Double-Edged Sword: Swine Flu and Vaccines
By guest author Terry Doherty and Ilene, your editor
Terry Doherty is the Research Program Coordinator in the Depts of Biomedical Sciences and Academic Affairs at Cedar Sinai in Los Angeles, California.
Double-Edged Sword: Swine Flu and Vaccines
My point in this article is that there’s plenty that is unknown about the swine flu and the swine flu vaccine. Deciding whether or not to be vaccinated may be a tough decision. A lot of emotion may go into the decision making-process. How - without having the background to write a swine flu study grant proposal, conduct the research, and get the thing published in the New England Journal of Medicine - do we decide whether or not to get a swine flu shot?
One way is to attempt to evaluate and weigh the risks of the vaccine against the risks of the flu. That is how I approach the subject but it’s easier said than done. As is often the case with medical interventions, the risks are not fully known. And even if you’ve carefully assessed the risks based on available evidence, your underlying assumptions may be entirely wrong. Besides the holes in the available data, personal beliefs and biases may drastically affect our thinking in such matters.
Due to its newness, this is especially true for the H1N1 flu and the H1N1 vaccine. Although several government-sponsored projects are attempting to evaluate the safety of the vaccines, we do not have conclusive data. But we have a rather unique opportunity to learn more. (See Swine Flu Vaccine: Watching For Side Effects, here or here.)
In Vaccine War: Autism, Flu and Science, TIME, Maia Szalavitz discusses how emotion and biases play a large part in our risk-benefit assessments:
Just in time for the national roll-out of the new H1N1 flu vaccine, Wired Magazine and the Atlantic have weighed in on the ongoing vaccine war: Wired has a profile of Paul Offit, a vaccine researcher and pediatrician who has consistently spoken out in favor of vaccination and pointed to the lack of evidence linking vaccines and autism; the Atlantic checks in with a piece questioning the science suggesting that flu vaccines and antiviral drugs prevent people from dying.
Both articles have elicited heated debate all over the Web: Amy Wallace, who wrote Wired’s piece, excerpted below, has received vitriolic criticism and attacks from vaccine opponents, setting records for page views…
This debate over vaccination doesn’t seem likely to end any time soon. For critics, vaccines have become a touchstone for cultural anxieties and a not entirely unjustified mistrust of government and big business. No matter what evidence researchers provide supporting the safety of vaccination and its clear benefit to global public health, opponents remain convinced that the vaccine industry is tainted and biased by commercial pressures and that anyone who supports vaccination must have financial motives.
But for those who are concerned about health and safety, these articles and the related discussions offer a fascinating view of the controversy. If we are to have a rational conversation about the best way to fight flu, infectious disease and autism, we need to recognize that these are scientific questions and use the best research—not the data that supports our preconceived views—to answer them.
We need to look at the science objectively, and perhaps free ourselves from an overwhelming amount of emotionally-charged misinformation that pops up in our well-intended flurry of google searches.
What is the Incidence?
One important factor in deciding whether to be vaccinated against a disease is its incidence, or likely incidence — what are the odds that you will contract the disease?
The incidence of swine flu is not clear. Mike Stobbe writes in 1 in 5 Kids Had Flu-Like Illness This Month, TIME, "about 1 in 5 U.S. children had a flu-like illness earlier this month — and most of those cases likely were swine flu, according to a new government health survey. About 7 percent of surveyed adults said they had a flu-like illness, the survey found." Of course, flu-like symptoms are not synonymous with confirmed swine flu cases. The number of confirmed swine flu cases–it’s not really known.
Countries are not keeping track of total number of H1N1 cases. See U.S., Other Nations Stop Counting Flu Cases, TIME. "U.S. health officials have lost track of how many illnesses and deaths have been caused by the first global flu epidemic in 40 years. And they did it on purpose. Government doctors stopped counting swine flu cases in July, when they estimated more than 1 million were infected in this country."
In Swine Flu Infected Millions in First U.S. Wave, CDC Study Finds, Bloomberg, Jason Gale notes that
"Swine flu may have infected as many as 5.7 million people in an initial wave that swept across the U.S. earlier this year, researchers at the Centers for Disease Control and Prevention and Harvard School of Public Health said.
The number of swine flu patients in the U.S. may have been up to 140 times greater than the reported number of confirmed cases, according to a study published in the CDC journal Emerging Infectious Diseases. A model used by the researchers to extrapolate total cases suggests 1.8 million to 5.7 million infections occurred from April to July."
CBS News has also investigated the occurrence of swine flu. According to CBS, state testing results suggest that H1N1 is not as prevalent as feared. See for example, Swine Flu Cases Overestimated?: "If you’ve been diagnosed ‘probable’ or ‘presumed’ 2009 H1N1 or "swine flu" in recent months, you may be surprised to know this: odds are you didn’t have H1N1 flu. In fact, you probably didn’t have flu at all."
Given that estimates may be too high, or too low, the incidence of swine flu is not known.
Consequently, the death rate in the population is also unknown.
What are the risks?
In H1N1: Hitting the Young, Riskier for the Old, TIME, Alice Park reports:
researchers are collecting more and more data on the spread of the pandemic flu and getting a clearer picture of its victims — who is most vulnerable to H1N1, how the most severe cases progress and which risk factors tend to contribute to life-threatening disease…
The latest study, published this week in the Journal of the American Medical Association, offers a snapshot of 1,088 H1N1 cases in California that were severe enough to require hospitalization — or resulted in death — between April 23 and Aug. 11 of this year. Experts at the California Department of Public Health, who led the study, say their findings are largely in line with the growing body of data on the worldwide pandemic flu, confirming, for instance, that the 2009 H1N1 flu disproportionately affects younger patients….
While H1N1 infection results in mild or moderate disease in most patients — indeed, the most severe cases account for a small proportion of overall infections — a subset of patients are harder hit, the data show. And in those patients, the disease can often quickly become life-threatening. "The major point of our findings is that there has been a lot of perception that this is a mild disease, and a lot of people may be ambivalent about vaccination," says Dr. Janice Louie, a public-health medical officer at the California Department of Public Health and the study’s lead author. "But for those patients who were hospitalized, 30% required intensive care. This is something that clinicians should be aware of when patients walk into their clinic or office with signs of flu."
Among hospitalized patients in the study, 118 died — an overall 11% fatality rate. Although the rate of hospitalization was highest among infants under 2 months old, the rate of death was highest in patients over age 50; H1N1 was least likely to turn fatal in patients under age 17. Yet with all the focus in the media on the vulnerability of younger patients to infection, the elderly may have been somewhat dangerously overlooked, says Louie. Although older patients may not be at high risk of getting infected in the first place (thanks to their residual immunity to the virus from previous outbreaks of H1N1), their risk of death from the disease may be higher than that of younger patients, primarily because of their higher rates of underlying conditions, such as heart disease, reduced lung function, diabetes and emphysema…
The California data also reveal a potentially new risk factor for H1N1: obesity. Obese individuals were disproportionately represented in the state’s sample of hospitalized cases…
This study suggests that while the swine flu is usually mild or moderate, in the subset of patients with severe disease, the symptoms may rapidly become life-threatening. While the elderly may have some residual protection and are less likely than younger people to be infected with H1N1, when they are infected, their course is generally worse.
How effective is the H1N1 vaccine?
Two other factors to consider when deciding whether to get a flu vaccine are the safety and effectiveness of the vaccine.
In the Atlantic’s Does the Vaccine Matter?, Shannon Brownlee and Jeanne Lenzer question the effectiveness of flu vaccines.
But what if everything we think we know about fighting influenza is wrong? What if flu vaccines do not protect people from dying—particularly the elderly, who account for 90 percent of deaths from seasonal flu? And what if the expensive antiviral drugs that the government has stockpiled over the past few years also have little, if any, power to reduce the number of people who die or are hospitalized?…
[The] impact of flu vaccine has been harder to determine. Flu comes and goes with the seasons, and often it does not kill people directly, but rather contributes to death by making the body more susceptible to secondary infections like pneumonia or bronchitis. For this reason, researchers studying the impact of flu vaccination typically look at deaths from all causes during flu season, and compare the vaccinated and unvaccinated populations.
Such comparisons have shown a dramatic difference in mortality between these two groups: study after study has found that people who get a flu shot in the fall are about half as likely to die that winter—from any cause—as people who do not. Get your flu shot each year, the literature suggests, and you will dramatically reduce your chance of dying during flu season.
Yet in the view of several vaccine skeptics, this claim is suspicious on its face. Influenza causes only a small minority of all deaths in the U.S., even among senior citizens, and even after adding in the deaths to which flu might have contributed indirectly. When researchers from the National Institute of Allergy and Infectious Diseases included all deaths from illnesses that flu aggravates, like lung disease or chronic heart failure, they found that flu accounts for, at most, 10 percent of winter deaths among the elderly. So how could flu vaccine possibly reduce total deaths by half? Tom Jefferson, a physician based in Rome and the head of the Vaccines Field at the Cochrane Collaboration, a highly respected international network of researchers who appraise medical evidence, says: “For a vaccine to reduce mortality by 50 percent and up to 90 percent in some studies means it has to prevent deaths not just from influenza, but also from falls, fires, heart disease, strokes, and car accidents. That’s not a vaccine, that’s a miracle.”…
Flu researchers have been fooled into thinking vaccine is more effective than the data suggest, in part, says Jefferson, by the imprecision of the statistics. The only way to know if someone has the flu—as opposed to influenza-like illness—is by putting a Q-tip into the patient’s throat or nose and running a test, which simply isn’t done that often. Likewise, nobody really has a handle on how many of the deaths that are blamed on flu were actually caused by a flu virus, because few are confirmed by a laboratory….
In Jefferson’s view, this raises a troubling conundrum: Is vaccine necessary for those in whom it is effective, namely the young and healthy? Conversely, is it effective in those for whom it seems to be necessary, namely the old, the very young, and the infirm? These questions have led to the most controversial aspect of Jefferson’s work: his call for placebo-controlled trials, studies that would randomly give half the test subjects vaccine and the other half a dummy shot, or placebo. Only such large, well-constructed, randomized trials can show with any precision how effective vaccine really is, and for whom.
In the flu-vaccine world, Jefferson’s call for placebo-controlled studies is considered so radical that even some of his fellow skeptics oppose it….
All of which leaves open the question of what people should do when faced with a decision about whether to get themselves and their families vaccinated. There is little immediate danger from getting a seasonal flu shot, aside from a sore arm and mild flu-like symptoms. The safety of the swine flu vaccine remains to be seen. In the absence of better evidence, vaccines and antivirals must be viewed as only partial and uncertain defenses against the flu. And they may be mere talismans. By being afraid to do the proper studies now, we may be condemning ourselves to using treatments based on illusion and faith rather than sound science.
Does the Vaccine Matter? points out problems with vaccine research, highlighting our need to make decisions based on incomplete information. This is not uncommon in medicine. Ultimately, we make choices within the framework of our beliefs, often based more on faith than science.
Is the vaccine safe?
In the case of a widespread, potentially deadly disease, it makes sense to risk rare side effects associated with a vaccine. Nevertheless, fear of serious side effects may prevent some people from getting vaccinated. For example, Guillain-Barré Syndrome was thought to have resulted from the 1976 swine flu vaccine program. As written about in Swine flu ‘debacle’ of 1976 is recalled:
The episode triggered an enduring public backlash against flu vaccination, embarrassed the federal government and cost the director of the U.S. Center for Disease Control, now known as the Centers for Disease Control and Prevention, his job.
The pandemic fears of the time and the resulting vaccine controversy may be fueling some of the public’s — and media’s — anxiety about the current outbreak, said health officials who recalled the previous event…
Since the 1976 episode, annual flu vaccines have been provided without the serious side effects seen then. A study from CDC scientists published in the current issue of the journal Drug Safety concludes that evidence exists for a link between the 1976 swine flu vaccine and Guillain-Barre syndrome but not for most other vaccines developed in the last 55 years."
According to a study published in Lancet last week, there is no evidence that the swine flu vaccine causes serious side effects, including an increased risk of Guillain-Barre syndrome or death.
Unfortunately, the availability of the internet together with an increased public concern and engagement in interpretation of vaccine adverse event data have increasingly allowed for spurious associations to be promoted as fact. Widespread beliefs that such false associations are true can and do disrupt immunisation programmes, often to the detriment of public health. Lancet, October 31, 2009 DOI:10.1016/S0140-6736(09)61877-8
In Side effects not always due to swine flu shot, Maria Cheng writes:
As millions of people worldwide begin getting the new swine flu shot, public health officials are bracing for rumors about dangerous side effects linked to the vaccine.
To provide context, experts combed hospital databases and population samples in Britain, Canada, Finland, the United States and elsewhere to find daily baseline rates of commonly reported events like Guillain-Barre syndrome, sudden deaths, seizures and abortions…
"People die every day for lots of reasons, but we tend not to think about that when a mass immunization campaign is happening," said Steven Black of Cincinnati Children’s Hospital in Ohio, one of the paper’s authors. "We’re not saying we don’t need to look at vaccine safety, but let’s do it judiciously."
Terry Doherty cautions: "In the world of medicine, safety is a double-edged sword. What if you refrained from having your child vaccinated because of some vague fears about the safety of the vaccine, then watched as your unprotected child contracted swine flu and died of it? The probabilities that this could happen are every bit as relevant as the probabilities that your child may have some side effects from the vaccine, and arguably, quite a bit more relevant. These potential disastrous outcomes associated with declining treatment must be factored in to overall risk."
In the end
After spending over a week reading through the available information and realizing what I don’t know still exceeds what I do know (and frankly not wishing to spend another month on it!), I’ll conclude with the words of my friend Terry who brings considerable knowledge and experience
in the field of medical research into my quest for answers:
If one day you find yourself in a space shuttle awaiting launch, would you rather that the space shuttle was designed, built, and operated by the "establishment" (that is, NASA), with it’s political agendas and various faults and self serving interests, or by a group of amateurs who had done a whole lot of reading and research on the Internet about space shuttles? While nobody can guarantee your safety no matter which of the above two options you pick, I think the best decision is self-evident, and anybody who decides otherwise makes a decision that is not in their own best interests.
We have to entrust our fate; we have to rely upon expert consensus opinion. That is a hugely important source of guidance. If you encourage everybody to read literature and make up their minds, you’ll get a wild spectrum of interpretations and judgments by people who are in no real position to make such judgments generally. This isn’t politics; lives may depend upon this process. Medicine in general relies heavily upon expert consensus guidance. Professional societies are constantly assembling groups of experts, sometimes very large groups, to meticulously comb through the available data, synthesize interpretations, and make recommendations that are widely promulgated and deployed. That’s because they know that individual physicians could never hope to do as well, as a rule.
So, what exactly are the consensus guidelines? These cannot be just ignored because they represent the medical establishment or because available data is incomplete. If it is incomplete for experts, then it is also incomplete for everybody else, so that is not a useful criteria. As for experts representing the “medical establishment,” I have participated in formulating some of these kinds of expert advisory statements. I can tell you that there is no central dictatory control. They are prepared to print whatever the group as a whole decides and writes, and that’s why they assemble the group in the first place. There is rarely or never any kind of agenda, in terms of the “establishment” foisting something onto the public for some self-serving reason or other. There is no central editorial oversight. The group basically writes whatever the members think is correct. There are usually several leading members of the writing group assembling and writing things, but that’s it.
If you encourage people to just examine whatever information they can find and come to their own conclusions, then you do people a huge disservice. That’s because it is inevitable that they will encounter wrong information, poorly done studies, falsified data, and papers written by people with hidden agendas and ulterior motives. But they will have no way to determine that this is the case, and will tend to give equal weight to articles published in the New England Journal of Medicine by Nobel laureates as articles written in the International Journal of Obscure Tropical Lagoons and Puddles by hucksters, charlatans, shills, frauds, and hired guns.
Whether the information and thoughts compiled here help anyone decide whether or not to get a swine flu vaccine, or the next one when another pandemic strikes, we can only hope. Jon Stewart, perhaps, says it best, or at least with the most laughs: http://www.thedailyshow.com/watch/thu-october-15-2009/doubt-break--09
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Fresh from the Desk of Phil's Stock World
Interview with Jesse at the Café Américain
"The easiest road to corruption is through self-delusion." - Jesse
By Ilene at Phil's Stock World
Ilene: Jesse, thank you for doing this interview with me. I’ve been visiting your Americain Cafe now for over a year and have greatly enjoyed the experience. Your site makes me feel like I’m in a real Cafe and have just picked up an interesting article to read with my coffee. However, as it is a virtual meeting spot, we haven’t been formally introduced yet. Will you tell me a little bit about yourself and how the Cafe got started?
Jesse: I am pleased that you are enjoying the Cafe as it has been intended. Too much information about the markets and the economy is hurriedly snatched and gulped down, like American ‘takeaway.’ Sometimes it is valuable to sample information from diverse sources, taste it from different methods of preparation that do not hide its true flavor, and digest it properly. Otherwise we tend to move from bite to bite, with a broadly shallow appreciation of current events, driven by those who shape the mainstream menu offerings.
In 2000 I had taken an early retirement from corporate work, where I had been a vice president at a Fortune 500 company. My intention was to take ten years off to study economics in greater depth, but primarily to spend more time with my family.
I had always been fascinated with economics from the time I had studied it at the university when I went back for an MBA. I am originally an engineer by trade with a background in mathematics and the natural sciences, and while finance was my favorite subject, economics was a fascination. It was clearly a nascent science, full of competing theories, and struggling to find a footing.
Even with my limited background, I could tell that we were approaching an historic period in economic history. The bubble in tech was obvious to anyone who was able to read a chart, and look at the rationale for the boom with a historically skeptical eye.
I had started to study bubbles and crashes in 1998. One of the benefits of traveling for business is that one can become a voracious reader, and so I read quite a few books on bubbles and crashes to supplement what I already had known.
In 2000 I discovered the world of financial chat boards. It was interesting to find a group of people who also did not believe in ‘the bubble.’ This was a chat board at a place online called ‘Fall Street.’ I had been studying technical charting for some time, and looked into most of the methods. I liked the classic charting method, and gained quite a bit of knowledge from Ken Shaleen. I found my own style of charting with what I called ‘the Babson method’ which had been used by the economist, Roger Babson.
There were requests to see these charts, which I was generating on a variety of timeframes. I started posting the charts, which included quite of bit of hand drawn features, for viewing at Yahoo Geocities at a site simply called Jesse’s Charts.
Early in 2001, I started taking things I wrote for the chat board and turned them into small essays, and placing them as text images along with the charts on this site, since the chat board was impermanent and not readily searchable. At that time, blogs were not so readily available. The name of the site was changed to Jesse’s Crossroad Cafe.
The site was intended to be entertaining and visually appealing, often funny, as well as informative. This made it more interesting to me to produce, and the idea was to educate people while providing an interesting diversion. Education does not have to be dry and painful to be effective. There is a wonderful experience to be had in the joy of learning, the ecstasy of understanding. It merely needs some encouragement to occur.
The format on Geocities was a single page, with a background wallpaper and music that changed every few days. The documents and charts were presented as links arranged around the page. It was visually appealing but difficult to maintain and with no search or long term archiving capability.
Yahoo Geocities decided to end their site hosting business in the autumn of 2007, and essentially shut down the Crossroads Cafe over a weekend. At first I was devastated as all the information I had stored there was lost.
I decided to find a new venue, and blogging seemed an even more effective method of providing information of various types in an attractive format with searchable qualities.
Le Café Américain as it is today opened in February 2008. And so here we are today.
Ilene: Are you planning on going back to the corporate world any time? Or will you continue with your studies, blogging and quest to educate people, or all of the above?
Jesse: I am not sure. My ten year hiatus is ending next year. What I do next will depend on where I am needed the most, and I imagine on who would have me. I will be ready for something new, but will always continue with my studies and reflection, meditation, as I have done all my life. It is always a matter of degree. The first six months in a new position are always intense with new learning. I have thoughts of writing a book or two, perhaps some essays, but one has to first think of something essential to say.
Ilene: I’d be willing to bet that you’ll find essential things to say…. As an avid reader of your blog, I sense some skepticism of the equity market’s recent ascent. Do you have any thoughts on where this market is headed?
Jesse: It is always difficult to forecast the short term direction of the US equity and bond markets, but it is especially so now because the Fed and Treasury have provided unprecedented amounts of liquidity to a relatively small number of Wall Street banks. The Fed is openly monetizing debt, and buying the long end of the curve! Because of the way in which rescue has been structured, the banks have little or no incentive to lend the money to commercial interests, but have plenty of incentive to chase beta by speculating in the markets.
The government and associated pundits and analysts also have an incentive to see the bond and equity markets rally because this is viewed as a ‘good sign,’ a way for the economy to rebound and carry the US past its financial crisis and the collapsing credit bubble. .
Without a reform of the financial system and a rebalancing of the economy there can be no sustained recovery. The Fed and Treasury are debasing the dollar in the hopes of masking their past policy errors. This is shaking the global currency regime which has been in place since World War II to its foundations.
So, will the stock market continue to rally? It can, as long as the world keeps accepting dollars, and the Fed pursues the quantitative easing, and the banks are free to trade for their own accounts with sophisticated programs that add no value, but transfer wealth from the many to the few.
Eventually the markets will reflect this economic reality, and the trend will revert to the fundamental mean. When this happens it may be quite painful for all of us. But predicting the time that it will occur is difficult, except to say that it will almost certainly be when the Fed must raise interest rates to save the bond and the dollar. Perhaps earlier than this, if people realize that the market has become a liquidity driven Ponzi scheme without fundamental underpinnings in the productive economy.
This may be triggered by some exogenous event, something that happens from outside the system, which causes the pyramid scheme to collapse. An oil shock would do it for example. It would even distract the public from the underlying causes and the need for reform.
Ilene: Your writing captures the frustration that many people may feel watching the stunning series of events leading to the financial meltdown/so-called recovery. I see our Constitution subverted, new powers created out of nothing, a system of justice turned upside down, and a free market that never really was (causing me to rethink many of my prior views). If you agree with my assessment, how would you explain how this could happen?
Jesse: From discussing this with much older friends, too many of whom have by now passed away, and from my own personal observation of large organizations, I would say that there is always some element, some minority percentage of people, who are amoral and possessed with a need to have many possessions for their own sake, and power over others.
They are often very verbally proficient and quick-witted, good on their feet. They tend to view other people as objects, and do not hesitate to act in a manner that most people would consider to be unthinkably dishonorable. To them the ends definitely justify the means, and the ends are all about the accumulation of more people and possessions to try and fill the great hole in their beings. Some of them are simply as they are because their father or mother did not like them, and they need to prove them wrong, that they are worthwhile. And so they have a neurotic need to gain power over the people and situations because they are afraid. It’s very sad really.
These people are mildly sociopathic, and generally miserable people to be around, but are normally restrained by the rule of law and social conventions.
But at some times the conventions of an organization or a society become weakened, through war or financial stress and crisis, and this relatively small group begins to assume more positions of power, often indirectly through other public personalities. Other people who are merely opportunistic and weak-willed, socially immature, fall in with them, acting as their enablers and supporters.
They see how things are going, and say to themselves, "Why be good? Why be honorable? If these others can gain power and position and possessions why should I not do the same? If I do not, someone else will do it."
This is where we are today. It has its roots in the ‘me generation’ of the 1980’s and the ‘greed is good’ culture that came with the counter-reaction to the altruism and idealism gone bad of the 1960’s in the economic shocks of the 1970’s and the recession of the 1980’s.
It was a remarkable achievement of American democracy that it resisted the allure of statism such as overtook Italy, Japan, and Germany in the 1930’s. Much of the criticism of FDR is from those who were disappointed at their failed coup to bring fascism or communism to the States. I thought FDR did a remarkable job of steering what was then a ‘middle course’ and was branded as a traitor to his class for it.
In retrospect many are harsh in their criticisms, but considering what other countries experienced, the US did quite well with his leadership, and like it or not the people loved him for it, and the elite monied interests hated him for it. Of course, there are always the masses of the ignorant that are only too eager to mouth slogans and selectively odd notions fed to them that they think make them sound wise in a contrarian sort of way.
Left or right, it is all about being successful by advancing over another, by taking what they have, by possessing them, objectifying them, setting yourself apart from ‘the crowd’ whom you secretly despise. For the most part these may be smart people, but in life they are mediocrities, banal in their tastes, unoriginal and unloved, unloving. But they are focused by their mania.
Could one find a more banal group of failed mediocrities than the National Socialist party leaders? And yet they almost succeeded in conquering much of the civilized world by corrupting a weakened nation.
After years of traveling, and seeking to meet people, I have come to the conclusion that people all over are essentially the same. But cultures can be different, because as an organization they reward and approve certain behaviours and discourage and admonish others.
Japan is very different culturally from the US. But I have met Japanese businessmen who were as egotistical and self-centered in private as an American scion of Wall Street might be publicly. But they tend to be restrained by their culture, and not held out as objects of admiration.
I do not believe in ‘conspiracy’ per se. But different types people tend to find each other, people with similar tastes and attitudes, and work together to achieve their similar ends when they are not fighting amongst themselves. It really is a sickness of the mind and the spirit, similar to any other sickness that needs to prey on others to satisfy its abnormal needs. It is because it involves financial and material goods, rather than physical abuse or physical theft, that a relativistic society can tolerate it, allow it to flourish.
It becomes a much more serious problem if amoral egoists begin to gain influence over the government and the media, and undermine the restraints on the will to power, their culture of emptiness. It only takes a minority of the people to give in to the darker impulses of fear and greed to support them, and for the majority to do nothing in response, and an entire nation can become slowly corrupted, allowing monstrous things to occur.
I would say that things in the US began to deteriorate in the middle 1990’s when Bill Clinton was in the White House. This was when we saw the overthrow of the last of the reforms put in place at the end of the Great Depression. Clinton was an egotistical verbalizer, a chronic abuser with a shocking set of personal habits that appear to be compulsive. And he was replaced by an amoral mediocrity that could view torture and the Constitution as impediments or enablers to his will.
Now the US has another high IQ verbalizer, who may be sincere and inexperienced, but unfortunately has surrounded himself with the same elitist group of corrupt statists that enabled the Clintons.
Ilene: What do you mean by “elitists?”
Jesse: Elitists are self-identifying, powerful people in business and politics. Those who consider themselves the elite, based on their wealth, their bloodlines, their university, their personal connections. They are certainly not egalitarian or humanists. They tend to worship power above all, and hold those who have less power in disdain. They have a decided lack of sympathy for their fellow humans, preferring to consider them as objects if at all.
By the way, it is a common characteristic that they cheat, they break the rules, they often flout the law as a matter of course. This type of person views the rules as something to be imposed on the common people, the others, those who need to be ruled by them. If you don’t believe me, start looking into their backgrounds. Everyone may cheat now and then, but for some people it is a way of life, an affirmation of their privileged status. It can almost become a game.
In the UK, it is hard to see daylight. Tony Blair was an egoist verbalizer, and it will be too bad if he gains power over the EU. Gordon Brown is truly frightening. The Tories are intellectually and morally bankrupt, but Labour is corrupted.
The answer of course is for society to begin again to restrain the minority who would serve the will to power, and discourage their demimonde of followers and enablers. The only way to do it is to put justice back into place, restraints on the risk-reward calculations of corruption. There really is little downside to white collar theft and graft, if you are ‘connected.’ Move on, all will be forgiven, we do not have time to enforce the rules in an emergency or a crisis. Besides, he is a ‘goodfella.’ One of our crowd. One of us.
The politics of the US today remind me of the competing crime families we saw in Chicago and New York at various periods in US history. Obviously they can gain enormous power, and the influence of their corruption can run deep. And just as obviously they can be taken down through a concerted effort by cutting them down at the roots.
Ilene: But doesn’t the trend seem to be one of ever-increasing power and wealth in the hands of the minority elite, who use their wealth and power to acquire more – how can that be stopped?
Jesse: The good news is that they are a minority, and they do not run the country and the world. There is always a minority of those who break the law, who subvert society, and there is the means to stop them from succeeding.
Their strength is their weakness. The focus which permits some people to succeed also gives them a ‘tin ear’ for the effects of their greed. In other words, they always go too far, and begin to blatantly start breaking the law, and acting in ways that are obvious wrong. And when there is a public revulsion to their deformity, they just do not get it.
One has to restore a rule of law, an atmosphere in which there are risks for wrongdoing. It is a classic case of the need for reform after a period in which rule breaking has flourished. It is a familiar story throughout history.
The Wall Street banks must be restrained from gaming with the public money. The markets must be a level playing field in which insiders and larger players do not engage in fraudulent trading practices. This requires honest regulators above all, who have not accepted jobs and favors from insiders. Self regulation does not work, because the easiest road to corruption is through self-delusion.
The flow of money from special interests to politicians via lobbyists and campaign contributions must be stopped through campaign financing reform and scrupulous disclosures. Those who accept money from special interests over which they have a public stewardship are a cancer to a society.
The media must once again be managed by diverse elements, and not a few corporations.
People must once again be willing to tell the truth, to stand for what is right, to speak for the ideals which govern the country under the Constitution, without fear of retribution or penalty.
Our treatment of ‘whistleblowers’ is often shameful.
Obama was obviously elected in the US as a reformer, and he is failing. Is he corrupt, or merely naïve? No matter. If he does not perform he will be replaced, by a third party if necessary.
I am a little less optimistic with regard to the UK, probably from a personal ignorance, but there is always hope.
America is a revolutionary country, and it still maintains a love of freedom and a dedication to its founding principles, even though at times it may seem to lose its way.
Reform is a response to a specific set of deteriorating conditions, some specific wrongs. It is when the majority of average people begin to restore a balance to their society by no longer being afraid to call certain behaviours ‘wrong’ and unacceptable to their society.
Who is to say what is wrong? There is a wonderful thing in America, its Constitution. It sets out the basic principles of freedom in a marvelous way. It is not perfect. It does not contain all the details, which are to be found in the body of laws that surround and support it, and those who swear to preserve, protect and defend it.
It starts by simply saying ‘no’ to those who would rule us by fear and discouragement. To say no to private prejudice and greed, which cause us to turn a blind eye to injustice. Daylight is a good disinfectant. Secrecy is not the normal condition in a free society.
Periods of time can be dangerous, because there are sometimes wolves in sheep’s clothing. Hitler was put forward as a strong reformer. He was elected by a minority, and suspended the rule of law. So a nation will be wise in whom it selects to lead it. If it holds on to its principles, in the case of America, the Constitution, then it can stay on the path to reform.
"The easiest road to corruption is through self-delusion." - Jesse
By Ilene at Phil's Stock World
Ilene: Jesse, thank you for doing this interview with me. I’ve been visiting your Americain Cafe now for over a year and have greatly enjoyed the experience. Your site makes me feel like I’m in a real Cafe and have just picked up an interesting article to read with my coffee. However, as it is a virtual meeting spot, we haven’t been formally introduced yet. Will you tell me a little bit about yourself and how the Cafe got started?
Jesse: I am pleased that you are enjoying the Cafe as it has been intended. Too much information about the markets and the economy is hurriedly snatched and gulped down, like American ‘takeaway.’ Sometimes it is valuable to sample information from diverse sources, taste it from different methods of preparation that do not hide its true flavor, and digest it properly. Otherwise we tend to move from bite to bite, with a broadly shallow appreciation of current events, driven by those who shape the mainstream menu offerings.
In 2000 I had taken an early retirement from corporate work, where I had been a vice president at a Fortune 500 company. My intention was to take ten years off to study economics in greater depth, but primarily to spend more time with my family.
I had always been fascinated with economics from the time I had studied it at the university when I went back for an MBA. I am originally an engineer by trade with a background in mathematics and the natural sciences, and while finance was my favorite subject, economics was a fascination. It was clearly a nascent science, full of competing theories, and struggling to find a footing.
Even with my limited background, I could tell that we were approaching an historic period in economic history. The bubble in tech was obvious to anyone who was able to read a chart, and look at the rationale for the boom with a historically skeptical eye.
I had started to study bubbles and crashes in 1998. One of the benefits of traveling for business is that one can become a voracious reader, and so I read quite a few books on bubbles and crashes to supplement what I already had known.
In 2000 I discovered the world of financial chat boards. It was interesting to find a group of people who also did not believe in ‘the bubble.’ This was a chat board at a place online called ‘Fall Street.’ I had been studying technical charting for some time, and looked into most of the methods. I liked the classic charting method, and gained quite a bit of knowledge from Ken Shaleen. I found my own style of charting with what I called ‘the Babson method’ which had been used by the economist, Roger Babson.
There were requests to see these charts, which I was generating on a variety of timeframes. I started posting the charts, which included quite of bit of hand drawn features, for viewing at Yahoo Geocities at a site simply called Jesse’s Charts.
Early in 2001, I started taking things I wrote for the chat board and turned them into small essays, and placing them as text images along with the charts on this site, since the chat board was impermanent and not readily searchable. At that time, blogs were not so readily available. The name of the site was changed to Jesse’s Crossroad Cafe.
The site was intended to be entertaining and visually appealing, often funny, as well as informative. This made it more interesting to me to produce, and the idea was to educate people while providing an interesting diversion. Education does not have to be dry and painful to be effective. There is a wonderful experience to be had in the joy of learning, the ecstasy of understanding. It merely needs some encouragement to occur.
The format on Geocities was a single page, with a background wallpaper and music that changed every few days. The documents and charts were presented as links arranged around the page. It was visually appealing but difficult to maintain and with no search or long term archiving capability.
Yahoo Geocities decided to end their site hosting business in the autumn of 2007, and essentially shut down the Crossroads Cafe over a weekend. At first I was devastated as all the information I had stored there was lost.
I decided to find a new venue, and blogging seemed an even more effective method of providing information of various types in an attractive format with searchable qualities.
Le Café Américain as it is today opened in February 2008. And so here we are today.
Ilene: Are you planning on going back to the corporate world any time? Or will you continue with your studies, blogging and quest to educate people, or all of the above?
Jesse: I am not sure. My ten year hiatus is ending next year. What I do next will depend on where I am needed the most, and I imagine on who would have me. I will be ready for something new, but will always continue with my studies and reflection, meditation, as I have done all my life. It is always a matter of degree. The first six months in a new position are always intense with new learning. I have thoughts of writing a book or two, perhaps some essays, but one has to first think of something essential to say.
Ilene: I’d be willing to bet that you’ll find essential things to say…. As an avid reader of your blog, I sense some skepticism of the equity market’s recent ascent. Do you have any thoughts on where this market is headed?
Jesse: It is always difficult to forecast the short term direction of the US equity and bond markets, but it is especially so now because the Fed and Treasury have provided unprecedented amounts of liquidity to a relatively small number of Wall Street banks. The Fed is openly monetizing debt, and buying the long end of the curve! Because of the way in which rescue has been structured, the banks have little or no incentive to lend the money to commercial interests, but have plenty of incentive to chase beta by speculating in the markets.
The government and associated pundits and analysts also have an incentive to see the bond and equity markets rally because this is viewed as a ‘good sign,’ a way for the economy to rebound and carry the US past its financial crisis and the collapsing credit bubble. .
Without a reform of the financial system and a rebalancing of the economy there can be no sustained recovery. The Fed and Treasury are debasing the dollar in the hopes of masking their past policy errors. This is shaking the global currency regime which has been in place since World War II to its foundations.
So, will the stock market continue to rally? It can, as long as the world keeps accepting dollars, and the Fed pursues the quantitative easing, and the banks are free to trade for their own accounts with sophisticated programs that add no value, but transfer wealth from the many to the few.
Eventually the markets will reflect this economic reality, and the trend will revert to the fundamental mean. When this happens it may be quite painful for all of us. But predicting the time that it will occur is difficult, except to say that it will almost certainly be when the Fed must raise interest rates to save the bond and the dollar. Perhaps earlier than this, if people realize that the market has become a liquidity driven Ponzi scheme without fundamental underpinnings in the productive economy.
This may be triggered by some exogenous event, something that happens from outside the system, which causes the pyramid scheme to collapse. An oil shock would do it for example. It would even distract the public from the underlying causes and the need for reform.
Ilene: Your writing captures the frustration that many people may feel watching the stunning series of events leading to the financial meltdown/so-called recovery. I see our Constitution subverted, new powers created out of nothing, a system of justice turned upside down, and a free market that never really was (causing me to rethink many of my prior views). If you agree with my assessment, how would you explain how this could happen?
Jesse: From discussing this with much older friends, too many of whom have by now passed away, and from my own personal observation of large organizations, I would say that there is always some element, some minority percentage of people, who are amoral and possessed with a need to have many possessions for their own sake, and power over others.
They are often very verbally proficient and quick-witted, good on their feet. They tend to view other people as objects, and do not hesitate to act in a manner that most people would consider to be unthinkably dishonorable. To them the ends definitely justify the means, and the ends are all about the accumulation of more people and possessions to try and fill the great hole in their beings. Some of them are simply as they are because their father or mother did not like them, and they need to prove them wrong, that they are worthwhile. And so they have a neurotic need to gain power over the people and situations because they are afraid. It’s very sad really.
These people are mildly sociopathic, and generally miserable people to be around, but are normally restrained by the rule of law and social conventions.
But at some times the conventions of an organization or a society become weakened, through war or financial stress and crisis, and this relatively small group begins to assume more positions of power, often indirectly through other public personalities. Other people who are merely opportunistic and weak-willed, socially immature, fall in with them, acting as their enablers and supporters.
They see how things are going, and say to themselves, "Why be good? Why be honorable? If these others can gain power and position and possessions why should I not do the same? If I do not, someone else will do it."
This is where we are today. It has its roots in the ‘me generation’ of the 1980’s and the ‘greed is good’ culture that came with the counter-reaction to the altruism and idealism gone bad of the 1960’s in the economic shocks of the 1970’s and the recession of the 1980’s.
It was a remarkable achievement of American democracy that it resisted the allure of statism such as overtook Italy, Japan, and Germany in the 1930’s. Much of the criticism of FDR is from those who were disappointed at their failed coup to bring fascism or communism to the States. I thought FDR did a remarkable job of steering what was then a ‘middle course’ and was branded as a traitor to his class for it.
In retrospect many are harsh in their criticisms, but considering what other countries experienced, the US did quite well with his leadership, and like it or not the people loved him for it, and the elite monied interests hated him for it. Of course, there are always the masses of the ignorant that are only too eager to mouth slogans and selectively odd notions fed to them that they think make them sound wise in a contrarian sort of way.
Left or right, it is all about being successful by advancing over another, by taking what they have, by possessing them, objectifying them, setting yourself apart from ‘the crowd’ whom you secretly despise. For the most part these may be smart people, but in life they are mediocrities, banal in their tastes, unoriginal and unloved, unloving. But they are focused by their mania.
Could one find a more banal group of failed mediocrities than the National Socialist party leaders? And yet they almost succeeded in conquering much of the civilized world by corrupting a weakened nation.
After years of traveling, and seeking to meet people, I have come to the conclusion that people all over are essentially the same. But cultures can be different, because as an organization they reward and approve certain behaviours and discourage and admonish others.
Japan is very different culturally from the US. But I have met Japanese businessmen who were as egotistical and self-centered in private as an American scion of Wall Street might be publicly. But they tend to be restrained by their culture, and not held out as objects of admiration.
I do not believe in ‘conspiracy’ per se. But different types people tend to find each other, people with similar tastes and attitudes, and work together to achieve their similar ends when they are not fighting amongst themselves. It really is a sickness of the mind and the spirit, similar to any other sickness that needs to prey on others to satisfy its abnormal needs. It is because it involves financial and material goods, rather than physical abuse or physical theft, that a relativistic society can tolerate it, allow it to flourish.
It becomes a much more serious problem if amoral egoists begin to gain influence over the government and the media, and undermine the restraints on the will to power, their culture of emptiness. It only takes a minority of the people to give in to the darker impulses of fear and greed to support them, and for the majority to do nothing in response, and an entire nation can become slowly corrupted, allowing monstrous things to occur.
I would say that things in the US began to deteriorate in the middle 1990’s when Bill Clinton was in the White House. This was when we saw the overthrow of the last of the reforms put in place at the end of the Great Depression. Clinton was an egotistical verbalizer, a chronic abuser with a shocking set of personal habits that appear to be compulsive. And he was replaced by an amoral mediocrity that could view torture and the Constitution as impediments or enablers to his will.
Now the US has another high IQ verbalizer, who may be sincere and inexperienced, but unfortunately has surrounded himself with the same elitist group of corrupt statists that enabled the Clintons.
Ilene: What do you mean by “elitists?”
Jesse: Elitists are self-identifying, powerful people in business and politics. Those who consider themselves the elite, based on their wealth, their bloodlines, their university, their personal connections. They are certainly not egalitarian or humanists. They tend to worship power above all, and hold those who have less power in disdain. They have a decided lack of sympathy for their fellow humans, preferring to consider them as objects if at all.
By the way, it is a common characteristic that they cheat, they break the rules, they often flout the law as a matter of course. This type of person views the rules as something to be imposed on the common people, the others, those who need to be ruled by them. If you don’t believe me, start looking into their backgrounds. Everyone may cheat now and then, but for some people it is a way of life, an affirmation of their privileged status. It can almost become a game.
In the UK, it is hard to see daylight. Tony Blair was an egoist verbalizer, and it will be too bad if he gains power over the EU. Gordon Brown is truly frightening. The Tories are intellectually and morally bankrupt, but Labour is corrupted.
The answer of course is for society to begin again to restrain the minority who would serve the will to power, and discourage their demimonde of followers and enablers. The only way to do it is to put justice back into place, restraints on the risk-reward calculations of corruption. There really is little downside to white collar theft and graft, if you are ‘connected.’ Move on, all will be forgiven, we do not have time to enforce the rules in an emergency or a crisis. Besides, he is a ‘goodfella.’ One of our crowd. One of us.
The politics of the US today remind me of the competing crime families we saw in Chicago and New York at various periods in US history. Obviously they can gain enormous power, and the influence of their corruption can run deep. And just as obviously they can be taken down through a concerted effort by cutting them down at the roots.
Ilene: But doesn’t the trend seem to be one of ever-increasing power and wealth in the hands of the minority elite, who use their wealth and power to acquire more – how can that be stopped?
Jesse: The good news is that they are a minority, and they do not run the country and the world. There is always a minority of those who break the law, who subvert society, and there is the means to stop them from succeeding.
Their strength is their weakness. The focus which permits some people to succeed also gives them a ‘tin ear’ for the effects of their greed. In other words, they always go too far, and begin to blatantly start breaking the law, and acting in ways that are obvious wrong. And when there is a public revulsion to their deformity, they just do not get it.
One has to restore a rule of law, an atmosphere in which there are risks for wrongdoing. It is a classic case of the need for reform after a period in which rule breaking has flourished. It is a familiar story throughout history.
The Wall Street banks must be restrained from gaming with the public money. The markets must be a level playing field in which insiders and larger players do not engage in fraudulent trading practices. This requires honest regulators above all, who have not accepted jobs and favors from insiders. Self regulation does not work, because the easiest road to corruption is through self-delusion.
The flow of money from special interests to politicians via lobbyists and campaign contributions must be stopped through campaign financing reform and scrupulous disclosures. Those who accept money from special interests over which they have a public stewardship are a cancer to a society.
The media must once again be managed by diverse elements, and not a few corporations.
People must once again be willing to tell the truth, to stand for what is right, to speak for the ideals which govern the country under the Constitution, without fear of retribution or penalty.
Our treatment of ‘whistleblowers’ is often shameful.
Obama was obviously elected in the US as a reformer, and he is failing. Is he corrupt, or merely naïve? No matter. If he does not perform he will be replaced, by a third party if necessary.
I am a little less optimistic with regard to the UK, probably from a personal ignorance, but there is always hope.
America is a revolutionary country, and it still maintains a love of freedom and a dedication to its founding principles, even though at times it may seem to lose its way.
Reform is a response to a specific set of deteriorating conditions, some specific wrongs. It is when the majority of average people begin to restore a balance to their society by no longer being afraid to call certain behaviours ‘wrong’ and unacceptable to their society.
Who is to say what is wrong? There is a wonderful thing in America, its Constitution. It sets out the basic principles of freedom in a marvelous way. It is not perfect. It does not contain all the details, which are to be found in the body of laws that surround and support it, and those who swear to preserve, protect and defend it.
It starts by simply saying ‘no’ to those who would rule us by fear and discouragement. To say no to private prejudice and greed, which cause us to turn a blind eye to injustice. Daylight is a good disinfectant. Secrecy is not the normal condition in a free society.
Periods of time can be dangerous, because there are sometimes wolves in sheep’s clothing. Hitler was put forward as a strong reformer. He was elected by a minority, and suspended the rule of law. So a nation will be wise in whom it selects to lead it. If it holds on to its principles, in the case of America, the Constitution, then it can stay on the path to reform.
Fresh from the desk of Phil's Stock World
Interview With A Mad Hedge Fund Trader
Mad Hedge is quite a fascinating character who’s had a very exciting career in finances and more. He writes daily newsletter entries on market action, stocks and trends in the economy, and I highly recommend taking a moment to peruse his site, Diary of a Mad Hedge Fund Trader. - Ilene at Phil's Stock World.
Introduction
Mad Hedge Fund Trader began his career in finance by moving to Japan and working at Dai Nana Securities as a research analyst in 1974. In 1976 he was named the Tokyo correspondent for The Economist magazine and the Financial Times, which then shared an office. He traveled the world interviewing famous people, such as Ronald Reagan and Margaret Thatcher. In 1982, he was named the US editor of Euromoney magazine, and in 1983 he built a new division in international equities for Morgan Stanley. After moving to London in 1985, Mad Hedge supervised sales and trading in Japanese equity derivatives. In 1989, he became a director of the Swiss Bank Corp, responsible for Japanese equity derivatives. A year later, he set up an international hedge fund which he sold in 1999.
I haven’t even covered all of Mad Hedge’s adventures, such as his latent movie star career (as an extra in the 1979 epic war film, Apocalypse Now), and who knows what else. But now, missing the adrenaline-surging excitement of active trading, Mad Hedge has returned to the hedge fund business, set up an educational website, and is busy keeping up with the demands of newsletter writing.. So let’s begin our interview with Mad Hedge by exploring his current thoughts on the markets.
Interview
Ilene: Hi Mad Hedge. You’ve had a fascinating career having little to do with your major in biochemistry. A brief review of your newsletter shows that your recommendations early in 2009 have appreciated by an average of around 400%. You’ve been writing your daily market thoughts and investment strategies at your website - www.madhedgefundtrader.com - which it’s terrific, by the way. What are your goals with this site?
Mad Hedge: This whole thing started out as a letter to investors in my hedge fund, to tell them my thinking behind my positions. Then I thought, why not post this on the web and see what happens? Six months later it is now going out to 50,000 readers a day, mostly to portfolio managers, financial advisors, and traders. The growth has been explosive.
Ilene: Who are your readers?
I seemed to have stumbled on a market that I describe as “semi-professionals.” If you are a big hedge fund, with a staff of 600 and a huge in-house research department, I’m not going to tell you anything you don’t already know. But there appear to be a few million people out there who trade their own accounts, or invest their own IRA’s. They have never worked on Wall Street, but have taught themselves a lot about markets and investing. My letter gives them the 30,000 foot view on global stock, bond, currency, commodity, and real estate markets which they can’t find at their online broker. About half of them are from abroad. When I get up in the morning now, there are five e-mails waiting for me from China and India asking what to do about natural gas. I also try to make the letter funny and entertaining. Not all financial publications have to be dreary reading. It’s not always about the next stock to buy.
Ilene: In a recent letter you wrote that one of your favorite ETF’s is the Proshares Ultra Short Treasury Trust (TBT). Why is that?
Mad Hedge: TBT is a 200% leveraged bet that long Treasury bonds will go down. While the Fed keeps short rates low, it doesn’t directly control long rates. As the supply of government bonds increases exponentially, their eventual collapse is inevitable. All Ponzi schemes must come to an end, and the US government is no exception. We currently have the greatest liquidity driven market of all time, and the ten year is eking out a mere 3.30% yield, pricing in near zero inflationary expectations. The average yield on this paper for the last ten years is 6.20%. If the yield goes back to 5%, that will take the TBT from $45 to $70. The TBT could perform even better if Treasuries lose their triple “A” rating, which I think is a real possibility.
Historically, bonds are not a good buy in a low interest rate, deflationary environment. If long rates move from 3% back to the 12% we saw in the early eighties, bond holders will get slaughtered, and the TBT could exceed $200. Even if inflation stays low, the sheer weight of supply and credit concerns will crater government bond prices.
Ilene: What’s the worst case scenario for the bond market?
Mad Hedge: Debt service is currently 11% of the budget. If interest rates rise sharply, that could double to 22%. Then you get a downward spiral like you saw in Latin America in the eighties, when higher debt service creates more borrowing, and more borrowing creates a higher debt service, until the whole thing blows up. At some point China, Japan, the Middle Eastern countries may stop buying our debt. There are only so many “greater fools” out there.
The only way out of this is for the economy to return to a long term 3%-4% growth rate. That’s obviously what Obama is hoping for with his programs. He’s taking big risks, but he doesn’t have much choice. He really did inherit a bad hand. If he did nothing, we’d be in a depression by now, with 25% unemployment. He understands what he’s doing and understands the risks. He has great economic advisors.
Obama couldn’t have allowed the banking system to collapse. We need banks as the economy’s lynchpin. A year ago we could have lost the entire financial system over a weekend. Ships were being turned around at sea and going back home because their letters of credit were failing. The freeze up in credit could have gone on for years.
The stock market is up 50% since Obama took office, so it likes the uneasy stability that we have now. Credit markets have recovered tremendously, and IPOs are coming to the market again. Junk bond funds are up, confidence is returning. There’s greater willingness to lend, though only at high interest rates. But it’s a big improvement over last year.
Ilene: What do you expect for mortgage rates in the next few months? Years?
Mad Hedge: You shouldn’t touch real estate, as I think it will be dead money for another decade. Rent, don’t buy. If you have to buy, then get a 30 year fixed rate mortgage now at 5%, because rates are going up a lot in the future. When I bought my first home in New York in the early eighties, I got nailed with a 17% interest rate on my mortgage. We may revisit those levels.
Houses will continue to move lower, maybe another 10% or so. We have another wave of foreclosures hitting the system soon, triggered by the option arm readjustments. I see support for prices when the cost of owning and the cost of renting are more in line. Home ownership may have to become cheaper than renting, because of perceived risk to the principle, for the real estate market sell-off to finish. However, expecting houses to drop a lot from here is like shorting Citibank at $3. We’ve basically had the big move already. Due to poor demographic factors, the demand for houses is going to take a long time to come back. While 80 million baby boomers are trying to sell their houses to 65 million gen Xer’s, don’t expect a recovery in prices, especially when the gen Xer’s are still living in your basement.
Ilene: You mentioned you missed the rally in financials, but still have concerns about the financial sector.
Mad Hedge: With financials, I knew they would rebound, but didn’t imagine the extensive move we’ve seen. It was the greatest dead cat bounce and short covering rally of all time. But the financial sector will have troubles for years. If I had to buy U.S. stocks, I’d buy big tech stocks like Microsoft (MSFT), Oracle (ORCL), Intel, (INTC) and Cisco (CSCO), because for the most part they have tons of cash and little debt. Tech stocks didn’t have the problems that were plaguing the other sectors. For example, they have no troubled assets, and no regulatory clamp down on their business. The credit crisis didn’t affect them directly because they finance their operations through cash flow and tend not to borrow. Of course, they’re hurt indirectly when the customers have credit problems.
Credit markets are now seeing a huge differentiation in terms. Lenders are much more discriminating about who they lend to. American consumers are very constrained, but foreign consumers are not as constrained. They are not returning to frugality as we are because they didn’t share our excesses in the first place. You don’t see many black Cadillac Escalades with chrome wheels in China. If I had to buy stocks, I would buy equity in foreign companies where the growth will be in the coming years. In March, you could have bought anything and had a great trade, as the rising tide lifted all boats. But stocks in emerging markets outperformed US stocks by over a two to one margin.
Ilene: Would you be buying stocks now?
Mad Hedge: No, I sold most of my positions in June. The risk was low in March, but not so low in June, and it’s even greater now. The PE multiple on the S&P 500 has just jumped from 10 to 20 in six months. Historically, a 20 multiple is a terrible time to enter the market. Markets are discounting a “V”-shaped recovery, which we are not going to get. I think we’ll get more of a “square root” shaped recovery, a “V” followed by sideways to a gradually upward sloping grind. We’ve already had the “V”. Markets are overpriced. I don’t see how we can have huge economic growth with capital-constrained banks, catatonic consumers, and commercial real estate troubles up the wazoo. One of the only positives is the weak dollar, which makes everything we sell to the rest of the world cheaper. This is good for our multi-national companies, good for our exporters. So far, the dollar is on a grinding, controlled move down, which is good. But if the dollar’s fall accelerates, it would not be good. A real dollar panic would lead to the widespread dumping of dollar assets, and commodity prices would explode. Then we’ll get to $2,000 for gold and $40 for silver very quickly.
Ilene: You spent several years wildcatting for natural gas in Texas and Colorado, which has given you a unique insight into the energy space. What are your current thoughts on natural gas and oil?
Mad Hedge: Stay away from natural gas. The volatility will kill you. If you are a masochist, then buy it only when it’s cheap, on big dips, in the $3/MBTU range. In the last three years, thanks to the new “fracting” technology used in oil shales, we have discovered a 100 year supply of natural gas sitting under the US, and the producers have not been able to cut back fast enough. So now we have a supply glut, and we are almost out of storage. This is what took us down from $13 to $2.40 in 18 months. The lack of hurricanes has not helped demand either. Producers have been cutting back like crazy, trying to balance supply and demand, with a breakeven point of $2. They need a cold winter to help bring things back into balance. If the industry gets organized, then gas can become the 20 year bridge we need, until energy alternatives kick in. That makes me a big supporter of the “Pickens Plan.”
Oil is much more interesting. It overshot to downside in January to $32. Crude is now at $70 climbing out of the recession. Imagine how high it will get when all economies are functioning again. The financial crisis hurt the ability of big oil companies to get financing for large development projects in oil. These projects can take five to ten years to bring online. That means we will get higher oil prices sooner. We may get a pull back to the $50s, but the $30’s would be a stretch. The $32 low was an artificial one caused by a complete absence of liquidity in all markets. I don’t think we’ll see those lows again.
Ilene: Where do you see the price of oil going in the distant future?
Mad Hedge: I think it may dip into the 50s, then up, perhaps skyrocketing to $300 before dropping back down to $3 after alternatives take over and demand vanishes. But that’s at best 20 years out. If we can wean ourselves off oil in 20 years, it would be a huge accomplishment.
Ilene: I noticed you speak a little about politics in your essays; do you have a leaning one way or another?
Mad Hedge: I’m politically neutral. I’m getting bashed by the right these days because I’ve said that the Republicans have no ability to affect the legislative process now. But we need to adjust our portfolios to reflect the current political realities. No matter how much you love Obama, you can’t dispute the fact that the massive issuance of government bonds he is proposing is terrible for the bond market and the dollar, but great for precious metals and commodities. Obama won by a big margin, so the Democrats will be around for a while. Of course, if my “square root” scenario doesn’t pan out, and we get a serious “W” recession instead, all bets are off. People will only give him the benefit of the doubt for so long.
Ilene: Where do you think the stock market’s going to go over the next few years?
Mad Hedge: I think there’s a 1 in 3 chance for new lows. That’s the “W” scenario. But with Lehman, Bear Stearns, Merrill Lynch, and Washington Mutual gone, we have run out of companies that can suddenly go under and trigger a new financial crisis. The big survivors are partially government owned, and of course zero interest rates help a lot. More banks are going under, but they will be smaller, regional banks with excessive exposure to commercial real estate.
Ilene: How does this affect your actions in the markets?
Mad Hedge: The best and least risky trades were in the early part of the year. Now, there’s a lot more risk in all markets. I’m neutral right now. If stocks dropped from here, I might be a buyer, but only in energy, commodities, and technology, and of course in emerging markets like Brazil, India, China, Korea, and Vietnam. Gold, silver and commodities have all had huge runs. My inner wimp has me in cash, waiting for better opportunities. I haven’t been playing the short side, because it’s a nightmare trying to short a liquidity driven market with interest rates at zero. There is no return on low risk investments now. Capital always moves to risky assets when interest rates are zero. Just look at Japan in the 1980s. There PE multiples soared from 10 to 100 purely driven by liquidity. For the last three years of that run the fundamental analysts were left twisting slowly in the wind. Artificially low interest rates boost asset prices to artificially high prices. It always ends in tears, but can play out for a while. You want to have an asymmetric risk reward metric in your favor, as we did in March of this year. Now, we don’t have that.
The next downward move in the markets will more likely be due to disappointing economic data, earning misses, etc., not due to a total collapse of the system. We may sell off, but I don’t think it will be to new lows. It’s hard to see new lows with interest rates at zero. Instead, I see the “square root” recovery scenario mentioned earlier. The market may start drifting lower as people start seeing this possibility. That might set up a trading range for the S&P 500 which could last for years, something like 800-1,200. During the nineties, Japan peaked at ¥39,000, then traded in a ¥20,000-¥25,000 range for five years, before the final collapse to ¥7,000. That’s one scenario for the US.
Ilene: You’ve had an amazing career. Let me ask you about some of the people you’ve interviewed. What was Ronald Reagan like?
Mad Hedge: Although I never agreed with him politically, you couldn’t help but like the guy. He always had a joke ready. He was a lot smarter than he let on.
Ilene: And Margaret Thatcher, the prime minister of Britain?
Mad Hedge: Her nickname as “The Iron Lady” was well deserved. She could stare holes right through you. She treated journalists like a disapproving school teacher, which of course, she was.
Ilene: How about the terrorist leader, Yassir Arafat, of the PLO?
Mad Hedge: His body guards almost shot me when I reached to turn over a cassette in my tape recorder. I always thought he was a terrible leader. That is why the Palestinians never got anywhere, and why the Israelis left him alone.
Ilene: Meeting China’s Deng Xiaoping must have been amazing.
Mad Hedge: I am 6’4” and he was only 4’9”, so of course there were plenty of opportunities for humor. I could never envision this guy going on the Long March. He had a tremendous wit. Someone asked him why China kept its borders closed, and wasn’t this an imposition on human rights. He said if he opened the borders, the surrounding countries would get flooded with people. He asked “How many Chinese do you want? 20 million? 30 million?” I also met Zhou Enlai during the Cultural Revolution. He was a brilliant man, the last man on a bell shaped curve of 500 million.
Ilene: I read somewhere that you interviewed four US Secretaries of the Treasury.
Yes, Miller Reagan, Schultz, and Brady. And I visited the French chateau of a fifth, C. Douglas Dillon. I keep a collection of dollar bills they signed.
My goal in life was always to get in the way of history, and let it run me over. It’s been an amazing life. I wouldn’t trade it for anything.
Ilene: What about Apocalypse Now?
Mad Hedge: I happened to be in town to interview Ferdinand Marcos, the president of the Philippines. If you look hard, I’m in the USO scene. Most of the other “GI’s” in that scene were European and Australian hippies rounded up from the Youth Hostels of Manila by Francis Ford Coppola’s agents. Good luck, though. I was a lot younger and thinner then.
Ilene: Thanks a lot. It’s been great talking to you.
****
We hope you are enjoying our new interview series at Phil's Stock World. Sample a FREE 90-day trial to our PSW Report by clicking here.
Mad Hedge is quite a fascinating character who’s had a very exciting career in finances and more. He writes daily newsletter entries on market action, stocks and trends in the economy, and I highly recommend taking a moment to peruse his site, Diary of a Mad Hedge Fund Trader. - Ilene at Phil's Stock World.
Introduction
Mad Hedge Fund Trader began his career in finance by moving to Japan and working at Dai Nana Securities as a research analyst in 1974. In 1976 he was named the Tokyo correspondent for The Economist magazine and the Financial Times, which then shared an office. He traveled the world interviewing famous people, such as Ronald Reagan and Margaret Thatcher. In 1982, he was named the US editor of Euromoney magazine, and in 1983 he built a new division in international equities for Morgan Stanley. After moving to London in 1985, Mad Hedge supervised sales and trading in Japanese equity derivatives. In 1989, he became a director of the Swiss Bank Corp, responsible for Japanese equity derivatives. A year later, he set up an international hedge fund which he sold in 1999.
I haven’t even covered all of Mad Hedge’s adventures, such as his latent movie star career (as an extra in the 1979 epic war film, Apocalypse Now), and who knows what else. But now, missing the adrenaline-surging excitement of active trading, Mad Hedge has returned to the hedge fund business, set up an educational website, and is busy keeping up with the demands of newsletter writing.. So let’s begin our interview with Mad Hedge by exploring his current thoughts on the markets.
Interview
Ilene: Hi Mad Hedge. You’ve had a fascinating career having little to do with your major in biochemistry. A brief review of your newsletter shows that your recommendations early in 2009 have appreciated by an average of around 400%. You’ve been writing your daily market thoughts and investment strategies at your website - www.madhedgefundtrader.com - which it’s terrific, by the way. What are your goals with this site?
Mad Hedge: This whole thing started out as a letter to investors in my hedge fund, to tell them my thinking behind my positions. Then I thought, why not post this on the web and see what happens? Six months later it is now going out to 50,000 readers a day, mostly to portfolio managers, financial advisors, and traders. The growth has been explosive.
Ilene: Who are your readers?
I seemed to have stumbled on a market that I describe as “semi-professionals.” If you are a big hedge fund, with a staff of 600 and a huge in-house research department, I’m not going to tell you anything you don’t already know. But there appear to be a few million people out there who trade their own accounts, or invest their own IRA’s. They have never worked on Wall Street, but have taught themselves a lot about markets and investing. My letter gives them the 30,000 foot view on global stock, bond, currency, commodity, and real estate markets which they can’t find at their online broker. About half of them are from abroad. When I get up in the morning now, there are five e-mails waiting for me from China and India asking what to do about natural gas. I also try to make the letter funny and entertaining. Not all financial publications have to be dreary reading. It’s not always about the next stock to buy.
Ilene: In a recent letter you wrote that one of your favorite ETF’s is the Proshares Ultra Short Treasury Trust (TBT). Why is that?
Mad Hedge: TBT is a 200% leveraged bet that long Treasury bonds will go down. While the Fed keeps short rates low, it doesn’t directly control long rates. As the supply of government bonds increases exponentially, their eventual collapse is inevitable. All Ponzi schemes must come to an end, and the US government is no exception. We currently have the greatest liquidity driven market of all time, and the ten year is eking out a mere 3.30% yield, pricing in near zero inflationary expectations. The average yield on this paper for the last ten years is 6.20%. If the yield goes back to 5%, that will take the TBT from $45 to $70. The TBT could perform even better if Treasuries lose their triple “A” rating, which I think is a real possibility.
Historically, bonds are not a good buy in a low interest rate, deflationary environment. If long rates move from 3% back to the 12% we saw in the early eighties, bond holders will get slaughtered, and the TBT could exceed $200. Even if inflation stays low, the sheer weight of supply and credit concerns will crater government bond prices.
Ilene: What’s the worst case scenario for the bond market?
Mad Hedge: Debt service is currently 11% of the budget. If interest rates rise sharply, that could double to 22%. Then you get a downward spiral like you saw in Latin America in the eighties, when higher debt service creates more borrowing, and more borrowing creates a higher debt service, until the whole thing blows up. At some point China, Japan, the Middle Eastern countries may stop buying our debt. There are only so many “greater fools” out there.
The only way out of this is for the economy to return to a long term 3%-4% growth rate. That’s obviously what Obama is hoping for with his programs. He’s taking big risks, but he doesn’t have much choice. He really did inherit a bad hand. If he did nothing, we’d be in a depression by now, with 25% unemployment. He understands what he’s doing and understands the risks. He has great economic advisors.
Obama couldn’t have allowed the banking system to collapse. We need banks as the economy’s lynchpin. A year ago we could have lost the entire financial system over a weekend. Ships were being turned around at sea and going back home because their letters of credit were failing. The freeze up in credit could have gone on for years.
The stock market is up 50% since Obama took office, so it likes the uneasy stability that we have now. Credit markets have recovered tremendously, and IPOs are coming to the market again. Junk bond funds are up, confidence is returning. There’s greater willingness to lend, though only at high interest rates. But it’s a big improvement over last year.
Ilene: What do you expect for mortgage rates in the next few months? Years?
Mad Hedge: You shouldn’t touch real estate, as I think it will be dead money for another decade. Rent, don’t buy. If you have to buy, then get a 30 year fixed rate mortgage now at 5%, because rates are going up a lot in the future. When I bought my first home in New York in the early eighties, I got nailed with a 17% interest rate on my mortgage. We may revisit those levels.
Houses will continue to move lower, maybe another 10% or so. We have another wave of foreclosures hitting the system soon, triggered by the option arm readjustments. I see support for prices when the cost of owning and the cost of renting are more in line. Home ownership may have to become cheaper than renting, because of perceived risk to the principle, for the real estate market sell-off to finish. However, expecting houses to drop a lot from here is like shorting Citibank at $3. We’ve basically had the big move already. Due to poor demographic factors, the demand for houses is going to take a long time to come back. While 80 million baby boomers are trying to sell their houses to 65 million gen Xer’s, don’t expect a recovery in prices, especially when the gen Xer’s are still living in your basement.
Ilene: You mentioned you missed the rally in financials, but still have concerns about the financial sector.
Mad Hedge: With financials, I knew they would rebound, but didn’t imagine the extensive move we’ve seen. It was the greatest dead cat bounce and short covering rally of all time. But the financial sector will have troubles for years. If I had to buy U.S. stocks, I’d buy big tech stocks like Microsoft (MSFT), Oracle (ORCL), Intel, (INTC) and Cisco (CSCO), because for the most part they have tons of cash and little debt. Tech stocks didn’t have the problems that were plaguing the other sectors. For example, they have no troubled assets, and no regulatory clamp down on their business. The credit crisis didn’t affect them directly because they finance their operations through cash flow and tend not to borrow. Of course, they’re hurt indirectly when the customers have credit problems.
Credit markets are now seeing a huge differentiation in terms. Lenders are much more discriminating about who they lend to. American consumers are very constrained, but foreign consumers are not as constrained. They are not returning to frugality as we are because they didn’t share our excesses in the first place. You don’t see many black Cadillac Escalades with chrome wheels in China. If I had to buy stocks, I would buy equity in foreign companies where the growth will be in the coming years. In March, you could have bought anything and had a great trade, as the rising tide lifted all boats. But stocks in emerging markets outperformed US stocks by over a two to one margin.
Ilene: Would you be buying stocks now?
Mad Hedge: No, I sold most of my positions in June. The risk was low in March, but not so low in June, and it’s even greater now. The PE multiple on the S&P 500 has just jumped from 10 to 20 in six months. Historically, a 20 multiple is a terrible time to enter the market. Markets are discounting a “V”-shaped recovery, which we are not going to get. I think we’ll get more of a “square root” shaped recovery, a “V” followed by sideways to a gradually upward sloping grind. We’ve already had the “V”. Markets are overpriced. I don’t see how we can have huge economic growth with capital-constrained banks, catatonic consumers, and commercial real estate troubles up the wazoo. One of the only positives is the weak dollar, which makes everything we sell to the rest of the world cheaper. This is good for our multi-national companies, good for our exporters. So far, the dollar is on a grinding, controlled move down, which is good. But if the dollar’s fall accelerates, it would not be good. A real dollar panic would lead to the widespread dumping of dollar assets, and commodity prices would explode. Then we’ll get to $2,000 for gold and $40 for silver very quickly.
Ilene: You spent several years wildcatting for natural gas in Texas and Colorado, which has given you a unique insight into the energy space. What are your current thoughts on natural gas and oil?
Mad Hedge: Stay away from natural gas. The volatility will kill you. If you are a masochist, then buy it only when it’s cheap, on big dips, in the $3/MBTU range. In the last three years, thanks to the new “fracting” technology used in oil shales, we have discovered a 100 year supply of natural gas sitting under the US, and the producers have not been able to cut back fast enough. So now we have a supply glut, and we are almost out of storage. This is what took us down from $13 to $2.40 in 18 months. The lack of hurricanes has not helped demand either. Producers have been cutting back like crazy, trying to balance supply and demand, with a breakeven point of $2. They need a cold winter to help bring things back into balance. If the industry gets organized, then gas can become the 20 year bridge we need, until energy alternatives kick in. That makes me a big supporter of the “Pickens Plan.”
Oil is much more interesting. It overshot to downside in January to $32. Crude is now at $70 climbing out of the recession. Imagine how high it will get when all economies are functioning again. The financial crisis hurt the ability of big oil companies to get financing for large development projects in oil. These projects can take five to ten years to bring online. That means we will get higher oil prices sooner. We may get a pull back to the $50s, but the $30’s would be a stretch. The $32 low was an artificial one caused by a complete absence of liquidity in all markets. I don’t think we’ll see those lows again.
Ilene: Where do you see the price of oil going in the distant future?
Mad Hedge: I think it may dip into the 50s, then up, perhaps skyrocketing to $300 before dropping back down to $3 after alternatives take over and demand vanishes. But that’s at best 20 years out. If we can wean ourselves off oil in 20 years, it would be a huge accomplishment.
Ilene: I noticed you speak a little about politics in your essays; do you have a leaning one way or another?
Mad Hedge: I’m politically neutral. I’m getting bashed by the right these days because I’ve said that the Republicans have no ability to affect the legislative process now. But we need to adjust our portfolios to reflect the current political realities. No matter how much you love Obama, you can’t dispute the fact that the massive issuance of government bonds he is proposing is terrible for the bond market and the dollar, but great for precious metals and commodities. Obama won by a big margin, so the Democrats will be around for a while. Of course, if my “square root” scenario doesn’t pan out, and we get a serious “W” recession instead, all bets are off. People will only give him the benefit of the doubt for so long.
Ilene: Where do you think the stock market’s going to go over the next few years?
Mad Hedge: I think there’s a 1 in 3 chance for new lows. That’s the “W” scenario. But with Lehman, Bear Stearns, Merrill Lynch, and Washington Mutual gone, we have run out of companies that can suddenly go under and trigger a new financial crisis. The big survivors are partially government owned, and of course zero interest rates help a lot. More banks are going under, but they will be smaller, regional banks with excessive exposure to commercial real estate.
Ilene: How does this affect your actions in the markets?
Mad Hedge: The best and least risky trades were in the early part of the year. Now, there’s a lot more risk in all markets. I’m neutral right now. If stocks dropped from here, I might be a buyer, but only in energy, commodities, and technology, and of course in emerging markets like Brazil, India, China, Korea, and Vietnam. Gold, silver and commodities have all had huge runs. My inner wimp has me in cash, waiting for better opportunities. I haven’t been playing the short side, because it’s a nightmare trying to short a liquidity driven market with interest rates at zero. There is no return on low risk investments now. Capital always moves to risky assets when interest rates are zero. Just look at Japan in the 1980s. There PE multiples soared from 10 to 100 purely driven by liquidity. For the last three years of that run the fundamental analysts were left twisting slowly in the wind. Artificially low interest rates boost asset prices to artificially high prices. It always ends in tears, but can play out for a while. You want to have an asymmetric risk reward metric in your favor, as we did in March of this year. Now, we don’t have that.
The next downward move in the markets will more likely be due to disappointing economic data, earning misses, etc., not due to a total collapse of the system. We may sell off, but I don’t think it will be to new lows. It’s hard to see new lows with interest rates at zero. Instead, I see the “square root” recovery scenario mentioned earlier. The market may start drifting lower as people start seeing this possibility. That might set up a trading range for the S&P 500 which could last for years, something like 800-1,200. During the nineties, Japan peaked at ¥39,000, then traded in a ¥20,000-¥25,000 range for five years, before the final collapse to ¥7,000. That’s one scenario for the US.
Ilene: You’ve had an amazing career. Let me ask you about some of the people you’ve interviewed. What was Ronald Reagan like?
Mad Hedge: Although I never agreed with him politically, you couldn’t help but like the guy. He always had a joke ready. He was a lot smarter than he let on.
Ilene: And Margaret Thatcher, the prime minister of Britain?
Mad Hedge: Her nickname as “The Iron Lady” was well deserved. She could stare holes right through you. She treated journalists like a disapproving school teacher, which of course, she was.
Ilene: How about the terrorist leader, Yassir Arafat, of the PLO?
Mad Hedge: His body guards almost shot me when I reached to turn over a cassette in my tape recorder. I always thought he was a terrible leader. That is why the Palestinians never got anywhere, and why the Israelis left him alone.
Ilene: Meeting China’s Deng Xiaoping must have been amazing.
Mad Hedge: I am 6’4” and he was only 4’9”, so of course there were plenty of opportunities for humor. I could never envision this guy going on the Long March. He had a tremendous wit. Someone asked him why China kept its borders closed, and wasn’t this an imposition on human rights. He said if he opened the borders, the surrounding countries would get flooded with people. He asked “How many Chinese do you want? 20 million? 30 million?” I also met Zhou Enlai during the Cultural Revolution. He was a brilliant man, the last man on a bell shaped curve of 500 million.
Ilene: I read somewhere that you interviewed four US Secretaries of the Treasury.
Yes, Miller Reagan, Schultz, and Brady. And I visited the French chateau of a fifth, C. Douglas Dillon. I keep a collection of dollar bills they signed.
My goal in life was always to get in the way of history, and let it run me over. It’s been an amazing life. I wouldn’t trade it for anything.
Ilene: What about Apocalypse Now?
Mad Hedge: I happened to be in town to interview Ferdinand Marcos, the president of the Philippines. If you look hard, I’m in the USO scene. Most of the other “GI’s” in that scene were European and Australian hippies rounded up from the Youth Hostels of Manila by Francis Ford Coppola’s agents. Good luck, though. I was a lot younger and thinner then.
Ilene: Thanks a lot. It’s been great talking to you.
****
We hope you are enjoying our new interview series at Phil's Stock World. Sample a FREE 90-day trial to our PSW Report by clicking here.
Fresh from Phil's Stock World
How To Buy A Stock For A 15-20% Discount With Our Buy/Write Strategies
We are finally over our watch levels, now let’s see if they hold!
Our watch levels for our next set of bullish market plays have been Dow 9,600, S&P 1,030, Nasdaq 2,038, NYSE 6,700 and Russell 577 and now they form a floor we will be able to watch so we’ll know when to be worried that the rally is running out of steam. Only 2 33% (off the top) levels remain and that’s 1,056 on the S&P and 6,959 on the NYSE and we will be officially raising our mid-point from Dow 8,650 to 9,500, which will make 9,000 our new expected floor on the Dow and that means we should be buying here! There’s no point in having watch levels if we don’t act on them and the best was to work our way into new bullish positions is with our famous Buy/Write Strategy - simply the best way to initiate new stock positions for the average investor.
Given that it is now much less likely that the market drops more than 10% from here, picking up stocks for 20% below their current price is a sensible way to begin building some new positions. By picking value names and concentrating on plays that give us much better prices than the ones paid by the average retail investor using very basic option strategies we can stay ahead of the game and buy with some comfort. This strategy, which we call a "buy/write", as we buy the stock and write options against it, is one of our most effective tools for dealing with a uncertain markets.
Not only does the Buy/Write Strategy give you an initial discount on your ownership of a stock, but you can use variations on this strategy to give yourself another 10-20% three to four times a year! If you have a retirement account that allows you to write covered calls and sell puts in it (check with your broker, of course, some do, some don’t) why wouldn’t you want to generate an additional discount off the stocks you plan to hold long-term? If you plan on accumulating a stock over time, why on earth would you even consider paying "retail" when we can teach you a simple method that can put money in your pocket?
We no longer have the absolute bargains we used to have but there are still plenty of stocks that are trading at 50% off their highs and, if this rally is going to continue, that spells huge opportunity for us. It is always important to select stocks that have strong underlying fundamentals which we intend to hold long-term.
As long as you are willing to own 200 shares of a stock - this system can reliably give you a 10-20% discount off the current market price. It’s simple, easy to follow and is ideal for trading in a volatile market.
Of course when we buy any stock or long-term option position, we should be scaling in. In other words - we don’t assume our timing is perfect and we enter a position in stages. In our Strategy Section I discuss the 20% entries and the various rules for that so I won’t get into it here but, effectively, selling puts and calls against a stock entry is a way of automatically following the scaling system without having to monitor your position that closely. I will give a few examples here and, if you sign up for our newsletter service, The PSW Report, using this link, you will be able to read more about this strategy as we follow it along and build new positions through the end of the year but new trades and our new Buy List will only be available with Basic and Premium Memberships. How does this strategy work? It’s very simple and here are a couple of examples using stocks you probably want anyway:
Let’s say, for our first example, we want to buy BAC at $17.22. If our goal is to buy 200 shares we buy instead 100 shares and also sell the Jan $15 puts for $1.30. Additionally, we sell the Jan $17.50 calls for $2.10. The two sold contracts reduce our net basis to just $13.82 and we have taken on two obligations. The call we sold, obligates us to sell our stock for $17.50 on Jan 15th (option expiration day) IF the price of BAC closes above $17.50 on Jan 15th. We have sold someone an OPTION TO BUY our stock for $17.50 on that date, which they will exercise if the price of BAC is above $17.50. Whether they exercise the options we sold or not, we keep the $2.10 they paid us and they would have to give us another $17.50 in cash to complete the contract. Our second obligation is on the put we sold. By accepting money for the put, we have agreed that, in exchange for $1.65, the put holder can "put" the stock to us (force us to buy it from them) for $15. They can do this at ANY time prior to Jan 15th, no matter what the price of the stock but, of course, if the stock stays over $15, there would be no point for them to put it to us at a discount.
So, if BAC finishes the expiration period above $17.50, we will have our 100 shares called away at $17.50 and our put holder will expire worthless. The profit on that trade would be $3.68 per share against our net outlay of $13.82, a 26% profit in 4 months. Should, on the other hand, the stock be put to us below $15, then our caller would be expiring worthless but we will be forced to pay $15 for 100 additional shares of BAC, regardless of what price it’s currently trading at. With our original 100 shares at net $13.82 and 100 more at $15, our new net basis would be $14.41 - which is 16.3% lower than the current price.
This is a simple example over a short period. The key is to pick stocks that are:
1. Trading near lows and are undervalued
2. Fairly volatile
3. NOT likely to go bankrupt
4. Either pay dividends or have good growth
5. Have a clear path of continuing contracts to write
6. You don’t mind owning long-term
In short, if you think BAC is a relatively good deal at $17.22 - why not commit to buying it for $14.41 instead? Also, to take a more advanced view, the trade doesn’t end on Jan 15th. You have a $14.41 basis in Bank of America, who may one day begin paying dividends again. If they do, that’s another 3% return on your money. Additionally, you can continue to sell calls against the stock. Let’s say BAC falls all the way to $12 (down 30%) and you are stuck in it at $14.41. You can still sell $15 calls for about .25 a month. While this is not absolute, I can see that the Oct $20 calls, which are $2.78 out of the money are selling for .25 so it’s not a big stretch to assume we can pick up a quarter for the $15s if BAC dips to $12.
With a .25 lower basis of $14.16 after selling another call, we don’t mind being called away at $15 (up 6%) and, if we sell just .25 12 times during the year, that’s an ADDITIONAL $3 return per share or a 21% return on our $14.41 investment while we wait (profitably) for BAC to come back in value.
Another application of this strategy is to hedge against riskier trades like biotech. We like PARD but they have trial results coming up in the next few months and they could go up or down 50% on any given night. Buying that stock for $7.77 and selling the Jan, 2011 $10 calls for $3.30 and the Dec 2010 $5 puts for $1.60 puts us into that stock for just $2.87 out of pocket. That’s a 63% discount on the stock and, if we are called away at $10 on Jan 21st, 2011, it will be with a 248% proft. If the study goes poorly and PARD drops like a rock and is below $5 on Dec 18th, 2010, we would be obligated to buy another round at $5, which would give us an average entry of $3.94, which is 49% LESS than it’s trading for today.
How often does someone come to you with a way to buy a stock at a 49% discount that can pay you a 200% profit if it simply holds its price for 15 months?
We identify dozens of trades like this every single week over at Philstockworld. While you can do this with any stock, we are able to identify unique option opportunities that make certain stocks a little more favorable than others and we can teach you to do it too. It’s not just Biotechs that can give you such outrageously good risk/reward profiles, here’s a way to play C long term:
If you think C is too big to fail and will actually survive the next 15 months, you can buy that stock for $4.75 and sell the Jan, 2011 $5 puts and calls for a total of $2.90. That very simply is a net entry of $1.85 and a profit of 170% if called away in 15 months. Should C remain below $5 through Jan 21st, 2011, then another round of shares will be put to you at $5 and your average entry would be $3.43, a 27.8% discount off the current price.
At this point you may be saying to yourself: "If I can learn to buy all my stocks for 27.8% discounts, I bet I can improve my trading performance." That’s exactly what hedge funds do and there’s no reason you can’t learn to do it as well! The great thing is - there is always an option.
What if the stock goes down - you may wonder? As we mentioned, if BAC falls to $12 on option expiration day, you are still (assuming you make no adjustment) obligated to buy another round at $15. Your average entry would be $14.41 but, guess what? You can do it all over again and give yourself another 20% discount, dropping your basis to $11.50 or lower. Of course you may end up with 400 shares at $11.50 but, since you started out willing to buy 200 shares at $14.41 ($2,882) and you ended up with 400 shares at $11.50 ($4,600) with the stock at, say, $10 ($4,000) you are down just $600 (15%), not bad for a stock that fell 42% from $17.22 since you first bought it!
We have featured over 100 of these plays in past months in member chat and on our Buy List, and, in this scary and volatile market, they are one of the best ways for you to capitalize on the volatility while hedging the risk on your upside plays and positioning yourself for a (we hope!) a long-term recovery. If the market does end up flatlining however, we are positioning ourselves in stocks at good prices that can generate a very reasonable monthly income - which will keep us flexible in a challenging market!
Again, if you sign up for our newsletter service, The PSW Report, using this link, we will be featuring some of these trades weekly and if you want live Alerts of Trade Ideas as we identify them or you want to view our daily trading chat live, then check out a Basic or Premium Membership - It’s a good time to stop watching other people make money and get into the game.
We are finally over our watch levels, now let’s see if they hold!
Our watch levels for our next set of bullish market plays have been Dow 9,600, S&P 1,030, Nasdaq 2,038, NYSE 6,700 and Russell 577 and now they form a floor we will be able to watch so we’ll know when to be worried that the rally is running out of steam. Only 2 33% (off the top) levels remain and that’s 1,056 on the S&P and 6,959 on the NYSE and we will be officially raising our mid-point from Dow 8,650 to 9,500, which will make 9,000 our new expected floor on the Dow and that means we should be buying here! There’s no point in having watch levels if we don’t act on them and the best was to work our way into new bullish positions is with our famous Buy/Write Strategy - simply the best way to initiate new stock positions for the average investor.
Given that it is now much less likely that the market drops more than 10% from here, picking up stocks for 20% below their current price is a sensible way to begin building some new positions. By picking value names and concentrating on plays that give us much better prices than the ones paid by the average retail investor using very basic option strategies we can stay ahead of the game and buy with some comfort. This strategy, which we call a "buy/write", as we buy the stock and write options against it, is one of our most effective tools for dealing with a uncertain markets.
Not only does the Buy/Write Strategy give you an initial discount on your ownership of a stock, but you can use variations on this strategy to give yourself another 10-20% three to four times a year! If you have a retirement account that allows you to write covered calls and sell puts in it (check with your broker, of course, some do, some don’t) why wouldn’t you want to generate an additional discount off the stocks you plan to hold long-term? If you plan on accumulating a stock over time, why on earth would you even consider paying "retail" when we can teach you a simple method that can put money in your pocket?
We no longer have the absolute bargains we used to have but there are still plenty of stocks that are trading at 50% off their highs and, if this rally is going to continue, that spells huge opportunity for us. It is always important to select stocks that have strong underlying fundamentals which we intend to hold long-term.
As long as you are willing to own 200 shares of a stock - this system can reliably give you a 10-20% discount off the current market price. It’s simple, easy to follow and is ideal for trading in a volatile market.
Of course when we buy any stock or long-term option position, we should be scaling in. In other words - we don’t assume our timing is perfect and we enter a position in stages. In our Strategy Section I discuss the 20% entries and the various rules for that so I won’t get into it here but, effectively, selling puts and calls against a stock entry is a way of automatically following the scaling system without having to monitor your position that closely. I will give a few examples here and, if you sign up for our newsletter service, The PSW Report, using this link, you will be able to read more about this strategy as we follow it along and build new positions through the end of the year but new trades and our new Buy List will only be available with Basic and Premium Memberships. How does this strategy work? It’s very simple and here are a couple of examples using stocks you probably want anyway:
Let’s say, for our first example, we want to buy BAC at $17.22. If our goal is to buy 200 shares we buy instead 100 shares and also sell the Jan $15 puts for $1.30. Additionally, we sell the Jan $17.50 calls for $2.10. The two sold contracts reduce our net basis to just $13.82 and we have taken on two obligations. The call we sold, obligates us to sell our stock for $17.50 on Jan 15th (option expiration day) IF the price of BAC closes above $17.50 on Jan 15th. We have sold someone an OPTION TO BUY our stock for $17.50 on that date, which they will exercise if the price of BAC is above $17.50. Whether they exercise the options we sold or not, we keep the $2.10 they paid us and they would have to give us another $17.50 in cash to complete the contract. Our second obligation is on the put we sold. By accepting money for the put, we have agreed that, in exchange for $1.65, the put holder can "put" the stock to us (force us to buy it from them) for $15. They can do this at ANY time prior to Jan 15th, no matter what the price of the stock but, of course, if the stock stays over $15, there would be no point for them to put it to us at a discount.
So, if BAC finishes the expiration period above $17.50, we will have our 100 shares called away at $17.50 and our put holder will expire worthless. The profit on that trade would be $3.68 per share against our net outlay of $13.82, a 26% profit in 4 months. Should, on the other hand, the stock be put to us below $15, then our caller would be expiring worthless but we will be forced to pay $15 for 100 additional shares of BAC, regardless of what price it’s currently trading at. With our original 100 shares at net $13.82 and 100 more at $15, our new net basis would be $14.41 - which is 16.3% lower than the current price.
This is a simple example over a short period. The key is to pick stocks that are:
1. Trading near lows and are undervalued
2. Fairly volatile
3. NOT likely to go bankrupt
4. Either pay dividends or have good growth
5. Have a clear path of continuing contracts to write
6. You don’t mind owning long-term
In short, if you think BAC is a relatively good deal at $17.22 - why not commit to buying it for $14.41 instead? Also, to take a more advanced view, the trade doesn’t end on Jan 15th. You have a $14.41 basis in Bank of America, who may one day begin paying dividends again. If they do, that’s another 3% return on your money. Additionally, you can continue to sell calls against the stock. Let’s say BAC falls all the way to $12 (down 30%) and you are stuck in it at $14.41. You can still sell $15 calls for about .25 a month. While this is not absolute, I can see that the Oct $20 calls, which are $2.78 out of the money are selling for .25 so it’s not a big stretch to assume we can pick up a quarter for the $15s if BAC dips to $12.
With a .25 lower basis of $14.16 after selling another call, we don’t mind being called away at $15 (up 6%) and, if we sell just .25 12 times during the year, that’s an ADDITIONAL $3 return per share or a 21% return on our $14.41 investment while we wait (profitably) for BAC to come back in value.
Another application of this strategy is to hedge against riskier trades like biotech. We like PARD but they have trial results coming up in the next few months and they could go up or down 50% on any given night. Buying that stock for $7.77 and selling the Jan, 2011 $10 calls for $3.30 and the Dec 2010 $5 puts for $1.60 puts us into that stock for just $2.87 out of pocket. That’s a 63% discount on the stock and, if we are called away at $10 on Jan 21st, 2011, it will be with a 248% proft. If the study goes poorly and PARD drops like a rock and is below $5 on Dec 18th, 2010, we would be obligated to buy another round at $5, which would give us an average entry of $3.94, which is 49% LESS than it’s trading for today.
How often does someone come to you with a way to buy a stock at a 49% discount that can pay you a 200% profit if it simply holds its price for 15 months?
We identify dozens of trades like this every single week over at Philstockworld. While you can do this with any stock, we are able to identify unique option opportunities that make certain stocks a little more favorable than others and we can teach you to do it too. It’s not just Biotechs that can give you such outrageously good risk/reward profiles, here’s a way to play C long term:
If you think C is too big to fail and will actually survive the next 15 months, you can buy that stock for $4.75 and sell the Jan, 2011 $5 puts and calls for a total of $2.90. That very simply is a net entry of $1.85 and a profit of 170% if called away in 15 months. Should C remain below $5 through Jan 21st, 2011, then another round of shares will be put to you at $5 and your average entry would be $3.43, a 27.8% discount off the current price.
At this point you may be saying to yourself: "If I can learn to buy all my stocks for 27.8% discounts, I bet I can improve my trading performance." That’s exactly what hedge funds do and there’s no reason you can’t learn to do it as well! The great thing is - there is always an option.
What if the stock goes down - you may wonder? As we mentioned, if BAC falls to $12 on option expiration day, you are still (assuming you make no adjustment) obligated to buy another round at $15. Your average entry would be $14.41 but, guess what? You can do it all over again and give yourself another 20% discount, dropping your basis to $11.50 or lower. Of course you may end up with 400 shares at $11.50 but, since you started out willing to buy 200 shares at $14.41 ($2,882) and you ended up with 400 shares at $11.50 ($4,600) with the stock at, say, $10 ($4,000) you are down just $600 (15%), not bad for a stock that fell 42% from $17.22 since you first bought it!
We have featured over 100 of these plays in past months in member chat and on our Buy List, and, in this scary and volatile market, they are one of the best ways for you to capitalize on the volatility while hedging the risk on your upside plays and positioning yourself for a (we hope!) a long-term recovery. If the market does end up flatlining however, we are positioning ourselves in stocks at good prices that can generate a very reasonable monthly income - which will keep us flexible in a challenging market!
Again, if you sign up for our newsletter service, The PSW Report, using this link, we will be featuring some of these trades weekly and if you want live Alerts of Trade Ideas as we identify them or you want to view our daily trading chat live, then check out a Basic or Premium Membership - It’s a good time to stop watching other people make money and get into the game.
Fresh from Phil's Stock World
Playing the Patterns
I know you don’t want to hear this. You don’t want to believe that the markets are being manipulated and you don’t want to think you can’t rely on your charts or numbers you read in the papers (or the articles for that matter) as it might prove that you have as little ability to predict the markets as a soap-opera viewer had of predicting who will be the next character to have an affair. Like a soap-opera, the stock market is written for television, has a regular cast of writers (the MSM) and makes little sense to people who come in late to the game.
We, at Philstockworld, do not care if the game is rigged. As long as we can figure out HOW it’s rigged, we know where to place our bets and we can make money from it. So don’t take this as me being down on the market - we love this stuff!
Another conspiracy we drone on and on about is the good old "stick save." Perhaps it’s not a conspiracy aimed at propping up the markets on low volume, perhaps it’s a natural phenomenon of the markets that makes it move up 3 out of 5 afternoons per week but we like to call it a stick save and we like to play it at 2:30 on any low-volume day. You can buy a DIA call that is about $2 in the money, like the Sept $94 calls (now $2.05) and they will gain 70 cents for every $1 the DIA moves up (the delta). Had you made this trade at 2:30 every day and sold at the close for the past week, you’d be up net 50% on that trade. When we see a pattern, we label it and follow it - is that complicated?
Market movement doesn’t matter. Fundamentals matter. If you haven’t learned that when the Dow was up at 14,000 or down at 6,500 or back at 9,500, all in less than 2 years - then I don’t know what I can say to convince you. Good companies bounced back, bad companies failed. The charts betrayed the pattern-watchers over and over again but the fundamentalists, including "doomsayers" like Whitney and Roubini were right when they said the markets were overbought and we were right at the bottom when we said they were oversold. Now that the markets have drifted into a middle zone, I’ve been willing to watch the charts and we set our levels every day (and RUT 577 kept us from being bearish early in the day yesterday, thank goodness).
Just because we set levels, doesn’t mean we’re believing the market action - it’s just a rational acceptance of the fact that "you can’t fight the tape" because there are so many of you out there who consider yourselves technical traders. As we saw in the last, failed "head and shoulders" event in early July, these patterns have become traps for the TA crowd and it was that sell-off that drew in the short speculators and the subsequent short-squeeze that followed, that gave the markets 2/3 of their current gains. The question that faces us now is - can this level (Dow 9,500, S&P 1,000) be sustained when the volume picks up in the fall?
Reading the Fed’s latest Beige Book, I would say clearly the fundamentals do not support the current market levels. As I parsed out the text for my 2:30 Alert to Members, I decided to highlight positive indicators in green and negative ones in red. Needless to say, the report was a sea of red, very similar to our negative reading of the Fed minutes last week. The Fed minutes were long on optimistic outlook but very short on actual improvements in the economy. The key is that those minutes were from a meeting that took place on August 11th and the data compiled was through July at best.
We’ve seen a clear deterioration in our "recovery" since then and the Beige Book, which covers the period through the end of August, contains little evidence of a bouncing economy. This is fine with us, it’s what we expected and the only question we are really wrestling with at the moment is: Should we raise the mid-point of our trading range from 8,650 to 9,100 or is this stretch to 9,500 the new "normal." We set our 8,650 Dow target way back in November and it has guided us through the ups and downs of the market - helping us to be, as Warren Buffett advises "Fearful when others are greedy and greedy when others are fearful" and we’ve gotten some great bargains along the way by sticking to our fundamental guns.
Has the global economic climate changed enough for us to raise our targets 5%? The mood certainly has but there are still many risk factors that leave us cautious. This does not mean we need to sit out the market and it does not even mean we have to bet bearish (in fact, we have very few bearish bets in place at the moment, something that will change into the weekend). What it does mean is that we will play cautiously, taking small gains quickly off the table and stockpiling cash for the next buying opportunity if we do get a real sell-off. I would love to see a big-volume move down to 9,100 and see it hold up so we can feel more comfortable raising our targets. The Dow NEEDS to finish the year at 9,700 to post a 10% gain, which is what we’re going to need to get enough investors off the sidelines to keep things interesting next year.
We’re not there yet. All we have so far is the biggest rally on the lowest volume ever recorded and there is AMPLE evidence that up to 80% of that volume is coming from 5 trading firms that have a strongly vested interest in getting the markets up and over that 10% mark - otherwise, where are the people going to come from to pay their fees? Only by being able to print those shiny brochures with all the charts and graphs that show you how much better off you’d be if you let them have all your money can "THEY" make their Billions in fees and Billions in bonuses for the next decade. As the first decade of the 21st century draws to a close, just try to keep that in mind.
In another clockwork trade this morning, the dollar (9am) is now at 91.8 Yen and $1.46 to the Euro and $1.664 to the pound. You could have made millions trading off my very cynical 7am prediction at the top of this post but we don’t mess around with currencies other than a couple of ETFs as they are just too crazy - even for us option traders! Still, a guy like me shouldn’t be able to predict the movement of the Dollar that easily, especially when I had no fundamental reason for it, just theory that "THEY" push the dollar down in order to boost commodities and the markets artificially so they can reel in the suckers for another round of market manipulation.
We’re going to be very happy to start buying when we see a clear break over our break-out levels (doesn’t that make sense?). As I said earlier this week, is the global economy really back to just 1/3 off the highs, even with 10% of the global population unemployed? If so, I suppose we must have been way UNDERVALUED at the top as we didn’t even need 10% of our customers in order to make 66% of our profits - that’s pretty incredible - as in: NOT credible.
As the Abe Lincoln once warned (quoting PT Barnum) in the face of shenanigans that were being played by his opponents: "You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time." Like Goldman Sachs, the great George Bush the second also seized on Lincoln’s words and he said (and I kid you not): "You can fool some of the people all of the time and those are the ones you want to concentrate on."
Let’s just be careful out there and try not to be one of "those" people. As my favorite band says: "We won’t get fooled again!"
Click here for a FREE, 90-day trial subscription to our PSW Report!
I know you don’t want to hear this. You don’t want to believe that the markets are being manipulated and you don’t want to think you can’t rely on your charts or numbers you read in the papers (or the articles for that matter) as it might prove that you have as little ability to predict the markets as a soap-opera viewer had of predicting who will be the next character to have an affair. Like a soap-opera, the stock market is written for television, has a regular cast of writers (the MSM) and makes little sense to people who come in late to the game.
We, at Philstockworld, do not care if the game is rigged. As long as we can figure out HOW it’s rigged, we know where to place our bets and we can make money from it. So don’t take this as me being down on the market - we love this stuff!
Another conspiracy we drone on and on about is the good old "stick save." Perhaps it’s not a conspiracy aimed at propping up the markets on low volume, perhaps it’s a natural phenomenon of the markets that makes it move up 3 out of 5 afternoons per week but we like to call it a stick save and we like to play it at 2:30 on any low-volume day. You can buy a DIA call that is about $2 in the money, like the Sept $94 calls (now $2.05) and they will gain 70 cents for every $1 the DIA moves up (the delta). Had you made this trade at 2:30 every day and sold at the close for the past week, you’d be up net 50% on that trade. When we see a pattern, we label it and follow it - is that complicated?
Market movement doesn’t matter. Fundamentals matter. If you haven’t learned that when the Dow was up at 14,000 or down at 6,500 or back at 9,500, all in less than 2 years - then I don’t know what I can say to convince you. Good companies bounced back, bad companies failed. The charts betrayed the pattern-watchers over and over again but the fundamentalists, including "doomsayers" like Whitney and Roubini were right when they said the markets were overbought and we were right at the bottom when we said they were oversold. Now that the markets have drifted into a middle zone, I’ve been willing to watch the charts and we set our levels every day (and RUT 577 kept us from being bearish early in the day yesterday, thank goodness).
Just because we set levels, doesn’t mean we’re believing the market action - it’s just a rational acceptance of the fact that "you can’t fight the tape" because there are so many of you out there who consider yourselves technical traders. As we saw in the last, failed "head and shoulders" event in early July, these patterns have become traps for the TA crowd and it was that sell-off that drew in the short speculators and the subsequent short-squeeze that followed, that gave the markets 2/3 of their current gains. The question that faces us now is - can this level (Dow 9,500, S&P 1,000) be sustained when the volume picks up in the fall?
Reading the Fed’s latest Beige Book, I would say clearly the fundamentals do not support the current market levels. As I parsed out the text for my 2:30 Alert to Members, I decided to highlight positive indicators in green and negative ones in red. Needless to say, the report was a sea of red, very similar to our negative reading of the Fed minutes last week. The Fed minutes were long on optimistic outlook but very short on actual improvements in the economy. The key is that those minutes were from a meeting that took place on August 11th and the data compiled was through July at best.
We’ve seen a clear deterioration in our "recovery" since then and the Beige Book, which covers the period through the end of August, contains little evidence of a bouncing economy. This is fine with us, it’s what we expected and the only question we are really wrestling with at the moment is: Should we raise the mid-point of our trading range from 8,650 to 9,100 or is this stretch to 9,500 the new "normal." We set our 8,650 Dow target way back in November and it has guided us through the ups and downs of the market - helping us to be, as Warren Buffett advises "Fearful when others are greedy and greedy when others are fearful" and we’ve gotten some great bargains along the way by sticking to our fundamental guns.
Has the global economic climate changed enough for us to raise our targets 5%? The mood certainly has but there are still many risk factors that leave us cautious. This does not mean we need to sit out the market and it does not even mean we have to bet bearish (in fact, we have very few bearish bets in place at the moment, something that will change into the weekend). What it does mean is that we will play cautiously, taking small gains quickly off the table and stockpiling cash for the next buying opportunity if we do get a real sell-off. I would love to see a big-volume move down to 9,100 and see it hold up so we can feel more comfortable raising our targets. The Dow NEEDS to finish the year at 9,700 to post a 10% gain, which is what we’re going to need to get enough investors off the sidelines to keep things interesting next year.
We’re not there yet. All we have so far is the biggest rally on the lowest volume ever recorded and there is AMPLE evidence that up to 80% of that volume is coming from 5 trading firms that have a strongly vested interest in getting the markets up and over that 10% mark - otherwise, where are the people going to come from to pay their fees? Only by being able to print those shiny brochures with all the charts and graphs that show you how much better off you’d be if you let them have all your money can "THEY" make their Billions in fees and Billions in bonuses for the next decade. As the first decade of the 21st century draws to a close, just try to keep that in mind.
In another clockwork trade this morning, the dollar (9am) is now at 91.8 Yen and $1.46 to the Euro and $1.664 to the pound. You could have made millions trading off my very cynical 7am prediction at the top of this post but we don’t mess around with currencies other than a couple of ETFs as they are just too crazy - even for us option traders! Still, a guy like me shouldn’t be able to predict the movement of the Dollar that easily, especially when I had no fundamental reason for it, just theory that "THEY" push the dollar down in order to boost commodities and the markets artificially so they can reel in the suckers for another round of market manipulation.
We’re going to be very happy to start buying when we see a clear break over our break-out levels (doesn’t that make sense?). As I said earlier this week, is the global economy really back to just 1/3 off the highs, even with 10% of the global population unemployed? If so, I suppose we must have been way UNDERVALUED at the top as we didn’t even need 10% of our customers in order to make 66% of our profits - that’s pretty incredible - as in: NOT credible.
As the Abe Lincoln once warned (quoting PT Barnum) in the face of shenanigans that were being played by his opponents: "You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time." Like Goldman Sachs, the great George Bush the second also seized on Lincoln’s words and he said (and I kid you not): "You can fool some of the people all of the time and those are the ones you want to concentrate on."
Let’s just be careful out there and try not to be one of "those" people. As my favorite band says: "We won’t get fooled again!"
Click here for a FREE, 90-day trial subscription to our PSW Report!
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