Wednesday, November 30, 2011

The Joys of Customer Service at

One of the nice things about having a blog is that it gives me a good place to vent on occasion. Today's been a long day - three classes to teach and met with student for about three hours in addition to that answering questions abut their valuation models. So, I'm basically wasting time before I have to leave and pick up the Unknown daughter from Girl Scouts. So, here's a minor vent.

I recently bought a Nook Color from "Daily Steals" ( The price (only $130) seemed like a deal that was too good to be true.

Being a born skeptic, I often tell people "if it seems like it's too good to be true, it probably is." I should listen to myself more often (and not merely when I'm saying "my preciousssss".)

About two weeks after I bought my Nook, it started malfunctioning - it would unexpectedly turn off, and then wouldn't boot unless the charger cable was connected (I think the "on/off" button might have had a bad connection - once booted, it would stay on, at least for a while). So, I sent them an email, and received an automated response saying
Your email is very important to us. You can be confident that we will adress your questions in a timely manner. A Customer Service Representative will personally respond to you within 1-2 business days. You may also contact our Live Chat during
business hours, Mon-Thu: 9:30-5 ET and Fri: 9-2 ET. We are closed on Saturday, Sunday and Holidays.
Two days go by, and no email response. So, I call their customer service number. I got a recording (that sounded suspiciously like Kasey Kasem - maybe he's doing a bit of work on the side), and ended up on hold for a half an hour.

Next, I tried their "live chat feature, and got a customer service person in a chat session. Here it is (I've done very minor editing only, since my typing-fu is not all that great):

Judith: Hi There! Welcome to DailySteals Live Chat. How can I assist you today?

Me: I am following up on an email I sent abut a defective product (two days ago) -- I have pasted the content into the email into the chat window to make your life easier. Here it is:
I ordered a Nook Color (order ID XXX) on 10/16/2011 (and received it on 10/27). It worked fine for the first few weeks, but it now appears to be defective. It will only boot when the charger is plugged in (and not using battery power only). In addition, it sometimes cuts off unexpectedly. The device information on the Nook says that if the Nook is defective and it was NOT purchased from a Barnes and Nobile store, I should contact the retailer from which I purchased it. So, I am contacting you to see what you can do for me.

Judith: Please send us an email to so we can have someone look into this for you.

(methinks Judith needs to read the message I just sent)

Me: I have already sent an email (as I mentioned in the chat, I sent it two days ago). I am chatting to follow up on that email. Are you saying that I should send another email to verify the first one? After all, It's been several days, and I haven't heard back on that one yet.

Judith: I am unable to assist you with this via live chat and if you have received an email correspondence, you need to respond to the email

(this sounds like a canned response)

Me: I am not responding to an email. I am "talking" to you because I HAVE ALREADY SENT AN EMAIL AND I HAVE NOT RECEIVED A RESPONSE. My problem is that I have sent an email and I have received no response. Is there a real live person I can talk to?

Judith: When did you send your email?

(again, there seems to be a lack of reading comprehension here)

Me: Please read my previous chat - I sent it two days ago.

Judith: You will receive a response very soon

Me: What does that statement mean? Is that a standard response to inquiries, or does it mean that you have checked into my SPECIFIC request and have verified that my problem is being handled?

Judith: It means that based on the date you emailed, you will receive a response from a representative shortly

Me: in other words, the first case.

Me: An additional question - what does "very soon" mean? A day, three days, a week?

Judith: Either today or tomorrow

Me: Good. If I haven't heard from anyone by then, I will assume that customer service is
not a priority (after all, three days is a long time to wait to receive a response for a basic inquiry). At that point I think it would be appropriate to post this whole episode on my blog - I have a bit more than 1,000 subscribers, and I'm always looking for material. That's not intended as a threat, by the way. It's just that I (and most people I know) value customer service highly. So, buying a product at a "great" price is not a deal if there are easily avoidable problems down the line.

Just for the record (in case anyone wants to contact me), the email is and my cell phone # is XXX-XXX-XXXX

It will be interesting to see how long "today or tomorrow takes." Ah well, at least I know that if it doesn;t work out, I have the satisfaction of knowing that the thousand or so subscribers who have nothing better to do than read this blog (seriously, people, you need to get a life) will know whiat the downside of "deal sites" are.


Alan Greenspan's nirvana

I wrote a post a while back exploring some of the silliest things economists were saying before the crisis about how financial engineering was making our economy more robust, stable, efficient, wonderful, beautiful, intelligent, self-regulating, and so on. The markets were, R. Glenn Hubbard and William Dudley were convinced, even leading to better governance by punishing bad governmental decisions. [How that could be the case when markets have a relentless focus on the very short term is hard to fathom, but they indeed did assert this]..

Paul Krugman has recently undertaken a similar exercise in silliness mining -- in this case going through the hallucinations of Alan Greenspan. The Chairman of the Fed was evidently drinking the very same Kool-Aid:
Deregulation and the newer information technologies have joined, in the United States and elsewhere, to advance flexibility in the financial sector. Financial stability may turn out to have been the most important contributor to the evident significant gains in economic stability over the past two decades.

Historically, banks have been at the forefront of financial intermediation, in part because their ability to leverage offers an efficient source of funding. But in periods of severe financial stress, such leverage too often brought down banking institutions and, in some cases, precipitated financial crises that led to recession or worse. But recent regulatory reform, coupled with innovative technologies, has stimulated the development of financial products, such as asset-backed securities, collateral loan obligations, and credit default swaps, that facilitate the dispersion of risk.

Conceptual advances in pricing options and other complex financial products, along with improvements in computer and telecommunications technologies, have significantly lowered the costs of, and expanded the opportunities for, hedging risks that were not readily deflected in earlier decades. The new instruments of risk dispersal have enabled the largest and most sophisticated banks, in their credit-granting role, to divest themselves of much credit risk by passing it to institutions with far less leverage. Insurance companies, especially those in reinsurance, pension funds, and hedge funds continue to be willing, at a price, to supply credit protection.

These increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago.

As Krugman notes, this can all be translated into ordinary language: "Thanks to securitization, CDOs, and AIG, nothing bad can happen!"

Waiting for Godot

Yesterday we suggested that the investors should not underestimate the power of the central bankers and politicians. We also said that the Pavlovian dogs like Zero Hedge or Mish will have to wait longer for the collapse of the world.

Sure enough, the latest press release: “The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.”

2011 is not same as 2008. There is more than enough liquidity in the market for TBTF Banks to play their shenanigans. So now their game is to wipe out the shorts. Next week they will squeeze the new bulls. Wash, rinse, repeat. 

A short term top is expected in the next few days. The “first of the month” effect will probably push the top in December. Then look for a dip by mid-December followed by a yearend rally topping at the end of December again.

I would rather not participate in this crazy up and down dance of the wolves. There is very little money to be made and more risk. A good bottom fishing opportunity will come by Jan 2012.  

As an investment policy in this volatile environment, we are committed to “Return of Capital”, not “Return on Capital”.

Follow us on twitter (#bbfinanceblog) or visit for correct and impartial market analysis.

Bail out everyone

I had wondered about this idea a couple years ago -- but that's all I did, wondered about it. The idea is that when banks need bailing out -- and sadly, we seem stuck with that problem for the moment -- we shouldn't bail them out directly, but indirectly. For example, just give every single person in the US $1,000. Or maybe a voucher for $1,000 that they have to spend somewhere, or put in a bank. This quickly amounts to $300 billion infused into the economy, a large portion of which would end up in banks. So cash would be pumped into the banks too, but only through people first.

You can imagine all kinds of ways to play around with such a scheme. Paying off some of peoples' mortgages. The amount injected could be much larger. Perhaps similar funds would be injected directly into banks and other businesses as well. Mark Thoma has thought through some of the details. But I'm quite surprised this is the first I've heard about any idea even remotely like this. It seems like a much better idea than just giving money to the bankers who created the problem in the first place. Why don't we hear more about such possibilities?

Modern European Tragedy

The endgame playing out in Europe is a tragedy in the usual sense, but also in the sense of Greek tragedy -- downfall brought about ironically through the very efforts, perhaps even well intentioned, of those ultimately afflicted. It's terrible to see Europe looming toward disaster, but also utterly fascinating that everyone involved -- Greeks, Germans, French, the European Central Bank -- has acted in what they thought was their own interest, yet those very actions have led the collective to a likely outcome much worse for all. A tragedy of the commons.

Philosopher Simon Critchley has written a brilliant essay exploring this theme more generally. Among the most poetic analyses of the situation I have seen:
The euro was the very project that was meant to unify Europe and turn a rough amalgam of states in a free market arrangement into a genuine social, cultural and economic unity. But it has ended up disunifying the region and creating perverse effects, such as the spectacular rise of the populist right in countries like the Netherlands, for just about every member state, even dear old Finland.

What makes this a tragedy is that we knew some of this all along — economic seers of various stripes had so prophesied — and still we conspired with it out of arrogance, dogma and complacency.  European leaders — technocrats whom Paul Krugman dubbed this week “boring cruel romantics” — ignored warnings that the euro was a politically motivated project that would simply not work given the diversity of economies that the system was meant to cover. The seers, indeed, said it would fail; politicians across Europe ignored the warnings because it didn’t fit their version of the fantasy of Europe as a counterweight to United States’ hegemony. Bad deals were made, some lies were told, the peoples of the various member countries were bludgeoned into compliance often without being consulted, and now the proverbial chickens are coming home to roost.

But we heard nothing and saw nothing, for shame. The tragic truth that we see unspooling in the desperate attempts to shore up the European Union while accepting no responsibility for the unfolding disaster is something that we both willed and that threatens to now destroy the union in its present form.

The euro is a vast boomerang that is busy knocking over millions of people. European leaders, in their blindness, continue to act as if that were not the case.

Tuesday, November 29, 2011

Gold Gave Sell Signal Today?

Ichimoku cloud is possibly calling for lower price ahead for gold.

AUD is moving up and is about at per. I think we will see strength in the markets for the next few days.
In any case, I do not believe that the end of world is upon us. People who are predicting apocalyptic and end of world, will have to wait more. They forget that it is the interest of Germany to have a weaker euro. And the printing power of the central bankers and politicians are never to be underestimated.
85% of the population still has jobs and malls are still full. We will muddle through for some more time. But that does not mean that we have to go long equities yet.
Cash is King. Long live the King.

Monday, November 28, 2011

“Cyber Monday”, Indeed!

Today’s relief rally was based on what relief really?

IMF refuted the rumor of Italian bond purchase and things everywhere remained same as ever. But still Dow was up 300+ points; Crude up about $ 1.50, Gold reached $ 1722. All based on “hopium” .

Will it lead to a new high? Not likely. I think we will reach a short term top around Dec. 5th, before we see weakness again.  But again, I expect the weakness to be limited. Have you noticed that stock markets have diverged from Euro to a great extent? When Euro dived to 1.32 level, stocks did not reach new low.

I do not think the October lows will be broken.

Crude on the other hand has broken the correlation totally.

I am disappointed with the price movement of gold. If gold cannot decisively close above $1711 tomorrow and close the week above $ 1730, then we will see further weakness in gold.

The world economy will muddle through. The situation today is not the same as it was in 2008/9. The bears are expecting a huge drop every day, but it is not going to come. While a Santa rally is now unlikely to materialize, it is not going to sink to the bottom either.

I shall be calling out the opportunities for safe trade as I see them. At this point of time, with volatility so high, it is better to wait for good trading opportunities and may be better to let go few chances. Risk reward ratio is not very good at this moment.

Be safe out there.

The end of the Euro?

Three interesting articles on what now seems to be considered an increasingly likely event -- the end of the Euro (in its current form, although some version might arise from the ashes).

First, Gavyn Davies speculates on several possible scenarios for the collapse of the Euro. It might persist as the new currency of a smaller union including Germany and The Netherlands (in which case the value of the Euro would rise significantly), or it might persist as the new currency of the periphery countries after Germany bolts (in which case the value of the Euro would fall significantly). Or the Europeans might finally find a way through the ongoing nightmare. Not betting on that one.

Second, Satyajit Das goes into a little more detail, and I think rightly sees some cultural issues as ultimately being most important. The three logical possibilities are easy to list:
The latest plan has bought time, though far less than generally assumed. The European debt endgame remains the same: fiscal union (greater integration of finances where Germany and the stronger economies subsidise the weaker economies); debt monetisation (the ECB prints money); or sovereign defaults. 
 Germany may be largely in favour of solution number 1. But the smaller periphery countries, and perhaps France as well, will favour solution number 2. Hence, we may by default find Europe hurtling inexorably into "solution" number 3 -- sovereign defaults:
The accepted view is that, in the final analysis, Germany will embrace fiscal integration or allow printing money. This assumes that a cost-benefit analysis indicate that this would be less costly than a disorderly break-up of the Euro-zone and an integrated European monetary system. This ignores a deep-seated German mistrust of modern finance as well as a strong belief in a hard currency and stable money. Based on their own history, Germans believe that this is essential to economic and social stability. It would be unsurprising to see Germany refuse the type of monetary accommodation and open-ended commitment necessary to resolve the crisis by either fiscal union or debt monetisation.

Unless restructuring of the Euro, fiscal union or debt monetisation can be considered, sovereign defaults may be the only option available.
Perhaps it betrays a little bit of anarchy in my own soul, but I'm rooting quite hard for sovereign defaults. I wish the Greeks had gone ahead with their referendum. For all the complaining about the slack morals of the Greek taxpayer, every debt-creating transaction has two sides -- and the creditors (French and German banks) bear as much responsibility as the debtors.

Then again, the end is likely to bring some severe social misery, not to mention riots (the UK is already advising its European embassies on the likelihood). A third article by Simon Johnson and Peter Boone points ominously in this direction, essentially echoing Davies' analysis in bleaker language:
The path of the euro zone is becoming clear. As conditions in Europe worsen, there will be fewer euro-denominated assets that investors can safely buy. Bank runs and large-scale capital flight out of Europe are likely.

Devaluation can help growth but the associated inflation hurts many people and the debt restructurings, if not handled properly, could be immensely disruptive. Some nations will need to leave the euro zone. There is no painless solution.

Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.

Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.

Mexican Standoff

I have been travelling again and hence the long absence from the blog.

Nothing really has changed from my last post. While the Euro-politicians are lurching from one crisis to another and the "Doomsday Sayers" like Zerohedge are salivating like the “Pavlovian dogs”, the market is playing in a range. It is a traders market and not a place for regular folks or investors.

In a market which is up today, down tomorrow, nothing saves our money. Not even inverse ETS.  The emphasis now is “Return of Capital not Return on Capital.”

It appears to me that the society as a whole has become kind of bi-polar. While the smart money is preparing for the coming tsunami, the ordinary folks are busy shopping. While on one hand we hear of high unemployment rates, both here in USA and in Europe, on the other hand, "Black Friday" sales are up over 6% and is a record braking number. People are using lethal force and are willing to inflict physical damage on others to buy sh*t from wall mart! I see the same shopping frenzy in Amsterdam or in other European cities. And here we are chattering about the imminent death of Euro. What gives?

I have no idea but I do not like what I see. I am neither long nor short. I went out of Gold and I am still waiting for it to bottom down. The huge up today is just a bounce and those of you who are still long, may want to use this opportunity to get out of equity. The bounce was expected because the market had become way oversold and McClellan Oscillator went below -100. This is kind of extreme and it is bound to correct itself.

But I do not think it is the beginning of a new bull phase or there is any substantial upside. I think we would be lucky enough if we can close the year above 1275. May be we will, just about, so that the year as a whole is in positive territory?

My reading of the global macro situation tells me that we are witnessing a train wreck in slow motion. The debt super cycle is about to end and the massive deleveraging is upon us. It will be playing out for many years to come. But the political powers are not going to let it happen without a fight. So while my emotions tell me that we should be short, logic tells me that bear markets do not start with advance notice. In fact bear markets starts at the height of euphoria and we definitely do not have that.

Will there be a QE3? I think there will be but the timing is an issue. Obama will probably use QE3 to get the maximum out of it for his re-election. If that is so, then the right time would be around June 2012. Till that time the TBTF Banks will do everything to scare the retail investors and make sure they are able to get the best out of it.

Where does that leave us, ordinary folks? I think a good buying opportunity for gold will have to wait till mid-Jan, 2012 but even that will be a short rally. But I am not inclined to go short in a big way either. So the “Mexican Standoff” continues.

Friday, November 25, 2011

Random Thoughts

It's been a busy month or so since FMA, so I've been out of touch blog-wise, So her are a few snippets:
  • We're now in the final throes of the semester (only two weeks left once the students get back from Thanksgiving), and they just had their second exam in my principles class). So, I had about 1000 pages of grading to do (I don't do scan-tron graded exams). But they did extremely well, so I feel good about it. Now all I have left to cover is CAPM and WACC, so I'm right on schedule.

  • I've been experimenting with online web-conferencing software as an enhancement to my classes. We use a really clunky system called Sakai, which has limited web-conferencing capabilities (only 15 or so concurrent users). So I and another faculty who's also a techie have been looking into using a commercial vendor that will allow us to do deliver online instruction (and review sessions) for 50-100 students at a time. I figure that this (along with my pre-recorded videos) could be the backbone for a fairly thorough and well-done online class.
  • The little guy is talking up a storm, and is a riot to be around. He loves to get a running start and then do a running headbutt. Unfortunately, he's at just the right height that he hits his dad in a very sensitive area. But it was pretty funny at Thanksgiving when he caught his uncle unawares. It probably didn't help that I distracted him at just the right moment. when he wasn't. Not nice, I know. But funny
  • Trying to get a paper out this weekend, another one in the following week, and a third one over December break. And then I'll do the usual scramble to get a new piece together for the FMA deadline in January.
Finally, I came across a pretty good quote (by Aristophanes) that will probably make it onto my door: “Youth ages, immaturity is outgrown, ignorance can be educated, and drunkenness sobered, but stupid lasts forever.”

Gotta get to bed. Later.

Friday, November 18, 2011

Are economists good scientists?

I've had no time to post recently for several reasons, mostly the urgent need to work on a book closely related to this blog. The deadline is getting closer. I hope to resume something like my previous posting frequency soon.

But I would like to point everyone to a fascinating recent analysis of economists' opinions about the scientific method (that seems the best term for it, at least). Ole Rogeberg, a reader of this blog, alerted me to some work by himself and Hans Melberg in which they surveyed economists to see how much they looked to actual empirical tests of a theory's predictions in judging the value of a theory. The answer, it turns out, is -- not much. Internal consistency seems to be more important than empirical test.

This even for a theory -- the theory of "rational addiction", which seeks to explain heroin addiction and other life destroying addictions as the consequence of fully rational choices on the part of individuals as they maximize their expected utility over their lifetimes -- which on the face of it seems highly unlikely, making the burden of empirical evidence (one would think) even higher. Some history. Gary Becker (Nobel Prize) of the University of Chicago is famous for his efforts to push the neo-classical framework into every last corner of human life. He (and many followers) have applied the trusted old recipe of utility maximization to understand (they claim) everything from crime to patterns of having children to addiction. You may see a slobbering shivering drunk or junkie in an alleyway in winter and think -- like most people -- there goes someone trapped in some very destructive behavioural feedback controlled by the interaction of addictive physical substances, emotions and so on. Not Becker. It's all quite rational, he argues.

Now, Rogeberg and Melberg. Here's their abstract:
This paper reports on results from a survey of views on the theory of rational addiction among academics who have contributed to this research. The topic is important because if the literature is viewed by its participants as an intellectual game, then policy makers should be aware of this so as not to derive actual policy from misleading models. A majority of the respondents believe the literature is a success story that demonstrates the power of economic reasoning. At the same time, they also believe the empirical evidence to be weak, and they disagree both on the type of evidence that would validate the theory and the policy implications. These results shed light on how many economists think about model building, evidence requirements and the policy relevance of their work.
Now, in any area of science there are disgreements over what evidence really counts as important. I've certainly learned this from following 20 years of research on high temperature superconductivity, where every new paper with "knock down" evidence for some claim tends to be immediately countered by someone else claiming this evidence actually shows something quite different. The materials are complex as is the physics, and so far it just doesn't seem possible to bring clarity to the subject.

But in high-Tc research, theorists are under no illusion that they understand. They readily admit that they have no good theory. The same attitude doesn't seem to have been common in economics. Rogeberg and Melberg have also described their survey work in this clearly written paper in a less technical style.

A few more choice excerpts from their (full) paper below:
The core of the causal insight claims from rational addiction research is that people behave in a certain way (i.e. exhibit addictive behavior) because they face and solve a specific type of choice problem. Yet rational addiction researchers show no interest in empirically examining the actual choice problem – the preferences, beliefs, and choice processes – of the people whose behavior they claim to be explaining. Becker has even suggested that the rational choice process occurs at some subconscious level that the acting subject is unaware of, making human introspection irrelevant and leaving us no known way to gather relevant data...

The claim of causal insight, then, involves the claim that a choice problem people neither face nor would be able to solve prescribes an optimal consumption plan no one is aware of having. The gradual implementation of this unknown plan is then claimed to be the actual explanation for why people over time smoke more than they should according to the plans they actually thought they had. To quote Bertrand Russell out of context, this ‘is one of those views which are so absurd that only very learned men could possibly adopt them’ (Russell 1995, p. 110).
On the nature of reasoning in rational addiction models (this is Nobel Prize winning stuff, by the way):
[The addict]... looks strange because he sits down at (the first) period, surveys future income, production technologies, investment/addiction functions and consumption preferences over his lifetime to period T, maximizes the discounted value of his expected utility and decides to be an alcoholic. That’s the way he will get the greatest satisfaction out of life. (Winston 1980, p. 302)


Thursday, November 17, 2011

Gold Continues To Follow AUD

Gold is now at 1746 level. It continues to drift lower with AUD. if this level is broken, next stop is $ 1695 and then $ 1675.
Would be interesting to determine a good entry point.

Wednesday, November 16, 2011


Before the markets opened today, I wrote that I am long gold with a very tight stop. Once the markets opened, the stop was triggered and I went out of gold. I believe in the long term higher price of gold. From the following chart you will note that gold is in a rising channel.

However it is now near the upper limit of the channel and even if gold were to correct another $ 90- $100, it will still be in a bull market. I am waiting for a better entry point. I think gold is safer place to be vis-à-vis equity.

For now gold is mirroring euro.

 In other word, it is moving opposite of US$. But a time may come, when gold and US$ will move in tandem. That will happen when investors flee euro and look for a safe heaven.

“Euroxiety” has taken centre stage and the Fitch comment at the end of the trading session spooked the markets. But Fitch did not say anything new, which we were not aware of.  Markets are anxious and the yields of Italy, Spain keep rising. Tomorrow is another big day for bond selling by France and Spain. Everyone would be waiting to see what the yield is. ECB would have to pump in more money tomorrow. How long and how far they will go, is the question.

In such a scenario, hedge funds and mutual funds would first sell their portfolio that are profitable and will hold on to the “not so good” part of the portfolio.  So we see Paulson & co , the largest holder of GLD selling its GLD shares and holding on to BAC shares.

The situation is rather scary and the 1st priority is not to lose money.  

For now, Cash is King.

Going through correlation between various currencies and gold, I found that gold has a better correlation with AUD, even better than Euro.
Gold has now gone down further and has taken out the channel support. If it breaks $1745, the next level is 1675. lets watch AUD carefully.

Stop Loss Triggered

Stop loss has been triggered on gold.
I am now out of gold.
Will wait for a lower entry.

Which Way Wednesday?

I was travelling for better part of last two months and now back in Toronto. I spent considerable amount of time in Western India, Northern India and Eastern India. I got a chance to meet people from different walks of life and got a glimpse of the mindset and thinking of the people of India. India is important in the global business, just as China was twenty years back. I plan to write about my analysis in the coming days as I recover from jet lag.

Back in North America, nothing much has changed since my last post. I am long gold with a very tight stop. If gold closes below $1765, I will get out. If we get past November without triggering the stop loss, then it would be OK to hold long gold. I am avoiding silver altogether. Europe continues to lurch from one crisis to another. I had written months back (When it was not in fashion) that the pink elephant in the room is Italy. And now the markets have found out how much vulnerable Italy is. I wrote that we will get a rally once “Bunga Bunga” goes out. We did get a rally but it was short-lived.  Now super-Mario will form a government and most likely we shall see little calm in the next few weeks.

I had written in last June / July that I expect two Euro. And reading the various comments coming out of Germany, it now seems that the Germans are seriously working on that. They will not put their necks on the chopping block for their profligate southern neighbours.  The EFSF remains a joke and team Merkozy is engaged in the policy of buying time without spending too much money. Now everybody realizes that the French banks are in deep soup with the sovereign debts of the PIIGS countries and France, the core of Eurozone, is in spotlight. With so much trouble in Euroland, one would expect the Euro to disappear but the markets can remain irrational longer than we can imagine. So I expect Euro to hang around some more time, may be till the end of 1st quarter , 2012. After that things may start to unravel quickly.

Something interesting happened last week in the Forex market. GS came out with a recommendation to buy Euro. Their stop loss was 1.35 and limit was 1.40. Normally I tell my clients to do the opposite of what GS advices. In this case, I was expecting GS to sell Euro above 1.35. Surprisingly or may be not, Euro sold off and 1.35 limit was triggered. Now may be they are buying Euro and it will go up again. If Euro closes below 1.3440, it will probably be a sell signal.

Back to Equity, I expect the market to grind up slowly till December. Already it is in positive territory for the year, marginally so.  We will continue to see massive sell off one day and gap-up open the next day. These are the typical signs of the top and both bulls and bears will get burnt. Yesterday’s late rally was as silly as it gets and so today might be a red day.  My advice is to stay out of equities altogether and if one has not gone out already, one should use the next high to unload. I am short Apple again with a very tight stop and otherwise I am just watching the madness of the market from the sideline.

Be very careful out there.

Tuesday, November 8, 2011

I Told You So!

So boring it becomes! To keep saying, “ I told you so”.

Monday, 7th Nov. I wrote; “Despite all the problems in Europe, I think Europe will hold up for some more time and possibly by mid-November, we shall see bids for risk assets. This is because, I see the trade becoming too one sided. Last week MS came out with a report for its clients which virtually says that Europe is finished. While I do not disagree with that diagnosis, I doubt their timing and agenda.  Everyone is looking to short Euro and play safe while the primary dealer banks need to do window dressing for the coming year end. Just like I do opposite of what GS says, I want to take all reports from TBTF banks with liberal dose of salt. I think bunga bunga Berlusconi would be forced to resign soon and a new Government will be formed in Italy. Then the ECB will buy Italian bonds to reduce the rates and bring in some short lived cheer.

Sure enough, we had a exit-Berlu rally. I expect a major top by December. And for those who have not gone out of equity yet, that would be a good opportunity to exit.

I am long gold in a measured way. Spreading my bets over few days. In short term gold has reached the upside of the channel and we may see some weakness in price. Longer term my upside price target of gold is around $2150 before another correction.

Things are as dysfunctional in Europe as ever. America is just muddling through. Cash is going to be king.
By the way, selling may not be over yet and we are likely to see some selling pressure in the coming days.

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Monday, November 7, 2011

ISDA: Stop Making Sense

The following is a response I just posted on Bloomberg to some criticism last week coming from the International Swaps and Derivatives Association. They took issue with some things I had written in my latest Bloomberg column. I think their comment was partially fair, and also partially misleading, so I thought some clarification would be useful. The text below is identical to what appears (or will very shortly) in Bloomberg:


My most recent Bloomberg column on the network of credit default swaps contracts provoked a comment from the International Swaps and Derivatives Association, Inc. The group objected to my characterization of the network of outstanding CDS contracts as "hidden" and potentially a source of trouble. I'd like to address their concerns, and also raise some questions.

Contrary to the association's claim, I am aware of the existence of the Depository Trust & Clearing Corporation. I'll admit to having underestimated how much their project to create a warehouse of information on CDS contracts has developed in the past few years; my statement that these contracts are not "recorded by any central repository" was too strong, as a partial repository does exist, and the DTCC deserves great credit for creating it.

However, it is not clear that this repository gives such a complete picture of outstanding CDS linkages that we can all relax.

For example, DTCC's repository covers 98 percent of all outstanding CDS contracts, not 100 percent. Asking why may or may not be a quibble. After all, a map showing 98 percent of the largest 300 cities in the U.S. could leave out New York, Los Angeles, Chicago, Houston and Philadelphia. Moreover, the simple number of contracts tells us nothing about the values listed on those contracts. In principle, the missing 2 percent of contracts could represent a significant fraction of the outstanding value of CDS contracts.

More importantly, when thinking about potentially cascading risks in a complex network, fine details of the network topology -- its architecture or wiring diagram -- matter a lot. Indeed, the CDS contracts that put American Insurance Group Inc. in grave danger in 2008 represented a tiny fraction -- much less than 1 percent -- of the total number of outstanding CDS contracts.

Hence, it would be interesting to know why the repository holds only 98 percent rather than 100 percent. There may be a very simple and reassuring answer, but it's not readily apparent from DTCC's description of the repository.

Also, there is another issue which makes "fully transparent" not quite the right phrase for this network of contracts, even if we suppose the 98 percent leaves out nothing of importance.

The DTCC commendably makes its data available to regulators. Still, it appears that the full network of interdependencies created by CDS contracts may remain opaque to regulators, because DTCC, according to its own description, enables...
"... each regulator to access reports tailored to their specific entitlements as a market regulator, prudential or primary supervisor, or central bank. These detailed reports are created for each regulator to show only the CDS data relevant to its jurisdiction, regulated entities or currency, at the appropriate level of aggregation."
This would imply, for example, that regulators in the U.S. can look and see which of their banks have sold CDS on, say, a big German bank. But the health of the U.S. banks then depends directly on the health of that German bank, which may in turn have sold CDS on Greek or Italian debt or any number of other things. The DTCC data on the latter CDS contracts would, apparently, not be available to U.S. regulators, being out of their jurisdiction.

The point is that a financial institution is at risk not only from contracts it has entered into, but also from contracts that its many counterparties have entered into (this is the whole idea of systemic risk linked to the possibility of contagion). Credible tests of the financial network's resilience require a truly global analysis of the potential pathways along which distress (particularly from outright counterparty failures) may spread. It's not clear that any regulator has the full data on which such an analysis can be based.

None of this, by any means, is meant as a criticism of DTCC or what it has done in the past few years. The 98 percent figure is impressive, and let's hope the 98 percent soon becomes 100 percent and the DTCC finds a way to make ALL information in the repository available to regulators everywhere. Even better would be full disclosure to the public.

Of course, nothing in the comment from the International Swaps and Derivatives Association changes the main point of my column, which was that it is incorrect to believe that more CDS contracts -- or, more generally, more financial interdependencies of any kind, including links created by other derivatives such as interest-rate swaps -- automatically lead to better risk-sharing and a safer banking system. More apparent risk-sharing can actually mean more systemic risk and less overall banking safety.

(Mark Buchanan is a Bloomberg View columnist.)

Circus of Paps.

G-Pap is being replaced by L-Pap or some other joker. That way Greece can get another $ 8 billion immediately.  How far this extortion will go on depends on the Germans. If a referendum is held now in Germany, about 70% would want to dump Greece or otherwise go out of Euro.  Regardless of the change of face in Greece, the Greek extortion racket continues even at a higher level.

Markets have written off Greece but the Euro- crates don’t get it yet. The one year Greek bond yields have now crossed 235%.

The focus has now shifted to Italy. The 10 year yields have reach around 6.6% and we are seeing the same kind of denials and action what we saw at the early stages of Greek drama. Remember that Ireland got bailed out at 7%. European and Asian markets are down and risk is off.  EFSF is a joke and anyone who believe in the capacity of team Merkozy to make good on the promised EFSF one trillion,  must also believe in Santa clause or tooth fairy. As of today morning gold is hanging on while silver, oil copper are down. Even CHF is down vs. USD. I expect some correction in gold as well this week, which would be my entry point. I wrote last week that selling may not be over and so it seems today morning. The world market is in red.

Sometimes it becomes boring to keep writing” I told you so”!

There is an interesting article in The Telegraph today. "The six weeks allotted to save monetary union have expired. The G20 has come and gone, yet no workable firewall is in place as the drama engulfs Italy and threatens to light the fuse on the world’s third largest edifice of debt."  


Despite all the problems in Europe, I think Europe will hold up for some more time and possibly by mid-November, we shall see bids for risk assets. This is because, I see the trade becoming too one sided. Last week MS came out with a report for its clients which virtually says that Europe is finished. While I do not disagree with that diagnosis, I doubt their timing and agenda.  Everyone is looking to short Euro and play safe while the primary dealer banks need to do window dressing for the coming year end. Just like I do opposite of what GS says, I want to take all reports from TBTF banks with liberal dose of salt. I think bunga bunga Berlusconi would be forced to resign soon and a new Government will be formed in Italy. Then the ECB will buy Italian bonds to reduce the rates and bring in some short lived cheer.

 My advice to my clients has been to get out of Equity and if one is still in equity, any strength in the market in the coming months should be used as an opportunity to exit. The best trade I see now is go long gold. I do not like silver so much and would rather avoid it if I may.

To close on a different note, do you know who or which country have been the worst drug dealers / traders in the history of mankind? If you say the Mexican drug cartels, you are probably way off the mark. The right answer should be; surprise, surprise, England. For two hundred years, when England was the colonial power, they cultivated opium systematically in India and forced sell them to China. For more info you may want to read this;  

Imagine, all the grandeur built on drug money! And then have the gall to lecture the world about democracy and human values. Pity England lost the lucrative slave trade or drug trade.

Friday, November 4, 2011

Crony Capitalism At Its Best

And you still think someone would be punished for the vanishing millions of investors' money from MF Global?
A change we can believe in!

Markets On Steroids.

Yesterday the Euro and the stock markets went up because?
Depending on what we are smoking, the answer could be:
·         ECB reduced rate, or
·         No referendum in Greece, or
·         Possible absence of Government in Greece, or
·         MOMO chasing lemmings forgot the MF Global fiasco and major Euro bank stress, or
·         HFTs forgot about the fact that Europe is in recession, USA is in stall speed and China is slowing, or
·         Uncle Ben promised more free money, or
·         G20 leaders may agree to run the printing press at high speed, non-stop and may even mandate IMF to do the printing, or
·         Nothing was solved in Euroland compared to day before, or
·         Bad news is good news, or most importantly,
·         The primary dealer banks need to do window dressing of their balance sheet and convince the sheeples that all is well.

Take your pick but it does not matter.  Santa clause rally is upon us. From now till the year end, we may see a multi-week rally in stock markets. I have written many months back that when the 1st day of the year and the 1st month of the year in the 3rd year of Presidential cycle is positive, 90% chance that the year will end in positive territory. 

There is absolutely nothing in the market to be happy about. It is just a casino on steroid. Europe’s debt is spiraling out of control and bond yields in Italy are going up. The bad moon is rising and the oceans are swelling to dangerous levels. No levy or dike can stop the tsunami coming in. It is not a question of if; it is a question of when.

I do not think that it is the right time to be in equities. The similarities with 2008 are too much to ignore. The entire global banking system is carrying trillions of dollars of un-hedged sovereign debt and other assets which are severely impaired. Just like MF Global, these sovereign debts are sitting in the books of the banks as risk free assets, leveraged to the teeth. But the stock markets will rise from here because the central banks are injecting liquidity or changing the rules of game. So how do we take advantage of that? They want us to be in equities and other risk assets. Then one day the floor will be removed from under our feet and we would be left dangling, holding worthless papers. From here till year end, window dressing will be on full swing. All the talking heads in MSM will sing that everything has been fixed.

I want to join the party but on different terms.  When the SPX reaches 1350, I would rather take that opportunity to short the market. But for now, I am declining the invitation to go long equities. I would rather go long gold just to be on the safe side. Waiting for a good entry price next week.

Today is a NFP day. The last 5 NFP days have been red. Will it be different this time? The normal pattern is either open high end low or open low end high.

By the way, do you know that the food stamp usage is at record high! Per the latest available record 45.3 mil people used the program. 45,000,000 people are a hell lot of people. And they say we are out of recession?

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Wednesday, November 2, 2011

Time For Long Gold?

Sometimes it is so easy to predict what will happen to the stock markets! And to think that TBTF banks have battalions of analysts and complex computer models to predict the future. On my last post I wrote, “Green tomorrow, but selling may not be over”. Sure enough, we had a green day across board. And now futures are down and it looks like it will be red tomorrow.

I also wrote that I expect a multi-week rally from mid-Nov. Apart from various indicators and analysis; one simple reason for the coming rally is the need of TPTB (The Powers That Be) to fool the investors and do a massive window dressing for the year end. The Greek referendum has been pushed till December and nothing much is going to happen between now and December. Italy and others in club PIIGS continue to dance on the edge of volcano. And they are inching ever so close to the edge.

This news is from Zero Hedge; “While the focus continues to be on G-Pap for the second day in a row following his shocking referendum announcement, the real diversion remains Italy, where the government is in as much of a state of chaos as that in Athens, and whose bonds, while not yet trading at Greek levels  (remember when the Greek 1 year hit 100% two months ago? Today it is at 225%... and tomorrow the two year will be at 100%), are far, far greater in amount, and the only thing preventing their collapse so far has been the ECB, whose monetizing assistance has been contingent on Italy passing and enforcing austerity measures to deal with its runaway debt to GDP of over 120%. Unfortunately, when BTPs open for trading in 7 hours, the ECB bid may not be there, or any bid for that matter, because as the WSJ reports, "Italian Prime Minister Silvio Berlusconi on Wednesday failed to issue growth-boosting measures demanded by European Union authorities ahead of the Group of 20 summit, raising further doubts about the government's willingness to pass economic reforms aimed at restoring investor confidence in the country."

I had written many months ago that there will be two Euro, one for the Northern Europe and one for the Southern Europe. It will be interesting to see where France fits in. But that is still some months away. In the meantime we still have to worry about things in North America. The USA is at stall speed and the FED is unable to help the Banks as much as it would like. Again, the only way the TBTF banks can make money today is through speculative profit and we will see the buy programs being set in motion soon. Other things being equal, I expect 2011 to be in positive territory. At the beginning of the year, SPX was at 1272, so even if SPX closed around 1300 by the year end, that you be sufficient to fulfill the requirement of a positive year.

I am debating whether to go long equities but the risks are high and the end game is near. It is very difficult to be precise in this volatile market environment. More likely, I would go long gold but not before I am sure that we have reached the tradable bottom. There are signs that the selling would continue this week and that would put pressure on gold price as well. But that would be a welcome development as it would give a better entry point.

Building a financial system that works for the real economy

I highly recommend this video of a talk given recently by Sony Kapoor at the Global Systems Dynamics Workshop in Berlin. As it happens, I was there and got to see the talk in person; it's funny and very insightful. Kapoor used to work at Lehman Bros (well before it's collapse), and eventually quit investment banking to do more useful things -- he now works at Re-define, a think tank on public policy.

I tried to embed the video here but failed. There seems to be embed protection on it for some reason.

There were a number of other great talks at the meeting as well, all available on video here.

There are markets... and markets...

John Kay makes a very good point -- that the ideology and rhetoric surrounding the allegedly wonderful properties of markets has taken us a long way from where we ought to be. We need a more balanced perspective on what markets do well and what they do not do well, where they are useful and where they are not:
A semantic confusion leads us to use the word market to describe both the process which puts food on our table and the activity of gambling in credit default swaps. That confusion has enabled people to claim the virtues of the former for the latter.
 In his book Extreme Money, Satyajit Das makes a closely related point which, I'm sure, many economists and finance people will probably find incomprehensible:
Banks are utilities matching borrowers and savers, providing payment services, facilitating hedging etc. The value added comes from reducing the cost of doing so. Paul Volcker questioned the role of finance: “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence. US financial services increased its share of value added from 2% to 6.5% but Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”

The idea of financial services as a driver of economic growth is absurd – it’s a bit like looking at a car’s gearbox as the basis for propulsion. But financiers don’t necessarily agree with this assessment, unsurprisingly.

Green Tomorrow But Selling May Not Be Over.

All the euphoria of last Friday vanished in thin air with the curveball thrown by G-Pap. For the last 30 years Greeks have held the EU hostage with their brinkmanship and guilt manipulation. After the voluntary ( ha ha ha) 50% haircut agreed by the European banks, EU should now set aside another Euro 200 billion for loss write off and show the door to Greece. If that requires change in the treaty, do it. That way others in the PIIGS club will not ask for any further concession or write off. But that requires nerves of steel and team Merkozy do not have that. They are just buying time for their banks. In the mean time, Greeks have got hold of Europe by their S&C and blackmailing them, milking them for whatever it is worth. Greece will collect another few hundreds of billions of Euros and then default.  It is their sense of entitlement that is driving the whole Euro mess. I do not see any solution for the debt problem of Europe and Italy will soon follow Greece to give the fingers to Germany and France. Already the Italian 10 year bond yields are well over 6% and rising. Frantic efforts are on to reduce the gap between German bunds yield and Italian yield and they are even changing the margin requirement rules. ECB has now stepped in to buy the Italian Bonds to control the situation.

On the other side of the pond, things are as messy as ever. Channel stuffing by GM continues. GM books its car sales as soon as the inventories are shipped to the dealers. And dealers’ inventory is up by 15%. How long it can continue? This is not well for jobs or GDP.

I think we shall see a green day in the stock markets after two successive distribution days.  NYMO is no longer at extreme high and now hear the 200 DMA. So we might see some buying tomorrow but I do not think the selling is over yet. We might see some more selling before we can have any tradable bottom.  I also think we are heading for a multi week rally and would like to take this opportunity to go long. But I am still waiting on the sideline and will take the call soon. For now, the best course of action is not to take any action.