Moosnippets-- An archive of Moose wisdom and folly
Decision Moose publishes a Moosecalls weekly review that essentially has a shelf life of seven days. After that, it disappears forever, unless it is deemed worthy of this abridged archive. Added in response to many reader requests, the criteria for inclusion herein is that the author, in hindsight, consider the material to be inordinately useful, prescient, dumb-blind-stupid, or funny. (It's a very low bar.) It will be added to gradually, when time permits looking back instead of forward.
INDEX
I Blew it! What do I do now? (10/10/2008)-- You missed/ignored our cash signal and took the worst hit in equity history. Should you sell now? (Archived 11/12/2008)
The True Cause of Winter, An American Fable (11/02/2008)-- A fable about assumptions. perceptions, and feelings in an election year. (Archived 11/12/2008)
Ego and the Public Man (07/11/2008)-- Author contemplates navel and website lint. (Archived 11/12/2008)
France to the Rescue (07/04/2008)-- ECB head, Jean Claude Trichet, goes to war. (Archived 11/12/2008)
ARCHIVE
I Blew it! What do I do now? (10/10/2008)
Many people still have equity positions in their retirement account or with their brokers. You missed the signal. You didn’t entirely believe it. You never heard of this site before. Regardless of why, all of you are asking yourselves whether to hold or sell next week. I know this because a lot of you have been asking me that question this weekend, on the street, on the phone, and by email.
I wish I could tell you what to do right now, but I can't. My general rule of thumb is that mid-signal moves aren't that great an idea unless you are going to cash. Technicals suggest we only have about 10% downside risk from here in a normal retracement. But general rules, based on mathematical averages are not always right for every person or every situation. It is really an individual decision at this point, based on your tolerance for risk (fear) and your desire for reward (greed). That differs from one person to another. I can only provide my view.
I’ve found that the biggest problem I have exiting any position that has lost money is that it makes me feel stupid to admit that I made a mistake. So I delay doing it, even though my gut says bail. I keep telling myself it's a good stock, it'll come back, this is a head fake. But once I've dallied too long, and I do because I work off longer term technical indicators and not my gut, I also worry about selling at the bottom and getting laughed at by my broker or questioned by clients.
Maybe the problem is one of terminology. A washout bottom is referred to as a capitulation. Total surrender. Like we’re giving up good old American bourbon for Vichy water. Fact is, there is a difference between capitulation and a fighting withdrawal. In both cases, you give up the field, but in the latter, you intend to live to fight another day.
So if you expect to get out of stocks and say never again-- many did that after the tech crash-- you're probably making a bigger mistake than you would be hanging on to see if we hold at the next support level. If you're thinking this could turn into a much bigger mess than we've seen so far, but intend to jump back in if support holds and equities start moving up again, that is never a mistake. It is a rational decision that is a function of your risk tolerance and that reflects a balanced approach to fear and greed.
The trick is not to feel stupid, beat yourself up, or worry about what other people will think. The trick is to decide what will make you happiest today and sleep best tonight. It's only money. If you wake up tomorrow having sold and the market is up, you will have lost absolutely nothing, and there's a good chance it will be down again the next day anyhow.
It was one thing when brokers charged 600 bucks for a round trip on 100 shares of IBM. Now trading prices like the commodity it is. You can sell today, sleep on it, decide you were a total idiot, and buy back a day later for next to nothing. (Just remember the wash sale rule.) Plus, down 40%, you get a nice cap loss deduction in your taxable accounts that should last for years, and could come in handy if the next batch of bozos, whoever they are, raises taxes.
Obviously, there is more to the decision than mere psychology. Your financial situation applies. How much money is it? What is it for? How critical is it to your basic survival needs going forward (food, clothing, medical, roof over your head). If it isn’t very much money and it is critical to survival, you should always err on the side of fear. If it’s a lot of money, and not critical to survival, you might go with a little more greed.
Finally, you have to make your own reasoned guess about what will happen next. You can’t know with certainty of course, and the scientific way would be to assign probabilities. A person who thinks there is a 25% chance of another depression will behave differently than one who thinks the chance is closer to 5%.
I always minimize loss before I look for profit because not losing money is the most mathematically efficient way to eventually increase it. I put fear before greed. At the moment, my personal fear is that this is far, far from normal. If Europe and Asia start to take hits like we've taken to our financial system recently, good night, Irene. If hedge funds turn out to be as highly leveraged as our investment banks were, an “average” bear market decline may not begin to describe the beast that devours us.
None of which is to suggest that we may not already be entirely eaten, and haven’t noticed because we are as yet undigested. If you do think the worst is over and decide to hang in, protect yourself. Look at your investments now and set an exit price for each. That way, if it gets worse instead of better, there will be less stunned surprise clouding your decision and a more matter-of-fact response.
Deciding whether your chances of being bear food forever outweigh your chances of eventually being bear throw-up isn't exactly an exercise leading to contemplative bliss either way. You have to deal with it this time, but if you bookmark the Moose, maybe there won't be a next time.
The True Cause of Winter-- An American Fable (10/31/2008)
The following is fictional. Any resemblance to actual events, or to real persons, living or dead, is purely coincidental.
Once upon a time, a few years back, there was a man who needed a new winter coat. So, one warm autumn day, his wife sent him down to one of Chicago’s finest department stores to buy one. When he arrived at men’s clothing, however, he found that the store only had one plain, shop-worn, brown overcoat that might fit.
The salesman, a tall and dapper young man in a $900 gray sharkskin suit, said, “You don’t want that old coat anyway. You need a change, a makeover. Think how you would look in a suit like mine. You would be up to date and stylish, like a Hollywood celebrity. The women would flock to you.”
“I’m married with kids”, the man replied despondently.
“All the more people to tell you how great you look”, the quick-witted young salesman countered with undeniable eloquence.
Although the man knew full well it didn’t work that way in real life, at least in his house, it did sound tempting. But he was still undecided. “I need a winter coat to keep me warm,” he said again, but with less conviction in his voice this time.
“This suit is well made and of top-notch fabric. It will keep you warm while making you very, very cool. Everyone is buying it. It’s all you need,” the salesman assured him.
The man considered his choice. The $900 suit certainly was stylish compared to the old brown overcoat. And the salesman certainly wore it well.
The salesman, sensing that his customer was about to crack, applied the coup de grace. “Overcoats are over-rated”, he announced, and then added in a conspiratorial whisper, “Don’t you know that they cause winter?”
“They do?” the man asked. He’d never known that before.
“Think about it.” the salesman said, “Every year, when you start to see a lot of overcoats in the city, next thing you know, winter gets really bad. Then when we get rid of them, springtime returns. Clearly, the overcoats are entirely at fault.”
“Makes sense”, the man admitted, and he bought the suit.
Several months later, the man and his wife were driving to a big-box discounter on a snowy day, when their car slipped off the road and into a ditch. As they sat there in a snow bank waiting for triple-A with the engine turned off (to keep from asphyxiating themselves), the man once again began to notice that the suit, although very stylish, was not as substantial as the salesman had promised. Actually, it was pretty thin material.
To keep his mind off freezing, be began wondering how all those Hollywood people kept warm in their suits when it was 20-below outside. Then he realized none of them wore overcoats. They had thus banished winter altogether. If only everyone were as well-informed as our celebrities, he thought wistfully.
He soon found himself shivering, but decided not to say anything to his wife. Lately, every time he’d complained of being cold, she had taken to inexplicably smacking him over the head with her handbag and muttering, “Dumb-ass!”
Although this was by no means an entirely new development in their matrimonial relationship, it had seemed to grow, both in frequency and intensity after he had felt compelled to educate the poor, naïve woman on the True Cause of Winter.
As she sat smugly in her delightfully warm, but pathetically brown, coat, he saw that she was far too stubborn to let the truth set her free. She and that insidious coat, he knew, were entirely responsible for the cold, the wind, the snow, and his driving that had sent them both into the ditch. But he kept it to himself, Not only was she hopeless, but she was clutching her handbag a little too tightly.
Eventually, the tow truck came, and eventually the man survived the Chicago winter, although he did require a somewhat lengthy period of hospitalization to clear up a pesky bout of double pneumonia.
It was not, however, until his wife finally put away her offending
overcoat, and winter soon after disappeared (just as the dapper young
salesman had said it would) that the man could feel completely
vindicated.
Moral: Assumptions affect perceptions, which cause feelings. Be gentle
with one another and understand that when dealing with a dumb-ass, you
will invariably need a bigger purse.
Ego and the Public Man-- (07/11/2008)
JUL 11— “The great corrupter of public man is the ego. Looking at the mirror distracts one’s attention from the problem.” –Dean Acheson
This, of course, presumes that the problem is not staring right back at you from the mirror. I mean that’s an easy call for a man as intelligent, morally upright, and well bred as Acheson, but what about the rest of us? What if looking at the mirror actually focuses one’s attention on the problem, otherwise known as me, myself, and I?
I only mention this because for the last week or so, I’ve been distracted by my public self. (Truth be known, we’ve probably all been distracted by our public selves for most of our lives, but I have managed to overcome it by being in a constant state of oblivion regarding my personal shortcomings. It was only this week, after more than a half century of contemplative bliss, that I became aware of this whole distraction thing. Swear it.)
As usual, email prompted the revelation. Inquiries which I term “process” (as opposed to “results”) questions, often prompt me to think about the website rather than the stuff on the website.
Q: “How long will the Moose will keep it up?”
A: Until the model, or I stop working.
Q: “When do you plan to start charging for the Moose?”
A: When my wife takes a baseball bat to my monitor, and I need a new one. Could be any day now.
Q: “What do I do if you die?” (And I thought I was distracted by myself!)
A: Dunno. Won’t care… Expect to be very busy fast-talking St. Peter.
This website— in which I clearly have a little ego invested— is my “mirror” and yes, my distraction. And such distractions can be very seductive when you’re sitting around in cash getting bored with the inactivity surrounding the “problem” of investing.
The Moose has always been a free site, no fees, no advertisements. It isn’t promoted anywhere, so most visitors find it by word of mouth, sheer luck, or when searching court or administrative decisions that, for whatever perverse reason, involve a moose. Obviously, decisionmoose is not set up to be, nor is there any advantage to its being, a high traffic site.
The last hard and fast traffic numbers I had were provided for free when the site resided on Earthlink’s complementary personal web space. After the Moose went dotcom in 2005 and actually bought web space, I decided against buying traffic stats. Back then the site had so few visitors (about 5000 a month) that paying for traffic stats seemed like standing in line to have a bucket of ice cubes poured down your shorts. It was too cold a dose of reality to merit financial outlay.
Maybe idle capital is the devil’s workshop. Sitting around in cash at 2% a year, one doesn’t have much to think about. So I became curious about how many Moosaholics there really are. Is this even worth it? If I decide to change the site in some way, or to stop working, or just up and die, it behooves me to know how many P-O’d people may come after me— if only to relieve themselves on my headstone. So I resumed counting.
The good news, albeit solely for author ego-reinforcement purposes, is that the Moose has grown four-fold in three years, having registered 7.6 million hits since going dotcom in September 2005. As impressive as that may sound, however, the deeper numbers suggest the Moose is still pretty much a secret. This week, for example, Traffic Facts reports 240,000 hits from about 5,000 visitors, 3,400 of whom were “unique visitors”. (Rest assured, all of you are unique. It’s just that I updated late last Sunday, requiring many of you to check in twice or more, and as you know, technically, you’re only allowed to be a virgin the first time.)
I can console my fragile ego with the knowledge that three years ago, 5K was a month’s traffic instead of a week’s, and it has all happened with very little, if any, promotion. In the internet world, however, three to four thousand unique visitors a week is small potatoes. (It’s a free site, for crying out loud— and you can’t GIVE it away? Google gets 20 gazillion visitors a minute. What’s wrong with you?)
So am I the problem in the mirror?
Maybe. I haven’t held the financial industry in particularly high esteem for awhile. The institutional focus there shifted from a quality product to sales volume a long time ago. Attracting potential clients takes precedence over servicing existing ones. Since a good investment manager must be humble, and a good salesman cannot be, the culture of the business has evolved accordingly.
My view, sadly jaded, is that the financial industry has been morphing into a bunch of high-energy shills selling sub-standard product for years now. The goal is no longer to find new ways to MAKE the client money, but to find new ways to TAKE the client’s money.
Maybe I’m being a little too generous. Maybe it’s always been that way, and I just had a fuzzy-headed fantasy that at one time, honest people used their brains to help others, not sell them, and everyone came out a winner. As a senior investment officer for a small regional bank that was my attitude. It worked so well for our clients and us that a mega-bank gobbled us up. The new ownership shifted to a sales focus, exclusively targeting its proprietary mutual funds, which were a disgrace, as I walked out the door.
Perhaps my fantasy was self-induced. Most are.
When it comes to investing, I’ve often said that I am a blind man feeling my way ahead one week at a time. My senses may be a little better honed than most because I’ve been doing it awhile, but I hardly have all the answers. Never will.
To promote or sell this site as if it did have some magical power to predict the future, when I know full well that past performance is no guarantee of future success, and that I am just feeling my way along with everyone else, would mean giving up a slice of my fuzzy-headed fantasy, which I’ve come to equate (rightly or wrongly) with my personal integrity.
It would be, as Acheson remarked, ego corrupting the public man. Ain’t gonna happen… not this week at least… not as we approach the first anniversary of the sub-prime credit crisis. (Yes, only a year, seems longer doesn’t it?).
The mortgage sector continues to demonstrate what can happen when a sales culture overruns an industry. Sane business practices go out the window, whether it is selling loans to people who cannot repay them, or repackaging mortgage products to be levered beyond all recognition. It was all done in an effort to sell, sell, sell, to move more product.
A year later, we have the second largest bank failure in U.S. history (IndyMac) and our two massive Federal mortgage lenders, Fannie and Freddie, in trouble. This week saw their stock prices almost cut in half. Fannie, which approached $70 a share this time last year, is $10 today. Freddie is below $8. While stockholders could be zeroed out at some point, I suppose, the feds are not going to let these two quasi-governmental agencies fail. To do so would be to start the Greater Depression. How they will bail, however, is as yet unclear.
France to the Rescue (07/04/2008)
JUL 4— Jean-Claude Trichet, head of the European Central Bank, raised interest rates on the continent this week. Whodathunk a Frenchman would lead the fight on inflation? The French don’t lead the fight on anything, anywhere. It was just a few years ago that the U.S. Secretary of Defense, prior to Iraq, said, “Going to war without the French is like going without your accordion.” Jokes like “Why does the Champs-Elysees have so many trees? Because Germans like to march in the shade” were all the rage.
The French, after all, have had a reputation as wimps ever since Waterloo in 1815. I have always questioned whether that was deserved, since victors (in this case, the British) tend to write the history books. Besides, I’ve been to Paris four or five times, and I’ve never met a wimpy Parisian waiter. On the contrary, I’ve often thought that if I could enlist the army of nasty, kick-butt, take-no-prisoners Parisian waiters I’d met, I could rule the world.
So if Mssr. Trichet, with respect to the war on inflation, ever says something so untoward as, “Going to war without the Americans is like going without your sousaphone”, I will not take offense. It will merit a deserved “touché”.
America is now the wimp in the global war on inflation. France is the macho macho man. (I can envision the Village People dancing beneath the Eiffel Tower as we speak. They look perfectly at home.)
I suppose it is only fitting that the French should come to our rescue 4th of July week. They did, after all, help pull America’s revolutionary chestnuts out of the fire. Unfortunately, they also eventually beheaded all the French who’d helped us, which naturally gives one pause. In any event, we entered WWI and WWII, claiming payback to France, but I have to think most of that was about Britain.
For all their faults, the English speak… English. Or something approximating it. The French only have menu items (French fries, French toast, French onion soup, and so on) to which Americans can relate. The French are blessed, however, that their menu items have usually been considered tastier than the Germans’. So: you want escargot, chateaubriand, a napoleon for dessert, and a little champagne to wash it all down, or do you want sauerkraut und bier?
Guess we’d better save France.
And now a Frenchman is trying to save us, and from ourselves no less. It is a commendable effort, but, unless we help, it is an effort that— as the French would say-- has a snowball’s chance in Algiers.
With the U.S. consumer price index hitting 4.6% in the latest month, we need to admit we might have a problem. Face it, when the top button of your trousers fires across the room at a cocktail party as you shove one last hors d’oeuvre (another French menu item) into your piggy little face, it’s time to diet. The Fed likes to point out that the Amish-Anorexic inflation rate (ex-energy and food) remains in the 2.1% to 2.3% range, but that’s still above its stated target, and has been for a year. Never mind that most Americans don’t live that way.
The scarier thing is that commodity prices are up almost 50% in the past year. The last time that even came close to happening was 1973. A year later we registered 13% inflation. Commodity prices are a reliable leading indication of future inflation. It is, after all, a basic rule of business, that if you’re selling your product for less than it costs to produce, you certainly can’t make it up on volume. You have to raise your prices as input costs escalate, or you go out of business.
Of course this isn’t 1973. The predominant inflation is different this time around. About the only similarity is that both inflations have offshore (exogenous) origins. The ’73 inflation was cost-push, promulgated by the OPEC cartel’s oil embargo. A managed supply-side constraint pushed prices higher. The current inflation is demand-pull, resulting from an emerging market boom. Global free-market demand has exceeded current capacity and pushed prices up.
Managed, exogenous, cost-push inflation (1973) is the hardest inflation to beat with Fed monetary policy. Managed inflation may not immediately respond to interest rate changes, which rely on a free market to work effectively. When it finally does, the cartel can simply raise prices again, as OPEC did. Cost-push inflation arising out of a supply constraint is also more difficult to control by raising interest rates. That’s because increasing supply means investing in new productive capacity. Higher interest rates make that more expensive. They actually work against price reductions.
Free market, exogenous, demand-pull inflation (2008) is more responsive to interest rate hikes. Not that it wouldn’t be painful to kill it— you still have to do in the U.S. economy first. But once you’ve gotten it, at least it should stay dead.
So this week, we saw a little more “stag” in the stagflation fears we’ve been talking about for several months. The ECB raised rates, and materials stocks had a particularly bad week. Steel and coal stocks corrected sharply with the start of the third quarter. A little profit taking and a little handwriting on the wall as building booms in India and China are looking at interest rate hikes in their own countries and now in Europe.
For U.S. stocks, it was a short week and not really voluminous. Old quarter new quarter complications skewed the view too. Equities sagged and are still quite bearish, but whether we’re headed much lower from here is still an open question. We’ve held here twice this year, and the Fed rate cuts are still expected to kick in someday.
Not that we’re jumping in or anything. The Moose hangs with cash for another week. Discretion is the better part of valor. (Probably another French concept.)
