Buying Oversold Market

Bought some Spiders (SPY) today at the opening. Put a tight trading stop under. Market was way too oversold yesterday, time to try to make some money on it. Looks like I was right. Turnaround Tuesday worked this time.


Full disclosure: at the time of publication author had a long position in SPY. Positions can change any time.

Hidden Crisis

It's pretty bad now. I don't want to rub any salt into the wounds. But I'm quite surprised that all talks of current crisis miss out one critical component of it.

Structural crisis. All by itself it's not that scary. Often goes on unnoticed. Actually, after World War II we live in a permanent structural crisis. Just look how many new industries emerged, how many old ones died or changed completely, how completely life changed in the last 60 years. And it was the time of the fastest growth of economy in the known history. But bad things happened when structural crisis consides with financial one.

There are only two crises in US history which could be compared with the current one. It's Great Depression of 1930s and maybe even greater depression of 1873-1876. And both of those two crises had two things in common: structural crisis combined with financial one. In 1873 structural crisis was caused by railroad build up, which changed business radically and also overextended credit markets of the country and also overbuilt railroads. But it probably wouldn't be that bad without coinage act of 1873 which essentially introduced Gold Standard in the country and caused a severe deflation.

Great Depression is closer, there were a lot ob books written about it, but not many people point to structural crisis behind it. Yes, there was a huge financial crisis, caused by credit destruction and some political errors. But structural crisis was there as well, caused by shift from horse to automobile in transportation and to tractor in agriculture. This crisis was bigger than that of 1873, because structural change behind it literally changed everybody's life in developed world.

Current structural crisis is a little bit different. It has two causes: the Internet and globalization. And they should be taken together, because some aspects of globalization are impossible without the Internet. As with previous structural crises, you can't undo it's causes. It's impossible to shut down the Internet, and it's equally impossible to stop globalization. Those who think that protectionism is possible now just don't understand how tightly our world is interconnected now. Take apart any piece of more or less complex machinery made anywhere in the world, and you'll find parts from at least five countries in it. Railroads were here to stay in 1873, cars and tractors were here to stay in 1929, Internet and globalization are here to stay now.

The lesson from previous structural crises is simple: it takes time to get through it. No matter what measures anybody is taking, we need time to work it out. Political decisions can make crisis longer or shorter, they can make it much worse or soften its effects, but they can't magically make it go away. In time we will get through.

From investment perspective, structural crises can create huge opportunities. So far not that many businesses take full advantage of the Internet. We have very successful ones, like Google (GOOG) and Amazon (AMZN), not very successful but viable Yahoo (YHOO) and very promising Netflix (NFLX). There are some travel and niche retail businesses, but I expect many more to emerge soon. Our task as investors is to find winners.


Full disclosure: at the time of publication author had a long position in GOOG and no positions in other stocks mentioned, considering buying AMZN and NFLX on weakness. Positions can change any time.

In The New Range

Dow Jones index quietly moved below November 20 low. On slightly below average volume at that. Technically what we see right now is as bad as possible. Remember, in November Dow only spent two days below 8000. Now it's sitting there since February 11 without any intention of going back up. It's going down mostly slowly, but surely.

Looks like Dow is settling in a new range. In October, we saw it in 8500-10000 range, since November, in range of 8000-9000. Now it's in 7000-8000 range if we are lucky.

Just amazing how this is similar to Dow's behavior in 1929-1932. Same picture: drop, oscillation in range, another drop, another range.

But there is a silver lining in current storm. There are almost no bulls in media right now. Probably they are sitting licking their wounds. Good. That means when current range is settled, we will have another period of range trading. I'm almost optimistic. Just remember, when not every cloud has a silver lining, every silver lining has a cloud.

Random musings: who is buying all that gold? If Indians are mostly out of the market, who replaced them? Maybe China quietly buys gold instead of Treasuries? Unfortunately, no way to know right now. We'll find out, eventually. Of course, China can't completely retire from Treasuries market, but they might redirect just a little bit to gold, and that'll be enough to cause current bull market. Pure speculation on my part, of course.

Economics Is Not Rocket Science

In fact, Economics is much more complex than rocket science. Many people don't know that actually rocket science is extremely simple: it's described by relatively simple differential equation, which has an exact analytical solution, which is called "Tsiolkovsky equation". Rocket technology is extremely complex, but science under it is simple.
Economics is not simple. It's not simple for two reasons. First, the most important reason: economy is interaction of people. You can never create exact math describing people interaction. Second reason is that all math describing economy is always oversimplified. Even the most complex math found in some papers is simplified and many assumptions are doubtful, to say the least.
Here's the example. Let's take the simplest equation:

M * V = P * Q

It supposedly describes relation between money mass, money velocity, amount of goods and prices of said goods. Every component of this equation is oversimplified. First of all, all goods are different, and similar goods are sometimes sold at different prices, so equation should possibly look like:

M * V = SUM(PQ)

Next comes M. What kind of money mass is it? Is it M1, M2, M3 or something completely different?

V isn't much better. Thing is, different industries have different money velocities. They also have different velocities in different time of year.

All together, the more you look at it, the less sense it makes. This equation, obviously, should be taken for some period of time. But time periods are different, and how you can compare Q1 with Q3 of any given year? And situation is changing all the time, but dynamics is not reflected in this equation.

So next time somebody tells you that Economics is not rocket science, agree immediately. It's much, much more complex.

An Ode To Jim Cramer

Market fell to the bottom and started digging
(New Russian joke).

Readers of my blog might have the impression that I am anti-Cramer. Nothing can be farther from truth. I started investing in 1998 because I learned from 2 sources: Motley Fool and Jim Cramer. His "Real Money: Sane Investing In Insane World" is literally my investing bible. I agree with Jim in most cases. The reason that there are articles in this blog which are critical of him and almost no articles praising him is simple: when I agree with Jim, I usually have nothing to say.

I have something to say today. Dow Jones closed at November 20 bottom. S&P is not far away. Jim raised alarm the only way he knows: instead of running his usual Mad Money show, he gathered CNBC people to try to analyze what's going on. I don't want to repeat what was said, because transcripts and reruns are available from several sources. But one fact was underscored by both Jim and Bob Pisani: there was no panic selling. Volume was somewhat elevated, but not 50-100% higher than average which is usual for panic. Bob Pisani said that market picture was like there are no buyers around. That's the scariest thing about today's trading. Panic selling usually creates bottom, at least a local bottom. Like it was on November 20. Today's picture is completely different. It doesn't look like bottom, it looks like we have a long ride down.

We are in Great Depression 2.0. Fundamentals are awful already. Technicals of this market just became equally awful. Where is the bottom? S&P 600? Or even lower?

I know that we can't get the real bottom until the fact of Great Depression 2.0 is accepted by majority. But discipline requires that I buy at least something during big drop. So I bought a small position in Evergreen Income Advantage Fund (EAD). I have a feeling that corporate bonds are way too underpriced now and want to build some position in them, and EAD looks like good fund to do that.


Full disclosure: at the time of publication author had a long position in EAD. Positions can change any time.

Oil is crashing to 30? Or to 20?

The message to all oil bugs out there: oil broke $40 support and confirmed it today. It's not a rollover effect of U.S. OIL FUND ETF (USO) described in this article, rollover happened on February 6. According to that article, USO now holds more than 20% of future oil contracts. Which accidentally means that it holds share of future oil contracts exceeding size of the physical market for Texas tea. So, rollovers are over, and price is going down. What's next?

I wrote here that I don't see any reasons for oil bottom now. I also provided chart of USO with very interesting downward triangle formation. Now this formation is broken down and break is confirmed. That's a very bearish signal. Granted, USO doesn't represent oil exactly, because effects of contango and rollover are killing this ETF right now. But together with fundamental data this signal is important anyway.

I think oil might go straight to $30 from here. And if it breaks that level, it can go even lower.

Please spare me lectures on how oil just can't be lower than $50 because it's a marginal cost of the production. Many marginal producers sold their current production last year at prices between $100 and $140. They don't care about current price, they sold that oil already. Real marginal oil is coming from Middle East, and real production costs on many fields there are still below $10.

How long can this low price last? I don't know. Unfortunately, not all oil producers are forthcoming about their hedging levels. One thing is for certain though: future market is a market of future contracts, not a market of real commodity. If investors start leaving USO and similar ETFs in droves, they can drive price down much, much more.

As usual, I retain the right to be wrong. But I wasn't wrong on oil since last May.


Full disclosure: at the time of publication author did not have any positions in USO. Positions can change any time.

Too Big To Fail? Make Them Smaller!

There are too many companies in our country which are "too big to fail". Practically all nationwide banks, now extinct big investment banks and some industrial corporations are in this category. Lehman Brothers collapse proved that for investment banks, and federal bailout of GM (GM) and Chrysler was done on the premise that bankruptcy of either of them can bring huge number of companies down. The other companies too big to fail are Boeing (BA) and General Electric(GE). Expect a bailout if something goes wrong there.

Is it possible to reduce number of companies too big to fail? Most of companies in this category are banks. What happens when small or even medium bank fails? It's quietly taken over by FDIC. So maybe increase banking regulation just a little bit and set an upper limit to the size of the banks so they are never too big to fail and always small enough to be taken over by FDIC? International operations are important here, so these limits shouldn't be set on international operations of the banks. And to make level playing field, restrict US operations of big foreign banks to the same level. No need to set this level in absolute numbers, percentage of US banking industry would do nicely.

Industrial companies are different. In some cases scale matters a lot. In aviation it became absolute, with only two companies in the world making big passenger planes (Boeing and Airbus). In other industries size is not that important. Looks like autos are up to a big restructuring, and I already wrote that GM must die, maybe with help of government here. GE should not exist in its current shape, time of conglomerates ended in 1950s.

I am usually not a big fan of regulation. In most cases it's wrong. But in some cases we need regulation and in some cases we need to increase it, otherwise we have situation like now, when the only solution is nationalization of losses, profits remaining private. Let's reduce losses.

Full disclosure: at the time of publication author did not have any positions in above mentioned companies. Positions can change any time.