At Some Point, Will Need a New Playbook

Woke up this morning and my eyes were about swelled shut. Sinus pressure is bad! Had to take the day off and go the antihistamine route. Feeling a little better now.

At Some Point, Will Need a New Playbook

2012 has started very positive and markets are very happy. Across the board enticing setups are showing up and fear has taken a back seat. Sentiment is running heavily towards the bullish side and action has followed suit.

For the last 5 months of 2011 this has always been a spot to get skeptical and very light or even outright short. At some point this will change and the playbook will have to be updated with new ideas. chessNwine has an excellent recap video today that discusses what may happen going forward this year; a market that rewards the best set ups and stock picks instead of a mass risk on/risk off sort of thing. You can see the recap here.

Looking things over today I was faced with one of two decisions, open up some long positions even as things are extended here (the two indicators I follow Robert Sinn's SMS and the PPT Hybrid score) or use the same old play from the old playbook and take a shot at a short position. I chose the latter.

I bought TZA about 15 minutes before the market close. I did this for two reasons. One was the blog I wrote last night about the last gasp rally to S&P 500 1295 or so. The gap up today had that well in play. The second is that I am feeling pretty ill and it would be easier to manage one position than carry 2-4 positions especially around earnings season where you have to check across your stock buys industry in case there is news that affects your position.

In either case, it should be readily apparent what is going on should TZA continue to fall part here. If a sustained move up is on the way, I feel that there will be great room to the upside in many names and I can play it out going forward that way. Top picks are TTEK, DFS, and INTU.

Have a good night.

Happy New Year!

That eve once again is upon us.

Market Themes for 2012
After 2011, I am going to skip the "this will happen" sort of thing for 2012. I think it will be best to be ready with an open mind. It is likely several things will present themselves in the first 3 months of 2012 which will be important for the entire year. I want to be ready to see them.

As for my own ideas for the New Year there are three things I want to be more diligent about which would have made a big return difference in 2011:

-Allowing runners to run. It was reactive to jump out with a small to medium gain in a trade that was working. Not many, but several of these trades became longer term winners if held through a bit of volatility. Identifying the most sound moves up will extend gains.

-Focus on extreme sentiment inflection points and place the correct, forceful bet when the time comes. If the manic market continues, these spots may prove to be both somewhat common and very profitable.

-Do not trade so much. The first half of the year I would open my best 2-3 ideas, and then add on 3-5 other ones I felt had promise. I will work to stick to my best 3-6 ideas at a time (usually in short term account looking to play a 2 week resolution of a pattern or target) and give them the right amount of attention.

I feel very fortunate to have broadly expanded the readership of Economic Disconnect in 2011. I have to thank many people for all the links, ReTweets, and kind words that allowed this to happen. It's amazing really.

Let's keep it running in the New Year.

Happy New Year

In the New Year try to do one thing that I suggest; email, leave a comment on a blog, or talk to someone you have wanted to. Take a chance and you never know where that may lead you.

Evening Music
Going to load a few of my favorite songs of this year (I heard them for first time, maybe older than 2011) and a New Years Eve performance.

"Two of the Lucky Ones" by The Droge and Summers Blend:


Nightwish's tearfully pretty song "Sleeping Sun":


I tend to spend New Years right in my living room, its just safer and more fun. In 2006 The Bangles did a performance of "Hazy Shade of Winter" that just rocked the house:


Have a good night.

For My Amusement

Another silly ride home today. I have no idea what is going on, the usual back to school thing cannot explain all the traffic. Long rides home really suck the life out of you. What I cannot figure out is that I leave at 6am and the roads are empty but when I leave at 4pm they are full. What freaking hours are these people working anyway, 10-4? Good deal if you can get it. We need higher unemployment in Massachusetts! (joking obviously, I am not that kind of doomer!)

For My Amusement
Seeing that there has been as much interest in this blog over the past week as there is in a turkey turd taco, I figured I would branch out and hit a few topics that I will find amusing or interesting. I will even break my writing about metals rule!

When Greenspan Makes Sense I know I Need a Drink
I know I need a cool one when Alan "The Maestro" Greenspan makes sense to me. If Paul Krugman ever makes sense I will need a bender in Vegas to get right!

Tim Iacono notes in an interview with the NY Sun Greenspan had this to offer:

Mr. Greenspan replied that he’d thought a lot about gold prices over the years and decided the supply and demand explanations treating gold like other commodities “simply don’t pan out,” as Mr. Malpass characterized Mr. Greenspan. “He’d concluded that gold is simply different,” Mr. Malpass wrote. At one point Mr. Greenspan spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes. Said the former Fed chairman: “If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.”

Oh No He DIDN'T!!

Should be the final nail in the coffin for Greenspan's legacy, though somehow Andrea Mitchell found him hot enough to marry.

Barry Ritholtz has an interesting bet on tonight based on gold prices:

Gold Bet: $2500 Over/Under 2012
With Gold at $1275/oz today (spot cash price), Paul took the over and I took the under on $2500, on September 16, 2012.
The bet: A dinner for 4 — us and our wives — costing whatever an ounce of gold goes for then.
May the best man win.

Barry does not play!

As of writing there are 31 comments. Breakdown:
-Over $2500 = 5
-Under $2500 = 10
-Non Committal/Nonsense = 16
Best comment by Shnaps:
Lock of the year. Except that you may end up dining at Applebee’s.

My call? I hate to take any bet looking 2 years out with the Mya 2012 thing and all! A far better bet would have been September 2011, and more telling of both men's positions. Even in 2011, I think $2500 is aggressive, but $1800 would be my call for next year at this time. Gold may well be $500 an ounce in September 2012, but it will not mean what you think it will mean right now.

Advice for the Federal Reserve
Forget about gold, forget about stupid curves and various models and equations. Economic Disconnect has a new policy tool in mind for the FED board to use, and it will even come cheap.

Rather than rely on advice and theorems from already rich people that have never worked and reports in their beige book from business folks across the country (I mean come on; who is going to say "business sucks and you guys did it!" No, we get "my orders are looking up compared to that one week last year when I had a cold and the internet was down so I am more optimistic!). Here is the winning tool:

Buy a Television and Get Cable TV

Now for the folks at the FED, a TV is a small (or huge, depends on what you want) box that shows moving images. You know, like the old black and white Zenith boxes they used to watch "Howdy Doody" and "Gunsmoke" on as a kid? Yeah, those, only better. And in color.

Tune into any show that has to do with folks getting their hands on free money that banks provide and you will know when things are getting out of control. Had the FED seen "Property Ladder" or "Flip this House" where starving artists were flipping Las Vegas condos worth (at the time!) $900k or more with no money down and never making a mortgage payment they might have even sidestepped the whole housing mess. Today they could watch "Jersey Shore" and then ask themselves should banks be lending aggressively to anyone that likes this show? I would suggest they read blogs, but they will only frequent the ones by their friends. Free advice guys!

A Note About Contrarian Calls
Think of the song "Every Breathe You Take" (The Police) and use these lyrics:

"Every page I load,
Every call I read,
Every single play,
Every single day, it's called contrary"

Ok, maybe that is a bit harsh, but I have been inundated with the "is this a contrarian indicator?" or "Time Magazine Cover Calls", or "this is so outside the main line of thinking contrary it rocks the house!" baloney I am getting dizzy.

First off, a definition to work with:

In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.

Important points here:
-there has to be accepted conventional wisdom
-that opinion must appear to be wrong

This disqualifies about 80% of all the calls I see day in and day out.

The Three Kinds of Contraries
Three broad types.

Absolute Contrarian
Here in Massachusetts it is Thursday. If I say tomorrow is Friday a whole subset of people will try to find a futures contract for tomorrow being Saturday. This is absolute contrarianism and it is the worst offender of all.

Wrong Contrarian
Remember from the definition, for a contrary idea to be good for investing, the main view has to be wrong. Sometimes the mainstream is right, it does happen. It was contrarian to get real long CSCO at the bottom of the tech crash in 2001. It is still right there if you want it around $21 bucks if you want to get contrary.

Nuanced (but still wrong) Contrarian
These callers have cool charts and maybe even some historical anecdotes to use but in the end they are still wrong. My favorite are the new era "housing may have bottomed due to rent/own ratio looking good and long term trendlines for prices looking more normal". The charts back them up but history does not. These two posts (here and here) on Barry's site have some charts that look downright encouraging for housing going forward. Too bad they are almost useless.

Anyone that lived through the late 80's/early 90's housing bubble (I did), which is barely a blip on the charts above, knows that it took a full decade to get back to the old prices! An entire decade (no accounting for inflation, just the dollar price)! So yeah, maybe thing have bottomed but I would think a entire 10 year waiting period is a long time to be correct. This is a believable but still very wrong contrarian call. I cannot stress enough that the late 1980's bubble in real estate is dwarfed by the last one. It is the height of contrarianism to think history will change now. Good luck with that!

What is More Important to You: Fairness or Lack of Inconvenience?
I will have a new poll question up (which should garner 2 or 3 votes) which will ask what is more important to you based on an essay at Aleph Blog (via The Reformed Broker).

The presentations key point by my excerpts (but you should read it all!):

Fairness Versus Economics
"...Men/(Women) were created to judge their surroundings and rule it. Man was created on Earth for moral purpose primarily, not for increase in consumption. When ethics are transcendent rather than a question of economic advantage (more is better), men will act against their short term interests to promote the long term good.
This is yet another reason why people don’t necessarily act on average to maximize their short-term pleasure. People will not normally enter into deals that they find morally repugnant even if they would gain from it. Ask a liberal if they would encourage the Nature Conservancy to sell land to Plum Creek Timber, or one of its peers. They will object. Wait, couldn’t they take the proceeds, and buy up more forest elsewhere? Sorry, this is a sine qua non for them. They don’t deal with the enemy.

So the central bank decides to finance a certain financing market in a panic. Fairness asks this: why them, and why not me, or everyone? We don’t care if the economy would supposedly collapse without the aid of the central bank. Things should be fair; if you are offering it to them, you should offer it to me, or everyone, or you should not offer it.The same applies to fiscal policy. Stimulus, should it exist at all, should apply to the broadest category of applicants. Don’t target troubled industries, particularly those whose products are in oversupply. Send the stimulus to average people equitably. Let industries fail, but let consumers choose what they need. Why should we support industries that are not needed by the public?

Forget the political angle and the religious one, it is not the writers point, nor mine in the presentation, just example. Focus on what the questions are. A little more:

"So when I read Daniel Henninger in the Wall Street Journal arguing that average people don’t respect spending beyond the budget of the government, I get it. I GET IT!!! They have an interest in fairness, which stems from their moral sense that we can’t spend beyond our means, printing press or not. Yes, the printing press may print, but it does not create value as much as redistribute value into the hands that the government favors, and the average person suspects they are getting none of it.
They look at it and wonder, Why can’t I do that? Why can’t we all do that? The moral/ethical question pops to the top, regardless of other concerns."

I hate to excerpt such a great piece so much, but you really should take a trip over there for the whole thing. Like now.

Now that you are back, let's get down to it:
There is no reason anyone on the street should not be treated as a huge bank. If I am in financial trouble, why can't the government give me a $2 million dollar loan at 0% up front with me to pay it off as a balloon payment when I die should I save enough? If I am short, why should the taxpayers of that time not pay for it? I supported consumption! I fostered aggregate demand! Where is my cookie? Where is my bride?

This brings me back to a point of contention I had during the big wash out a while ago. While many contrarians were piling in to the banks, Fannie and Freddie, and any insurance company saying the government would not let them fail, they were not contrarian at all to reality, just morality! That craven play was as ugly a thing as I have ever seen and I really could give two chits if you made money for your clients. It was disgusting and paved the way for future policy because you all got lead by your greed to do what the powers that be wanted, sell out. It is what it is. Middle ground is hard to find on that one.

So the question is up tonight, please place a vote as I am interested in seeing what the readers think.

Have a good night.