). It claims (without any evidence to back it up) that China can't keep growing like it has and even if it does its energy intensity will fall (reducing the amount of oil needed per Yuan of GDP). 

The only point they make about supply is probably flat out wrong: That $70/bbl is plenty enough to bring on new supply. 

It says nothing about the built-in automatic decline of existing producing fields of something like 4 to 6% /year and the fact that its been something like 30 years since as much oil was discovered as was consumed.

This complete lack of balance means their conclusions are worthless. Yes, you can pick a few data points out from a piece like this to help with your own evaluation, but you can't trust their conclusions.

Now, I don't have a dog to fight in the price of oil debate as I don't own any energy stocks, but I point this out because its a case where I have enough expertise to know when they are trying to sucker me.

How many other topics that the mainstream press deals with:

• Global Warming
• How To Deal With The Financial Crisis
• What's Going On Politically
• What's Going On With These Stupid Wars

am I similarly trying to be suckered on where I don't have enough expertise to see it?

Its a real question: Where can you get expert opinion and analysis that isn't trying to sucker you and how can you tell when the opinion's conclusions have value?

 

MontyHigh, www.worldofwallstreet.us

For Conspiracy Theory Fans: Chelsea Clinton Engaged to Goldman Sachs Man

"Chelsea Clinton Engaged to Goldman Sachs Man

Chelsea Clinton Engaged to Goldman Sachs Man

Bill and Hillary Clinton's daughter Chelsea is engaged to Goldman Sachs man Marc Mezvinsky.

Between 2007 and 2008, he donated $4,800 to Hillary's presidential campaign.

He seems to be climbing the corporate ladder rapidly at Goldman. In 2007, on his political contribution form he listed himself as "Associate", then "trader" and then just "Goldman Sachs". Marrying Chelsea should help his ascent, it's just the kind of "God's work" Lloyd Blankfein likes to see.

 

http://www.economicpolicyjournal.com/2009/11/chelsea-clinton-engaged-to-goldman.html"

Yet another data point pointing to the existence of an elite that is ruling the USA for their own benefit. I was quite a sucker when I was a Bush supporter, wasn't I?

MontyHigh, www.worldofwallstreet.us

Not Off-Topic: What The "Khalid-Sheik Mohammad Trial" Is Actually About

If its not clear to you already, its time to get real about the American mainstream media. They exist to distract the American populace. They want to deliver eyeballs to their advertisers while keeping those eyeballs off the subject of how their bankster overlords and they (and I'm not sure who else) are really running things for their own benefit.

Seems pretty clear to me that this whole KSM trial is being timed to be a major distraction to allow a classic doves/hawks food fight distract the population from the fact that nothing has been done to fix the economy or punish the banksters who caused the downturn and that just about every one of the congressman and senators are bought and paid for by the banksters (and their allies).

The way I look at it is: "If the mainstream media is covering a subject closely then its not really what you really should be paying attention to." I consider this to be "on-topic" because its only by finding out what's really going on that you can make investments that will produce real returns.

MontyHigh, www.worldofwallstreet.us

Could The Markets Close For Months?

Click Here For The Sound Bite

Click Here for the 2 minute audio excerpt from "The Ascent Of Money" DVC [which I recommend]

What would happen to leveraged trades if they did? What would happen, for example, to futures (or options) if the markets closed like this? A major warning against the use of leverage.

Now that was a black swan.

MontyHigh, www.worldofwallstreet.us

Jim Sinclair's Dollar Countdown Ends Around November 7, 2009

Jim Sinclair has been talking about a "Countdown To The Implosion Of The Dollar" for quite a while (click here).

Here Jim Sinclair reveals what his "dollar countdown" has been about:

"When Push Comes To Shove

Posted: Oct 27 2009     By: Jim Sinclair     

Dear CIGAs,

October 30th the Fed is planning to curtail QE regarding Treasury auctions.

November 4th is the FOMC meeting most likely to contain discussions of timing for the exit from economic stimulation.

November 7th is the G20 meeting at which BRIC nations will anticipate a cessation of QE and a commitment to establish a currency alternative to the US dollar...

So fasten your seat belts because our long discussed rock and hard place will be reached shortly.

Can the Fed provide the Chinese with their demands of middle July at the USA/Chinese Washington Financial Summit in a deal to buy US Treasuries so as to let the Fed back off their US Treasury instrument auction QE?"

I thought it was interesting to finally find out what he has been talking about with his count down. I have mixed emotions about the guy, but one of the things I like is that he has made specific, testable calls. On the down-side, his "This Is It" and "This Is It And It Is Now" calls have pretty consistently been made at temporary gold price highs (when fear is running at a fever pitch). The way to deal with the gold market is to buy when the fundamentals remain good but when sentiment is bad (like yesterday). Buying breakouts has not seemed to work well (particularly for short plays with tight stops).

MontyHigh, www.worldofwallstreet.us

MontyHigh: What I'm Doing And Thinking Now

This post summarizes my macro outlook, how I'm currently invested and my thoughts on investing and blogging.

The following graph pretty much summarizes how I'm invested and what my macro outlook is (Au=Gold, Ag=Silver):

I'm pretty bearish on the outlook for the US economy and stock market. The stock market valuation just makes no sense at all and I expect a pretty big downturn this fall when the a dramatic economic recover fails to appear.

I'm actually fairly bullish about precious metals themselves on seasonalities and fundamentals. We are now moving out of the summer doldrums and into the bullish fall thru March season. The fundamentals are also bullish: zero interest rate, lots of fear about other forms of investing, potential dollar weakness, etc.

I'm more bullish about my Jr gold producers as I think they are in position to "print money" providing prices stay reasonably high. I continue to value these stocks at $800 gold and $13 silver for 2010 which I consider to be pretty conservative. I continue to approach investing as a value investor looking for stocks which are undervalued and which can expect to make considerable money given reasonably constant current conditions and where I hold a bullish macro view of the company's underlying fundamentals.

I have no edge or special insight into how China is going to do, going forward, and I believe this is the key to general resource investing (oil, base metals, etc.). There's enough uncertainty that I'm staying away.

One noteworthy thing in the graph, for me, is the use of S&P 500 futures and futures options. These allow me to short the general market as a hedge against its falling impacting my Jr stocks. I may increase this short position going forward if it really looks like stocks are going to turn-down hard. When I say I'm short US stocks 23% that I am taking the full value of the futures contract or what the put option gives me the option to sell (e.g. 50 times the roughly $1000 S&P index value). It does not mean the amount of money currently tied up to hold the position (cost of the put option or margin value to support the futures contracts). The use of futures and futures options allows me to use just a little "up-front" money to get a big % of my portfolio short.

I've been spending more time on getting my Macro view right (I hope) and less time actually doing what is probably of most value to you dear reader: Fundamental analysis of Jr resource stocks. The following graph shows what I'm holding now. I'm actually shifting around my Jr resource stock investments right now, trying to reduce oversized positions. Last year when the general stock market took the big hit, my Jr gold producers got hit even harder. If that starts happening this year I'm going to bail on most of them. I'd like to get the sizes of almost all my positions to the point where I can get out in a single day without driving the stock price down more than 5% more than its price when I started selling.

As far as investing goes, I've been getting more satisfaction from my engineering / advanced research day-job than in investing, although I'm still enjoying the investing. I'm probably putting about 30 hours a week into investing. I've given up on the half-baked, never taken really seriously idea of ever being some kind of investing guru. This blog is now about providing some useful information to you dear reader and keeping my own investing thoughts straight. Its also about calling them as I see them (except when I am entering or leaving illiquid stocks where silence is golden) and not trying to spin anyone.

The following graph shows how my investing portfolio has done year to date. This does not adjust for the affects of some smallish deposits and withdrawls. I'm doing pretty well, but obviously would have done much better if I'd caught the base metal or oily energy moves off their lows. I was just too uncertain about the U.S. economy to be confident about resource prices recovering the way they did. 

Another thing to note about the above graph is the volatility. 5% swings on a single day are not uncommon. That's pretty breath taking and its probably more than most should try to take on.

The following graph shows why you don't want to invest like me. That's quite a plunge from my 07 top to my 08 bottom. I don't ever want that to happen again. Its not quite as bad as it looks because I have a paid-off house and the net present value of my day-job significantly exceeds my account sizes.

I believe I've learned a lot the last 3 years and won't have the same kind of big downturn you see from my summer 2007 highs. I plan on using technical analysis to "stop me out" of any serious wrong macro calls. This may keep be from ever having the kind of run-up I had from late 2006 to mid-2007.

Overall, I can tell that I've made a tonne of progress in my investing skills since I started getting serious in 2003 and even since I started this blog in April 2007. My fundamental analysis of individual resource stocks has stepped up quite a bit. My understanding the precious sector has grown much deeper. I've gone from no use of technical analysis to having technical analysis genuinely add value to my investing.

One other thing, I've realized I don't really enjoy short-term trading. I am not actively pursuing it any more even though my overnight paper calls on gold futures show some promise of generating 50 or 100K of profits a year.

Hope you find this update and retrospective of some use,

MontyHigh, www.worldofwallstreet.us

P.S., leave me a comment about what you are thinking and doing and where you are making progress in your investing.

John Hussman: Responding Vs Reacting

Hussman, once again, is worth reading (click here for the full article):

"For our part, our focus is to ask the same basic questions every day – “What is the opportunity,” and “What is threatened?” We rarely have any sort of forecast for the market, and certainly don't have short-term forecasts here. Instead, we are responding to market fluctuations as they occur. For example, in response to last week's powerful rally, which brought the market again to overbought conditions, we took profits on the index call option position we established the prior week, and moved back to a fully-hedged investment stance. I certainly don't know whether that shift will be “right” in this instance, but it is the appropriate response from the standpoint of our investment discipline. Meanwhile, we continue to focus on individual stocks demonstrating favorable valuation and market action on our measures, with an eye toward buying higher ranked candidates on short-term weakness, and selling lower ranked holdings on short-term strength.

The distinction between reacting and responding is one that I've emphasized often over the years. To react is essentially to change one's plans abruptly based on what the market has just done – usually involving a certain amount of panic or worry that essentially forces one's hand. In contrast, to respond is to take the most recent market move as a piece of information, and to change the investment position accordingly, following a very specific discipline (ideally which allowed for the move in the first place).

For example, a reactive investor tends to reverse existing investment positions only when provoked by pain. Investment positions are sold when they have declined enough to trigger fear or panic. Investment positions are purchased in a rush to “catch” or “ride” them. My impression is that the single best mark of a reactive investor is the tendency to measure investment success by the amount gained or lost on any particular day. In contrast, the investor who responds puts much more emphasis on daily actions than on daily outcomes. That doesn't mean ignoring outcomes, but it means following a specific, well-studied discipline with the expectation that the results will emerge through repeated application. As usual, those results are best measured in terms of long-term return and risk over the complete market cycle."

MontyHigh

Ancient Wisdom: "... The Borrower Becomes The Lender's Slave"

That's the saying (from about 3000 years ago) that I keep thinking about. It kept me from doing what seemed like a good trade: "Mortgage house on a 30 fixed 4.3% rate and invest the money".

Here's another bit of ancient wisdom: "Owe nothing to anyone except to love one another", the Apostle Paul, circa 58 AD.

MontyHigh

Review Of IOUSA Movie And Townhall Meeting

I guess some of you are familiar with the IOUSA movie produced and touted by the daily reckoning folks. Its a documentary discussing the USA's financial situation focusing on the effect of growing government debt, Social Security and medicare obligations.

The movie itself is a well-done, but standard documentary discussing a scientific or numerically oriented subject. It has all the usual items:

• Historical footage of presidents and other politicians delivering weighty quotes about how important this is.

• High-powered authorities making scary quotes using emotionally charged words and phrases (Tsunami, disaster, catastrophe, etc.)

• Graphs and numbers fly by without giving the viewer time to really understand what they mean.

Now, I've been reading books and studying this and have put dozens of hours trying to get to the point where I really understand this and here's the key point that I got out of the movie:

The US government has 53 trillion dollars of debt of various forms and its growing. The breakdown (from memory watching the numbers flash by) is as follows:

• 10 trillion$ - Treasury debt (around 4% per year) in the form of bonds sold to others. 44% of these bonds are held by foreigners and China has more than anyone else.

• 15 trillion$ - Social Security obligations. Its not clear to me what this really is. Is it that we should have 15 trillion dollars saved earning N% (e.g. 4%) interest to cover the future obligations the way a business has to save  and invest money to cover their pension obligations.

• 25 trillion$ - Medicare. The new Medicare perscription drug plan is a big part of this (1/3 to 1/2). Again, like social security, its not clear to me what this really is.

• The rest is miscellaneous.

So, without really knowing what most of that 53 trillion dollars is, what kind of interest rates are factored in to the assumptions and whether they are reasonable and what fraction of the average American's salaries is needed to service the equivalent amount of straight-ahead debt its pretty hard to evaluate whether this is a serious problem or not.

Can anyone provide some help figuring this out?

MontyHigh

By the way, the townhall meeting afterwards would have been a joke were it not so painfully long and boring. It consisted of a 30-something female moderator and a panel of old white guys. Three of them were so old (late 80s?) that they clearly were way past the prime of their ability to communicate.

That left David M Walker (ex-head of the GAO who has been sounding the alarm) and Warren Buffett (who, although in his 80s is still quite a pistol). I'm thinking the organizers wished they hadn't invited Buffett, because his attitude was: America is a great place and the economy will growing so much, increasing the size of the pie, that there really isn't any problem at all!

The Good Stuff: Nassim Taleb, Author Of "The Black Swan" Interview

How many books are so good that you've read them more than once? For me, not many lately. An exception is Nassim Taleb's "Fooled By Randomness". I expect its sequel, "The Black Swan", will fall in the same category. The guy's thinking is so powerful, unique and relevant to the trader that there is no comparison.

Here's (click here) a link to an hour long interview of Nassim Taleb by Russ Roberts of Econtalk. This is probably the best interview I've ever found on the Internet. I listened to it again (actually twice) this last week. The concepts are so fascinating and so relevant for a trader.

My favorite quote is "Fifty sigmas, no problem". Just try to get Excel to calculate the probability of a 50 sigma event with a normal distribution!

By the way, if you want to try something cool, go to trends.google.com and try out "Black Swan".

Enjoy,

MontyHigh

Short Story: RVBD, TWM (UltraShort IWM) And PEIX Shorts All Doing Just Fine

All are profitable. Got a really nice entry with PEIX at $4.07 (high for the day). It closed down 6% from there. Nice start.

MontyHigh

Stock Picking Prowess Wanted

I don't think the bottom is in for the financial sector. I could just buy SKF (the XLF index double-short), but I thought I'd see if there's a better way. Here's a graph I quickly threw together. It looks at the relative performance of certain XLF index components since the XLF peaked last June. It compares the top six XLF members (as of 12/31/2007) by index-weight and the bottom twelve XLF members.

What I get from this graph is that there was a huge variance in performance. From this I conclude that if you had sufficient insight to be a good stock picker you could exceed the performance of SKF. But this requires true insight into the financial sector.

Shorting the financial sector rhymes with Don Coxes famous statement about why buying mining stocks makes sense. Mining stocks are "loved least by those who know them best because they have been disappointed most". Thus sentiment undervalues mining stocks.

I think the reverse applies to financial stocks. They are "loved most by those who know them best because they've worked for them longest making the biggest bonuses ever.". I think they have the opposite sentiment problem. Common sentiment overvalues the financials. I think the Wall Street of the last decade is like Scarlett O'Hara's Tara... and like the high-tech world of the 90s... Gone With The Wind.

So, anyone have any good thoughts on how to get up to speed on financial stocks that are not "too big to fail", but are actually in grave danger of going under?

Do you have any favorite web sites or message boards for this kind of stock picking?

MontyHigh

Shorting With An Edge... Short Riverbed (RVBD) At $12.50

Here's an ugly chart:

I've already shorted this stock successfully once and I wish I had thought of shorting it earlier.

For me, this is a perfect example of doing what Peter Lynch recommends: When stock investing, use your own specific expertise to provide you with an edge over the "smart money". From my day job, I understand this company's technology in-depth and have a lot of experience watching this kind of company.

Riverbed was 2006's high tech IPO darling. As a high-growth leader in the seemingly limitless Wide Area Network (WAN) optimization market niche, it jumped from 10$ to almost 50$. I was the technical evaluator of the crop of WAN optimization companies. Riverbed's attitude was similar to the "we rule the universe" attitude of Microsoft and Intel in their hay days.

The key point that I understood was that Riverbed's technology was not so advanced as to give Riverbed a sustainable competitive advantage. In this case, my edge is realizing that Riverbed has no edge. The lack of a technical edge means that Riverbed is at a disadvantage against larger competitors, such as CISCO, which has better / cheaper distribution (and product support). As a result, I'm not surprised to see their stock falling. I expect it will continue to do so having recently announced a disappointing quarter's results.

CISCO and other competitors are getting stronger and are picking up the features that initially gave Riverbed an advantage while Riverbed has not be able to add significant new capabilities. At a trade show I recently attended, Expand Networks (a Riverbed competitor) told me that they were winning every government contract where they competed against Riverbed. This is an example of the "scuttlebutt" that Philip Fisher recommended as an important component of investing.

Anyway, I think the recent correction from the bear market has about played out, some I'm short. My stop is Riverbed having an up week or something happening that convinces me that the bear market has ended or another correction has started.

Let me know what stocks you like (or know are in trouble) based on your own personal edge.

MontyHigh, editor-in-chief

Feeling Greedy

On Monday, Mar 3, I made this post on one of my favorite message boards:

"I'm feeling very greedy this morning... Usually means we are close to a temporary top. I'm itching to go out there on margin."

The famous Warren Buffet quote goes something like: "Be greedy when others are fearful. Be fearful when others are greedy."

For me, what I'm learning is: "Raise cash when feeling greedy." My greedy feelings are pretty reliably an indicator that a temporary top for my investments is in. My feelings of fear are not as well tuned, yet.

Monty

Interest rate 'freeze' - the real story is fraud

Here's an eye-opener: http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/12/09/IN5BTNJ2V.DTL&type=printable

"But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it."

Read it all.

Mortgage Mess: There's A Lot More To Come

There's a lot more to come with the Mortgage Mess. Check out this blog/article with info from a California mortgage insider, Mark Hanson. The guy seems to know what he is talking about. Its a fairly long read which shows that many, many homes that did not have "sub-prime" mortgages are mortgaged to 100% of their home's peak price with ARMs whose payments are about to reset (jump up). Here's the "shocking conclusion":

"One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible."