Sacrificial Bear

On the day that Bear Stearns (BSC) was initially sold to JPMorgan (JPM) for $2/share, we mentioned that the firms with the ability to make it out of this mess would end up in better positions since they could snap up business from one of their major competitors.

Ever since Bear pretty much went under, major banks and brokers have come back quite a bit. While Lehman (LEH) is still down 29% on the year, Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BAC) and Merrill Lynch (MER) are now down less than 10% year to date, while Wells Fargo (WFC) and JPM are in positive territory.

Market Rallies Since the Credit Crisis

Since the onset of the credit crisis last Summer, the S&P 500 has now had four rallies of more than 5% (using closing prices), which are highlighted in the chart below.

Many investors believe that the market has a different and more positive feel during the current rally, and when we compare it to the prior two rallies, they have a point. Prior to this run, the S&P had two rallies that lasted two weeks or less. With the current rally continuing on for more than thirty trading days, things should feel different.

However, before we all call an official end to the market's declines, we would note that from last August through October, the S&P 500 rallied by more than 11% over a 38-day period. The current rally, on the other hand, has shown a gain of 9.77% over a 33-day period. Until this rally shows that it has more staying power (in time and/or magnitude) than any of the prior head-fakes, investors should continue to keep a cautious stance, and keep tight stops on their short-term positions.

With a flood of economic and earnings reports, an overbought market, as well as a Fed meeting which could set the stage for a pause in rates, the reaction to this week's news will tell a lot about the market's health.

Baseball and Markets

First, it is a long season. Although you have to play to win every day, no team ever has. Winning 100 out of 162 is considered a mark of greatness. A trader who wins 60% of the time day in and day out will probably also reach greatness. There will be losing days in the market as well. Shrug them off and learn from them. There is another game tomorrow.

Swing for the hits. the home runs will happen on their own. Sluggers who routinely swing for the fences every at bat may hot a lot of home runs. they will strike out a lot as well. Good hitters look to make solid contact knowing that the home runs will come when the conditions are right. a fastball inside or a curve hanging out over the plate. The major concern is to put the ball in play and advance the runners. In trading the objective should be to make good trades. the home runs will happen on their own when the conditions are right.

Focus when the play starts. Baseball players seem to stand idly around between pitches. But watch how they focus once the pitcher steps on the rubber. Once you hit they key to enter the order, it is time to pay attention.

Situation matters. It is okay to steal second in the third with no outs and no score. In the 8th with the game tied and two outs it is usually not such a great idea to waste the potential winning run. A bunt early in the game with the bases empty and a three run lead does not make a lot of sense either. But in the ninth with a runner on first, no out, a tie and the top of the order coming up, its time to lay one down. If the markets is making new lows several days in a row, it might make sense to buy big on the long side. if it has been making new highs, maybe not so much.

Sometimes you just don't want to pitch to the guy. If a power hitter is up, a base is open and the game is on the line, it might make sense to just walk home and face a less powerful hitter. Sometimes, the small loss is the best one if it appears powerful forces could cause your trade to go strongly against you.

The game is not over until the last out. Keep playing. baseball is riff with stories of 5 run comebacks in the ninth. So is trading. Stay focused and look for the chance to rally.

Defense matters. Ask the Texas rangers. You can play powerful offense but if your pitching and defense callow the opponents cheap runs, it is hard to be a winner. If you have large winners combined with large losses all the time, it is tough to win over time.Not every team will win the World Series. Only one will. But a winning record and playoff appearances fill the seats with fans. Not everyone can be the best trader at every time, but you can be a winning trader.

If you can steal the other teams signals, or just figure them out, you have an advantage. In the market you can gain one by being aware of what large successful traders and investors are doing. Thanks to COT reports and sec filings, it is easier for investors than ballplayers!

What position are you playing and what is your role? Pitchers and catchers are involved on each and every play. Fielders have to watch every play but are only involved when the ball is hit their way. The designated Hitter is only involved three to five times a game at most. Short term day traders are in every minute of every day. Macro oriented traders only when the markets move towards their entry points. Longer term investors only when conditions are exactly correct for entry. Knowing what you are trying to achieve and what style fits your strengths can be critical to your success.

It takes more than one person. Ask Barry Bonds or Nolan Ryan. you can be the best ever at your position but if the team around stinks it will be hard to succeed. in trading I think this goes beyond just the coworkers and analysts you might work with and take advice form. our team is those people we surround us with, bounce ideas off of, celebrate wins and suffer losses with at the end of the day. Our team is our family, friends and confidants. I do not think anyone can be successful without having the strong network of friends with them along the way. It is like being a pitcher with no team. you cannot just be good, you have to perfect as any ball put in play is a run. Pretty damn lonely even if such a perfect person were to exist.

Be ready when called on. Recently jay payton of the baltimore orioles went 5 for 5 as a late inning pinch hitter. it is a big reason the Birds are winning right now. Same with the bullpen. Even when market conditions are not right for your type of trading, stay sharp and focused. You never know when a late inning rally puts you in a position to come off the bench and drive in the game winner. Markets and games can change in the blink of a surprise fed announcement or a three run homer. be ready.

There is more to life than baseball. You must practice your skills, study your opponents and work hard. But it helps to be able to relax away from the game and enjoy other endeavors as well. Same with the markets. Study learn, anticipate, but take the timeout for books, music, friends, family and all the other things that actually make life so damn good. Maybe even take in a baseball game once in awhile…

U.S. Sector P/E Ratios

Below we highlight one-year charts of trailing 12-month P/E ratios for the S&P 500 and its ten sectors. The red dots highlight where the P/Es stood when the market peaked on October 10th. Since the market is down significantly since October 10th, it's not good to see its P/E higher than it was back then, as that means earnings are declining faster than the price.

Remember when everyone was saying Financials were cheap in late 2007 based on its P/E ratio? That argument didn't hold for too long. Materials and Energy have also seen their P/Es rise, but prices have also risen for these sectors. And unfortunately, we didn't include Consumer Discretionary or Telecom because Discretionary's P/E is in the 100s and Telecom's is negative. Industrials, Health Care, Consumer Staples and Utilities have fortunately seen their P/Es decline slightly, and Technology's valuations have fallen significantly since earnings have held up well for that sector.

A Simple, Honest Proposition: Housing Data Interpretation First, Conclusions Later

Here is a simple and honest proposition: Data interpretation should lead to conclusions, not the reverse.

If an analyst believes that an indicator is important, and trumpets news about that indicator, it is intellectually dishonest to abandon the measure when it moves the other way.

If one endorses the Baltic Dry Freight index, Dr. Copper, or the inverted yield curve, then one should be willing to change forecasts when those indicators reverse.

Fair enough?

Some of these have recently rebounded, with little attention. We shall follow up in more detail.

The Application to Housing

Nearly everyone, even those who are not equity investors, is interested in the housing market. Calculated Risk covers this like a blanket. There are several key articles today. Our advice is to read them all.

A story describing the absolute worst case of subprime lending and packaging.
Downgrades of a couple thousand securities, formerly in Aaa. More writedowns?
The most recent Shiller estimate. CR objectively notes the discrepancy with OFHEO data (a difference we need to understand) and the use of nominal data.
Foreclosures soaring in California.
An analysis of existing home sales.
An analysis of inventory, at a very high historical level.
It is a great job of telling us all what is at stake and where things stand.

Seasonal Adjustments

We are a bit confused by the analysis from The Big Picture. Barry Ritholtz correctly observes that there are important seasonal factors in home sales. This is, of course, the reason that everyone else uses the seasonally adjusted data to compare one month to another. Barry maintains [RealMoney article not yet available, but promised] that we should use unadjusted year-over-year data for comparisons. We do not understand the advantage of this approach.

Everyone agrees that things are much worse than a year ago. The seasonally adjusted pace of sales was up 2.9% last month and down 2% this month. The year-over-year was down 19.9% this month, actually a bit better than last month. Does that tell us something? Is it an improvement?

If that is the real test, the year-over-year is going to start looking better in September or October, just because last year was so bad. Will Barry call a turn in housing if year-over-year flattens out? That would seem to follow from his analysis, even if the month-to-month seasonal data shows a decline.

We still do not see the advantage of this approach over looking at the seasonally adjusted data. When one spots a big seasonal effect, as Barry demonstrates, doing the adjustment seems routine. (We note that he criticizes the WSJ article from last month as not recognizing seasonality, even though it employed the seasonally adjusted data, a 2.9% increase. Had they used the raw data, the increase would have been 12.3%. (Check out the data for yourself here).

Questions for Further Review

What does it mean for a home to be in "inventory?"

We have not yet seen a good answer to this question. Let us offer a simple comparison that everyone will understand. We hold various stock positions. Each day there is a point where we would buy more and a point where we would sell. We enter stock offers "away from the market." Are these offers part of inventory?

Furthermore, if the stock price were to move higher, more stock would be offered. If it were to move lower, more bids would appear. The market clearing mechanism involves price discovery, where the market-clearing price is found. This affects both price and volume.

Applying This to Housing

In our neighborhood, there are people, empty-nesters since this is a kid-friendly town, who are willing to sell - at a price that is not realistic. These homes are part of "inventory" but the offers are not really serious and the sellers are not motivated.

Meanwhile, CNBC reported today that there was a survey as part of the report [looking for the link]. 18% of homes offered were in foreclosure. We may assume that these are motivated sellers, as are those who have a job transfer or other personal needs.

Our point is that the concept of "inventory" in existing home sales is a bit elusive. If prices were to move higher, the "inventory" might increase dramatically. Things would be worse than we think. Meanwhile, the existing "inventory" may not really measure the motivated sellers.

Conclusion

We do not have a firm conclusion -- only questions.

We would like to see more analysis where economists looked at shifting demand and supply curves and talked about market-clearing prices. Instead, nearly all market commentators (mostly non-economists) view both supply and demand as black and white. This does not recognize that a buyer whose credit score does not qualify at one price may be good enough at another. This affects the demand curve.

Another question relates to the effect of government programs. We know that the liberalization of the conforming loan limit on jumbos has shifted the demand curve. How much?

We also know that efforts to help those threatened by foreclosure will shift the demand curve. How much?

No one is analyzing the problem in this way. At some point -- who knows when? - there will be some bottoming action. What indicator should we follow to observe this effect?

What is the difference between OFHEO prices and Shiller? Why?

It will be interesting to see if those who have been the most aggressive in pointing out problems use their methods and indicators that signal the onset of the solutions.

Interveiw with Warren Buffet

What should we say to investors now?

The answer is you don’t want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market. And (b) they can’t pick stocks that are better than average. Stocks are a good thing to own over time. There’s only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. But they could buy a cross section of American industry, and if a cross section of American industry doesn’t work, certainly trying to pick the little beauties here and there isn’t going to work either. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that’s too much to expect. Of course, you shouldn’t get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.

By your rule, now seems like a good time to be greedy. People are pretty fearful.

You’re right. They are going in that direction. That’s why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.

But you’re still bullish about the U.S. for the long term?

The American economy is going to do fine. But it won’t do fine every year and every week and every month. I mean, if you don’t believe that, forget about buying stocks anyway. But it stands to reason. I mean, we get more productive every year, you know. It’s a positive-sum game, long term. And the only way an investor can get killed is by high fees or by trying to outsmart the market.

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Insider Trends in the Financial Sector

Pop quiz: Over the past six months, one sector of the market has seen more insider buying than any other. Can you name it?

If you think it’s technology, you’d be wrong. Yes, the sector has enjoyed a resurgence in recent months, but not enough to whip up a heavy enough wave of insider buying as the sector I’m talking about.

Healthcare? It’s an excellent investment area during tough economic times, due to the essential nature of drugs and medicine that produces plenty of repeat business. But that’s not it either.

No… the answer is the financial sector. Large insider purchases have occurred at some of the following companies:

Wells Fargo (WFC) *

Bank of America (BAC) *

Wachovia Bank (WB)

Fifth Third bank (FITB)

American Express (AXP)

Genworth Financial (GNW)

Colonial National Bank (CNB)

* Market purchases by existing holders like Warren Buffett’s Berkshire Hathaway.
But for all the strong insider buying, financial shares have endured a beating.

What gives? Insider buying is one of the best market indicators. Always has been. But could all these insiders be wrong? And if they are, the question is: If the guys running these companies can be so wrong, what chance do ordinary investors have? After all, these are the people involved in the day-to-day operations and privy to details that will never be public. Are they just plain stupid? Let’s find out…

Short Versus Long

In the investment world, there are two types of investors:

Short-term: These guys look to be in and out of a stock in a matter of weeks, sometimes days. They’re looking for trading opportunities, not necessarily value.

Long-term: These investors look past the daily market noise and hype, focusing instead on the next 12-18 months for a return on their capital.

Insiders definitely tend to have a longer-term outlook. Insider buying is historically a very early indicator. For example, insiders cannot buy shares on Monday, knowing there will be good news on Friday, because they can’t trade on material information.

Instead, they buy shares on anticipation and optimism that their company is poised for future success. In addition, insiders can’t sell shares for a good length of time after buying them.

So when it comes to the current financial sector pain, the insiders who bought shares in their own companies are suffering just like regular investors.

However, here’s why you should pay attention to these trends…

Putting Their Money Where Their Mouths Are

More often than not, insider buying is a very accurate indicator – especially when a certain company’s insiders buy shares in a cluster pattern. They’re right more often than they’re wrong – and usually by a very wide margin.

You have to remember that insiders buy thousands of shares with several thousand, sometimes millions, of their own dollars. It’s not just a few hundred bucks here and there.

Ask yourself why anyone would bet the farm like this just to lose it. It may happen occasionally, but rarely when insiders buy with such gusto and such size. Such heavy buying usually signals some serious optimism.

And with the financial sector, there’s another factor at work…

A Unique Opportunity In A Mammoth Sector

In terms of financial sector shares, many insiders realize that that the current battering gives them a unique opportunity: To buy high quality stocks at very discounted levels.

This is a real “kitchen sink period” for financials – companies want to announce all their ugly losses to the market at once and get the pain over with quickly.

Financial stocks with heavy insider buying look extremely attractive now. They may look even more attractive next week. But I’d say that a year from now, they will look much less attractive from an investing standpoint.

So what’s the best way to follow the insiders?

The All-Important “Insider Window”

The key to following insider trades is timing.

If you’re looking to hop on the bandwagon with these astute folks (and remember, they know more about their companies than anyone else), you want to buy after the insiders buy.

That means you want to buy in a 3-6 month window after the insider buying has taken place. Why? Because insider buying as a forward-looking indicator is usually not confirmed by the market for a period of at least 6-9 months in the future.

You must be patient. Don’t fall into the trap that many ordinary investors do – that is, they do all the hard work by following the trends and buying shares, but then get antsy and sell at a loss within that 6-9 month period because “nothing” happened.

They then watch as the shares begin to move up in “miraculous” fashion.

But it’s not a miracle at all. It was the insider buying indicator working in time-tested fashion: Buy shares when they’re cheap and hold them until they are expensive.

Believe me, insiders also have an uncanny knack for selling at (or near) the top. Right now, they’re not selling in the financial sector; they’re buying like there is no tomorrow. We’ll check back at the end of the year to see if their strategy has worked or not. But you could do a lot worse than buying some financial sector shares now.

epyphytes

There were all sorts of records in stocks and bonds last week with stocks having their 6 th best week in history, and bonds having their 10 th worst week. Strangely only once before have they moved with stocks up and bonds down this much, the week of March 21 2003 when bonds down 4.5 points and stocks up 54. Because of the small number of observaitons the expectations next week for the events singly or in combination are not meaningful.

However, one can say that in retrospect that this was a natural result of the increased liquidity provided by the Central Banks. They were able to get the stock market up , but in the process they raised the specter of inflation again and commodities went through the roof and interest rates had a climactic increase . Thus, the bond vigilantes come to the fore again and force the Fed to trot out their higher ups to say that they are very concerned now about inflation, this coming of course after the 3% rally in stocks so as not to hurt the market too much.

The key event in the climactic moves has to be the big brokerage house bail out. It always seems that the destruction of a big institution is the key to renewed success in the market. It was that way with the big commodities firm, the big Nobel Prize fixed income house, and also the big banks and brokerages of the past including Barings in two events separated by 100 years.

The epyphytes like the Orchids find it much easier to get to the light after a tree has fallen, so that they don't have to waste their energy in growing support structures of their own . Think of the countless businesses and opportunities for making money that will come now that all the weak assets have been or are in the process of being withdrawn from the asset pool.

The same thing happens when a Walmart enters a town. A few slow-moving competitors like Kmart might find their business depressed, and the local hardware store might find that many of its customers prefer the lower prices that Walmart offers. But these lower prices lead to increased spending and new businesses that arise that quickly fill the vacuum.

Such can be expected in the next several years in the stock market, until the weight of the epiphytes is so large that the limb breaks.

Citigroup's Flush

A plan seems to be emerging from Citigroup (C). If nothing else, the credit situation was not as bad as people feared.


Citigroup reported a net loss of $5.1 billion, or $1.02 a share, for Q1 with more than $10 billion of write-downs. Revenue fell 48% to $13.22 billion. They took $6 billion of pretax write-downs and credit costs on sub-prime loans. The firm also announced write-downs of $3.1 billion on funded and unfunded highly leveraged finance commitments, a downward credit value adjustment of $1.5 billion related to exposure to monoline insurers, write-downs of $1.5 billion on auction rate securities inventory, and a $3.1 billion increase in credit costs in its global consumer business.

Citi also said they have already sold $4 billion in leveraged loans in April. CFO Gary Crittendon said there will be no "transformational" assets sales (they will sell some, just nothing big) in 2008, no more dividend cuts, and no more equity raising. About 9,000 additional jobs, on top of the 4,000 already announced are going to be cut.

In short, things seem to have bottomed. This is not to say it is a shot up from here. My guess is things languish for a while until there is some trust back in the financials. The past month has seem an avalanche of bad news out there, and as a group the financials have taken the hit and equity prices have remained stable.

Now we look to next quarter for more stabilization and perhaps improvement. If there is improvement, it will be small. Just no further billion-dollar write-down would be huge at this point. Investors seem to have much more clarity as to both what is happening inside the bank and in the environment it operates in.

For long term folks, it would seem a good time to get in

ICF: The Surprising Rise of REITs in a Real Estate Downturn

Despite a one-week dip of 4.3% through April 11, iShares Cohen & Steers Realty Majors ETF (ICF) has held up well in 2008, with a three-month jump of 12.6% and a year-to-date gain of 4.4%, better than the S&P 500 by 17 and 13 percentage points, respectively.

Given the real estate downturn, that may seem surprising—especially because the fund enjoyed a nonstop run-up until early 2007—but some REITs can benefit from sluggish home sales, the sector as a whole has a low correlation with stocks, and some investors see a bargain after REITs took a beating in 2007 and early 2008.

ICF’s portfolio shuns risky (and recently deadly) mortgage REITs, focusing on the stocks of diversified firms and retail, industrial, office, and multifamily sectors. That’s offered the ETF some protection from direct damage from the retail real estate crash, at least for now. These stocks may not, however, survive the continuing fallout of the crash and its impact on the broader economy.

ICF focuses on firms that hold retail and office properties. The fund’s top four holdings—mall-operating giant Simon Property Group (SPG); No. 2 ProLogis (PLD), which specializes in warehouse and distribution centers; No. 3 Vornado (VNO) (office and retail); and No. 4 Boston Properties (BXP) (office buildings)—saw their share prices gain an average of 9.1% in the month ended April 11.

No. 5 holding Public Storage (PSA), which owns and operates self-storage facilities, is one company whose stock has benefited from the real estate slowdown, with shares up 21.8% year to date. Revenues are up, which is often credited to foreclosure victims needing to store their stuff.

Within the residential sector, ICF’s biggest bets are on No. 6 Equity Residential (EQR) (shares up 10.26% YTD) and No. 10 AvalonBay (AVB) (up 3.35% year to date). The stocks of these two major players in apartment leasing have benefited from real estate’s troubles.

ICF, which languished at 41st out of 44 funds on our ETF Momentum Tracker Sector Momentum Table in January, has moved 17 spots over the last four weeks, from 34th to 17th on April 8.

Last year marked the end of a magnificent run for ICF, which offered above-average market yield and an annualized gain of 19% from its 2001 inception through the first half of 2007. The ETF peaked in February of 2007, then lost nearly half its value over the next 11 months, bottoming out on Jan. 27.

In an early April speech, Marty Cohen, co-chairman and co-chief executive of New York’s Cohen & Steers, said the fall was the “worst bear market” in REIT history. (ICF tracks its namesake index, which invests in REITs that meet the liquidity and quality standards of Cohen’s firm’s investment committee, according to Morningstar.)

The fall, Cohen said, creates opportunity in the space, because REITs are now trading at a discount to their underlying assets—a condition that historically has led to the sector outperforming the broader market. Cohen sees a quick recovery for REITs and emphasized that he views the sector’s troubles as perception, not fundamentals. At their peak in 2007, REITs sold for more than their net asset value. Recently, they traded at a 17% discount.

From Jan. 22 to April 3, the day of Cohen’s speech, ICF gained 23.5%. It remains up 16% since that day (through April 11).

Long known as high-yield income investments—before they became growth stocks in the last seven years—REITs once again offer solid yields, with ICF recently yielding 4.7%.That said, the sector and the fund carry a great deal of risk in these volatile times. S&P holds a neutral outlook on the six categories it uses to break down REITs: diversified, industrial, office, residential, retail, and specialized.

If the economy worsens further, office tenants could pull back on space needs and retailers could continue to close outlets, hurting mall and shopping center REITs. And more empty houses could cut into rent increases recently enjoyed by residential REITs.

Finally, REIT dividends are taxed as ordinary income and thus not subject to the 15% rate applied to most stock dividends. That can hurt after-tax returns in taxable investment accounts, especially for investors in high tax brackets.

The bigger potential downfall for ICF lies with the state of the economy and the sector’s long rally. Bargain hunters should remember that the fund’s NAV remains nearly twice as high as five years ago and note the roller-coaster swings of the financial sector. There could be more pain in the sector, and it could be dramatic. A small stake in ICF can help boost returns and diversify your portfolio, but it’s best to keep that stake small.

As the market goes back and forth

As the market goes back and forth, trying to scare out the longs and then the shorts in one market or the other, stocks, bonds, et. al., and a call for more barbecue appears on this web site, one thinks of Beethoven's meeting with Rossini, when Rossini came to pay honor to the downtrodden, overlooked Beethoven in 1814 while he was in eclipse to the popular Italian operas. "Give us more Barber" Beethoven said, "and whatever you do, stick to comic opera."

What we need is more square dancing. The market going back and forth, in its very civil way, around unchanged, it's like a do si do. We need more square dancing insights (and other dancing insights) into markets.

Art Cooper replies:
It reminds me of a merengue, the partners circling each other slowly and majestically (although the tempo of the music might become frantic), sometimes twisting their handholds into intricate pretzels, sometimes separating completely while remaining "tied" to each other, their steps remaining small, each partner suggesting actions which are never quite realized.

Jim Sogi adds:
In ballroom dancing you have the basic box step, a square pattern, then after a few of those, a line step. I'm not sure what they call it, but when you dance forward or back and cover some ground. Like the market did last week, then down. Now box step, then… In country dancing, a move is sometimes punctuated by swinging your partner around in a spin. It all has a nice rhythm and feel to it with a lot of back and forth motion and various patterns set to a cadence. Our markets sure have a nicer feel to it now than the head banging mosh pit earlier this year.

Jim Rogers' Picks and Pans

China is going to be the next great country. The 19th century was the century of the U.K. The 20th century was the century of the U.S. The 21st century is going to be the century of China.

He recently moved his family to Singapore so that his young daughter would learn the language.

Rogers doesn't tout any U.S.-traded Chinese firms, but says the best ways to play a China boom are:

The currency (renminbi), which will go up against the dollar "for the next several decades." (Ed: Market Vectors - Chinese Renminbi/USD ETN (CNY).)
Commodities, specifically nickel (Ed: iPath DJ-AIG Nickel Total Return Sub-Index (JJN)) and water.

Domestically, Rogers likes Boeing (BA), noting you can't get a new plane for the next 5-7 years (or more if Boeing extends its 787 Dreamliner deadline again).

He's short Citigroup (C) and Fannie Mae (FNM), along with the Amex Securities Broker/Dealer Index (Ed: iShares Dow Jones U.S. Broker-Dealers Index Fund (IAI)). He's also short U.S. homebuilders including Lennar (LEN).

He fails to understand the bearish case on commodities:


Nobody has brought on any new supply of anything in the past 25 or 30 years. The last gigantic oil field was discovered in the 1960s. The number of acres devoted to wheat farming has been declining for more than 30 years. Food inventories are the lowest they've been in 60 years... in 2018, or whenever this bubble finally starts to peak, if I'm lucky you will call me up and I'll say it's time to sell commodities.

But Rogers has exited most of his emerging market investments, but says he'd buy back in if and when there's a big correction.

As Confidence Drops, Americans Shop Cheap

American consumers are not in the mood to spend. The Reuters/University of Michigan preliminary index of consumer sentiment fell to 63.2 in April from 69.5 in March, worse than the 69 reading expected.

Consumers haven’t been feeling this pessimistic since March 1982. Their sentiment for the next six months wasn’t that good either as that reading fell to 53.4, the lowest reading since November 1990, from 60.1 last month.

With jobs on the downward spiral, tightening credit, higher gasoline prices and declining values of their homes, Americans are feeling the need to tighten their belt, spending their hard-earned salary on bare necessities. That is good for discount stores like Walmart (WMT), but not good for Tiffany (TIF) or Gap (GPS).

But the thing is, if Americans don’t spend, they will affect the US economy even more, as consumer spending makes up two-thirds of the overall economy. Just on Wednesday, oil prices rose to a record high of $112.21 a barrel on supply concerns as people in the US are about to start their summer driving season. Today, oil is trading above $110 a barrel.

ECB Thinks Differently From IMF

The International Monetary Fund has been urging the ECB to cut the main interest rate, but that sentiment isn’t shared by ECB’s Axel Weber, who is also president of the Deutsche Bundesbank. He said ahead of the G7 meeting that “there is no leeway at all to discuss a rate cut” as the global economy is still in a robust state and the Eurozone and German economies are in a better shape than that of the US.

I’m glad the ECB is standing firm on its primary mandate of maintaining price stability - inflation is very high in the Euro area and if it’s not kept under control, it could lead to more dire consequences. Weber shares German Finance Minister Peer Steinbrueck’s view that the IMF’s growth outlook is too pessimistic. Steinbrueck said that G7 would discuss the weak US dollar behind closed doors.

Forex Trading

EUR/USD retreated from yesterday’s record high of 1.5920 and is trading in the 1.5800s on Friday. USD/CHF’s resistance lies around 1.0100-1.0130.

Indexing Our Global Market Portfolio

Buying Mr. Market in all his various asset class flavors is easy these days, thanks to the proliferation of ETFs and mutual funds that mine all the major (and increasingly minor) niches in the capital and commodity markets. But what exactly is Mr. Market offering, and what does his track record look like?

That's a crucial question for strategic-minded investors, if only to catch a glimpse of the true global market benchmark, which by definition is diversification in full. Alas, there's no off-the-shelf index for the global portfolio, at least none that we've come across. The vacuum inspired your editor to put one together, and so yesterday we unveiled the Capital Spectator Global Market Portfolio Index [GMP], which is an approximation of the global capital and commodity markets and weighted as per Mr. Market's valuation. We'll be using the index in future posts to compare and contrast various trends in the financial markets.

The methodology behind the benchmark in discussed in some detail below, but first let's address the obvious question: how has GMP performed? The quick answer is in the chart below, which shows the relative total return performance of GMP against the S&P 500. As you can see, GMP handily beat the S&P 500, from the end of 2001 through March 31, 2008.

click to enlarge



Looking at the trailing performance numbers, the GMP index generated a 13.4% annualized total return for the five years through the end of last month vs. 11.3% for the S&P 500. In addition to outrunning the S&P, the GMP index did so at about three-quarters of the S&P's volatility over those five years (measured by annualized standard deviation of monthly total returns). The practical evidence of this smoother ride is evident in recent history. From the S&P's peak back in October 2007, the stock market suffered a -13.8% tumble through the end of last month, vs. a mild -3.2% loss for GMP.

What's behind GMP's impressive risk-adjusted performance? It's rather elementary, actually, in that our index embraces modern portfolio theory and builds a benchmark that holds all the major asset classes in their market weight on the start date (Dec. 31, 2001). Make no mistake: this is passive investing writ large, with all its faults and benefits.

Accordingly, Mr. Market is the investment strategist with full authority over the portfolio and so he incessantly adjusts the weights as he sees fit, letting the financial chips fall or fly where they may. After the initial market cap settings, subsequent investment performance alone determines the rise or fall of any asset class's weight in the index. Meanwhile, because the portfolio holds some assets that post low and negative correlations with one another, financial intuition suggests that this index is superior in many ways compared to the stock market by itself, or any one asset class index for that matter, as a long-run proposition.

As for GMP's basic design, we recognize 10 asset classes for the index and use some familiar and not-so familiar benchmarks as proxies:

1. US stocks (Russell 3000) (IWV)
2. US bonds (Lehman Bros. U.S. Aggregate)(AGG)
3. Foreign stocks/developed markets (MSCI EAFE)(EFA)
4. Foreign emerging market stocks (MSCI Emg Mkts) (EEM)
5. Foreign bonds/developed markets (Citigroup WGBI)
6. Foreign emerging market bonds (Citigroup ESBI)
7. US REITs (DJ Wilshire REIT)(VNQ)
8. Inflation-indexed US Treasuries (Lehman Bros. US TIPS) (TIP)
9. Commodities (DJ-AIG Commodity)(DJP)
10. US high yield bonds (Citigroup High Yield)

note: the foreign bond and stock indices are in unhedge dollar terms
The initial portfolio weights were determined by the relevant market caps at the end of 2001, as per the capital asset pricing model's idealized instructions. This is simple enough for the stocks, bonds and REITs. The challenge was figuring out how to weight commodities, which of course have no market capitalization.

Indeed, commodities are inherently a speculative asset since there is no formal cash flow, earnings, or other fundamental data available for analysis. Yes, supply and demand factors are relevant and so they ultimately dictate price. But the task of figuring out what commodities in the aggregate are "worth" in an accounting sense requires guessing in more than trivial doses. Ideally, the guessing is rooted in something approximating hard numbers and financial theory, which is why we settled on using the total dollar value traded [TDVT] figure, as calculated by Goldman Sachs. By our reckoning, that seems to be about as close to a market capitalization-equivalent in terms of what's available to the public. The TDVT number is calculated over several months for a given year and encompasses roughly two dozen futures contracts traded in Chicago, New York, and London.

Nonetheless, there are a number of caveats. First, a global market portfolio, even if it was calculated with absolute perfection as per financial theory (and GMP falls short of that idealized standard), is appropriate for the average investor. Any given investor will have particular financial objectives, risk tolerances, cash flow needs, etc., that call for some deviation from the true global market portfolio. There are also those investors who believe (rightly or wrongly) that they're in a position to correctly second-guess Mr. Market, in which case there's an argument for doing something different, perhaps radically so, relative to the global market portfolio. In addition, our index at the moment goes back to only 12.31.01, which is far from a robust sample.

Still, it's important to know what's available as a default investment portfolio, courtesy of the global capital and commodity markets. Such a benchmark reminds us what's available to everyone, at minimal cost. No skills are required. The GMP index, we believe, provides such a rough approximation of the true default portfolio.

Keep in mind that there are a number of moving parts to calculating a global portfolio index. Different researchers may reach different conclusions about building such a benchmark, and so different benchmarks probably will dispense different results.

This is why:

The choice of indices can alter results. Meanwhile, certain asset classes were left out of our index. Notably, we don't use foreign REITs or foreign inflation-indexed bonds.
Different start dates can produce different track records. We choose 12/31/01 because we have yet to find data for all the asset classes prior to that date. As we find older data, we'll recalculate going back further in time.

Perhaps the most important caveat is that turning the GMP index into a real world portfolio would incur costs in terms of fees, taxes, etc. — burdens that paper benchmarks can blithely ignore. So, yes, you can buy the relevant mix of ETFs and/or index mutual funds and create your own global market portfolio, with or without your own tactical overlays. But jumping from paper portfolios, regardless of the underlying strategic design, invariably introduces new and perhaps expected risks.

Then again, one has to begin somewhere when it comes to pondering the investment challenge and the global market portfolio seems like an obvious place to start if only to offer a bit more perspective on the money game.

Market and Sports

Proper preparation: Went to a boat race at St. Andrews recently and saw the senior crew rinsing and washing their boat one hour before game time. They said it adds a small fraction to their time and gives them pride. The importance of getting everything in place and order for your trading day, with every little thing, and every little extra and everything prideful is underlined. John Wooden's first meeting with his players where he teaches them how to wash their hands, and put on their socks, comes to mind.

Playing for keeps: Federer is having the worst start of a season ever, not getting into a final in his last six tournaments. Before he started competing for real, he played a series of exhibition matches with Sampras, and each went three sets into extras. He obviously was fooling around, trying to keep it interesting and this kind of "customer's game" is hard to extinguish — even the memory of it is odious for competition. How many times does a market player put on a reaching trade, for the fun of it, or just take a roll of a dice with a small edge after a series of big wins, and how often does he end up like Federer this year?

Hall of Fame: Patrick Ewing was inducted into the Hall of Fame yesterday, and certainly Doc Greenspan would have been a better choice. His grotesque and sullen disposition, his outside game that prevented any rebounds, and the general aura that he created for the team during his last eight years there must have had much carryover effect on why the Knicks are still the world's worst. Sort of like the residue of the bridge player on the take-no-prisoners brokerage house that recently saw a 90% decline in stock price.

Success factors: The Memphis-Kansas game illustrates a myriad of truths about markets. First, the little things that were done wrong made the difference between success and failure. A Memphis player argued with the referee and saw Kansas score an easy basket while he procrastinated. How often does one argue with the floor, or the counterparty and lose much more than he would have by calling it a day? If litigation is involved, know that the legal costs in the typical court case are far greater than your net expectation.

Little things: The game decided by little things and letting up with Memphis ahead by nine with two minutes to go. It reminds me of days like today where the market was way up as of 1:00 or 2:00 or 3:00 and everything was grand for the bulls, the sun was shining, the water was beautiful (a la Memoirs of a Superfluous Man) and then one minute after the close, the market had dropped 2% from its three month high, a 20 day high, which, incidentally, took the longest to realize of any in the last eight years. One also notes that Chalmers seems to be the best thief in recent memory, and his four steals meant the difference between success and failure. Specialization in one market, one part of the day is often sufficient to give one the victory.

Gold Could Hit $1200 By Early 2009

Gold prices could move sideways in the near term and may not make much of a move in the next two quarters, but they should turn upward after that, according to Martin Murenbeeld, chief economist at DundeeWealth Economics.

In a note he told clients:

These projections may be considered somewhat bearish by some readers, but we assure them that the medium and long-term outlook remains quite bullish indeed.

Mr. Murenbeeld said several issues remain for gold such as the market’s focus on the euro-dollar exchange rate that may “keep gold in check” when the euro declines against the greenback.

Then there is the U.S. recession. He noted that commodities, in general, do not do well during U.S. recessions, and nobody can be sure there is a complete decoupling in the global economy. Mr. Murenbeeld also sees a pause in gold and commodity prices developing as the middle of this long cycle arrives.

Both another financial crisis or a geopolitical disaster could alter things dramatically, but given the willingness of the U.S. Federal Reserve and other central banks to step in, equity investors may be feeling more confident these days. And this could lead to gold underperforming versus stocks in the near term. Nonetheless, Mr. Murenbeeld considers gold equities depressed and recommends investors overweight them.

Meanwhile, the large amounts of liquidity entering the financial system and pressure on other commodities should ensure that gold rises significantly higher, he predicted, adding that the supply argument for gold is becoming even stronger as mine output has not looked like it will rise before 2010 or so for quite some time. However, he added that there “remains a small possibility that miners will respond faster to the higher gold prices of recent times than they have in the past.”

Among the scenarios Mr. Murenbeeld laid out for gold prices, the “most likely” one is where the U.S. dollar index falls about seven points from the first quarter of 2008 through the third quarter of 2009. And this suggests gold prices will be in the range of $850 to $950 per ounce at the end of that period, he noted.

Another scenario where the dollar plunges around 10 index points during the next six quarters is much more bullish for gold, with prices expected to rise to $1200 in early 2009.

Both scenarios assume speculative buying of gold will continue in 2008 and beyond.

Naked Shorting Comes Full Circle

During last week’s testimony to the Senate Banking Committee from Bear Stearns (BSC) and JP Morgan (JPM), the world's leading bankers from Humungous Bank & Broker seemed to be in tears over the naked shorting, organized and otherwise, that had gone on in the BSC stock, going so far even as to infer that that problem, not the illiquid assets of Bear unwanted by other bankers, was the real issue.

Surprise, surprise; only when their houses are affected by vermin do these people speak up and admit that just maybe Patrick Byrne of Overstock.com (OSTK), whom the same illegal short selling syndicates have tried to destroy, slander and humiliate, may have been right after all.

(From the Overstock.com website) "Patrick Byrne is waging a fight with Wall Street over naked short selling. He believes that, through the practice of naked shorting, Wall Street is cheating Main Street America and destroying small companies for a profit. Byrne feels that the SEC is failing to protect retail investors and small companies because it has been captured by Wall Street, and that the New York financial press is similarly co-opted. Byrne believes that the SEC's efforts to eliminate this abusive practice are falling short, not simply for Overstock (which has itself been on the Regulation SHO Threshold list for over two years), but in a way that creates the possibility of systemic risk for our financial world."
Of course Patrick Byrne was right. He was up against the most powerful network in the world, HB&B, and Patrick is just a guy like you and me, trying to make a living doing the right thing, while the last thing the leaders of HB&B want is social equity. They want to control us, plain and simple. Now that naked shorting is threatening their control of the capital markets, they speak up.

That is the entire point to my blog, which is to say that the owners of capital have been made subservient to those who run the credit-based financial services industry in the world, which has been headed by Mr. Moral Hazard himself, Henry Paulson.

Who were the people who permitted naked short selling in the past? Why, it’s HB&B. If these investment bankers had refused to allow unsupported short sale trading, this issue would be a non-starter. But they liked the extra commissions and knew that the practice was being done by their best clients and friends, so they allowed it.

We have discussed this issue at length here, in full support of our friend Dave Patch who has taken this fight to the SEC.

Finally some positive response from the SEC. Well done Patchie.

From: OIG [mailto:OIG@SEC.GOV] Sent: Friday, April 04, 2008 1:14 PM To: Patch, David (GE Infra, Aviation, Non-GE, US) Subject: Proposed Response on Naked Short Selling Dear Mr. Patch, We are planning on sending an update regarding the naked short selling issue to the investors who have previously expressed their concerns on this subject to us. Specifically, we plan to send out an email that mentions our meeting with you. We wanted to show you our proposed email (which we've copied below) before we send it to the investors who have corresponded with us. Please let us know if you have any thoughts on our proposed email. “ *** You previously contacted the Office of Inspector General on the subject of naked short selling. We would like to provide you with an update on our progress regarding this issue. We have conducted a thorough review of all the correspondence provided to us about naked short selling. We also met with Mr. David Patch on Wednesday, March 26, 2008, at which time he gave us an extensive briefing on this topic. We understand the seriousness of the concerns about naked short selling and have begun looking into potential audit issues related to this matter. Thank you again for providing us with information about naked short selling and we will keep you advised of further developments on this topic. *** “ Thank you, Mary Beth Sullivan Counsel to the Inspector General Office of Inspector General U.S. Securities & Exchange Commission
What we need to do is to send letters of support (e-mail) to Dave Patch (idpatch@comcast.net), particularly if you are concerned about specific cases where you believe the illegal naked shorting to be happening. Let Patchie deliver them to the SEC, where they will be heard.

By the way, I once did a blog headed "Short selling is not un-American". I couldn't find the article, but this reference was to another one that was kind of fun doing.

Mr. Sell-Side: Stop this nonsense. You'll never get rid of me! You short-seller, you.
I ought to call the SEC. Maybe even the President, because you're Un-American.
Wizard: Thankfully it's not un-American to be a short-seller. On the other hand, Mr. Sell-Side; in the USA alone, the Government's SEC sees fit to permit Buy-Side to pay its mutual fund managers directly for advisory fees the shocking total of $80 billion dollars annually -- over 1.1% of over $7 trillion -- which is a travesty when, as Mr. Morningstar tells us...

So, the short selling is ok; it's the problem called "naked shorting".

I wrote another one in 2006 called “A Failure to Deliver” in which Kaimu pointed directly to the main offending culprit. Guess who? It was Jamie Dimon, the JP Morgan CEO who was the man giving testimony to the Senate Banking Committee. Kaimu also outlined, as he has on many occasions, the dire straits facing Patrick Byrne in his fight against Wall Street. This is all coming full circle.

We are here to learn the truth, right? Re-read the “Failure to Deliver” article until you come to the point of it all – the problem at the DTCC that needs to be fixed.

The current rules don't require the brokers to fix the trades by buying shares to cover their short positions after 13 days, they merely say that if the trades aren't fixed, the broker can't do any more short-sales in that security without borrowing or arranging to borrow the stock.
The Depository Trust & Clearing Corp., the New York clearing house that is owned by the big brokerage houses and whose mission is to settle and clear the lion's share of the daily stock transactions that occur in the markets, says it has no power to force brokers to fix the trades either, a fact that also frustrates critics of the current system.

"We don't have any power or legal authority to regulate or stop short-selling, naked or otherwise," the DTCC says on its Web site. "We also have no power to force member firms to close out or resolve fails to deliver."

About ten years ago, I gave a formal presentation in a major hearing conducted by the Canadian Securities Administrators, chaired by the heads of the nine major Provincial Securities Commissions. This hearing on the future of electronic markets heard presentations from every axe-grinder in banking and capital markets in the world, from the Investment Dealers Association, all the stock exchanges and ETN’s, all the major info services, Bloomberg, Instinet, and so on.

The acting-Executive Director of the Ontario Securities Commission had asked me to present material that would serve the public interest. He gave me almost 30 minutes. So I gave my usual song-and-dance about the need to break up the broker-agent from the dealer-principal; separate the credit-based financial system from the capital market; and, along with flow diagrams even, I even showed how control of the Depository Trust & Clearing organization had to be taken away from HB&B, and put under the control of private banks that serve only the client.

The people in that room either didn’t understand the magnitude of what I was saying or they scoffed that I could break their control of the system. My associates have always said I am 15 years early.

I do agree that I am always thinking ahead, analyzing the problems, and formulating solutions. It helps me see the enemy. Patrick Byrne is not the enemy. Those Senators were staring for the afternoon at two of them, calling them wonderfully successful people and all. Yes, but for what reasons and at whose expense?

We will never have social equity unless and until the capital markets are freed of the iron fist of Humungous Bank & Broker.

I am taking time to teach you that what transpired in Congress this week, at least the pieces we were able to see on TV, was presented as a clown show, but in fact was a start to getting to the truth. All of you need to seize the moment. You have to understand that these people who run HB&B are an organized gang, hiding behind one another’s skirts, with no intention of giving up control over you. But you now see who they are. They put their pants on same as you and me. In fact, I’ll go so far to say they couldn’t carry the lunch pail of the average steelworker or auto assembly line worker who still have jobs that these people haven’t helped shipped off to countries that are cheaper but have bad labor practices, leaving 25% of Americans in debt to them with underwater mortgages and credit card debts they cannot escape.

Yes, finally, Mom & Pop got to see their masters, the people they have become slaves to. Recognizing the enemy is the start. Yes, these are Henry’s friends, and sad to say, unless Congress and the SEC do an about face here, the new system will be called Henry’s Rules.

To be crystal clear, I am not saying one bad thing about these firms; just about the control they have in the present structure and the executive managers who will do pretty much anything to keep in control. In fact, I said already my heart goes out to the Bear Stearns employees, who, like you, get paid to do a job and don’t expect to have their life-built pensions wiped out in a couple hours. I am happy to see them suing their bosses. What goes around comes around.

I was criticized, as I had expected, for saying two weeks ago that lawyers were changing the fundamental rules of capital markets, which is that a trade is a trade; not a maybe trade. The lawyers here were saying to me that they just carry the water for these investment bankers, and that’s where I disagree. A desperate banker doesn’t know the law, but will ask the lawyers what might be possible to help solve their dilemma. Lawyers seeking fees will not care a whit about the public interest, and that’s the problem. As soon as the JP Morgan-Bear-Fed deal was consummated at $2/share and reported, and then subsequently changed, the SEC (and Congress) had an obligation to the People to step in and stop the change. A deal was a deal. The bullet was out of the gun. Hundreds of millions of dollars, if not much more, was subsequently transacted on the basis that Bear had sold out for $2.

Congress also should be totally embarrassed that once Wall Street figured out the impact of the $29 billion guarantee, the Bear shares were worth more. By changing the deal, the JP Morgan shareholders got screwed because after the merger, there is greater dilution. And the public got screwed because if Bear shares were actually worth $10, then a full $29 billion guarantee from the Fed was not needed.

Now, it goes without saying that the new unwritten rule on Wall Street is that no investment bank of any large size is going to be allowed to fail; that the People’s money, not the shareholders capital, will stand behind the company debts and the mistakes of executive management. That offends me because I stand up for social equity, not socialism.

This latest situation in Washington is simply mind-boggling to the owners of capital in America who once had a measure of faith in their capital market. Now it is apparent that the market will be played by Henry’s Rules, and Mr. Moral Hazard had the arrogance to not even show his face at these crucial hearings. That’s not right.

A final note regarding the Treasury Secretary; I ask, is it possible under the freedom of information act to see Paulson’s income tax returns and his so-called blind trust? I think America had better awaken to what’s happening here before the upcoming change in the Administration, during which time certain people will be trying to accomplish whatever they can for themselves, Friends & Family.

This week the markets were in a state of confusion because of all the happenings in Washington. Traders are uncertain regarding the new power of HB&B, so far giving them the benefit of the doubt.

Art

As a very serious collector of art, I see people buy art for the purpose of investment all the time. I'm asked to give my opinion on the worth of a particular piece of art a few times a month. When the public sees headlines touting record price for Van Gogh, Renoir or Matisse, they rush out to buy art for investment. Some major companies have also put the shareholders at "art market risk" by owning large collections of art for investment purposes. The cottage industry of consultants that has sprung up dealing with the art investment field is full of swindlers, thieves, liars and cheats. The consultants, dealers, and auction houses are the ones who profit, not the average collector. Even some reputable dealers have been known to sell fakes, such as works by Dali, which are 99% fake (except for his signature). While it is possible to make some money in the art market, it is very improbable for the collector to profit. A collector should stick to buying art he loves, has beauty, wants to display forever, and is willing to bequeath to a relative or museum upon death. The art hanging on our walls and in our collections is owned by history, and we are merely the caretakers of the art. Incidently, despite the spin by Sotheby's and others, the mid-range market for good Impressionist art is rather soft. There are also some good prices to be found in the Old Masters. I used to tell my lovely wife that the price of good mid-range art fluctuates inversely with the number of margin calls on the Street.

How Much Can We Blame the Uptick Rule?

There have been a number of headlines in recent weeks on whether or not the elimination of the uptick rule (a stock no longer has be shorted on an uptick) in July of last year has contributed to the market's declines or at least the pickup in volatility. While it is hard to argue with the fact that volatility has picked up since July, it's important to remember that the no-uptick rule was in place for a large number of stocks as the market charged higher from the middle of 2005 to 2007.

Way back in 2004, the SEC announced that it would suspend the uptick rule on designated securities in the Russell 3,000 as a pilot to see how the stocks and the market would react. The pilot ended up consisting of about 1,000 stocks and didn't go into place until May 2nd, 2005, with an expiration in April 2006.

While the pilot didn't get much coverage when it was announced or finally put in place, here is an article from The Wall Street Journal back in 2004.

If the no-uptick rule was really the root cause of the market's declines and increased volatility, shouldn't the market have struggled much more than it did from mid-2005 to mid-2007 when the pilot was in place? The pilot consisted of 1,000 highly-liquid stocks that all had associated options. Below we highlight a chart of the Russell 3,000 from 2004 to present. Had you looked at the chart in July 2007 right before the uptick rule was officially eliminated, one could make the argument that no-upticks across the board could make the market go higher!

Jim Cramer has been all over this issue in recent weeks as an opponent to the no-uptick rule. While some may think he's irrationally blaming the market's declines on the no-uptick rule, he has in fact been criticizing it for some time now, and his commentary definitely suggests that other issues are contributing to the fall. But after a Google search, we did find an ironic article that he wrote just prior to the pilot period. Below are some excerpts from the article that he wrote on April 29, 2005:

"Just when you thought it couldn't get nastier for the "longs" out there, the people who just play from the long side, the SEC passes the Hedge Fund Relief Act, and it goes into effect Monday. Oh, it's not called that. It is just the suspension of the "uptick rule." But it certainly will have that impact, for both the hedge funds and the market.
This rule change, of course, couldn't come at a worse time. The market's terrible. Longs are beleaguered, shorts are emboldened. I think it is fair to say that things are about to get a lot worse, a lot faster for the stocks of bad companies without the slowdown circuit breaker of the uptick rule. But the SEC, in its non-infinite wisdom, dreamed this little doozy up and all I can tell you is that you ain't seen nothing yet."
As shown in the chart below, his "couldn't come at a worse time" comment actually came at a great time to buy stocks, all but disproving his argument for the next few years.

While the no-uptick rule might be contributing to some increased volatility, it's hard to blame it (and not the other glaring issues) for the downward pressure on the market.

Yale Money Whiz Shares Tips on Growing a Nest Egg

The turmoil in the stock market has a lot of people nervous about their retirement savings. If only they had David Swensen investing their money.

Swensen manages Yale University's endowment. Last year, he made a 28 percent return, adding a whopping $5 billion to Yale's endowment, which is now valued at $22 billion. And that wasn't a fluke: Over the past two decades, under Swensen's watch, Yale's endowment has grown an average of 16.8 percent a year, more than any university, foundation or pension fund.

In scary economic times like this, he cautions that individual investors shouldn't trust their instincts.

"The human tendency in this kind of environment is to do something — to make a change," he says.

Stocks seem risky, especially since they've been falling. Swensen says most people he talks to get nervous and want to sell stocks.

"And that's exactly the wrong reaction," he says. "Buying high and selling low is not a way to make money. It's not hard, right? It's very simple: You want to do the opposite."

Finding the Right Investment Mix

To share the wealth with everyone, Swensen wrote a book about retirement investing that details his allocation strategies. He advises having the right long-term mix of stock index funds, bonds and real estate investment trusts (see chart below).

But when stocks tank, that mix gets out of balance: For example, U.S. stocks that once constituted 30 percent of a portfolio may now constitute just 29 percent or 28 percent.

When that happens, Swensen rebalances, shifting more holdings into stock index funds. Then, if the market comes back up and ends the day flat — where it started — Swensen sells those stock index funds.

Swensen's ability to buy low and sell high on the market roller coaster has in some instances earned upwards of $1 million in a single day for Yale's endowment — just by rebalancing amidst volatility.

"So you end up at the same place you started, except a million dollars ahead, that's not bad," he says. "But from rebalancing, not speculating — just sticking with your long-term targets."

That's the upside: The stock market can end up flat, but investors still make money because they rebalanced when it was down. Sometimes the market keeps going down. But over time – five, 10 or 20 years — as the market keeps rising, Swensen says, investors can goose out extra returns by rebalancing along the way.

Paying for Investment Advice?

One of the reasons that Swensen can rebalance so frequently is that Yale, like other educational institutions, is tax-exempt. Before attempting to rebalance their portfolios, individual investors need to understand the tax implications of any trades they might make.

Figuring out the right mix of what to own can be tricky. Many people seek out professional advice.

And that's a good idea, says Jim Barnash, the national director of financial planning for Ameriprise Financial. He says in volatile markets like this one, people need quality one-on-one advice to make sure they're properly diversified.

But Ameriprise's advice comes with a price: up to 1.25 percent of the total investment. That means an investor with a half-million dollars invested in a retirement 401K would end up paying about $6,250 a year in fees.

Over 20 years, that person is losing hundreds of thousands of dollars because of fees. Of course, that's better than not investing at all, and a lot of people want an adviser to help them.

But Swensen says most of these investment services provide pretty mediocre advice, and it's just not worth giving them a percentage of your life savings.

"That's the wrong path," Swensen says. "And the reason it's the wrong path is it's a very, very expensive path."

Index Funds or Mutual Funds?

Swensen says fees are also the big reason you should buy index funds instead of classic mutual funds. Index funds, which track market segments like the S&P 500, are a lot cheaper.

Swensen says the vast majority of professional mutual fund managers fail to beat those indexes.

"When you look at the results on an after-fee, after-tax basis over reasonably long periods of time, there's almost no chance that you end up beating an index fund," he says. The odds, he says, are 100 to 1.

Swensen, who cautions against trying to pick individual stocks, favors nonprofit funds like Vanguard and TIAA-CREF. There too, the lower fees will mean more money in your pocket over time.

MUST READ!!

The key to this market was when Abbey Cohen refrained from making any more bullish forecasts and it was accepted that we were in bear market by Goldman itself.

On March 17th, 2008
Goldman Sachs Says Abby Cohen to Stop Making S&P 500 Forecasts
By Lynn Thomasson
March 17 (Bloomberg) -- Abby Joseph Cohen, the most bullish investment strategist on Wall Street this year, will stop making Standard & Poor's 500 Index forecasts for Goldman Sachs Group Inc.

She was succeeded in the role by David Kostin, Goldman's U.S. investment strategist, spokesman Ed Canaday said in a telephone interview. Kostin today predicted the S&P 500 may fall 10 percent to 1,160 before rebounding to 1,380 by year's end. Cohen, as chief investment strategist, last predicted the benchmark for American equities would end 2008 at 1,675, representing a 32 percent rally from its current level.

The 56-year-old Cohen now has the title ``senior investment strategist'' and contributor to the portfolio strategy team, according to Canaday. Her prediction for the S&P 500 this year was the highest among 14 Wall Street forecasters followed by Bloomberg.

``She will continue to meet with our clients around the world and provide commentary on financial markets focusing more on longer-term market activity,'' Canaday said in an e-mailed statement.

April Fool

How ironic that on April 1st we have do do without our fearless leader…

Bush is in the Ukraine today, pushing for Ukraine’s NATO membership over Russia’s strenuous objections because the Ukraine is willing to support his war(s). Why Bush is going to spend his last few pennies of political capital pissing off Putin is beyond me but anything that keeps him from going on TV and telling us how good the economy is can’t be a bad thing for the markets.

The date was not lost on the Ukranian papers who said: "All’s well with the American leader’s sense of humor: visiting Ukraine for the first time in his eight-year presidency, Bush decided the visit should take place on April 1 but not everything about the day will be a laughing matter…. Among Ukrainian leftists Bush’s visit is like a red rag to a bull."

Let’s hope Bush’s departure is a red flag for the bull market as we need SOMETHING to get excited about. I already mentioned this weekend that the combination of Congress returning and Bush leaving is being seen as a big positive to international investors, who are looking for reasons to put money back into the US and are currently placing 60% odds that Barack Obama will be the next President of the United States. They are also placing a 70% bet on a US recession this year so, again, any indications that we will skip one during second quarter earnings will be a very big upside surprise to the people who have all the cash (Europeans).

Right before they have at Bernanke this afternoon, Congress will be grilling executives from XOM, CVX, COP, BP and RDSA as to why they should continue to get $18Bn in tax breaks ($1.8Bn/yr) but the timing does not bode well for the energy companies, as many of their Republican supporters will be busy with the Fed chair, so we can expect some very nasty rhetoric from the Dems that should be good for our XLE puts and I still like the May $73 puts. which fell back to $3.15 at yesterday’s close.

Let’s all keep mind when the oil guys tell us that 40% of their stock (that’s $4Tn worth of stock) is owned by pension funds and "widows and orphans" that 60% IS NOT - just like the wealth of this nation, 60% of the money is in the hands of 10% of the people and WE, THE PEOPLE, need to stop falling for this BS every time someone questions these guys. Hopefully, today will be the day but maybe I’m just a fool for hoping…

Our futures are looking very bright this morning, let’s hope they are not fooling us again - The Hang Seng and the Nikkei traded up about a point despite very low confidence numbers from Japanese manufacturers but Shanghai could not shake off China’s tight-money crackdown plus some weaker-than-expected earnings in early reporting, taking the index down 4%. China’s central bank reiterated late Monday that it will "decisively" implement a tight monetary policy, and added that curbing overly rapid price increases is a key task this year.

Europe is up nicely this morning despite UBS announcing another $19Bn in write-downs and DB announcing $4Bn in Q1. It is very important to understand why UBS is UP 3% on this news. The bank is writing off $19Bn in real estate assets FULLY, which ELIMINATES risk from their remaining assets and they put those real-estate assets into a separate business unit that will explore options as to how best to maximize the value. UBS meanwhile, can take a much cleaner balance sheet to investrors, free from the stigma of sub-prime and CDOs and they can get on with their business of moving $2Tn in other assets around from which that bank derives an average of $100Bn in annual revenues.

Investors are already starting to see the good in banks’ attempts to put these lending mistakes behind them. A write-down does little to impune a large-cap financial’s day-to-day operations. We discussed this weekend how it is fear and manipulation that have been taking down our financials. Those XLF Apr $25 calls should do very well today in the DTP and LTP players will be very happy with the leaps we picked up last week. C is still a wildcard, we like them in the leaps but we’re going to keep a stop on our short-term profits - better to be a fool who takes a 30% gain too early than one who lets it slip away!

Microsoft said "no soup for you" to YHOO and will NOT be raising their offer, this should be good for our MSFT calls and we could get a very nice run if they break $29 today. The $27.50s make a nice momentum play at $1.30 (yesterday’s close) and the May $29s are also attractive at $1.15. AAPL is also attracting attention with Piper Jaffray suddenly deciding Apple can sell 45M IPhones NEXT YEAR ALONE! This is a near doubling of expectations and comes coupled with a report that Mac sales grew 37% in 2007, also double the PC industry’s rate of expansion. You would think we couldn’t want any more Apple as it’s our largest portfolio holding but it may be time to buy MORE APPLE! If you have it now, or even if you don’t, it’s time to add a layer of higher calls like the Jan $150s at $22.50 (more this morning) or the 2010 $150s at $36.10. There should also be some interesting spreads and we’ll check them out in the morning.

With a position like our July $125s, which are up 60% from our 2/6 purchase, we buy an equal number of Jan $150s, which are well covered by the existing 3/4 sell of $145 callers and, if Apple keeps going up, we roll the callers to 2x the May $155s but if Apple drops, we stop out the $125s, taking that profit off the table and leaving ourselves with a well-covered and easy to roll spread.

It’s going to be a very exciting day but we have to get past ISM and Construction Spending at 10 am. We also need oil to stay below $100 for the day, which will give consumers a nice $150M a day break vs. last week’s prices - that’s a lot of IPhones!