Trading for the Short Term

One of the best brief descriptions of how to trade for the short term is in this video describing the trading action from Friday at one of our favorite sites, Alphatrends. You can view it here: Alphatrends Blogspot for Friday February 22.

Of course we don't always agree with Brian Shannon's interpretations of the short term chart patterns, but we usually do and always find them useful, and listen with great attention and respect. We find his overall approach, and his coaching remarks in passing, to be very appropriate in particular, and his style is our style for short term trades. No matter how good you think you are, traders are fighting a constant battle in adapting to changing markets and new experience, and the creeping bad habits that can develop into major trading slumps.

Enjoy listening to Brian, and always remember that, once you get past the basics, trading is 90% self discipline and a willingness to subject your ego to learn from the discipline of the markets. Please keep in mind that short term trading, intermediate trading, and investing are very different disciplines, despite their similarities, and each demands its own approach and techniques.

The Great Crash of 1929 - A Walk Down Memory Lane

It is difficult to obtain a copy of the best documentary which we have ever seen about the stock market crash of 1929. It was written by the award winning screenwriter Ronald Blumer, and produced by Middlemarch Films for WGBH Boston, and shown on the excellent PBS history series American Experience Its title is The Great Crash of 1929.

The last time we checked you could not buy a copy from PBS, and it's rarely shown on television, perhaps due to a lack of corporate sponsorship (lol). This might have changed but we doubt it. If it is ever shown again on PBS try to DVR or Tivo it, since it is exceptionally well made, informative, entertaining, and contains many insights into the people and the period that you rarely get to see anywhere else, especially in dry economic analysis. It captures the spirit of the time, the zeitgeist.

The documentary contains a significant amount of original photos, film footage, and personal commentary, arranged in the style that Ken Burns has perfected to bring to life so many other historic documentaries. There is a web site for it from PBS which you can visit by clicking here: The Great Crash of 1929. There is a transcript for portions of the film, and they make interesting reading if you cannot see the actual film.

We first saw this video when we were doing work in Silicon valley. An acquaintance at a high tech IPO gave us a VHS copy to watch, just prior to the Nasdaq Bubble bust of 2000. It inspired us to investigate many of the written sources cited in the film, including Sobel, Galbraith and Klingaman, and greatly enriched our understanding of this little understood period of American history. It also persuaded us to sell all of our stocks that represented much of our life's savings, a few months before their prices plummeted about 90%. It made a deep impression on us after that. It might make a similar impression on you now as well.

As George Santayana said, "Those who cannot learn from history are doomed to repeat it."

NARRATOR: Everything was not fine in 1929 with the American economy. It was showing ominous signs of trouble. Steel production was declining. The construction industry was sluggish. Car sales dropped. Customers were getting harder to find. And because of easy credit, many people were deeply in debt. Large sections of the population were poor and getting poorer.

Just as Wall Street had reflected a steady growth in the economy throughout most of the 20s, it would seem that now the market should reflect the economic slowdown. Instead, it soared to record heights. Stock prices no longer had anything to do with company profits, the economy or anything else. The speculative boom had acquired a momentum of its own.

NARRATOR: Wealthy investors would pool their money in a secret agreement to buy a stock, inflate its price and then sell it to an unsuspecting public...

Mr. ROBERT SOBEL (Historian): I would say that practically all the
financial journals were on the take. This includes reporters for The Wall Street Journal, The New York Times, The Herald-Tribune, you name it. So if you were a pool operator, you'd call your friend at The Times and say, "Look, Charlie, there's an envelope waiting for you here and we think that perhaps you should write something nice about RCA." And Charlie would write something nice about RCA.
A publicity man called A. Newton Plummer had cancelled checks from practically every major journalist in New York City.

Mr. NESBITT: Then, they would begin to -- what was called "painting the tape" and they would make the stock look exciting. They would trade among themselves and you'd see these big prints on RCA and people will say, "Oh, it looks as though that stock is being accumulated."

Mr. SOBEL: Now, if they are behind it, you want to join them, so you go out and you buy stock also. Now, what's happening is the stock goes from 10 to 15 to 20 and now, it's at 20 and you start buying, other people start buying at 30, 40. The original group, the pool, they've stopped buying. They're selling you the stock. It's now 50 and they're out of it. And what happens, of course, is the stock collapses." [and on a large enough scale, the stock market, and the regional or national economy].

We came to the conclusion back in 1999 that stock market crashes are by and large the end result of reckless credit expansion, lax regulation, and widespread corruption of the society by a like-minded group of individuals who turn society on its head for their own selfish and personal benefit. They don't need to have a plan, they don't even need to communicate. Its simply what they do, like musicians play music, and bakers bake, and painters paint. They are financial predators.

Of course there are willing fools and greedy individuals up and down the food chain. One only has to look at the current mortgage crisis to see how that happens. They do not intend it to end in ruin, but it seems that the leaders, the primary movers, always take it just one step too far, and lose control, and then step aside.

Its not because they need the money. Its a pathology, a will to power, a need to be in control. They have great holes in their being, and they try to fill them with the most money, the most power, the most of everything. They feel the overwhelming need to be .... different, better, than everyone else. They join exclusive clubs, send their children to exclusive schools, drive exclusive cars, and do exclusive things to... exclude "the lesser men" whom they might view as potential servants, or useless eaters. And if they cannot excel by writing a great book, or performing great music, well, they can try to stand out by destroying and humbling everyone else by subverting the public good and the law.

We don't know why it is, but they always seem to cheat: in school, in business, in marriage. They think the laws are not for them, and relish breaking them, while using them to subvert the little people. And they always seem to have a father or mother they despise because they made them feel unworthy. In a way, for them its all just game, because being sociopaths they cannot feel the misery that they cause. They can feel very little actually, and are generally incapable of normal human love and friendship. So they try to feel something through excess and indulgence in drugs, dress, drink, cars, fads, marriages, houses. Incapable of a mature loving relationship, they oscillate between immature romance and impersonal sex. They are driven, and once you get past the public face, they are pathetic, rarely at peace, and often downright scary.

In 2005 we forecast that 2000-2 was a preview, and that they would do it all over again, and this time the country would not be getting up from it intact for many, many years. We think we're well on our way. May God have mercy on us.

It's Not Your Grandfather's Bank Run...Yet

Yes, we understand that it is considered the duty of those in charge, the usher in the burning theatre, to maintain order, and certainly NOT to create a panic rush for the exits. But we wonder at what point as they reassure the public to remain placidly in their seats eating popcorn with their kids, and shut off the fire alarms, and describe the smoke wafting in between the rows as cigarette fumes from the Ladies Lounge, that a fine line in motive and outcome is crossed. And as the privileged few are allowed to slip out the side doors first, after collecting their expensive coats and valuables, we wonder at what point this becomes something more than the duty of a public servant, and a despicable act of fiduciary negligence.

Wall Street Bank Run
By David Ignatius
Thursday, February 21, 2008; Page A15
Washington Post

It doesn't look like an old-fashioned bank run because it involves the biggest financial institutions trading paper assets so complicated that even top executives don't fully understand the transactions. But that's what it is -- a spreading fear among financial institutions that their brethren can't be trusted to honor their obligations.

Frightened financiers are pulling back from credit markets -- going on strike, if you will -- to escape the unraveling daisy chain of securitized assets and promissory notes that binds the global financial system.

As each financier tries to protect against the next one's mistakes, the whole system begins to sag. That's what we're seeing now, as credit market troubles spread from bundles of subprime residential mortgages to bundles of other kinds of debt -- from student loans to retailers' receivables to municipal bonds.

Investors are nervous because they aren't sure how to value these bundles of securitized assets. So buyers stay away, prices fall further, and the damage spreads.

The public, fortunately, doesn't understand how bad the situation is. If it did, we might have a real panic on our hands...

The answer to Wall Street's bank run may be a version of what saved Main Street banks during the Great Depression. President Franklin Roosevelt created the Federal Deposit Insurance Corporation in 1933 to reassure the public that there was an insurer of last resort for the banks -- and that people's money was safe even if they couldn't see it or touch it or put it under a mattress. Rep. Barney Frank and other congressional experts are weighing different approaches to this problem of how to backstop the markets...

The hubris in this system was Wall Street's confidence that it could value paper securities that had been sliced and diced so many times that they no longer had solid connections to their underlying assets. [the essence of a bubble - Jesse]

The nation's leading financier, Warren Buffett, had warned years before that "derivatives," whose value was balanced loosely on the real assets underneath, were the equivalent of "financial weapons of mass destruction." But in the rush for profits, nobody listened. [His was a lonely voice in a stream of propaganda to the contrary, and conspiculous silence from almost all the financial commentators, economists, and media - Jesse]

I've saved the worst for last. Do you want to know who is bailing out America's biggest banks and financial institutions from the consequences of their folly -- by acting as the lender of last resort and controller of the system? Why, it's the sovereign wealth funds, owned by such nations as China and the Persian Gulf oil producers. The new titans are coming to the rescue, if that's the right word for their mortgage on America's future.

We respectfully differ with Mr. Ignatius on two points. The people did not "ignore" the warnings. The warnings were willfully muffled by the corporate media, and a steady stream of financial and government propaganda which assured them that the problem is contained, the stock markets are rising, the Fed's got your back, and so all is well.

Secondly, if the foreign Sovereign Wealth Funds pick up the tab for this, it might well be the desired endgame for the insiders and politicos, because in the ensuing liquidation the SWFs will be demonized and their markers will be ripped to shreds and tossed, one way or the other. When Wall Street and Washington look for someone to take a visible hit on this, it will be those who don't vote and don't sit on juries.

The best bet is that whatever cannot be laid off to foreigners is going to be spread over the American public, probably as a monetary inflation and a continued lowering of living standards for all but the top 1%. And a maximum effort will be made to "move on," and the same people that caused it will convene committees to come up with programs and reforms to fix the problems, and administer cursory slaps on the wrist for the worst of the perpetrators, with a few designated scapegoats taking the big hits. Déjà vu all over again.

But is now the time for abstract discussions about economics and stewardship? As a practical observer might conclude when the seas withdraw ahead of an approaching tsunami: head for higher ground!

IMF External Relations Department,
Morning Press
Thursday, February 21, 2008
Wall Street Bank Run
David Ignatius, a Washington Post columnist, wrote today..."Wall Street Bank Run" Washington Post

We're Going to Make the Banks an Offer They Can't Refuse

Can you believe that there are people who think the forced splitting of the monoline insurers, like MBIA and AMBAC, into two entities would be a positive development for the banks?

The setup is that Eliot Spitzer's insurance enforcer, Eric "The Shiv" Dinallo, has brought the banks and the insurers together and made them an offer they can't refuse.

"Look, you truffatore have a good thing going down there in the City, running the stock market numbers rackets. And we envy the regulators and politicians you have in your pockets. But this move into counterfeit AAA debt and subprime is hurting the municipal and state bond business. That's our turf, and we don't like it when coglioni mess with our thing.

You banks are going to have to bail out these monoline insurers, and we don't care what deals you have to make to get the dough from Benny the Banker and Omar "the Turk" Sovereignfunzo, because we're not going to the public again to save you mamalukes. The terms are between them and you.

Oh, you're going to talk to your Texas stoonads in Washington? Fuhgheddaboutit! Barack "Bumpy" Obama from Chicago has them si stanno cagando sotto. Their scam has had a nice run but you can stick a fork in it fa Nabola, its done. A few of them are going to be sleeping with the fishes before this is over.

So you either paga in anticipo and make the problems you caused for us go away, or we are going to split up the monolines, take all the good parts to protect our business, and you are going to be picking about $580 billion worth of CDO and bad debt tranches out of your culone for the next ten years. Capice?"

New York's Dinallo Considers Splitting Bond Insurers
By Christine Richard and James Tyson

Feb. 14 (Bloomberg) -- Bond insurers may be split into two businesses in what would be the biggest overhaul of the industry since it was created almost four decades ago.

New York Insurance Department Superintendent Eric Dinallo said such a separation is one of the proposals regulators have been discussing with bond insurers, including MBIA Inc. and Ambac Financial Group Inc.

``One would have the municipal bond policies and any other healthy parts of the business,'' Dinallo said in prepared testimony for a hearing today of the House Financial Services subcommittee on capital markets in Washington. ``The other would have the structured finance and problem parts of the business.''

New York Governor Eliot Spitzer told the committee that the step, while ``not optimal,'' may be necessary if the companies can't raise the capital needed to stave off credit-rating downgrades. The world's largest bond insurers may lose the AAA ratings they use to guarantee $2.4 trillion of municipal and mortgage-backed debt, casting doubt on the rankings of thousands of schools, hospitals and local governments around the country.

Dinallo said his main goal is to protect the municipal borrowers and debt holders. Executives of Armonk, New York-based MBIA and Ambac are also scheduled to appear before the committee and will say they can survive the slump in mortgage securities.

Recapitalization

The best option is to recapitalize the bond insurers and stabilize the companies without dividing them, Spitzer told reporters after his testimony. ``That could happen within a couple of days [or else],'' he said.

Dinallo last month organized banks to begin plans for a rescue of the insurers and said he may consider tightening restrictions on what bond insurers can guarantee.

Splitting the companies in two was proposed by billionaire investor Warren Buffett, who this week said he offered to take over $800 billion of the municipal debt guaranteed by MBIA, Ambac and FGIC Corp., the fourth-largest bond insurer. The plan would leave behind the guarantees on mortgage-backed securities and other corporate debt responsible for the companies' losses.

Spitzer told the committee that such a ``good bank, bad bank structure,'' may be necessary if other rescue plans fail. Federal regulation may also be needed, he said. [Never screw with an ambitious district attorney].

``I am not opposed to federal regulation but how and when it is done needs to be thought through,'' Spitzer said in an interview with Bloomberg Television. [I'm not letting those clowns get in on this until OUR problem is solved.]

Insurers are supervised by states rather than the federal government, with New York often taking a lead role. New York regulates bond insurers under Article 69 of the state insurance law, Spitzer said in his testimony, calling the statute ``the standard for state insurance departments around the country...''

To contact the reporter on this story: Christine Richard in Washington at crichard5@bloomberg.net ; James Tyson in Washington at jtyson@bloomberg.net

Last Updated: February 14, 2008 16:14 EST