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Risk Manifest (by Steve)

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Wednesday's sentiment and the market's recent price action has made me step back and stroll down memory lane for some context. The increased debt in our society is very destabilizing even though when it is being created and put to use, it has the appearance of tranquility, and masquerades by the ever so juicy bullish nickname of liquidity. These debts and imbalances are cumulative and must either be paid off,defaulted on, or monetized in the case of a nation.They have not been paid off and some have defaulted but the size of the debt has increased dramatically, and terms have been extended.

Risk  -  General: Probability or threat of a damage, injury,liability, loss, or other negative occurrence, caused by external or internal vulnerabilities, and which may be neutralized through pre-mediated action.

Manifest – 1 : readily perceived by the senses and especially by the sight2 : easily understood or recognized by the mind: obvious

In 2006-2007, perhaps earlier it was clear to me that the market and the economy were going to be hit with a very high magnitude earthquake. The Fed has always been relieving the pressure of any tremors with low rates and bailouts, so that by this time the pressure of debt accumulation was off the charts -literally. Capitalism's destructive side had been banished, and the nation would know only good times thanks to Central Planning. Who is against that? There were so many economic first's that exceeded all of our previous historical extremes, including the Great Depression era,such as CEO pay in relation to the average worker, and debt to GDP ratio's. I had a nice basket of puts on Nova Star,New Century, Countrywide, WAMU, etc….. but I was looking for the glue factory that kept all of this debt together. I stumbled upon Ambac financial and read the following on yahoo finance ABK profile –

"Ambac Financial Group, Inc., through its subsidiaries, provides
financial guarantees and financial services to clients in the public
and private sectors worldwide. The company operates through two
segments, Financial Guarantee and Financial Services. The Financial
Guarantee segment provides financial guarantee insurance and other
credit enhancement products in the U.S. public finance market, the U.S.
structured finance and asset-backed market, and the international
finance market. The Financial Services segment manages interest rate
swap and investment agreement run off businesses for municipalities and
other public entities, health care organizations, investor-owned
utilities, and asset-backed issuers."

I suspected I had hit a future Grizzly Bear junction, but I am only a non-pro -"don't try this at home"- type, with no Street connections. Looking back you must admit that profile is a scream. I  A quiet, off the radar, multi -billion market cap black box! I bought Jan08 85,70 and 60 puts from AUG 06 until Feb 07 at prices from $1.45-$2.90. Nothing huge as I had no conviction, just a hunch. By the spring of 07 I was stupefied (extremely pissed) that the market had not priced in what I was seeing.

Then I read this – sounds like today.

"I haven’t had much to say lately. Just more of the same. With money
growth my firm estimates at an egregious 14% (compared to a falling GDP
now quoted in the 1-2% range, we can safely say that the money is
becoming more and more anemic in producing growth), no wonder
speculation in stocks and other assets is unabashedly high, along with
risk. But I don’t confuse risk taking with value and I hope you don’t
either". "I have suspected for a long time that government
“intervention” or “participation” (or whatever you want to call it) in
private asset markets is as high as it has ever been. The markets are
just not acting “naturally” to me. They seem orchestrated in many ways.
Why? With the levels of debt in the system (we have no historical
reference), central banks must keep asset prices rising so that the
debt doesn’t look so bad on balance sheets. To keep the public and
corporate sectors borrowing, they have to have rising collateral.
Governments are becoming a larger part of the real economy with their
debt creation. Free money means lower returns for everyone." – John Succo of Vicis Capital May 17th 2007 full text is here http://www.minyanville.com/articles/5/17/2007/index/a/12859

That might explain it, the Fed starting intervention at 5% from the highs, but finally by July, New Century and some others started to pay off but it was small consolation at the time. Then on July 19th I read something about analysis and pricing that I will never forget.

An Intricate Pas de Deux, Starring Mr. Market and You

"Lastly, I'd like to make a comment about analysis versus opinion. In
the investment business, there are two components of an outcome you
expect to see in the marketplace. The first is your analysis of the
phenomenon or security you are scrutinizing. The second is your opinion
(educated guess) about how other people will greet (price) the outcome
that you expect.

For some time now, I have
been chronicling the problems in subprime and what they mean. It was
possible to look at what had been occurring in subprime and know that a
very large number of these loans shouldn't have been made, as they
weren't going to be paid back. In addition, it was possible to know
that the people who owned the loans were levered up, as were the people
on the hook for them. Thus, it was logical to conclude that many of
these mortgages would be defaulted on, creating ramifications
throughout the financing and economic food chain.

Those
of us who believed in that analysis have been correct, and I believe
are continuing to be correct. However, those people (like me) who
thought that analysis would matter to the stock market (the opinion
part) have been incorrect, as thus far it hasn't mattered. Nonetheless,
I am more convinced than ever that the outcome I envision is
unavoidable, even as the timing remains unpredictable.

In the Final Analysis, Trust Analysis

Why do I bring this up? Because folks at home trying to determine who
they'd like to listen to/and what information to ponder — versus what
to ignore — need to be aware of those different components. I say that
because if somebody continually gets the analysis part wrong but gets
the guess part right — i.e., temporarily makes money buying
stocks because he says that either subprime doesn't matter or is
contained — that incorrect analysis will ultimately see him get
carried out. In the long term, correct analysis is more important than
your guess about how people will react to it.

Today's bulls have all been right about their belief that stocks should
go up every day, but many have been wrong in their analysis. One of
these days, Mr. Market is going to exact a penalty for the guessers
who've guessed right for the wrong reason. I believe that day is coming
sooner rather than later, and will cause far more damage than anyone
expects." -Bill Fleckenstein's Daily Rap 7-19-07

Here is what ABK looked like going into July 2007

ABK 

Daily "Endurance" Relief Chart 

ABK2

 "Risk Manifest" and a true picture of our financial system.

ABK TODAY

So where does that leave us today? Where are some ABK"s? Looks easy now – remember all the Fed tricks and Jam Jobs to keep the tape together? It was crazy. It is crazier now, but many of those stocks are gone and the problems have changed somewhat and the risk shifted. Fleck has had virtually no shorts since March. Fred Hickey none since October. Jimmy Rogers said today "this is one of the few times in my life I have not had shorts anywhere in the world". The reason? Fear of money printing liquidity re-fueling the stock markets.

Could we see something similar to this again? Of course we could and I should welcome it rather than fight it. Patience. I knew they would keep bailing until they are forced to stop, and that is why I own gold.

Spy

Was yesterday our July 19th 2007 and the reality of our economic plight gets priced right? Is it 2004 again? Where is safety? Cash? 

Finally an article I re-read frequently as it captures the quintessential nature of "Risk Manifest" in this era. You can read it here -http://www.minyanville.com/articles/index.php?a=24852

"I’d like to discuss human nature and the paper we call money from a
slightly different perspective. I was recently thinking about what's
transpired in this country in the last decade: First the equity bubble,
then the real estate/credit bubble, and then the steady debasement of
the dollar (where a trickle is now threatening to turn into a flood).

I've been struck by how few people seem to understand how all these
events are related, in that at the root, they each have irresponsible
money-printing as the cause; the sociological and psychological
phenomena that go with it (i.e., the regulators not doing their jobs)
are just part of the process. Each problem led to the next, where one
year ago, the financial system was bailed out at the risk of the
country ultimately enduring a funding crisis.

One fact that strikes me is how few people seem to have been able to
protect themselves from the first two (even though they were so
obvious) and how few will be able to do so on this third, huge problem.
In my own little world, I wrote until I was blue in the face about the
risks inherent to both of those bubbles (as did other people), but
still only a small subset of folks managed to avoid calamity." Bill Fleckenstein 10-08-2009- Its All Just Monopoly Money

Make sure you are in the small subset this time around! This is not quite ABK but it is the real glue factory in my eyes and I will be unleashing the put army when it finally breaks. Good Luck to us all!

Tlt 

A Value Proposition

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Hi Slope, Gary from Biiwii.com and Biiwii.blogspot.com here again, with something I wrote in 2007 that I think can help settle some of the noise regarding gold, should Tim choose to publish.  I think it is relevant here since Tim often refers to some err, dynamic tension between himself and gold bugs.  🙂

As the rot in Wall Street's dark
alleys works its way from the inside out, from the seediest hedge
funds' leveraged 'investment' vehicles to Main Street's financial
institutions (pensions, 401K's, savings, etc.) gold has taken center
stage, closing above $800 for the first time in its still young bull
market. Fear and anxiety are increasing as the US Dollar falls
further below serious long term support and in this environment,
gold is an emotional conduit through which growing fears of fiat
monetary instability pass. Picture a burning building with a limited
number of exits and a large crowd trying to pile through the door.
Let's call it a… oh I don't know… let's call it a casino.

Gold is the object of many strange and varied perceptions, perhaps
because it is an ancient asset that has always stirred basic human
instincts for wealth, good fortune and even survival. But in light
of the perverted and multi-headed monster we call a financial system
– with seemingly infinite instruments of 'profit' limited only by
the imagination of financial engineers – perceptions toward gold
have become distorted, helped by an enabling Wall Street and
mainstream financial media.

The main point to remember is that gold does nothing; it just sits
there and does not care about the crazy gyrations going on all
around it. But to understand and accept this, casino patrons must
first accept that the metrics they have been schooled in and the
rules they have been taught over the fiat decades to play by are not
applicable. Filling the void that this lack of understanding creates
is a whole host of opinions, many disparaging and/or dismissive.
Others simply attempt to fit this "asset class" into
conventional metrics. The inspiration for this missive was a recent
SeekingAlpha
piece by Brad Zigler called All
That Glitters May Not Be So Golden. Mr. Zigler did not write a
'hatchet piece' on gold but what I find interesting is his and many
other financial media correspondents' analysis of gold as a return
(or lack thereof) instrument.

Gold pays no risk premium as it carries no default risk. But in the
world of financial media-fed perceptions that is a bad thing. No
return you say? No markup? No leverage? Who needs that?! Gold is
about value and nothing more in my opinion. That is why I refuse to
get excited when its fiat currency denominated price goes up and why
I also remain at a normal pulse rate when said 'price' declines
sharply. I do agree that when trading or investing in the gold
miners (as I do) it is important to keep traditional metrics in
mind. But the miners are my casino of choice and I most certainly do
not see the gold miners as gold, a gold equivalent or anything other
than a potentially hugely leveraged play on an enduring asset of
value.

Back in the real world, players are just beginning to get the hint
that the risk they have taken on in the hunt for return in some very
dark corners has come at a price and the price is a massive debit
against the entire system of something for leveraged nothing. Yes,
gold pays no premium but neither is it subject to this debit because
it never went anywhere to begin with.
It
Is What It Is (this is the credo by which the website was
created) and as a barometer of global financial sentiment its
exchange value is rising versus a whole host of paper promises not
to mention many hard assets. So what many investors now need is a
sort of 12 step program as they attempt to 'put down the crack pipe'
and come to an understanding that real value has nothing to do with
return (unlike modern portfolio and asset allocation theory) and it
certainly has nothing to do with leverage.

Mr. Zigler's
assertions
and my responses:


Debate
has raged for some time now about the utility of gold in a
portfolio. Forget, for a moment, the breathless claims of
infomercial touts and Parade
magazine advertisers. Think, instead, of asset class selection.

Why
should anyone add gold—or, for that matter, any asset—to a
portfolio? The answer that comes immediately to many people's minds
is "return." It's the promise of outsized, and often outlandish,
returns that entices people to call that 800 number in the wee hours
of the morning to get their hands on the yellow metal.

There should be no debate. An asset of
historic value belongs in a portfolio if debt obligations (bonds)
and calls on corporate earnings (stocks) belong there. I agree, the
800 number pitch men are seedy characters capitalizing on fear and
insecurity, but why are they part of the conversation? Have you ever
seen the movie Boiler
Room? The world of stock scams dwarfs that of unscrupulous
precious metals dealers.


Gold
isn't the end-all, be-all, however. In the long term, the metal's
price is notoriously unstable. Since gold's price was allowed to
float in 1970, its annualized standard deviation—its price
variance—has been clocked at nearly 20 percent, versus 15 percent
for blue-chip stocks. And in that time, gold's return has only
averaged 8 percent. The S&P 500 earned 11 percent per year.

There is the word "return" again. The reason gold has
under-performed over the measured time frame (minuscule in the
context of history) is because contrary to what some gold bugs may
think, there certainly was upside to the fiat money system. This
upside was manifested in liquidity to build out all manner of
productive enterprise. The United States for example spent the
majority of the 20th century on the upside of this build-out. The
question now becomes 'do we remain on the upside or have the secular
changes beginning in and around 2000 marked a decided switch to the
inevitable payment to the piper (of the debt used to keep the dream
alive)?' If you think there is still productive upside, you will see
gold's 'return' as sub-par. If you believe that secular changes are
at hand, you are looking for that exit door in a crowded casino and
you don't give a damn about return. You want to stay whole.


So what
return can we expect
from gold? Well, financial theory says you can't expect any increase
in an asset's value without growth prospects. Stocks' expected
return derives from earnings growth. Issuers of corporate securities
can create things and grow. There's a real prospect for a company
trading its shares or warrants to be worth more and more as the
result of management decisions. Gold itself doesn't produce
earnings, and for that reason its expected return can be
approximated as zilch. Nada. Bupkis.

Mr. Zigler is correct. Gold provides no 'return' in the modern asset
allocation theory sense of the word. But in bringing the word
'value' into the equation he again shows how modern portfolio
theorists are trained; no return, no 'growth' = no value
proposition. Gold does not stand at $806 this morning because of its
growth but rather because of its retained value vs. paper
instruments – USD first and foremost – which are coming under heavy
questioning. It should be noted that in the US the stocks of these
growth entities are denominated in USD.


Appreciation
in the price of gold, of course, does occur. History attests to
that. There's just no reason to expect
it. What influences the price of gold are external, not intrinsic,
forces.

It appears Mr. Zigler and I have been watching two different
financial systems over the last several years but I certainly agree
that gold's value is affected by external forces.

He then goes on to write about the gold miners which is my usual
subject matter on the
TA
Blog, so I will just end here this critique of modern portfolio
theory as it applies to gold. I hope it helps shed a little light on
an alternate way of thinking for a few people.

I will leave you with a final thought that I was taught early on in
a school of decidedly unconventional asset theory. Price is price
and value is value. They are not one in the same. Unfortunately that
simple thought has been schooled out of the masses. I have no doubt
that pitchmen of all types will come out of the woodwork to hawk the
golden solution to an awakening public. A fortunate few will keep it
simple however and remember that real value is enduring and real
value is not a pitch. I find value splitting wood at my wood pile. I
find value in jamming loudly on guitar. I find value in Google. I
find value in the air I breathe. I find value in remaining
financially whole. I do not find value in debits attached to an
unpayable black hole.

Solvency and Sovereignty

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Hello Slopers. I am cccactii  a new and very occasional poster here and I was quite surprised that Tim gave me a chance to post, and I imagine you will be astonished that he did so. He may have had a momentary lapse in judgement if you are reading this or he is giving you all some fresh meat to fade.

I am a 47 year old airline pilot that became aware of the futility and danger in leaving my money with mutual fund managers and similar CFP types near the end of the tech bubble. I believed then that I had to learn this myself or I would be fleeced. I am a native of Minnesota and will never be looking at charts on my laptop while flying. Most of you slopers likely spend more in commissions than my net worth so this post may be for those of us who are trying to get to your realm. As such I am a Slo – Ho, or a Slop – Hopper, but I will get there!

In order to manage my own money I read a great deal including Jimmy Rogers, Reminiscences of a Stock Operator, Prechter's Tidal Wave, and even Edwards and Magee's Technical Analysis of Stock Trends to name a few. I have rarely been using charts and it certainly would have been helpful. In 2001-2002 I was convinced Greenspan would destroy the dollar and bail out any and everything he could.

I began to look at alternative investments as I perceived Wall Street to be toxic. I realized that gold and silver had been in a 20 year bear market while paper (stocks and bonds) had the opposite results during this period. I pulled up a chart of silver and Jimmy Rogers quote "I just
wait until there is money lying in the corner, and all I have to do is
go over there and pick it up. I do nothing in the meantime."hit me like a 100oz silver bar. It was the first time in my life where I believed I could have little to no downside risk as the zero rate policy was in full force.

Silver had been forgotten and it was laying there waiting to be picked up. We sold our house in Phoenix as I perceived a housing and credit bubble in 2002, and I put all of the money in physical silver and some gold. This 10-15 year base between roughly $4.50 -$5.50 had me believing the upside from such a long base would be spectacular, and my downside nil, except time value of money at less than 1%. It was to me a very bearish expression of my views, and in my mind allowed me to opt out the madness that was going on at the time.

!cid_sc

Soon after my large purchase silver moved up from $4.50 and I kept buying until the $8 area, and gold up to $480 before I decided I had enough and would just sit tight. I began reading Bill Fleckenstein daily and that only added to the confidence of my metal position. The crash in precious metals last winter was rough on me at the time, as I am heavily exposed. Instead of brooding about my metal positions tanking I thought long and hard about my thesis of the Fed printing until they cant, and gold being a very good place to be. I decided it had to be forced liquidation as all of my reasons for owning gold were completely intact. I surmised the best course of action would be to buy more. I bought more physical and some miners.I like the idea of being my own central bank and having individual sovereignty through metal. A sovereign piggy bank to you slopers.

I am trying to emulate the old man in Reminiscences of a Stock Operator who said very little except "you know it's a bull market" when asked his opinion. This dovetails Jesse in my mind when he talks about his sitting that made him the most money, not his thinking. Until I can trade like you Slopers I need to sit on the only bull market I have been fully invested in.

This bull market to me is cash. Gold is the highest form of cash and it fit perfectly in my still ongoing 10 year bearish thesis. Gold pays no dividend so in my mind I need an appreciation commensurate with interest bearing instruments. Roughly I need more than .5%/yr, .9% for 2 year according to yesterdays auction and 3.5% for 10 years. Lets compare this stealth gold bull market that a certified bear has embraced, yet the public seemingly has yet to discover. I was surprised that most slopers seemed to want to short gold, rather than own it. That may prove to be prescient and my posting this view may mark the top.

This looks like a 10 year bull market to me. Major precious metal crash like pullback to retest the 700 area last fall. I am guessing we will challenge the $1000 level soon and possibly a $950 flush. It is not out of the realm of probabilities that we retest $700 area once more, but I am not expecting it.

Gold

Gold vs SPX on a ten year view we can see the stock market rally was largely a falling dollar phenomenon and gold traded up with the market but diverged with the plunge. Gold has made a new high and SPX – Not so Much!

Goldspx 

Gold is technically a commodity but perhaps is starting to be seen as money, which is ultimately what I would expect in this environment. Gold vs CRB index. below.

Goldcrb

Finally a ten year view of the dollar with price performance of Silver,Gold, and a miner of each, as well as our beloved GS. I was surprised to see GS with all the intellectual firepower and unlimited access to funding has underperformed. Is this a bullish picture?

Perf 

I believe that everyone needs to think hard about the dollar and what that ten year chart is telling us. We know that the economic activity since March is all government induced. It is failing now and I believe they will stimulate much more. Last night it appears that the home buyer tax credit will be extended and moved up the income strata as that is where the new supply lurks. More job losses this week including the airlines which are a very good indicator of the economy along with the shipping stocks.

I read a great deal, and you may find this gal useful for macro data. Plus I think this Fleck article is mandatory.

I currently own puts on many stocks and indices and I feel that this will help mitigate any damage my large gold position may incur. I do not believe gold will go down without the stock market going with it. I believe that gold may go up even if the stock market tanks. Others before me have done a much better job on gold than I have done, but I hope it makes you think and you find something useful in the post. Good Luck to us all! 

The Alcoa Effect

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I was long the /ES last night but closed the position at 1063.25. This morning, when I fired up the screens, I was curious to see what the retail and jobs reports had done to the market. I was expecting anything, include a much higher /ES.

Both the jobs report and the retail report were good for the bulls (or "less bad", as is the case in this economy- there's no such thing as true "good" anymore). Jobless claims were substantially below even the lower range of the consensus, and almost all stores reported sales drops – – again, "less bad" – – than expected.

The /ES doesn't seen to have cared. As I'm typing this, it's up 7.75 as opposed to being up in the double digits as it was last night.

In addition, it seems that the dollar's pummeling, which it suffered all night, is abating somewhat as of this writing. So Alcoa's – – sigh – – "less bad" earnings effect, which set the market on fire yesterday evening, seems to have been the principal driver of the strength.

One other item which did occur to me is this………..if you're in charge of a government, and your success depends on your popularity with the people, and you could choose to either (a) kill the dollar or (b) kill equities, which would you choose? The wise choice in the short term (which is all that matters if you're an American politician) is the dollar. Why? Because hardly any citizen understands it.

If the stock market loses 40% of its value, that effects a lot of Joe & Marge Sixpacks out there. And most of them will understand it, because their 401-k will be turned into a 201-k (hyuck hyuck hyuck hyuck ). The idea that something they own is now worth 40% less actually gets through most of the skulls out there.

But what if I challenged you to walk down a random American street and ask the first adult you saw to explain in even the most basic terms what it means to have a falling dollar? How about if I asked you to query 100 different adults? How many do you think could do a reasonable job explaining to you even what a cross-currency valuation represents, and how it affects the economy?

My guess is probably 2 people could explain, and that is a kind estimate.

In any case, another day is before us. I see my post last night has nearly 1,000 comments (!), so welcome to a new day.

What Money Can’t Buy

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I keep reading in various blogs and newsletters how any weakness in the market will be answered by Uncle Ben and his Printing Press. In other words, now that the government has proved it can simply pour Monopoly money into the marketplace by way of Goldman Sachs and prop up the markets, it will just keep doing so in perpetuity. No more bear markets – ever!

There is one thing about which I am certain in this very uncertain world in which we live: at some point, this little game of creating trillions of dollars for the sole purpose of creating an artificial demand for financial instruments is going to fail. It might not fail tomorrow It might not fail next month. But one day, it will fail. And when it does fail, the Dot-Gov bubble is going to make the Dot-Com bubble and the Housing bubble look like pathetic jokes in comparison.

The reason capitalism – real capitalism – not fraud and artifice – has always appealed to me is because it most closely resembled the natural order of things; that is: the truth. And I've got a familiarity with the truth that some people find disquieting. I'm kind of a big fan of it.

And truthful capitalism is about things like quality products, satisfied customers, an inspired and creative workforce, and earnings growth. It is also, in turn, about a mindful board of directors, a satisfied (and yet vigilant) body of shareholders and an earnest track record of truthful accountancy and reporting.

I'm not interested in shorting AAPL or GOOG, not only because their charts simply aren't that opportune (even in the face of a severe leg down), but also because, by and large, these companies represent capitalism at its best. That's also probably why they charts don't look like good shorts.

But what's going on now with the market in general – superb companies like the above notwithstanding – is fakery. If you've got a dead tree………but you hire someone to spray paint the leaves green and trim off some of the more obvious diseased branches………you're going to convince most people for a given period of time that the tree is OK. But you've still got a dead tree. And one day when a storm blows the whole thing over, people are going to realize you've been lying to them for however long the charade has been going on.

My point is that government money, funneled through Goldman Sachs, can – and has – created artificial demand for equities that have sent them soaring. The government's printing presses are big enough to "buy" the market. But even the government can't fake widespread corporate prosperity, and for that reason, sooner or later, this game is going to reach its ugly conclusion.