Category: Economics & Finance

Remember the advice I gave way back in September 2008…..

And that advice was to sell in May and go away.  I follow that rule religiously and especially when I see the price of gas go through the roof.

The DC crowd is evidently still completely out of touch with what average Americans are going through financially day-to-day as most have seen their standard of living erode significantly since 2004 as the country speeds down the bankruptcy highway in debt to the tune of 6 figures for every man, woman and child.  When all the chickens come home to roost it will be very bad folks.

The way I see it Obama has about 9-12 months left to turn things around.  Since he chose to pay bonuses to the Wall Street crowd instead of locking them up  for what they did he is in reality no different from the republicans that bailed them out to begin with meaning the public has nothing to lose by throwing his sorry ass out next year unless he turns things around.

So in a change of pace from our recent emphasis on more local topics, I’ll add that my latest foray into Ginnies has exceeded my expectations from a pricing standpoint and in today’s day and age the 3.18% YTD yield isn’t half bad either. For those familiar with the work of Nassim Taleb, a good part of the trick is to manage downside risk and ginnies do that right now.

Some recent headlines that partially explain why I’ll be on the sidelines with my long-term money until there is a substantial market correction: Continue reading “Remember the advice I gave way back in September 2008…..”

A peek inside Slabbed as we set up some important financial concepts and introduce the ol’ Forex Scam. Anyone else remember Russell Erxleben?

These past 2 weeks we’ve periodically gotten a huge number of worldwide referrals from what appears to be a pornographic website, based on the verbage contained the referring URL.  Running the link through a Whois search reveals it is in reality a Forex scam site.  As is my custom I checked the wiki entries to see if the explaining could be made easy for me and sure enough the two wiki entries had a wealth of great information.  (Those wondering about the Forex proper can click here.) For the balance of this post we’re going to concentrate on the scam I linked first and the implications therein so is there we now visit:

A forex (or foreign exchange) scam is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. Currency trading “has become the fraud du jour” as of early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission. But “the market has long been plagued by swindlers preying on the gullible,” according to the New York Times. “The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records” according to The Wall Street Journal. The North American Securities Administrators Association says that “off-exchange forex trading by retail investors is at best extremely risky, and at worst, outright fraud.”

With the scam set let’s visit with the assertion it is possible to beat the Forex. I’ll note these same concepts apply to the stock markets too in varying degrees:

The forex market is a zero-sum game, meaning that whatever one trader gains, another loses, except that brokerage commissions and other transaction costs are subtracted from the results of all traders, technically making forex a “negative-sum” game.

…………..there are many experienced well-capitalized professional traders (e.g. working for banks) who can devote their attention full time to trading. An inexperienced retail trader will have a significant information disadvantage compared to these traders.

Retail traders are – almost by definition – undercapitalized. Thus they are subject to the problem of gambler’s ruin. In a “Fair Game” (one with no information advantages) between two players that continues until one trader goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first. Since the retail speculator is effectively playing against the market as a whole – which has nearly infinite capital – he will almost certainly go bankrupt. The retail trader always pays the bid/ask spread which makes his odds of winning less than those of a fair game. Additional costs may include margin interest, or if a spot position is kept open for more than one day the trade may be “resettled” each day, each time costing the full bid/ask spread.

Although it is possible for a few experts to successfully arbitrage the market for an unusually large return, this does not mean that a larger number could earn the same returns even given the same tools, techniques and data sources. This is because the arbitrages are essentially drawn from a pool of finite size; although information about how to capture arbitrages is a nonrival good, the arbitrages themselves are a rival good. (To draw an analogy, the total amount of buried treasure on an island is the same, regardless of how many treasure hunters have bought copies of the treasure map.)

So it is the middle men who always make the money. Often the middle men also are taking a trade position too so the game truly is rigged.  I mention this because the entry properly mentions information advantages. Indeed in my closest circle of stock trading friends we often discuss price/volume movements in issues we own in terms of buyers/sellers “with superior knowledge” or “access to information” the retail investor simply does not have.  Properly analyzed the data can confirm previous buys or signal that it’s time to sell.  These concepts also underpin the business of insurance where “information advantages” has a more proper name: Information asymmetry. Continue reading “A peek inside Slabbed as we set up some important financial concepts and introduce the ol’ Forex Scam. Anyone else remember Russell Erxleben?”

Slicked and Slabbed the BP disaster Part 3: Commenc

With a big hat tip to Editilla over at the Ladder lets visit with Phil Butler, editor-in-chief of Everything PR and senior partner at Pamil Visions PR as he explores the reasons he thinks BP’s common stock is worthless. Here is a snippet:

The simple truth, when all is said and done, is that British Petroleum cannot pay for the damage it has done. No way in hell. This is my opinion, and I am not alone in suggesting it. BP has already lost one third of its value based just on the stock market. If the total costs exceed BP’s value, or even come close, liquidating the company could likely still not satisfy all the damage done. Especially if this oil continues for an extended period.

There is no denying that is it awfully risky to own BP ADRs these days.

sop

A quick detour from bashing corrupt politicians: Sell in May and go away.

Those that know me from the financial boards know that I was 100% in Ginnies in my retirement account back in the fall of 2008 when the markets began to crater along with the near collapse of our financial system. Of course when I perceived an opportunity in early 2008 to buy back into equities, I was all over it, indexing the market and overweighting certain sectors I thought would do well on the way back up. I am pleased to report I consider that mission accomplished to my personal satisfaction.

But there is also an old Wallstreet saying, “sell in May and go away”. It refers to the historical fact that the market performs best from December to May while most of the spectacular crashes have occured in the June to November time period with an overweight on big declines beginning in the months of September/October.

Toby over at Greenbacked wrote a post last Friday that highlighted a post on the DShort blog which analyzes current market valuations using the Ben Graham’s PE10 which is an excellent read, especially for you lay people that self direct your own 401k accounts. Lets begin at DShort:

Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market’s value, which they discussed in their 1934 classic book, Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by the 10-year average of earnings, Continue reading “A quick detour from bashing corrupt politicians: Sell in May and go away.”

Slabbed takes the Regulatory Challenge Part 3: Incompetent is as incompetent does. Tim Geithner and Peter Principle.

The Peter Principle is the principle that “In a Hierarchy Every Employee Tends to Rise to His Level of Incompetence.” It was formulated by Dr. Laurence J. Peter and Raymond Hull in their 1969 book The Peter Principle, a humorous treatise which also introduced the “salutary science of Hierarchiology”, “inadvertently founded” by Peter. It holds that in a hierarchy, members are promoted so long as they work competently. Sooner or later they are promoted to a position at which they are no longer competent (their “level of incompetence”), and there they remain, being unable to earn further promotions. This principle can be modeled and has theoretical validity.[1] Peter’s Corollary states that “in time, every post tends to be occupied by an employee who is incompetent to carry out his duties” and adds that “work is accomplished by those employees who have not yet reached their level of incompetence”.

The Peter Principle is a special case of a ubiquitous observation: anything that works will be used in progressively more challenging applications until it fails. This is “The Generalized Peter Principle.” It was observed by Dr. William R. Corcoran in his work on Corrective Action Programs at nuclear power plants. He observed it applied to hardware, e.g., vacuum cleaners as aspirators, and administrative devices such as the “Safety Evaluations” used for managing change. There is much temptation to use what has worked before, even when it may exceed its effective scope. Dr. Peter observed this about humans. Continue reading “Slabbed takes the Regulatory Challenge Part 3: Incompetent is as incompetent does. Tim Geithner and Peter Principle.”

Slabbed takes the regulatory challenge part 2: Which school do you belong to?

Ok folks, we had some fun in part 1 where the good people at econstories.tv contrasted classical economist Friedrich Hayek (Austrian School of Economics) with the father of Keynesian economics John Maynard Keynes via a well done rap song. Our friends over at Greenbackd are unabashed adherents to the Austrian model (Toby has written several excellent posts on the topic) while Team Obama thus far has favored the Keynesian school in their economic policy with programs like stimulus and cash for clunkers. These distinctions are important as they fundamentally shape how their adherents view the regulation of our financial system which is a vital subject given the implosion of our financial system in late 2008. Before I give my thoughts let’s visit with Wiki and get some background, first on the Austrian School:

According to Austrian School economist Joseph Salerno, what most distinctly sets the Austrian school apart from neoclassical economics is the Austrian Business Cycle Theory:

The Austrian theory embodies all the distinctive Austrian traits: the theory of heterogeneous capital, the structure of production, the passage of time, sequential analysis of monetary interventionism, the market origins and function of the interest rate, and more. And it tells a compelling story about an area of history neoclassicals think of as their turf. The model of applying this theory remains Rothbard’s America’s Great Depression.

Austrian School economists focus on the amplifying, “wave-like” effects of the credit cycle as the primary cause of most business cycles. Austrian economists assert that inherently damaging and ineffective central bank policies are the predominant cause of most business cycles, as they tend to set “artificial” interest rates too low for too long, resulting in excessive credit creation, speculative “bubbles” and “artificially” low savings.

According to the Austrian School business cycle theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable “monetary boom” during which the “artificially stimulated” borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable. Economist Steve H. Hanke identifies the financial crisis of 2007–2010 as the direct outcome of the Federal Reserve Bank’s interest rate policies as is predicted by Austrian school economic theory. Continue reading “Slabbed takes the regulatory challenge part 2: Which school do you belong to?”

Slabbed takes the regulatory challenge part 1: Lets rap.

Dedicated to a reader. I’m off to buzzards roost and will check back later. (h/t Russell)

Friedrich Hayek, Nobel-prize winning economist and well-known proponent of free markets, is having a big month. He was last seen rap-debating with John Maynard Keynes in the viral video above, (in which Hayek is portrayed as the sober voice of reason while Keynes overindulges at a party at the Fed). His 1944 book, “The Road to Serfdom,” provided the theme for John Stossel’s Fox Business News program on Valentine’s Day.

Lets talk cat modeling and insurance rates: Karen Clark welcome to slabbed.

OK folks, I’ve written a good bit on weather modeling most of which in one way shape or fashion has its roots in the work of Karen Clark, a woman with a keen financial intellect, that literally pioneered the field. Her story is reminiscent of HAL 9000 and a South Park episode. It is also my considered opinion Ms Clark is one of the good guys in the insurance wars.  I mentioned this general topic and its importance with the last State Farm rate hike here in Mississippi using very plain english but no journalist here in Mississippi was up to the challenge of reporting it. I say that because if there is one area in the rate setting process that is completely suspect it would be in the loss assumptions indicated by the models. These concepts are equally applicable in other states besides Mississippi that now face insurance rate hikes such as our neighbor Alabama. Finally in the land where people get it, FLOIR Commish Kevin McCarty busted Allstate using bogus short-term models to calculate a 65% rate hike in Florida in 2008.

Besides Sop, Karen  Clark understands the implications. She left the company she founded, AIR Worldwide (most likely forced out IMHO), founded another company and went public with her concerns on how the information produced by those models was being misused. It was no surprise to me then when a reader sent me this link from the National Underwriter:

Catastrophe modeling firms’ hurricane damage predictions overestimated insured losses for a second year, according to a catastrophe prediction consulting firm.

Karen Clark & Company in a report said models designed to project U.S. Atlantic hurricane insured losses for the five-year period ending in 2010 “have significantly overestimated losses for the cumulative 2006 through 2009 seasons.”

“Hurricane activity is very difficult to project because the Earth’s atmosphere is very complex and has many feedback mechanisms,” said the report. “Given all of the uncertainties, near-term projections do not have sufficient credibility to be used for important insurance applications such as product pricing and establishing solvency standards.”

Predictably Karen’s wayward babies were having none of it: Continue reading “Lets talk cat modeling and insurance rates: Karen Clark welcome to slabbed.”