The Bernanke Put

Greenspan had a theoretical put, so why can't Bernanke? Well, he does. This theoretical Greenspan Put is a belief that, given a "market crisis", the Federal Reserve chief would step in and lower key rates to avoid a systematic crisis. We have seen this several times with Bernanke since he took over the reigns. Even the rumors of Fed action is enough to create the most dramatic of market rallies (as witnessed on November 28th , 2007 as the DJ-30 gained 330 points). If you are short, you will feel the pain. These types of events are what make shorting more risky than being long.

Nouriel Roubini does a fantastic job looking into the recent market rout and subsequent Fed inspired rally. Spend some time with the full article, it will help shed some light on the recent developments in our economy and just might save your financial future.

The Bernanke Put and the Last Legs of the Stock Market Sucker's Rally

How sharply will the US stock market fall if the US experiences a recession? Given the recent flow of very negative macro news, the likelihood of a US hard landing has sharply increased; thus, it is important to assess the implication of such growth slowdown, hard landing or outright recession on the stock market.

It is true that in the last two days the US stock market has recovered sharply after a significant 10% downward correction in the period from early October until Monday. But the most sensible interpretation of the upward move on Tuesday and Wednesday this week (in spite of an onslaught of lousy macro news: consumer confidence, existing home sales, Beige Book, fall in durable goods orders, regional Fed manufacturing reports, initial claims for unemployment benefits, expectations that Q4 growth will be closer to 0% after the revised 4.9% in Q3, sharply rising credit losses, falling home prices and a worsening housing recession, etc.) is that this is the last leg of a sucker's rally (or dead cat's bounce) driven by wishful hopes that the Fed easing will prevent a recession.

Certainly yesterday Wednesday equities rally was totally driven by Fed governor Kohn signaling the obvious, i.e. that given that the liquidity and credit crunch is now worse than at its August peak the Fed will cut rates in December, January and for as long as needed. In this game of chicken between the Fed and the bond market (with the latter signaling already for a while that the Fed will keep on cutting) the Fed was obviously the one to blink: this was no surprise to anyone who had noticed the meltdown in financial markets (a ugly liquidity and credit crunch) in the last few weeks. But for some reason the stock market on Wednesday discovered what analysts, the bond market and credit markets knew all along, i.e. that the Fed will have to keep on cutting rates as we are headed towards an ugly recession that is now inevitable regardless of how much the Fed cuts rates.......

Hello winter part two

Hello winter part I was a look at exercising during the tough times and staying true to personal goals and commitment to those goals. In part II of Hello winter, I want to relate that same outlook on commitment to personal finances. These two endeavors go hand in hand from a mental aspect. It makes complete sense to me to mix the two, thus the reason I am keeping a blog in the first place. Staying fit in the winter mentally is exactly like pushing through the tough times in your investing. You have made the plan, then some bad weather comes along and does its best to steer you off course and create doubt in your strategy. The mental pain can be severe but the reward is worth the suffering. Danger seems to be at every corner, your decisons are tested to the point where you think you will break. These are the times you must stay true to your system. Your system, that is the key. This is your training plan, it has been thought out with a clear mind, it has been time tested for soundness. If you are to make it to the "summer" or easier times you must remain true to your system and follow it regardless of the external environment.

Now lets back up one step further. To develop a plan and stick through it most, if not all, great athletes need a coach, a coach who has seen it all, and has consistently put his athletes in positions to become great. Don't discount the athletes personal determination to his goals, but they need someone to guide them and encourage them when the times are tough. This is no different in investing. To be successful, the individual investor needs guidance. I am no different. While I have the mental capacity, drive, discipline, and dedication to be successful I have not had a "coach". Without a coach, I can't live up to my potential. This realization has forced me to rethink my role as an Investment Advisor. Being a value to my clients as an Investment Advisor has been on of the most difficult experiences of my life. I will be a success in the future but now I am forced to look in the mirror and ask myself a very difficult question. Can I honestly do the best job for my clients when I know that I am not doing the job I expect of myself? The answer is no. Therefore, I have decided to merge my current client base into a firm with many years of experience and success. In order for me to be successful in the long run, and to be a real value to my clients I must find someone who can help me realize my one true goal, To be the best that I am capable to being.

Hello Winter part one

It finally happened. After a very mild start to the winter, we finally were hit. Now I know winter has not yet officially begun, however, my calender flips over once we have finally had some real cold weather. This was the first trail run I went on the was better served with crampons and ice skates. This usually means my real runs and bike rides are now isolated to the flats; endless loops around the Boulder Reservoir or Eagle Trail, rides out to see the Interstate, or even worse the treadmill and trainer. I begin asking myself why do we subject ourselves to this every year. Is there a benefit to going through these tough winters? While I was slip sliding away this morning, the answer came to me. We go through the tough times to make us stronger. When the going is tough we are forced to dig deep inside and push through. I thought back to my best season as a triathlete, 2004. I had just come off of Ironman Wisconsin, in September 2003 with a good result but not great. I had always been a good swimmer and cyclist, but my running had a lot of holes in it. If I wanted to see my potential as a triathlete I had to become a better runner. In order to become a better runner for the 2004 season I had to begin now, in late 2003 and train through the winter.

The first step was commitment to the end goal, qualify for Ironman World Championships in 2004, about a year out. Second was to run through the winter. I was determined to become a runner. This takes time, lots of miles, and lots of determination. Through that winter I did become a much better marathon runner. In fact, I did several marathons late that winter and spring, including the Boston Marathon (which by the way is an incredible event). The training was extremely tough. Winter brings with it short days, bitter cold mornings, and unstable weather. Dedication kept me going, nothing was going to stop me from becoming a runner. The body is amazing what it can become. The mind is even more amazing in what it can make the human machine become. I attribute part of my success during the warm summer season to the determination to train and stay motivated through the winter months. You must to have a goal, a commitment to that goal, and that determination must be tested for a real sense of accomplishment.

So as I was out running this morning, asking myself why am I doing this, I realized I am out here because I need to be tough. I don't have a goal to stay motivated yet. I talk about Xterra next season but I have not committed to it yet. Without commitment, a goal is not real it is only a dream.

Honestly, I do have to admit that winter training is not always that bad. Some of my best most memorable runs have been on the snow, in cold temperatures. The solitude and beauty of running through the forest in a fresh blanket of snow is something special.

What to make of this market?

As of writing the DOW-30 is up just shy of 300 points and about 4% higher than the close on Monday, Nov 25. Does this imply that we have seen a bottom? The talking heads have declared that we have seen a 10% move lower in the indexes and now we can get back to our raging bull. I take caution to this. Why is 10% the amount markets need to correct to shake off excess, etc? By trade I use technical analysis in making investment decisions. This includes support, resistance, moving averages, and some various other indicators to help me decide to pull the trigger. What really matters is what happens after I initiate a position. This is what really matters, how you get in a position is meaningless (be it technical analysis, fundamental analysis, or throwing darts at the quotes of the Wall Street Journal). Positions must be entered in a favorable risk to reward ratio. I am willing to give up X dollars in expectations of Y returns. The way I see it currently is there is little more upside potential to be gained versus the likely hood of the markets being at some sort of intermediate top. I could be wrong and the markets might continue higher, I don't know. What I do know is the probabilities and the amount of money I am willing to risk on my decision. Below is what my favorite Blogger, Barry Ritholtz, has to say, via his Blog, The Big Picture.

Market's Back-to-Back Streak

Wednesday, November 28, 2007 | 01:00 PM

Well, the Christmas Rally we discussed on Monday and Tuesday has finally arrived.

Indeed, like the NY Knicks, the Markets have finally pieced together two consecutive winning days.

Since the decline that began on October 30th, the S&P 500 has gone 19 days without having more than one winning session in a row.

I have been following this ever since my friend Paul first asked about what the failure to have two consecutive back-to-back winning days actually means. I was speaking with Mike Panzner about this earlier in the week. Mike noted:

• The longest such streak (since 1999) was the 24-day run that ended on 9/21/01. The second longest streak was 22 days, which ended on 3/21/01. There have been two other streaks of 21 days each, ending on 10/3/00 and 4/29/02, respectively.

• Except for the post 9/11 streak, which marked a climactic V-bottom low in the equity market, other spans seemed to define the first leg of a downdraft that "paused" for anywhere between 4 and 14 days before it resumed.

• Visually speaking, the pattern that developed when those prior one-day-wonder streaks ended was a "flag," which in technical analysis terms, often implies that a move -- in this case, the downtrend -- is about half-way over.

• For what it's worth, the same also holds true for the two shorter streaks of 16 days that ended on 1/28/03 and 4/1/05, respectively.

• Based on past history, then, it seems that once the current streak ends ( i.e., we see two or more winning sessions in a row), the risk is that it won't be long before the market begins another push lower.

I would add one item to Mike's comments: The wild swings in the markets, +/- 2%, with violent up 200 or 300 point days don't typically come in healthy Bull markets -- these spasms are symbolic of Bear markets.

The Evolution of an Investor

This is a very interesting article out of Portfolio.com, following the progression of a stock broker and a look under the hood at the mechanics of some Wall Street firms. The conflicts of interest that are presented in this article are the reason so many advisors are going to fee only. By having a fee only advisor the firm's interests and its client's interest are more closely aligned. This structure forces the firm to actually make the client money to have them retained as an advisor and not just a sales and marketing firm. Always try and ask yourself (and advisor for that matter) how does the other guy make money from this? Money is the score card of Wall Street, always find out how they score and make sure your are along for the ride and not taken for one.

Enjoy the following article and be better informed next time someone asks for your money.

The Evolution of an Investor

Retail round up

Now that we have made it through the first push in Holiday spending we should take a look and see what kind of damage we, as a spending nation, did. I expect the results to continue to be OK from downwardly revised expectations. This is one of my favorite Wall Street tricks: lower expectations then create excitement when the expectations are beat. Despite the shenanigans we are constantly led to believe, these expectations are what create stock's value. Prices will move to account for all known information, as well as expectations (a phrase the efficient market folks leave out). There for beating lowered guidance is a valid excuse to increase share value. I expect too much pessimism has been priced into the retailers going into the holiday season. Longer term I think we will see some weakness, but for the immediate future there are some opportunities out there. Stores are busy for now but the real test will be in the bottom line. Sure sales may be up, but sale will undoubtedly come at the expense of normal margins. This should be just as exciting as unwrapping the gifts themselves, at least for some the retailers.

Without further comment, lets see the spending scorecard.

The New York Times reports...Bargains Draw Crowds, but the Thrill Is Gone

American consumers flooded stores yesterday on the traditional first day of the holiday shopping season, but the irrational exuberance of the Black Fridays of the last five years has been replaced by pragmatic restraint.

With an uncertain economy, a slowdown in the housing market and high gas prices hanging over their heads, consumers flocked to discount chains like Wal-Mart, Target and Best Buy, brandishing bargain-filled fliers.

In a reversal from years past, they largely bypassed more expensive retailers, including such powerhouses as Nordstrom, Coach and Abercrombie & Fitch, according to shoppers and merchants interviewed around the country.

This shift has prompted industry analysts to christen this the “trade down” holiday season......

Return to Sender

Once again folks, there is nothing to see here, we are still in the greatest bull market we have ever seen. Unfortunately, your S&P indexed mutual fund is worth the same as it was on January 1st, 2007, unless you are looking in real trade weighted dollar terms then you would actually be down about 10%. That is really unpleasant. Lets say, "be thankful you aren't traveling outside of the USA." Now, back to your regularly scheduled holiday. Eat up!!!


This might be a good time to review your portfolio strategy. A start would be to review my some of my earlier posts.

-Are you diversified?
-A subprime look at the global economy
-Dear Mr. Poole, you left the money spigot on
-Real effects of inflation