Monday, March 24, 2008

Selling more Gilead.

Sold more Gilead into today's rally. A little bit of disappointment with Ameritrade, can't buy PM-WI or MO-WI there.

Everybody's jumping of joy today. I wonder if I had to sell more. Current financial crisis is far from over. About 300 billion of writedowns far from over.

Full disclosure: at the time of publication author had long positions in Gilead Sciences and Altria. Positions can change at any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Thursday, March 20, 2008

Uptick rule is a bunk. Cramer, get over it.

Jim ranted today on "Mad Money" about abolishing the uptick rule. He thinks that's the reason for bear raids on stocks, including some high-yield ones. Really? I think we witness quite different situation on market right now. In short, Quants went mad. Most of models used by quantitative speculators, AKA Quants, stopped working sometimes in July-August of 2007. The reason is highlighted by Alan Greenspan in his article in Financial Times. I blogged about it yesterday. Article really talks about models used by Central Banks, but the same is applicable to any economic model: people have uncanny ability to screw up any math model applied to human behavior. Especially if people are aware of this model. What probably happened: Quants honed their models to perfection, which means that of thousands of models only a handful got selected. As a result, most Quants used the same or very similar models. Quants trading patterns started affecting the markets and, surprise, most models stopped working at all. Which left on a table huge sums of money which are trying to find home and skewing all markets they go to. Commodities jumped, dropped, jumped. Foreign fund jumped, then crashed. Now significant amount of money went into shorting. Multiple margin calls don't help matters either.

Why I think the above scenario is in play? Volatility. Last several years, Quants made volatility almost the thing of the past. Every movement of more or less widely traded stock was smoothed by different kinds of model trading. Now volatility is back huge. Which means that a lot of Quants are out of business.

Uptick rule or not, bear raids will continue. On the other hand, it's hard to explain some movements by bear raids only. Take Cramer's example, Verizon and AT&T. Verizon (VZ) has 1.2% of shares sold short, AT&T (T): 0.9%! It's not short selling, it's more like lack of buying pushes those stocks down.

Jim, get real!

Wednesday, March 19, 2008

Nod to Maestro.

Excellent article by Greenspan in Financial Times (here). Somebody should have said it long time ago. A little bit convoluted and longish, in real Greenspan style. But the essence of it is absolutely true: you can never have perfect model of any market (or any other human behavior for that matter), because humans adjust their behavior if they know of model's existence. This article is a mandatory read for any quantitative trader out there.

Market is killing me. I gave an excellent advice to sell into the last week rally, just didn't have time to do it myself. I will try to sell into this one. Jim thinks that we are in the clear, I think we have 300 billion more to go (see my previous blog). After another 300 billion are written down or taken by the Fed, we should be OK. All usual caveats applied.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Sunday, March 16, 2008

330 Billion done, 300 more to the bottom?

About 4 months ago, when current credit crisis just started to show up, somebody (I think it was Goldman Sachs, but not sure) said that total amount of writedowns related to mortgage crisis is going to be around 500 billion dollars. Current status: total writedowns around 100 billion, plus 200 billion coming from Fed on March 27, plus 30 billion provided by Fed to JP Morgan for buying Bear Stearns. 330 total. Now, home prices fell hard lately and projected writedowns amount should be adjusted to something like 600-700 billion. So, we are somwhere in the middle. So far, so good. If credit crisis is the only problem, we should be out of the woods by the end of the year. But...

There is a small problem, like an elephant in the room. Nobody talked about it lately, probably thinking it's going to disappear somehow. Name is: China. It seems that Chinese government is holding Chinese bubble using all possible measures. Why? Old Chinese tradition, saving face. They can't do it forever, but they definitely, if at all possible, will hold it until the closing ceremony of Olympics.

There is an interesting dilemma. If I'm wrong about Chinese bubble and it doesn't pop in September-October, now is a good time to buy stocks. Anything, even bank ETFs (but not any bank stocks). If I'm right, then it's time to sell all commodities short, with possible exception of platinum.

A lot to think about...

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, March 11, 2008

I'm back

I'm back in my blog. I was quite busy last several days at my day job (system and network administration) and didn't have any time or energy for anything else. Result: I missed yesterday's blood on the streets. It was a day of mandatory buy, and I missed it. When almost every stock is down 3, 5, 10 percent, you just have to buy something. But I didn't have time and didn't make a dime. Oh well, I can't afford to quit my day job, so complains stop right here.

On continuation of my main economic idea: depression. We are going there, no question. Otherwise Fed wouldn't act today. 200 billion seems like a large sum. But it's well below Goldman Sachs estimate of 500 billion writedowns by banks. And I feel that estimate is a little bit low, like by 30%. So, until we see at least 500 billion writedowns + Fed injections, nothing positive happening.

What does it mean for us, small time investors? Let this rally run a little bit and sell something. I'm reviewing my portfolio right now, trying to make some money. I probably will sell something in a day or two, just don't know what. Sell something even if you feel that all your positions are golden. You will get a chance to get back in at lower price. Sell some position if it goes up a lot this week. Buy it back when it's down from sell price 10% or more. And buy more of anything when blood is again running on Wall Street. It will.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Monday, March 3, 2008

Economy and Psychology

Why are we going into depression? It's psychology, stupid. You look around and everybody is talking about stagflation. Inflation is below 4%, economy isn't contracting hard (yet), so why is the talk? It's because most of important people in investing business and economy lived through stagflation in '70s. That's the scariest economic impression they ever had in their lives.
That's a huge problem. Economics is not an exact science because economy is a result of human interactions. And in the extremal situations (which is right now!) things which happen are the most unexpected. Almost everybody expects stagflation. Not gonna happen. We are going into real depression, 1930s style. Reason number 1: nobody expects that. Parallels: in 1930s there was banking crisis. Check. Real estate prices were falling around the country. Check. There was credit contagion, even best borrowers couldn't get a loan. Check. Fed fought a wrong war, they tried to hold to the gold standard. Here's the difference. Question is: did Fed wake up in time? I don't think so. In 1930s there were runs on the banks. Not happening now, thanks to FICA (not everything in the New Deal was bad).
The scariest thing right now is the inability of municipalities and other government and pseudo-government agencies to get loans at reasonable rates. If this problem is not solved right now, we are in a big trouble.
What does it mean for investing? I'm trying to think about it. Maybe I'm going to have couple of ideas soon.
Very disappointed in Jim lately. He mostly guessed right about stocks to sell, but because he doesn't advise to sell short on the show, there is no useful advice last three weeks. Oh well, everyone has to do own homework.