The great in Davos are confused and uncertain

 I read from the BBC news to-day that the heads of state,  CEOs,  finance ministers and other sophisticated leaders gathered for the last day of the annual Davos forum are not sure what's going on either. The volatility of these markets is unparalleled. In "Manias, Panics, and Crashes", Charles Kindleberger studies the global interrelationship of these events which are so increasingly obvious in the daily media.

The general collapse of the indices late Friday afternoon did not continue in spite of on going demonstrations in the streets of Egypt. The price of oil rose, of course, supposedly because of fears that the Suez canal would be blocked, but these days I doubt that would  make so much difference, since the really giant tankers can't get through there anyway. The price of oil always rises when there is threat of war.

This morning I bought more shares of both TSTC and CREE instead of fiddling with the options as I had planned to do. I was too late to take a promising position in the options. The best profits there are only to be had very near to exaggerated tops and bottoms. In the case of both these companies, things seem to have settled down from the initial exaggeration. Both actually make useful products, actual profits, and growing revenue- the kind of reality that would have made them investments in the old days before flash trading. I am still buying them as investments, but one has to have a high tolerance for the interim swings- a prevailing belief that life is not over even when I lose!

I wrote about  TSTC a little while back, when it  was savaged by an anonymous blogger and dropped 28% (The blogger undoubtedly made big profits from his shorts)

CREE anounced earnings very slightly less than the pundits had expected, and added that their next quarter would  be quieter than usual. For a few percent less profit, the stock immediately sold off 15%  I already hold shares in a tiny Canadian company (Carmanah) that makes LED lights, but I had been looking longingly at CREE for some time- it is the elephant in that sector, and the sector is growing 40% annually.

Revolution in Egypt

The US markets all plunged together late on Friday. Apparently this is a response to public upheaval on the streets in Egypt. It seems that the investing class worries that if thirty years of tyranny end in Egypt, corrupt agreements will be at risk, and profits may suffer. Certainly my profits have suffered, or they would do if I were to sell now.

I can't help but hope that they are successful in getting rid of Hosni Mubarak anyway. Even if popular sentiment is unsympathetic to the needs of global corporations, I feel confident that global corporations will survive. There is supposed to be a general global economic recovery underway. It is probably a good time for addressing the needs of ordinary people, and it seems the young people protesting on the streets are mostly interested in basic stuff, rather than religion.

I think I will be selling puts on some of my favorite companies tomorrow morning: nice little short term profits (6% in a month), and in the worst case I end up instead holding companies I like. TSTC, maybe CREE

Green money, green placemats

On Friday, the Dow was up, NASDAQ was down, and the S&P went sideways. According to "The Economist", analysts from Goldman Sachs in New York think this will be an up year for the market because of the growth in Brazil, Russia, India and China,while analysts for Societe General in France think it will be a down year because of difficulties in the economies of the Euro-periphery (Greece, Portugal, Spain and Ireland).

CNN Money reports that nearly half of the companies in the Dow Jones industrial average are scheduled to release quarterly reports this week, and expectations are very high for stronger-than-anticipated profits and sales. The economy has supposedly been showing signs of strength recently, with many economists raising their forecasts for 2011 . None of this will necessarily make any difference to the direction of the markets.

Government stimulus programs fade are supposed to be the origin of all this happiness, yet "If it turns out that the economy needs another round of government aid in the form of liquidity, I think you'll start to see the market decline into the summer as investors send a message to the Fed," according to an investment guru.
So much for the opinions of experts.

I can't imagine who these "investors" are, or why anyone would pay attention to any message they would send. I mean, except that loads of money are apparently flowing into and out of one thing or another according to the whim of the computers talking to each other in parking lots in New Jersey. (See my blog on Canadian banks & high speed trading.) I am going back to making quilted green placemats from scraps.

High speed rail

  China is poised to build a national system of high-speed trains that go 300mph, and Brazil is investing heavily in trying to ease congestion in its mega-cities. Eurostar has claimed a 'renaissance' in rail travel after experiencing  a 3% growth in passenger numbers despite the pre-Christmas snow disruption. The Guardian asks," are we entering a new golden age of rail travel?" On Friday, new EU rules came into effect that encourage high speed rail across Europe. They also give passengers  rights to cash compensation for delays on international travel. If the train is 60 to 190 minutes late they will receive 25% of the fare and if longer, 50%. Passengers will also be able to receive free meals for a one-hour delay and accommodation where the delay has forced them to make an overnight stay.

  Meanwhile, in the US, governors of Ohio and Wisconsin have turned down a combined $1.2bn in funding from the 2009 economic recovery act, dedicated for high-speed rail, and asked if they could instead build more roads. This outraged commuters, but is certainly gratifying to the auto and petroleum industries. It reprises early twentieth century  responses of entrenched interests to developing  auto makers, all the time New Yorkers worried about how they  would succeed in clearing the streets of the growing volume of horsesh*t.


 The whole idea of government imposing  passenger protections seems to insult to American "pioneer" myth. Every person needs to stand completely on his "own two feet." The masthead of "Investment Business Daily" reads  "For those who choose to succeed". IBD uses strict transparent criteria for assessment of investment opportunities,  a really scientific approach. Their commitment to educating investors is clear, and was certainly useful to me. I recommend IBD for people who want to learn how to invest, although I gave up my subscription because  their editorial pages don't use anything like such a reasoned  approach to  social ills. After 40 years in medical practice, it was clear to me that in the real world, a lot of people will never be equipped to stand on their "own two feet" (or to succeed.) Those editorials were another case of too much horsesh*t to bear.

I'll be reading about  Bombardier....the world's largest maker of "rolling stock". 







.

Banking again

    J P Morgan Chase, has set aside $10 bn  for the salaries and bonuses of the investment bankers it employs (an average of $360,000). The second largest bank in the US this morning reported a 47% jump in profits for the last quarter of 2010.  European government debt (from bailing out banks) has not deterred China from buying European government bonds. With this reassurance from human overseers, our upward trend in the markets is now for three months old, quite a long time for a volatile system run by computers talking to each other in New Jersey parking lots.
   Banker's Community Trust (BTC) has started up. Even Allied Irish Bank (AIB) has a little smile on its face. Morgan Stanley is up: it remains a nice candidate for selling alternate calls and puts

Volatility and trust

Yesterday at noon, a  blogger  alleged that  a Chinese company I have owned on & off for the last  few years  had sold shares on a fraudulent basis. The stock immediately plunged 28%.  The company (TSTC) is  profitable, but they did report a month or more back that some of their clients  were slow to pay. An earlier commentator had suggested they would have trouble because of cash flow. They had many orders to fill, and maybe not enough cash on hand for the raw materials they needed. They could get money as a bank loan, or sell shares, so they sold shares. Of course, the company's people were asleep on the other side of the world when the smear hit the press.

John, who looks at companies from the point of view of the basics, first bought this company at about $6.00 before the "great crash", held it  while it dropped to $.75,  sold it out last year at $24 and has bought and sold it from time to time.  It first caught the eye of the "players" last year with its huge rise, and has been very volatile ever since.  I sold my holdings yesterday anyway, because even if  "Tyler Durden" (pseudonym of the anonymous blogger) is the scammer, people will take a while to sort it out. (The principle is "your first loss is your best loss"....which is true sometimes)  I also sold puts. The stock is back up 11% today.

This is exactly the kind of volatility I have been writing about lately (not wishing to experience it myself, of course) It summons up all those issues of trust. Are the Chinese companies really more corrupt than the American ones? How much protection does American law offer?  In spite of the technological advances that make much more information available to small investors than was ever available in the past, it seems to me we never know what's going on. At least, I don't. I like the market, because nothing else keeps me paying such close attention to the world, and somehow that seems good to me.

From Canadian Banks to high speed trading

Canadian culture is sufficiently distinct from US culture to frown on the obvious levels of financial excess that led to the recent financial meltdown. Canadian banks were largely spared from the worst of all that because they are more highly regulated. In my Canadian affairs, I  bank with Toronto Dominion (TD), and I  cordially dislike them. They could be the Canadian bank  to compete with US banks. They actually have moved into the US quite successfully. As my mother used to say, "they are up to all the tricks". Even their website is annoying, and as for service, forget it! Not something they provide (although as a Canadian, I'd have to say that  goes way beyond banking n my home and native land.) No such consideration is supposed to matter to  investors (including me). I found TD on a list of "highly rated large cap stocks", along with the Bank of Nova Scotia (BNS) and  Suncor (SU)

I'm not sure what happened to the Royal Bank of Canada, which did not make that particular list, and calls itself  RBS here, well understanding that neither "Royal" nor "Canada" would be a winner. Sneaky buzzards, "flying in low under the cultural radar", as was once said of another Canadian who succeeded in the USA. I always disliked banks, and never invested in any until after the crash, when because of volatility they became attractive for option trading.

 Reuters says "any weakness in earnings reports during the upcoming earnings season (Jan 4-Feb 15) will give traders a reason to pull back from the rally of recent weeks, which stalled on Friday on bank stock losses and lackluster jobs data."  Nevertheless, according to the NY Times, the biggest "upcoming jump" (assuming there are upcoming jumps)  is  expected  from  "financial services", with profit growth of 250%, (Standard & Poor figures).  

It depends on your time frame. My dear friend Linda sent me an article from the NY Times reporting that these days one new strategy is to use powerful computers to speed-read news reports automatically, then to let the machines interpret and trade on them. High-frequency traders now account for 56 percent of total stock market trading. A measure of their importance is that rather than charging them commissions, some exchanges now even pay high-frequency traders to bring orders to their machines. This is not a time frame that has any interest for me. I wonder about  "any weakness in earnings reports during the upcoming "earnings season"  will give traders a reason to pull back from the rally of recent weeks" .... Which traders do they mean? Not me, for sure. 

“Markets are there for capital formation and long-term investment, not for gaming,”says Michael Durbin,

author of the book “All About High-Frequency Trading"  How ingenuous. Bah, humbug. Since I've got my eye on Canada, I'm thinking of Suncor instead- another very dirty bunch.

Creating trust and tea leaf reading

This morning, it looked as if the indices were all topping. This afternoon, there does look like the beginning of  a downturn- whether a real downturn, or just another waver on the trend remains to be seen. My Allied-Irish Bank is further down the drain (glug, glug) whereas somebody may have started to buy back Bankers Community Trust in earnest.

To-day's reports confirmed that US unemployment figures remain grim: 9.4% in spite of a flutter early in the week about private employment numbers improving.  I see that there is widespread disenchantment with investing in China because Chinese figures are "unreliable", and it does seem that there is a good deal of underhanded wheeling and dealing there..

 On the other hand, Bloomberg had a review article to-day about Goldman's $1.5 billion Facebook  stock offer to clients, as an illustration of its "potential conflict of interest" in the face of news that Goldman did not promise not to sell its own $375 of Facebook holdings without warning the clients to whom it is selling this stock. After all, the clients are wealthy and sophisticated.

This summoned up the story how Goldman got sued for selling its mortgage bonds to investors in 2007 while its hedge fund went short at the same time. They justified this by claiming their investors had been among the "most sophisticated mortgage investors in the world" (therefore capable of making their own decisions) Actually, I think you could say the figures were unreliable.

Michael Farr, president and founder of Washington-based Farr, Miller, & Washington, LLC told Bloomberg, "Having an obligation to your shareholders as an investment bank to remain profitable means you're going to be making money off your clients, and so there is an inherent conflict." A very funny footnote to the whole matter is that in response to its legal challenge, Goldman set up a committee! Yes, a "business standards committee" to "reinforce  client focus" and "improve upon transparency of our activities". Improve upon transparency means going from completely opaque to just a little murky, maybe.

C$ off its highs, indices topping..banks taken care of

I quote Rep. Spencer Bachus (R-AL)who says “my view is that Washington and the regulators are there to serve the banks.” Certainly this is in line with William Greider's "Secrets of the Temple", which was our breakfast reading last fall. 

Yesterday's news was of increased hiring by the private sector: to-day's that jobless claims are up anyway.

Many big banks (as well as brokerage houses) make money  from trading commissions, which have been hurt by the 16% drop last year in trading volumes (they are 24% below 2008 figures). Investors took 80 billion out of their 4 trillion in stock and shifted $250 billion into bonds in 2010.

It was a good year for company profits, and a second year of rising stock markets, which was generally not predicted back in Jan 2010.The NY Times now says the past  year's profits generally were bolstered by job cuts and restructuring rather than by revenue growth, an approach that may not have much further to go. 

Nevertheless, there is apparent investor enthusiasm  that the Bush era tax cuts were prolonged, and that a further 600 billion was pumped into the system by the Federal Reserve in November. Surely the banks will be saved!

Our bank holdings are MS, BTC, and AIB....very small amounts of the last two. BTC  could be a turnaround (up 24% this morning, and still deeply underwater for me) I have AIB long term call options, a risky bet suggested by Chris that the Irish pension fund will not disappear. MS is what I call a "steady honker", which John had the chutzpah to buy at the very bottom of the '08 crash and to use profitably in option trading while it was volatile.

To-day's private employment figures are up

Unemployment stands at 9.7%  (not very accurately measured, it seems) Anyway, the unexpected rise in privately generated  employment is encouraging. This means the markets can resume the trend of the moment....UP But of course, the gambler asks, "for how long?"

The Baltic Dry Index has fallen dramatically, indicating low volumes of world shipping, and the world price of basic foods are up....usually a harbinger of rioting and social ills. This fall in world shipping puzzles me in light of the wave of optimism I read about business for this year. How can business be doing so well if we are not seeing shipping? I understand that business can do well while people can't get work (at least, it can do well for a while, although eventually they do need people to have money to buy their stuff) But don't they need to be shipping?

Do the stock markets have  anything to do with the real economy? I suppose they do, if you can live through all the volatility created by casino trading. Anyway, I hope so.

Why don't I want to look at my accounts?

Really, that's a pretty good question. By "good", I mean it's a question that reveals to me how much I love things to be certain and sure! There is also my bias against wasteful meaningless activity. Also, I would like "the system" to be rigged in favor of the good of the enterprise "humanity" as a whole. And I have hotly contested the suggestion that my activities in the market were "gambling"

Well, ho, ho to all that. After the US elections, the indices roared up with what looked to me like a vote of approval from the "investing class" (whoever they are, given the low volumes that were trading all through the fall.) I think they must be all those clever young men employed by banks, hedge funds, etc. They graduated with my son and went into "financial engineering", thus being lost to any worthwhile endeavors, at least for a decade. They program computers to do the trading, and the profits are best when there is volatility...great for day trading, good bye investment. I don't approve.

Then the indices all fell back to where they had been before the election, and THEN they resumed the upward movement that has been going on all fall. Now they are hovering at new highs, maybe reflecting the consensus that 2011 will be a better year for the companies than 2011 was. For sure the interests of the professional investors have nothing much to do with any interest in the "real economy" where people make things and do things that other people need or can use. It seems unlikely that there will be much growth in employment. It seems likely that the American dollar will fall.

I don't like gold in spite of the way it has been going up (it did crash today) I do like uranium and alternative energy (solar, geothermal, wind). I do like China in spite of the way it is dealing with such toads as Robert Mugabe. Like, not like, invest, gamble...hello 2011! I call this "the private investor's puzzle"....but maybe it is the "local gambler's conundrum". My accounts are up.