High Yield Times

Soul Trader Blues is being put in suspended animation.

I will now be concentrating on a new blog at High Yield Times.

The aim of High Yield Times is to comment on financial news and to gently show passive investors how a little analysis can go a long way towards improving investment returns. the focus is more on investors than traders.

Go to High Yield Times.

Markets Hit 12-Year Low - How Significant is this for Stocks?

Markets Hit 12-year Low for only the Third time, but will this be 1974 or 1932?

With US indices breeching their 12-year lows financial journalists and analysts have been reaching for their history books. A long term chart of the Dow reveals that only twice before has the index wiped out 12 years of gains; back in 1974 and 1932.

As everyone in the financial industry is praying that investors will return to the market the focus has been on calculating if these previous retracements can tell us anything about when we are likely to hit this bear market's low. In short, when will this pain end?

"What we found intriguing is that the 12-year lows were breached at a critical juncture in the bear markets," JPMorgan Chase equity analysts gush. In 1932 the April 8 finish came three months before the market hit its bottom, while 42 years later, the Dec. 6 breach marked the exact end of the 1974 low.

So there you have it! The equity pain will - or rather might - be all over within 3 months. Except that having just two data points does not fill me with the same overwhelming confidence as self-interested parties such as JPMorgan Chase. This strikes me as a slightly more sophisticated version of "when is it time to buy shares?" articles.

It is also worth stepping outside the purely US markets, this is after all a global marketplace. The most depressing index by far is surely the Japanese Nikkei. Peaking at around 39,000 in 1990 it now languishes around 7,500: that is a loss of over 80% over a period of almost 20 years and is currently sitting at a level seen in 1981. The "12-year low" is, at least for the Nikkei, a complete irrelevance.

However, stock market indices are all denominated in their local national currency so to accurately compare indices one has to do so using a fixed currency. In 1990 the US Dollar was worth about 140 Japanese Yen; in 2008 the average was about 100 Yen, a loss of about 30%. This is a good time to recall that percentages are multiplicative and not additive. An 80% drop in the index combined with a 30% rise in the currency does not equal an overall drop of 50%, but more like a 74% drop in dollar terms. Even with this adjustment the Nikkei looks in very bad shape.

The fear is that the American and European markets will follow the Japanese, in which case this 12-year low will be consigned to the dustbin of false indicators.

How Much is the World Worth?

An alien race visits planet Earth and they like it so much they want to buy it. “How much is it worth?” they enquire. Hard one to answer. The data that is most available is the gross world product; the global equivalent of GDP. But this tells us the level of economic or monetary activity rather than the value of all the land. GWP in 2008 was about $70 trillion. When one looks at the level of debt and costs of bailouts throughout the world this number seems frighteningly small. Let's make some kind of estimate based on a price/earnings ration. Much of the highest priced land in the world is in metropolitan areas and it tends unless rented to not be earning anything. Let's pick a high but not ridiculous PE ratio of 40, making the Earth worth about $2,800 trillion. However, the current estimate of the size of the financial derivatives market is about $1,400 trillion. Half the world! This figure may even be an underestimate as it combines the regulated exchange traded derivatives (ETDs) and the largely unregulated over the counter markets (OTCs).

But our aliens are a shrewd bunch and they argue that this is hugely inflated; poor stitching, cheap lining, a bit tight round the shoulders - you get the picture. They argue that much of this monetary value is fictitious being brought about by money borrowed on credit being then speculated with in highly leveraged financial products. Any small losses in the underlying assets have become magnified to the point that many businesses have negative real values. Many banks are now worthless. Remember the warning that every derivatives broker gives that you may lose more money than you put in? The problem has become an epidemic and everyone seems to be staring down a black hole. The aliens look smug and say they can wait for the fire-sale.

In the meantime they do a further bit of terrestrial due diligence. George Soros was not in the best of moods. He sees no end in sight for this financial crisis. With reference to the collapse of Lehman Brothers,"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner on Friday. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom." The aliens didn't look particularly out of place in a crowd of students, but did wonder why humans had switched off their telepathic abilities. The old man seemed to be in the midst of his own great depression. "How did you people make such a mess of things?" the aliens enquired. "Ask him." replied Soros, barely looking up but pointing in the vague direction of Paul Volcker.

Volcker had been the Fed chairman in the 1980's and had gained great respect for taming inflation. He was now back as an adviser to President Obama. He said things were going to get worse. "I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world." What happened? Financial innovation is what happened. Borrowing and lending makes a nice tidy low-risk income but that was seen as too boring. When everything is measured by growth rates the financial sector wanted to grow faster – hi-tech finance for a hi-tech world. Except that financial hi-tech came with hi-risk. "These risky securities brought no benefits whatsoever to the public," Volcker lamented, "the invention of the ATM was of far more economic benefit than any asset-backed bond." The two men gulped down their brandies and Soros set to replenishing their goblets. The aliens nodded in agreement, taking cue from the pall that had enveloped the two sages.

On their way back to the mother ship one of the aliens spoke up,"We learnt all of this in ancient history. We could buy this whole place for nothing." They all knew what was coming next. "Let's offer them a new currency. Wipe out their debt and have our own central bank run the world. We could call it the Alien Dollar!" "Perhaps Astral Dollar sounds less threatening, don't you think?" interjected their leader. "They're bright but not particularly perceptive socially, maybe they'll swallow our ADs."

Friday Night is Bank Failure Night Again - 3 More US Banks Collapse

Federal regulators closed three banks in a single day Friday, as the ongoing credit crisis showed no signs of abating. Utah's MagnetBank became the fourth bank failure of the year, and the Federal Deposit Insurance Corp. was forced to directly refund depositors after being unable to find another institution willing to take over its operations. The FDIC later said it has also closed Maryland-based Suburban Federal Savings Bank, and Florida's Ocala National Bank.
From MarketWatch.

With what is becoming tedious and worrying regularity Friday Night is Failure Night. Regulators always seem to choose Friday night after the markets have closed and people are generally going home hoping to enjoy their weekend.

The market timing is obvious; with the Dow dipping below 8000 again three bank failures would probably have spread further panic and a new low for this bear market. But what about those poor sods hoping to withdraw money to spend at the weekend. Hopefully they can still get their money quickly.

This bear market is far from over, however much some journalists are trying to pump it up. This is also time to check once again how much the FDIC is insuring and to implement your own insurance policy by spreading your money across more than one bank.

When to Really Start Buying Stocks and Shares Again

On an almost daily basis some financial website has an article entitled something like “Is it Time to Buy Stocks?” In these times of distress everyone wants to be in at the bottom. But for the investor who has traditionally trusted in managed funds and has little experience in managing his own portfolio this is a highly dangerous strategy. There is a strong case for ignoring all these articles and just looking at the numbers.

This is really written for those people who think that financial markets are complicated and that the whole thing is best left to professionals. The recent fall in global stock markets should have at least made you think that these experts are not really so professional after all. Indeed, for many of them their profits take precedence over yours. Their annual fees are earned whether the fund does well or not. Yes, a well-run highly profitable fund will gain new investors and thereby start on a round of positive feedback. But the art of finding such funds is actually the same as I will describe below.

For those investors with more experience, the thrill and profits from trying to pick the bottom of a market is a genuine driving force. I wish them luck but, as I say above, this isn't primarily written for them. For those who have dutifully put their savings into some kind of investment vehicle and seen those savings dwindle the idea of going it alone can seem daunting. But, I wonder how you initially chose which funds to invest in? Was it from a recommendation from a financial adviser, possibly from your bank or insurance company? There must have been some decision taken right at the beginning. However, since then you have probably lived in the hope that the fund managers know what they are doing.

The point I would like to make is that the transition from a passive investor to an active investor is not so daunting. You don't have to become a trader, watching the markets every day and buying and selling stocks in a frantic attempt to make some profits before the market turns again. I understand that you don't have the time or the inclination to do this, and that as you haven't this would be even more dangerous than doing nothing. But having a look at your portfolio once a week, or even just once a month, is not so much work considering it is after all your money. More importantly, have a look at the charts for each investment. If a page full of numbers makes your head spin then a chart will give you all the information you need to see at a glance if the price is going up or down.

This is where I'd like to introduce one of the most widely used long-term price indicators. Staring at charts of stock prices still won't tell you the future or when to buy or sell. However, adding one simple indicator will make this much clearer. Before doing so let's pull up a chart. There are many websites with financial charts but one of the easiest and free to use is on Yahoo Finance. Just go there and you will see a snapshot of the major stock markets in the world. For the purposes of our example, click on the link to the S&P 500. What I'm about to go through can be used for any stock or share, commodity, investment fund or stock market.

On the main S&P 500 page you will see some basic information about the current day's trading and some news links. What we're really interested in is the chart, so click on that. I think the easiest chart to use at the start is the Basic Tech Analysis one so just click that – the link is on the left column. Along the top row you will see Range and Type options. I actually prefer to look at the candle-stick charts rather than the plain line ones as they also give a sense of the price volatility. So click on Candle in the Type list and you will see the difference. Now let's look at a meaningful range; click on the 1-year chart under Range. Looks ugly, doesn't it! But what is it going to do next? Is it going to take another dive below 800 or hold its nerve and climb back to 1000? None of us knows. Indeed, nobody knows and nobody can tell you for sure. The question “Where is the stockmarket going?” makes work for a lot of writers and pundits but is a question best left for dinner parties and fortune tellers. What you want to know is not what it is going to do but what is it doing right now. The one thing to guide you in your decision to buy or sell is what is the current trend.

To see what the trend is we shall now overlay our first technical indicator – the 200 Day Moving Average. On your chart options you will see one labelled Moving Avg; just click on the 200. You will see a smooth line overlaid on the price chart. This is the running average of the closing prices of the previous 200 days (or 40 weeks). It is one of the primary indicators used by chartists, people who use technical chart analysis on a daily basis. Charts cannot predict the future but they do show the current trend. It will be no surprise to see that the SP500 is currently well below the 200DMA as we are, after all, in a bear market. This is our first clue that it is no time to start buying any stocks at all! As I said before, some of you will get excited by the thought of buying stocks at fire-sale prices but I'm pitching this at those who perhaps have never considered even looking at a technical indicator.

Before we move on, just a few words about using this and other moving averages. The 200-day moving average is used by many as a medium to long-term indicator, showing the trend for possibly one to two years, often longer. It is not in itself a magic wand that will land you untold riches but it is an industry standard. This means that market traders will use this to decide on whether stock prices have finished their current trend and are due for a reversal of fortunes. The fact that so many insiders use this and react to it is one reason why it still works. But unlike secret trading programs this is all in the public domain – you too can profit from it. As you can see, venturing into the world of technical analysis sounds all rather complicated but we haven't even looked at a single equation. It just really isn't that scary.

Right, let's get back to our SP500 chart and zoom out to a 5-year view. Now, looking at a 5 year chart defaults to giving weekly prices rather than daily. On their fully interactive chart you can get a finer view by seeing daily prices for the 5 years. It isn't any more complicated but just has drop-down menus rather than simple clickable links. Anyway, on this particular chart we can see the stockmarket rising from 2004 till the end of 2008. Note how the 200DMA sits below the market during a rally. Also note that the market will sometimes drop down to touch the indicator then bounce off it. In this phase the moving average is known as a support. But look at what happened in the second half of 2007 and especially in January 2008. It looked initially as if this was going to be another bounce off its support but the tumble in January and the failure to break back up above the 200DMA was a dramatic signal that something was very wrong. Those dips below the moving average were signals to start selling. Not all at once, but slowly and with a wary eye if stocks fell further. In May 2008 the S&P 500 tried to rally back up but by now our 200DMA was no longer a support but a resistance level. The failure to break up above this in June 2008 was also another major selling signal. Coming to the present, we see that the S&P 500 is well below its 200DMA and we are well and truly in a bear market. At some point it will rise to meet its 200-day moving average. That could be a few months way, possibly many months away.

As an investor and not a trader you have to think long term and the 200-day moving average is the perfect long-term indicator. Amid the noise and confusion of financial advice you now have one solid technical indicator that gives you a decision making tool independent of personal advice. The 200DMA is not an on-off switch but rather a smooth transition which either confirms the existing trend or starts a reversal of it. As your stock or share or fund starts to approach this moving average is when you should start to be thinking about being active. Back in late 2007 you would have started to sell slowly. There is no shame in selling some stock one month only to buy it back 3 months later at about the same price. These things happen. In January 2008 was a signal to sell some more. And if you were still holding on to all your shares then May 2008 gave you another opportunity to start cashing in the profits of the previous 10 years or so.

For the casual informed investor the 200-day moving average gives a simple indication as to whether we are in a bull or bear market, whether to buy more stocks or sell them. If you are setting aside regular money then there is the temptation to want to invest it immediately. The very simple rule here, with which you won't go far wrong, is that if the price is above the 200DMA then it is safe to buy and if it is below it then it is safe to sell. We have been looking at one particular stockmarket but the technique will work with individual shares and investment funds. Even in a bear market there are some companies that do very well. If you read a recommendation to buy a particular stock then just repeat the above exercise. Yahoo Finance also has charts of all the major stocks and shares. I think this is enough advice for now! I will look at some of the finer points of using this indicator in a future post.

For now, buy stocks if you enjoy gambling!


reprinted at High Yield Times.

Great Depression 2.0 to be Released Soon

Paul Farrell, writing for Marketwatch, has been stirring around that festering brew that is our financial system and with every ladle he picks up more toil and more trouble. But as so many financial news outlets seem unable to deprogramme themselves from their bullish delusion, it is good to see the occasional doom-monger express the same views as so many of the general public, or at least those that post on news forums. The really depressing thing is that stacking all the problems up in one big pile shows how completely rudderless this current financial ship is - it could be argued that a sinking ship has no need of a rudder, just lots and lots of life-boats. Anybody who is still naive enough to think that the big boys at the top know what they are doing is likely to be sold a cut price life jacket that has been slipped through quality control and which won't work when you need it.

With two major crashes in quick succession there is little to be hopeful about. Farrell lays the blame fairly and squarely at the doors of those free-market ideologues who publicly pushed their "liberal" laissez faire propaganda whilst in private being fully aware of what could go wrong... and of how horrific it could be. The big shocker came from the new Treasury secretary two years before the meltdown: Bloomberg News reports that shortly after leaving Wall Street as Goldman Sachs' CEO, Henry Paulson was at Camp David warning the president and his staff of "over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy." Not surprisingly Paulson wants to quit before he can be prosecuted.

But as these people have no regard whatsoever for the wider population, why are people so feeble in their response, so powerless to somehow return the disdain. These free market magicians are of a very black hue, and as we can witness every day they will do whatever it takes to keep your money flowing in their direction. Even if it isn't your money, it will be soon as taxes will go up and jobs will be lost.

The doomsday list has 30 items on it - and probably rising. You can read the full article at Marketwatch, I just wanted to highlight a few of the more nefarious deeds.

America's credit rating may soon be downgraded below AAA. I have been waiting for this but the huge political threats emanating from the USA have, for the time being, saved it from the ignominy of being downgraded. The idea that Treasuries are a "flight to safety" seems laughable given the pathetic interest rates on offer. Indeed the Japanese Yen has continued to climb with respect to the US Dollar at a time when Sterling and Euro are getting clattered. The theory that this recent Dollar rise is due to repatriation of wealth by American companies sounds far more plausible. At some point, the family silver will all have been sold off and the dreaded thought of having to sell all the land and homes comes starkly into view. Also, as unemployment rises so tax returns to government fall off. At some point, the mechanism of paying off credit with more credit will fail at the government level, just as it is failing at the corporate and personal one.

Fed refusal to disclose $2 trillion loans, now the new "shadow banking system". Although listed as a separate item, this actually goes hand in hand with Congress has no oversight of $700 billion, and Paulson's Wall Street Trojan Horse. Taken together, they are further proof that the Federal Reserve is following its own agenda that may, or may not, have anything to do with the public interest, not even for Americans. To see who really benefits from government one just has to look at how Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists. Elections are just inconvenient exercises to preserve the facade of democracy. The media enjoys whipping up partisan feelings so as to avoid real debate. It is quite astonishing how little informed debate has been taking place within the corporate media. The internet has played an important role in this last US election but the power it can wield is still in the testing phase. Many forum discussions are actually led by the corporate media agenda, rather than leading it.

The article ends on an even gloomier note, "At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan's Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America's problems will take years and will burn trillions.

He sees "nothing but large increases in the deficit ... I think it would be worse than the depression. ... Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." It'll get worse because "the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government.""

So what can the individual do? This blog is not really about political activism or lifestyle management, but it is about trying to take responsibility for one's own finances, and especially one's investments. If there is one lesson from these two recent bubbles, is that there is absolutely nobody you can trust to tell you what to do. Learning to look at the numbers and ignore the media is a valuable step forward.

Are we in the middle of a 20-year flat market?

We all love to have our opinions - or prejudices - confirmed by others. The latest Mark Hulbert commentary on Marketwatch does just that. Irrational exuberance redux, or how stocks now lag Treasury bills for the past dozen years, puts some flesh on what I have been saying that stocks have seriously underperformed. Of course, we can all see the disasters that are global stock markets. The important question is whether the pundit mantra that stocks are better in the long run still holds true, and what does "in the long run" actually mean?

"Consider data compiled by Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania. In his famous book "Stocks For The Long Run," Siegel reports the percentage of time from 1802 through 2001 in which stocks failed to beat T-Bills. Not surprisingly, this percentage falls as holding period increases.

But what is perhaps even more surprising: This holding period has to grow to well more than a decade in order for the percentage to drop to below 10%."

After 10 years there is still about a 20% chance that treasuries will beat stocks, whereas at 20 years this drops to just 5.5%. So only after 20 years does the buy stocks mantra come true with any certainty - that's a long time to be chanting.

Actually, if you look at a long term chart of, say, the Dow back to 1920 you can clearly see what appear to be 20-year cycles. There are 20 years of rapid growth followed by 20 years of going nowhere. The periods from about 1940 to 1960 and then 1980 to 2000 saw huge stock bull markets. What we are seeing now, scaled in percentage levels, looks horribly similar to the market of the 1970's which saw its 1975 value being lower than its 1965 one. Good to see that someone has done the number crunching to back up this purely visual feel.

What this means is that we could well be in the middle of the current 20-year flat cycle. In such a market the buy-and-hold investor is going to be treated very poorly. The only options are either to adopt a market timing strategy, or to change the stocks to bonds weighting dramatically, or both. This also means that in spite of all the bullish media talk, investors may have to keep chanting for a long time to come.

Don't Believe The Pundits - Leave Stocks Alone For Now

Don't you get a touch irritated when you see pundits trying desperately to talk up stocks as you watch their prices sink ever lower? At what point do you just stop believing them? There are many situations in life where it pays to look at what people do, not what they say. Investments are a perfect example.

The FTSE recently failed to even bang its head on the 100-day moving average, never mind reaching for the stratospheric 200DMA. It has since come down to break the SAR and MACD looking red.

S&P 500 looks even worse. If anything, this is time for another round of shorts.

For the stock investor, this is absolutely not the time to do anything other than gamble. If you find a company chart that looks positive, then go for it, but remember not to buy anything from broker recommendations - before you even read the review or hear the interview the price will have moved already.

This is why my aim here is to show how some fairly simple indicators can be your friend, even for people who see themselves as investors rather than traders. I will not be giving daily advice but slowly going through how to apply indicators to investment strategies. The last 10 years have seen virtually no returns from the world's stock markets. Compare this to holding bonds, or even compounding a deposit account.

The really big indicator that we are very much in a bear market is the 200DMA. For the FTSE this is around 5200 and for the S&P at about 1250, and we are well below both of these. We've just gone through a few weeks in which markets have desperately tried to bounce off the last lows, but looks as if we are going to retest them.

Don't believe those people who keep calling "bottom" every time we hit a new low. Of course, they will be right, eventually, just that nobody knows when, which is as useless as not having read the advice in the first place. Trying to call a bottom is often seen as trying to catch a falling knife. A better strategy is trying to catch it off the first bounce. I haven't written much recently but am coming back on stream, so to speak, so let's watch closely what happens this time.

Bloomberg Files Lawsuit Against Federal Reserve Over Failure To Disclose Loans

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
(Bloomberg)

This is precisely what many feared. Firstly, that $700 bn was nowhere near enough, and secondly, that without a precise protocol about what transparency means the Fed will hide behind smokescreens of its own making. In September, both Bernanke and Paulson testified that they wanted the whole process to be transparent, like children promising they could look after the party food without eating it.

Now, the Federal Reserve, with what seems like the obvious complicity of the Treasury, are defaulting on their promises. These are not just promises to Congress, they are also promises to the American people and, because of the scale of the problem, to the world at large. This is yet another indication that people should never trust bankers and governments. The primary aim of governments is to keep control, with the supposed will of the people being a subsidiary concern once the electoral begging season is over. The primary aim of central banks is to keep control of money and to make profits for their owners. The US government is a client of the Federal Reserve. If that government either does not or cannot extract the information they need, or they can and do but are just not telling anybody else, then they are negligent in their office. Remember that Congress was bounced into the bailout bill be apocalyptic visions from both Bernanke and Paulson. Because of all the arm-twisting that was necessary just to get the bill passed, the oversight rules were big on words and small on specifics.

The corporate media is also complicit in this propaganda. However, occasionally one hears the odd independent analyst make some good points. Yesterday there was one talking head trying to talk up Goldman Sachs stock, for no good reason other than that the price is now so low. But as we are seeing, stock prices can quickly go to zero. Anyway, our bullish advisor was then contradicted by a fund manager who said in his opinion Goldman Sachs was vulnerable to changes in staff at the Treasury and Fed. It is well-known that Henry Paulson and many others are all fully signed up members of Goldmans and that more than a helping hand has been given to this bank compared to others that were fed to the lions. Nobody yet knows what changes the new president will make and whether he too has been brought into the fold, but such uncertainty is precisely what worries investors.

The defenders of secrecy - as the Fed are not answering the phone - claim that disclosing every loan or agreement could signal to the markets that the companies involved may have greater problems than anticipated and could lead to further market volatility. But the main reason for all this largesse was precisely to bring back market confidence. The fact that professional investors and fund managers are worried means that everybody else should be too. This slow motion crash is nowhere near over and any pundit seen talking up stocks is doing it for their own interest rather than the investor's.

As is often the case with these big decisions taken with public money, the individual feels powerless to do anything. The huge public outcry at the bailout bill was fended away and after all the emails and phonecalls and huffing and puffing the house of fiat money is still standing. I still think there is one protest that the public can still do. Take your money out of the banks and put it into credit unions. They operate under different rules to commercial banks and are not exposed to the credit crisis because their rules stopped them from ever participating in either fractional banking or leveraged financial products.

Banks Demand Fantasy Fair Value

Investors locked horns with the banking industry on Wednesday on whether U.S. regulators should suspend or change accounting rules used to value assets such as mortgage-backed securities.

Fair value accounting, which requires assets to be valued at market prices, has been blamed for billions of dollars in writedowns by some U.S. banks and policymakers. But investors and accountants say the approach gives investors a clearer window into banks' balance sheets.

The U.S. Securities and Exchange Commission was charged by Congress to produce a study by early 2009 analyzing the effects of fair value accounting rules on financial firms' balance sheets and examining alternative accounting standards. The SEC held a public meeting on Wednesday to gather information on the accounting rules, also known as mark to market or FAS 157.

Charles Maimbourg, senior vice president of KeyCorp bank, told the SEC that what management intends to do with an asset should help determine the fair value of the asset.

"You have to include management intent. They have opinions, they are in the best position to do that," Maimbourg said.

Under the fair value rules, assets can be valued based on a simple price quote in an active market. But hard to value assets rely on management's best estimate derived from computer models.

Given that there is no market for certain securities such as those linked to mortgages, banks say they have been forced to value assets at fire sale prices they could fetch in the current market. That is misleading, they contend, because the banks do not plan to sell the assets immediately and their value could rise in the future.

"There are loans that banks hold and intend to hold," said Maimbourg. "The fact that the market will only pay us 20 cents ... (is not) a reason to mark it down to 20 cents on the dollar."

Patrick Finnegan, a director at CFA Institute, disagreed and said allowing management intent to influence the value of an asset was an "insidious" idea.

Reuters

==

This is quite astonishing. The idea is that by sleight of hand companies can massage their balance sheets to make themselves look better. Indeed, I heard one senior commentator on Bloomberg some days ago openly say that as far as he was concerned banks should value these "assets" at whatever level is necessary to make their balance sheets look good! A blatant public plea to companies to swindle their investors.

And as for the pathetic quote above, that just because an asset is now worth 20% of its "value" as it might be worth more in the future companies should be allowed to reprice it, they should call it "unfair value accounting" or "fantasy book value". That is the whole point of fair value accounting - by booking it to 20% now, if the value should rise to say 50% then that's a profit compared to the present valuation. By creating a fantasy valuation companies are not only misrepresenting their liabilities to shareholders they are also going to be presenting losses for years to come as they chip away at these "liability assets".

As an example, if I have an account with a broker I need to place a deposit for every trade. The beauty of leveraging is that I can place a fraction of the real value of the trade. This increases profits in percentage terms. However, if suddenly the market for an instrument evaporates and the price drops to zero, my broker is going to phone me and ask me to either put up the money for the whole trade or close that trade. If I say to him that surely this is just temporary and that once markets stabilize the value will look less distressed, the broker is going to turn round and say to me,"Sure, you may be right, but that's your risk! At the moment it is worthless - put up the money on the assumption it remains worthless."

Surely if a market in a particular instrument just disappears, that is telling us something important. The problem with leveraged trades is that one can lose more money than one has put in. If I buy a stock at $100 but only need to deposit 10% of the price, my liability is just $10. If the price rises to $110 I have made $10 profit. Notice that the asset price has risen 10% but my profit is 100% - that's the nature of leveraged positions. However, if the price drops to $50 I am $50 down with only $10 deposit. I have to find the money to cover that extra $40 loss. As far as my leveraged trade is concerned my asset, the stock, is actually a liability, and will remain so until the price goes back to $100. Perhaps these bank "assets" are worth negative amounts of money. Perhaps these assets should be moved to the liabilities column. Then we can see their fair value.

Fed Cuts Rate to 1% - So What Now For Your Investments?

Yesterday the Fed's FOMC cut US rates by half a percent to 1%. As predicted, the dollar has weakened, losing about 10% in two days. The corporate media loves to talk up stocks (especially their own) but the effervescence went flat pretty quickly, with the Dow index doing its now legendary nose-dive in the last 10 minutes. The Dow plunged some 400 points in those closing minutes. There's confidence for you!

The resistance level it is trying to break through is around 9350, which was last week's high. It did peer above it yesterday but then suffered altitude sickness and collapsed. The level above that is around 9800, but if it fails at 9500 we continue to be in a downward trend. Nobody knows what will happen and anybody that says they do is just guessing. As I've said before, shouting "bottom!" every time we hit a new low will be correct one day, we just don't know when.

However, US interest rates cannot go much lower. They could fall to Japanese levels but that is absolutely no guarantee that it will help stock prices recover. It is a sobering thought that the Nikkei peaked at about 39,000 in 1989 - it is now, 20 years later, at about 9,000. It has lost some 75% in 20 years. Beware of the broker mantra that stocks always outperform bonds.

Treasury 10-year bonds are still yielding 3.8% in spite of the discount rate dropping to 1%. In 10 years, compounded, that comes to a 45% profit - after 20 years the profit would be 110%. Many people have now been through two serious bear markets. The promise of retirement wealth may ring hollow to many of them. All pundits repeat their sacred mantra, mainly because they cannot breathe without their broker fees, but investing in Japan may be a warning that things do not always get better. I think many individuals need to carefully rethink their retirement investments. Holding a majority in sovereign bonds and having the stock markets and commodities as the froth on top would have been the wisest thing to do 20 years ago. It may well be the wisest thing to do for the next 20 years.


This article also appears at Xomba

FOMC Meeting - Time for a Dollar Collapse?

Later today the Federal Reserve's Open Market Committee will announce its decision on US interest rates. Many are expecting another half a percentage point cut, bringing the discount rate down to 1%. What effect will this have on the dollar?

We have seen the dollar rally spectacularly in the last couple of months from an all-time low of the dollar index. However, this has been largely due to the fall in the Euro and Sterling, which account for a majority of the dollar index. The dollar has actually fallen against the yen.

Now, the media pundits are nothing if not cliche-merchants, and the mantra has been that the resurgent dollar is due to a "flight to quality". Quality!? With so much dollar wealth being destroyed it seems a flight of fancy to see the remaining dollars as quality. And at potentially just a 1% yield that seems very poor value - OK 30-year treasuries are still around 3%, an indication that the market doesn't see such low rates lasting for long.

But that is partly the point, at 1% there is very little lower it can go. What this also means is that bond prices - treasuries - cannot go much higher (unless the US has a credit downgrade). So by the end of today we could see treasury yields at their lowest and their bond prices at their near-term highest. If I was a foreigner holding billions of dollars worth of treasuries, this looks like a good time to get rid of them.

One thing that seems to be being forgotten is that a huge amount of US debt is in the hands of foreigners, both corporations and foreign government sovereign funds. This rise in the dollar seems to me to have little to do with quality and everything to do with corporations needing to liquidate assets in order to buy dollars so they can keep afloat as credit is expensive or non-existent. As has been noted elsewhere, this is not a flight to quality but a concerted repatriation of global dollar assets. This is a flight to self-security! However, what happens when other governments, dragged down by the US mess, decide that it is in their own self-interest to repatriate their own foreign investments?

The decisions of the inner sanctum of central bankers may well be a mystery to most of us. The manipulations are evident but in whose interest is often less so. However, if Americans are being bounced into repatriating assets, then everybody else in the world can do the same. Once treasury bonds have maxed out, what is the point in holding them? Indeed, with the combination of the dollar rally and bonds rising, many foreigners are holding onto very large profits from the last couple of months. What will happen when those profits are taken? What will happen when other countries start doing the same as the USA?

The markets are currently predictably unpredictable. But I for one will be keeping one eye on currencies, one eye on treasuries and the other on the stock markets. I know, it's not easy!


Also posted at Xomba

Trading Signal: short FTSE

Damn! I'm going to sound like all the others, giving trading signals after they've already happened. Well, sadly, that's how it is going to be this time. The reason was that I'd started writing on the use of IG Index's charting software, and one serious bug in it.

The signal was to short the FTSE. This I actually did at 5440, a few days ago, only to discover the faulty signal generated by the chart I was using. The SAR on a standard daily chart was to be triggered at about 5410; which has now happened. So, in this case I was lucky to get a few extra points, but did also have to suffer the FTSE climbing back up to 5500.

I write this as the FTSE is sitting at 5340 and itching to take another dive. As we are potentially looking down the same well as a month ago it perhaps isn't too late to short here.

Anyway, I'll write about the chart bug later.

Back Again!

Have had a month's break from this blog. This has been a time to think of how to carry on writing, and how to structure it. Basically, the idea of looking at live short-term trades is being abandoned for now. I'm not sure how many people are reading this - probably very few from the comments - so the work involved in trying to write as quickly as possible just doesn't seem worth it. Also, as there is always a delay between trading and posting, most trades are likely to have disappeared by the time my comment gets online. All of which has made me think that I will have a different focus from now on.

The Trading Day pages will look at current trends and look forward to levels at which indicators give trading signals. I will start a new section entitled Trading Signals, which is when the market is very close to a trading signal. The point here is that as a reader, I hope it will be more useful knowing when a signal is about to appear, rather than just knowing that it has already been and gone. The latter just seems to me fairly useless and just states the obvious.

I will also continue to look in detail at technical indicators and at the different types of contracts available to spread betters. Also, my occasional series of The Clouded View will remain occasional as I myself tire of reading newsletters that actually don't have anything to say but feel obliged to fill space every week.

So... lets see how round two goes!

Spread Betting Quoted Prices

Spread betting companies such as IG Index will be losing money this week. They always do when the market is so obviously moving in one direction. It is one of those strange industry facts that spread trading companies do not hedge their positions, instead relying on their spreads and market volatility to do the job of losing money for clients. Only a small percentage of traders make regular profits. However, when a market makes a decisive move in on direction - down in this case - everybody jumps in with the same trades and everyone is making money. Everyone, that is, apart from the spread betting company.

There are always tell-tale signs when this happens. In extreme cases you will see the prices indicating telephone dealing only. In cases like the last two days you will see prices being manipulated to reflect not just the underlying market but also the profile of bets on the trading company's book. Remember that spread betting companies are not market brokers but bookmakers. They may look and smell like brokerages but the taste is as much casino as it is stock exchange. Contracts such as binary bets and daily options are not covered by the FSA, and it was with the daily options that I finally saw the most flagrant price fixing.

I was trading Wall St daily options and had made good profits on put options but also had a call option hedge. Late in the session the Dow rallied bringing that call option into profit too, which was nice. However, as I stared at the Dow index price and my option price I was getting worried. The option was being priced at below its market value. At one point the market was 45 points above the option strike price and yet the option was being priced at 35 points - a huge 10 points below its value with no time value, or indeed negative time value, to speak of. I was tempted to wait for the market to close and then the option would have closed at a fair price. However, the indicators were pointing to another turn around so I sold it with a pathetic profit. It seems obvious that the calls were all hugely under-priced and the puts over-priced, no doubt reflecting the profile of the positions taken. But in my case this was a raw deal as I was already holding a position. This is the first time I have actually seen such a blatant mis-pricing. The only lesson is to be aware that these things happen and allow for it. During a "normal" day this rarely happens but you will see small price spikes as they are either adjusting the volatility setting in the options formula or, yet again, just trying to balance their books so they are not over-exposed and in the hope people will close early if they see the price start to go against them. The other option is not to use daily options, but sometimes they are useful, especially in a highly volatile market. Just be careful.

Trading Day

If June was depressing for stocks then July has so far been indecisive. The FTSE has traded in a narrow 200 point range. The wise thing would have been to just stay out and do nothing, as the intra-day volatility has increased so the indicators so useful in a trending market have been failing. A lesson for the future. The last time the FTSE did nothing for so long was last October, which just goes to show, if any more proof was needed, that we are at a decisive level. As bad news just piles on top of more bad news the support at this level seems to be purely technical. That doesn't mean the support is not real, just that historically the oversold indicators have predicted a reversal, even if temporary. For example, on 11 June the daily RSI showed an oversold market and the FTSE went up for 4 straight days before continuing its downward spiral. It could be as little as that or it could be much larger. The RSI gives no indication of the size of the reversal. As I've said before, it could be just enough to switch off the oversold red light. Fridays are usually volatile days, although if nothing much happens will hang on to the options till Monday as the Dow has been making significant moves in the last hour.

Trading Day

Nothing quite like a sucker's rally to brighten my morning! The Dow took a nosedive last night after Europe tried to rise. Perhaps time to decouple a little as the US and Europe are in slightly different economic cycles. Today will be the eighth trading day with indices stuck in this narrow range. We may end up with a similarly shaped day to Tuesday, with the FTSE and DAX having been pushed down overnight and slowly regaining their losses until the Dow opens. Nobody really knows! To short the FTSE again I want to see 5350.

Trading Day

A look at today's daily charts shows that some indexes have a bullish air about them. Perhaps all this talk of bottoms will stop being a fetish for a while. Also, I said before that the oversold indicator was likely to put a brake on the fall. Not because the market cannot fall further but just that technical analysts would expect some kind of rebound. The most telling moment was when the Dow hit 11150 bang on the nail and spiked up in what had all the hallmarks of automated computer trades.

So, the FTSE has hit the SAR and MACD is positive. One can never tell how far markets will move but the first test is the 30DMA at 5643, then the 5700 level. The whole thing could sink like a lead balloon if oil starts to rise again. There is one small crumb of comfort here in that the Chinese authorities have ordered all industry around Beijing to close during the Olympics, for fear of showing the world what a polluted capital they live in. So putting aside woeful corporate earnings, on just an energy point of view it is possible to have a month upwards.

TRADE
FTSE AUG 5750 CALL
BUY @ 60.3

The DAX has the same shape as the FTSE, the MACD is slightly positive but the SAR has not yet been taken out and stands at 6418.

The Dow also has the MACD positive but has hit the SAR on both the up and the downside in the last couple of days and I really would like to see it at 11400 before committing to more than excessive froth.

All three indices have come off their oversold indicators. The signs of an upswing are there in all three cases. However, I have only taken one call option out of the three. We should know this week if this is more than noise. Looking for FTSE above 5500, DAX above 6400 and Dow over 11400.

Trading Day

Half an hour ago IG Index was quoting the FTSE as opening 105 pts down, sitting at 5400. This seems to have more to do with the Asian collapse as the Dow is also quoted lower than last night's close. Now, we often see that the cash market needs to catch up with its out of hours prices, so with such a big drop I'm sticking my neck out.

TRADE
FTSE Daily
BUY 5420 call @ 26.6

Yesterday the FTSE was just 10 pts away from breaking the SAR indicator, which today stands at 5518. This is the first indicator to be flagged for any upward movement. The last few hours have shown it was wise it didn't touch it! The 30DMA is somewhat further away at 5645.

Trading Day

Another week, another bear market. A bright and sunny morning has quickly clouded over as FTSE heads for 5400 and the DAX 6300. Dow finally comes back into play later, and we shall see if it gives up on 11331. Talking of bears, the FTSE enters bear territory at 5400, hence has been flirting around this level for a week. The investment banks have been issuing conflicting advice of late. On the one hand we hear attempts at bullishness stating that equities are historically cheap and that much of the bad news has been factored in, and yet at the same time we see stocks downgraded on a daily basis. A case of watch what they do, not what they say.

From now on I will also be looking at the DAX. The FTSE and DAX have fairly similar shapes in the long term, but intra-day can behave somewhat differently. The DAX is largely composed of industrials and financials, without the heavy weighting in commodities. Hence, the DAX reactions to commodity and currency movements seems more clear cut than with the FTSE. We shall see if this continues to be the case.