Lucky sevens

Last year, a friend of mine opined that Sun stock would hit 7 bucks within a year's time. It was going over 6 bucks at the time and headed higher to about 6.8 before calming down. But true to his word, yesterday it did pass the magical 7! The irony of the matter is that there was a 4 to 1 reverse split and a stock symbol change from SUNW to JAVA in between :(

I can almost hear the board's response..awesome! Let's pay the CEO 11 million.

"Canary in the coal mine" indicators

I wanted to bring to your notice these indicators I have had up for a while now (you would have noticed them on the right side of the blog). They were meant to warn us of an impending collapse in the markets, and from recent facts, they did!

• Oil losing $100!
• 10yr yield falling close to 3.5%
• SnP falling below 1200

So I'm going to state that these are the same numbers I will be looking at to see if we are headed for another near term gut-wrenching collapse. On the flip side, here are the levels for these very same indicators which will tell me we are seeing a healthy recovery

• Oil holding $100 but staying below $120
  
• 10yr yield rising above to 4%
• SnP rising above 1310

Let's see how true they are this time.

The untold story of Goldman, Morgan Stanley

I'm beginning to tie things together and think that the reason for Goldman/Morgan Stanley suddenly choking has more to do with the bursting of commodities rather than just their mortgage crap gone bad. Wasn't it these two firms that scared us with their hand-waved projections of $150 to 200-a-barrel oil? Now, peruse the picture below. This shows the Var (Value at Risk) for various firms from their commodities trading.

Doesn't it strike you suddenly that just as oil craters, the top investment banking firms lose loads of market value. So interestingly, it's a chicken and egg where the very reason commodities imploded was these companies or their hedgie buddies unwinding massive long positions.

What next? In comes the magician Paulson, a former head at Goldman, with his relief package. How much do you think is the market cap of the entire financial sector in the S&P 500? A back-of-the-envelope calculation says that it was about 15% of 30 trillion dollars when the financials were at their peak, so now it would be worth about half that or about 2 trillion dollars. So the govt. could actually buy up little less than half the US financial companies with their 700 billion dollar piggy bank! Hmm. Instead, by buying the toxic waste these companies hold, whom exactly are they helping out? One wonders.

Carte Blanche to the PPT

For almost the entire time that I have been following the financial markets, I have heard conspiracy theorists posit that there was a Plunge Protection Team that stepped in everytime the markets were in freefall and bought up everything in sight in order to prevent disaster. While such stories are great for the movies, I am still a skeptic at heart and am aware that manipulation of markets by the authorities themselves is very difficult. Not exactly the process of it but keeping such intervention under the wraps. However, we now have such a PPT and it will have powers explicitly authorized by the US congress!

Trust. How much do we, the people, have in our government, the congress, the treasury, the SEC? They certainly failed to prevent this crisis and maybe even led to it in the first place! Now they want the authority to buy 700 billion dollars of mortgage backed securities! OMG!! While I have been a supporter of recent efforts to shore up the financial system from armageddon, I am amazed at the audacity of this effort. I think though that the combo of Bernanke, Paulson and Geithner (one an academic, one with a career in the financial services industry and one a longtime treasury official) is one of the best to tackle this situation. Yes things could have been done all along to avert this scenario but as Bush said (puke...i agree with him on something), we need to confront this situation first and then make sure we never ever get here again. Something still unclear to me however is on what basis and price they will buy these securities since there exists no regulated market for them. And if they are picked up at depressed prices as I hope they are, banks will have to mark down their other holdings to market immediately thereby further weakening their balance sheets in the process. Unprecedented times for sure.

AIG, markets

I just saw Charlie Rose's interview with Hank Greenberg, AIG's former CEO. I think the critical differences between LEH and AIG are

• Assets: LEH was not just illiquid, it was insolvent. There was a hazard with rescuing it in that it was throwing good money after bad. With AIG, most of its trillion dollars in assets are really good. So a loan can be considered as a calculated bet. The loan is supposed to be a bridge loan until AIG can secure loans from elsewhere (SWF's, private equity) and sell off assets at non-firesale prices.

• Too big to fail: A failure would have caused other institutions to immediately write off all their assets that were insured by AIG creating a ripple effect and seizing up markets across the board.

As far as market technicals, a rally from here would not be just about short covering. This is a way pessimistic permabear view of things. I think getting through this time brings more clarity in the financial markets. Institutions that were the most levered have already failed and FNM, FRE have been nationalized. Excessive risk is being punished severely. And for those waiting for GS, MS to fail...i think it's going to be a long wait. This is how bear market rallies are supposed to happen.

Define ViXeN

Google search define: vixen

• a malicious woman with a fierce temper
• a female fox

We have an analogue in the financial world too! Can you guess? It is
^VXN or ^VIX depending on your taste :)

I just wanted to present a recent graph of the VXN and explain what it means.

See the recent spike and compare it to prior spikes. Does it tell you anything? Now you may wonder why volatility is a good measure of fear in the system. I mean, even if the market is jumping upwards in leaps and bounds, it should be volatile...right? But essentially, volatility represents risk in the pricing of options and other derivative contracts. So a higher volatility essentially means that the sellers of these contracts expect large price moves to occur in the near future. At market tops however, what sets in is complacency and not volatility..funny eh (reminds of an obese fat man living life large without worrying of the future risk he's creating for himself). So there. A volatility spike either ways means that we are most likely at a turning point in the markets when there is immense fear or complacency in the financial system.

Terror strikes again

Serial blasts in Delhi now. What you can do to educate yourself and fight terrorism. Articles specific to terror in India. Did you know that Dawood Ibrahim is a son of a police constable and is of Konkani origin, and that his son married Javed Miandad's daughter! Any idea how we can find out which businesses he deals with and boycott them? Recent BBC news article on Bollywood taking ideas from real life.

Detailed article coming soon...

A quick list of funds I track

Most of us are confounded on how to choose quality funds and how the hell do we decide that? Let me state at the outset that I do not personally believe in indexing in this market and in the future (just see where you'd have been with a SnP 500 index tracking fund). My rule of thumb while choosing funds for my 401K has been no-load, no transaction fee, low expense ratio, minimal to low early redemption fees, <=5K initial purchase requirement, and then performance going from 3 year, 1 year, 1 month. So I present a list of funds for your consideration. I will not post all such funds I track restricting myself to 5 right now with a short commentary on the risk/rewards, volatility and anything else I see fit. Here goes.
RYVNX : Rydex double inverse Nasdaq 100. What a way to start right...an index fund :) The reason I like this is it's one of the few ways to hedge your portfolio in a down market. Note..shorting is not a good long term strategy so use it judiciously and mostly to protect potential losses in other funds
GAAEX : Guinness Atkinson Alternative energy fund. It got whipped 7.4% yesterday so definitely a volatile fund. And very very focused! But I like the sector a lot although it sports high P/E's.
LSBRX : Loomis Sayles Bond Fund. It's not a "safe" bond fund since it's mostly in corporates and not all are investment grade bonds. But the management is almost the best around so definitely something to think about for high interest income while tolerating some risk.
CGMFX : Ken Heebner's CGM Focus Fund. This has also got smashed recently and that's because Heebner makes big bets and holds only 25 stocks at most! But I'd argue he's the best manager around and he has delivered before.
UNWPX : A very focused precious metals fund, investing in miners and the like. I really like this sector especially after the way it's been pummelled recently.

Bike ride calorie burn contrasted with car driving costs

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This was a really nice 12.7 mile bike ride I did today in little less than an hour. There was one climb on Stevens Creek that I just could not surmount and had to walk my bike. I think I burnt 500+ calories atleast.

So now, how much do you think it costs to drive one roundtrip mile. Included in this depreciation of the car due to that one extra mile driven, insurance cost, etc. My back of the envelope calculation gives me about $1 per "roundtrip" mile which means that if you decide to spice up your life and live in the city instead of the insipid south bay, you'd be spending 35 bucks to just drive once to and from work! Much better to take public transport then, even if Caltrain starts costing a little more.

Personal risk and "limited liability"

Finally there's someone smarter than a 5th grader. At the same time that she became the first person to ever win a million dollars on the TV show, she exemplified fruitful risk taking. Interestingly however, she had gallantly decided in advance to donate the money she made towards education programs at Georgia's school, she being their benevolent superintendent or something (need to fact check this). Now you may be wondering how I plan to segue from this into the title of my posting and whether I am chiding her (which I am not). Here it is. I think that if she was playing for keeps, she would have thought much harder than she did about gong for the million dollar question and would have chosen to walk away with the 500K instead (the reward drops to 25K if you get the last one wrong). She made a statement to the effect that she was exemplifying risk taking to the youngsters watching her and was setting an example for them. In fact, I say that had she taken the 500K and walked away, I'd think of her as way way smarter than a 5th grader!

The point I'm trying to make is that it's easier to take bigger risks when you're playing with someone else's money and your personal risk is limited. Remember the guy at Societe Generale who was the prime cause of the emergency Fed funds rate cut in January. Or even better, Brian Hunter, who single handedly forced a big commodity hedge fund to go belly up...apparently this guy is now making big bucks for some other fund. (I want to give an honorary mention to Nick Leeson who brought down Barings Bank....honorary since he did it through really crooked means so that doesn't count for the particular case I'm trying to make).

I extend this analogy to the folks at Freddie and Fanny, Lehman, Bear Stearns and the many mortgage lenders who made a quick buck for themselves and got out relatively scot free, while leaving us the taxpayers to foot the bill. The one solace I find though is in the newsletter from Third Avenue Value Fund in which Whitman (the lead manager) talks about the substantial amount of his own money he's put in, thereby taking a personal hit from the big losses to his shareholders (reminder to self...that does not mean his fund will do well so pull money out of this one as well).

Btw..sorry for one more post with only text. I will try to include a picture or two every now and then to spice things up :)

Interpreting market action

The latest trend in the market is sell all "stuff" stocks (commodities, agri, shipping, etc.) and buy financials, housing and consumer discretionary. Isn't this insanely counterintuitive? If the market is pricing in a downturn, there is no reason why the most toxic sectors are up. An interesting thing to note is the massive run to safe treasuries (as seen by the decrease in the 10 year bond yield).

My take on all this is that it is not news related but the news does exacerbate the action. Gustav was a dud and that put more pressure on hedgies that were tied to their commodity longs, and incidentally and also short financials, housing and consumer discretionary! So I think this is the classic unwinding of positions trade with some hedge funds blowing up, having to sell their long commodity holdings and cover their shorts, and money is being put exclusively into safe treasuries. I do think the dollar strength has something to do with this but come on..if the dollar is up, our exports are going to be crappy which means crappy economy leading to more weakness (this explains some of the tech weakness though).

Hence, to conclude, I believe if we go down now, it will not stop for a while and will include all sectors under the sun! But my money is on all boats rising (due to a falling dollar as well) and breaking through 1300 on S&P pretty soon. Let's see.

Idea factory: TV show chat room

So the idea is to have a discussion portal while you are watching a TV show. For eg. you were seeing the Democratic convention and wanted to discuss what Mrs. Obama was wearing. What better way to get on a forum discussing the convention and maybe join a subset room (there may be a political room, a fashion room) and you post your thoughts, get feedback, maybe find out where she got that dress and get one for yourself! Make a note, save it, or go online and shop for it right then and there! I'm looking at this as a potential Apple Iphone app.

Idea factory: Cubicles effect exercise machine

How many hours do we spend in front of the comp at work, where are fingers are definitely doing their bit but the rest of our body is at rest. Hence i thought of this simple exercise machine..it could be like 2 pedals that you push down on (not like cycle pedals but more like paddle boat pedals). And you can keep track of your progress in many ways. One way i envision is a reward system. On the rowing machine, this usually takes the form of you blowing air on yourself. At work, it could be a meter showing you your current speed and calories burnt, power spent or even better, you let it know how many calories you'd like to burn to earn your next treat like a bag of chips and it lets you know how much further you have! Maybe such a machine exists? If so, add what you know in the comments section. As always, I have too many ideas but not enough motivation to start working on them and take them through to fruition. So if you are really interested in something and would like to collaborate, give me a holler and we can sit down to discuss about it. Remember..1% inspiration, 99% perspiration.