“The real story of the rescue. Save the euro, must save the euro. All the world’s central banks rush to save a fiat currency. If the euro should collapse, it would demonstrate the inherent vulnerability of a leading fiat currency. The central banks and the IMF have put up nearly one trillion dollars to bail out Greece, but more important, to show the world that fiat currencies are “safe” and here to stay. Remember, the business and power of central banks lies in their fiat, non-intrinsic money – money they can create at will). To hell with Greece, the euro, therefore, at all costs, MUST be saved. In all my market years, I’ve never seen such consternation and disbelief in market action, and I’m referring to last week’s crash. Headlined the Los Angeles Times on Saturday, “Stocks’ Plunge a Troubling Mystery.” From the NY Times on Saturday, “Origin of Scare on Wall Street Eludes Officials.” Front page of Barron’s — “Don’t Let Europe’s Problems Fool You. The Bull Market Will Regain His Footing.” The Saturday Wall Street Journal even viewed the crash as a God-given opportunity with a big black-letter headline, “Playing the Market Plunge.” Wall Street and the public are so all-fired bullish that they are calling the crash a mistake, a computer error, or even the stock market losing its mind. Nobody, it appears, accepted the crash at face value. I find the cynical reaction to the crash rather ominous. I’d call it total disbelief in the market. Behind the disbelief are the unspoken words, “The economy is good, Corporate earnings are improving dramatically. Therefore, the stock market must be advancing. The crash was a terrible mistake. The stock market has lost its mind. Buy the mistake, it’s a great opportunity.” A radio station called me and asked what caused the crash. I answered, “Four words — More sellers than buyers.” The interviewer seemed stunned. He paused for about 10 seconds and asked, “You mean that’s it?” I answered, “Right, when sellers overwhelm buyers in a big way, guess what? The market goes down in a big
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Barron’s had an awesome interview over the weekend with Howard Marks. They made it the cover story for a reason. If you missed it, you must immediately read it here.
For those that don’t know, Howard Marks is the chairman of Oaktree Capital Management ($77 billion under investment). They focus on distressed debt and Warren Buffett is one of his biggest fans. What I found very appealing was his use of sentiment in his overall market thesis.
He’s been in this game longer than I’ve been alive and whenever I see someone willing to share what they’ve learned, it is like Christmas.
Here are a few of my favorite quotes from the story and my take. (more…)
Graham & Doddsville, a Columbia Business School investment newsletter, has recently scored an interview with Jim Chanos, the founder and Managing Partner of Kynikos Associates and one of the world’s most successful short-sellers. His most celebrated short-sale of Enron shares was dubbed by Barron’s as “the market call of the decade, if not the past fifty years. Obviously, he’s still bearish on China’s property market and banking sector and his positions are starting to move his way. In this long (though very insightful) interview with G&D, Chanos talks about his background, investment style, short-selling, contrarian trading and, of course, China.
Here is an excerpt of the original interview (full interview below that… it’s long but it’s worth the read).
On Wall Street ethics:
“… I handed out a two page memo to the senior banker discussing the impact of buying back stock. The senior banker looked at me with an icy stare and stated that we were not in the business of recommending share buybacks to our clients; we were in the business of selling debt. This was my first douse of cold water regarding Wall Street and I became pretty disillusioned after that episode. I had learned that Wall Street wasn’t necessarily doing things in their clients’ best interest…”
On timing a short-sale:
“I recommended a short position in Baldwin- United at $24 based on language in the 10-K and 10-Qs, uneconomic annuities, leverage issues and a host of other concerns. The stock promptly doubled on me. This was a good introduction to the fact that in investing, you can be really right but temporarily quite wrong… I went home to visit my parents for Christmas and received a phone call from Bob Holmes telling me that I was getting a great Christmas present – the state insurance regulator had seized Baldwin-United’s insurance subsidiaries.”
On being a contrarian:
“… numerous studies have shown that most rational people’s decision-making breaks down in an environment of negative reinforcement… You’re basically told that you’re wrong in every way imaginable every day. It takes a certain type of individual to drown that noise and negative reinforcement out and to remind oneself that their work is accurate and what they’re hearing is not.”
“We try not to short on valuation, though at some price even reasonably good businesses will be good shorts due to limitations of growth. We try to focus on businesses where something is going wrong. Better yet, we look for companies that are trying — often legally but aggressively — to hide the fact that things are going wrong through their accounting, acquisition policy or other means. Those are our bread-and-butter ideas…. Valuation itself is probably the last thing we factor into our decision. Some of our very best shorts have been cheap or value stocks. We look more at the business to see if there is something structurally wrong or about to go wrong, and enter the valuation last.
…You need to be able to weather being told you’re wrong all the time. Short sellers are constantly being told they’re wrong. A lot of people don’t function well in an environment of negative reinforcement and short selling is the ultimate negative reinforcement profession, as you are going against the grain of a lot of well-financed people who want to prove you wrong. It takes a certain temperament to disregard this.”
“This is a bubble that has a long way to go on the downside. Residential real estate prices, in aggregate in China, at construction cost, are equal to 350% of GDP. The only two economies that ever saw higher numbers at roughly 375% were Japan in 1989 and Ireland in 2007, and both had epic property collapses. So the data does not look good for China.”
…In China, everyone is incented by GDP. They are fixated on growth. In the West, we go about our economic lives, and at the end of the year the statisticians say, this year your growth was 3%. But in China, it’s still centrally planned. All state policy goes through the banking system. They decide what they want growth to be and then they try and figure out how to get there.”
Full interview below. (more…)
Easily the most feared technical pattern in all of chartism (for the bullishly inclined) is the dreaded Hindenburg Omen. Those who know what it is, tend to have an atavistic reaction to its mere mention. Those who do not, can catch up on its implications courtesy of Wikipedia, but in a nutshell: “The Hindenburg Omen is a technical analysis that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster of May 6th 1937, during which the German zeppelin was destroyed in a sudden conflagration.” Granted, the Hindenburg Omen is not a guarantee of a crash, and the five criteria that must be met for a Hindenburg trigger typically need to reoccur within 36 days for reconfirmation. Yet the statistics are startling: “Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days.” The last Hindenburg Omen occurred during the lows of 2009. Today, we just had another (unconfirmed) Hindenburg Omen. It is time to batten down the hatches – something big is coming.
As a reminder, the 5 criteria of the Omen are as follows:
- That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
- That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
- That the NYSE 10 Week moving average is rising.
- That the McClellan Oscillator is negative on that same day.
- That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.
Today, all five conditions were satisfied. June 2008 was another such reconfirmed event, and as Barron’s pointed out then, “there’s a 25% probability of a full-blown stock-market crash in the next 120 days. Caveat emptor.” Boy was the emptor caveating within 120 days (especially if said emptor was named Dick Fuld). Which brings us to the present: should the Omen be reconfirmed within 36 days, all bets are off.
Always the contrarian, Marc Faber’s investing advice for 2010 is this — listen to the experts, and then do the opposite. Faber, the editor of The Gloom Boom & Doom Report, wrote in his most recent January newsletter that he was bullish on U.S. stocks.
Nothing lasts forever, though.
He’s changed his mind after participating in this week’s Barron’s round-table discussion. “Everybody was looking for further gains in stocks,” he tells Henry in this clip. That opinion is also reflected by Bloomberg’s latest investor survey, which registered its highest level of bullish sentiment since the survey began in 2007.
That overwhelming consensus worries Faber. He now thinks a correction in U.S. stocks could come much sooner than most predict. Momentum players who are driving the market could “pull the trigger relatively quickly,” he says. He also observes that the charts of stocks favored by momentum investors, like Google, RIM, Apple and Amazon, look to be flattening out.
Overall, 2010 will not be one for the record books, as 2009 was. He’s looking at a more normal 5%-10% rate of return for global investors.