Friday, March 31, 2006

A Major New Documentary On Speculation


History's Hidden Engine

Watch History's Hidden Engine -
watch it online now - for free!

I've just finished viewing this documentary, there is some very good information here.

This is a new production and is enjoyably informative.

The insight History's Hidden Engine offers into the nascent science of socionomics is quite profound.

The online streaming video itself is well worth your time, you will learn a great deal, at the very least you will be exposed to some wonderful conceptual challenges.

This video is available through the same folks that offer the excellent Elliott Wave Tutorial - which is also free.

Elliott Wave International's tutorial is a comprehensive introduction to the Elliott Wave Principle. All ten lessons have been adapted from Prechter and Frost'’s Wall Street bestseller, Elliott Wave Principle - Key to Market Behavior.

To start your Elliott wave education now, click here.

Elliott wave theory addresses much more than markets, it attempts to find patterns that underlie collective society.

Study of financial market implications are usually addressed under the Elliott Wave moniker. When folks are looking for deeper and broader societal trends they flaunt the socionomics label.

History's Hidden Engine is an in depth, without complicated math, documentary about social patterns. It is well done.

This may be a pseudo-science, or you may be witnessing the birth of a new science.

It is still early in the game - we just don't know yet - I'll consider it a protoscience for now.

I have found however that Elliott wave theory is applicable to speculation - it is a model I personally utilize.

Think about Hari Seldon in the Foundation series by Isaac Asimov. Socionomics may become an accepted discipline for the study of
predictive group dynamics.

Watch the video - but don't make up your mind yet.

The field of Socionomics will be expanding.

This is worth investigating.



Figures Don't Lie

Figures Don't lie, But liars sure can figure.

There has been talk of tipping points in many areas recently.

A tipping point is that instant where a feathers weight can shift a teeter-totter or break a camels back. Before that point all was stable, after that point all is massively different.

Custom derivative liquidity, stock market valuations, and more - all are capable of sudden and massive swings.

I think we may be close to an inflection or tipping point in the average American's perception of their government. A primary purpose of public schools is indoctrination -- creating a conditioned obedience response to authority. To challenge years of training will require a massive shift of confidence.

Today the average American believes those parts of the government that they don't understand - and seriously doubts the areas with which they are familiar.

As to what will happen if a tipping point of realization happens - we can guess - and we can protect ourselves - at least financially.

Just as a fad - poker, baseball cards, bowling - can suddenly appear or disappear, so can mass perceptions seem to shift overnight.

An overview of what may trigger this realization is available at the link in the headline, or for a cogent synopsis read this short report by Doug Hornig.

This might be another good time for a small bet on volatility, or any of a dozen other interesting plays. This is of course not investment advice - it is just a reflection of what I am thinking. Do your own research - follow your own counsel.

We will repeat an important
speculation rule:

Just because something is inevitable does not mean it has to be immediate.

Enjoy Life.

tomorrow our lives may change drastically.


Tuesday, March 28, 2006

Stock Market Shorts - A few indicators

A quick point, a stock can start declining just because less folks are buying it.

There are many reasons a stock can decline.

  • The first reason is that almost all stocks are declining - a bear market. A standard view is that a declining tide lowers all boats.

  • A sector out of fashion by definition will effect all or most of the stocks in that sector. (A company that resists its sector trend is showing strength - it may be the first to rebound if the sector comes back.)

  • The third reason would be company specific. The stock can be in trouble for many reasons, but something will catch the eye of investors and the price will start slipping.

From the Bastiat Free University introduction page - here is a primary reason for a decline in a stock. BFU added a bit about society trends - I've included that also.

In finance there is a rule of thumb for large investors. If they own a great deal of stock in a company and notice the company has not, and will not, repair a flawed business plan; they sell their stock to protect themselves. They will then sell short more stock to profit from the collapse they think is coming. Their sales may alert others to look for problems and the stock may start it's decline.

BFU believes that as the netcohort society takes hold -- our traditional, inefficient, expensive, snobbish, government supported and regulated universities must change. They have a flawed business plan for the information society.

That finance rule of thumb for investor's?

If something is going to fall - it should to be pushed.

I also recommend that you visit the excellent blog of Mark Cuban - Blog Maverick. Mark has shown excellent timing in sports and in business Mark openly shares some great insights in his posts. In this entry he hits at least two indicators of a weak stock, some indicators are obvious - others you may have to think about.

IF you have the ability and the will to follow the speculation rule - cut losses short and let profit run - a few short sales can reduce your overall portfolio risk. This was of course the original idea behind hedge funds.

Stocks will rise and fall for many reasons - the most damaging to the stock will probably be company specific.

Any time a stock falls it could be a warning sign to take a close look at the sector and the entire market.


Saturday, March 25, 2006

Investment vs Speculation - Your Life Insurance

Most of these journal entries spring from a well founded belief that speculation is preferable to investment.

An Investment is a guided vehicle that plants you in promising soil, for a price. That price is not only commissions and management fees, it is a lack of control as you defer to other's knowledge. Others have their agenda first - can you be sure they are recommending the buy or sell based only on your best interests?

Of course not.

As an example look at life insurance products that are touted as also being investment vehicles. These pay the salesman great commissions, but they provide you with little additional benefit. A term life insurance policy will provide you with far more life insurance coverage - but pays little if any commission.

I was going to grab some comparative numbers, but the old line companies that push expensive life insurance want a rep to talk to you. These following numbers may be way off, they are as I remember them from a brief period after college when I was a licensed life insurance salesman - I had to quit when I realized the only way to do what was best for the client was for me to starve.

I should also add that
life insurance is very important in many instances. If you need to pay a huge premium to be talked into protecting yourself - do it.

If not find and act on the information yourself - and get far more coverage for far less money.

As a general rule when I sold Life Insurance, a healthy man age thirty could expect to pay about one dollar a year for one thousand dollars of term life insurance coverage. One hundred thousand dollars of life insurance coverage - one hundred dollars - per year. (not a lot of room for commissions in that)

A whole life policy could be priced any of a hundred different ways, and structured thousands of ways; universal life - term plus annuities - investment life . Think of a comforting word and it will probably have been applied to a life insurance product.

I had one client that had been sold a ten thousand dollar whole life policy. He paid close to three hundred dollars a year for this life insurance coverage - and he was healthy and less than thirty years old. With a term life policy he could have had a quarter million dollars of life insurance. (we did make sure he was approved and had the new policy before he chose to cancel the old one.)

Here are some of the standard objections a life insurance representative will make to the above:

  • Yes, but the term life policy will go down in coverage or up in price as time passes.
This is true, but total cost will be far smaller. Except for some estate planning issues, life insurance is mostly needed for young families, to decrease insurance latter in life as other assets grow may be a good thing.

  • Ok, but there is no investment in term life, what will you do when you retire?
Hopefully you learn to speculate, and retire well before your policy matures. If not your uncommitted money sitting in a bank is probably going to yield more than tied up in a whole life policy. Buy the best life insurance policy at the best price - make the best speculations separately - do both under your own counsel.

  • Sure, if people would save -- but most people need a built in expense to force them to save.
If you are in this position, have 10% of your gross pay removed before you see it - for an IRA - a 401K - or for a stock purchase plan. If you think you can't do that - why would you want an expensive life insurance policy to do it for you? That is a policy you will probably cancel when the bill arrives.

  • In case of emergency a whole life insurance policy will have built up a cash value available to the holder.
Lets look at this one a bit closer. That cash value is supposedly your money, right? Why if you ask for it does it cost you interest? Why if you borrow it does the value of your policy decrease by the borrowed amount? If you die why is your cash value kept by the insurance company - not passed through to your heirs?

To illustrate this last one. A ten thousand dollar policy may slowly grow a cash value - that is the built in retirement feature. Lets say after twenty years your policy has built up two thousand in cash value - supposedly your retirement fund.

If you borrow the two thousand:

  • you pay interest on the borrowed amount
  • you still pay your full policy premium
  • if you die your heirs only get eight thousand dollars
  • if you pay it back - your heirs will get ten thousand dollars, not twelve thousand

In essence- you are increasingly self insuring. The insurance company has over charged you and pretended to refund part of the over-charge as "cash value."

If you live to the life insurance policy's retirement age they will hand you this over-charge as your "investment return." Assume however the amount of your cash value is $9990.00 a year before an age 70 retirement. If you die - the insurance company will toss in ten bucks and hand your heirs a check for ten thousand, your cash value was just part of the policy.

Notice that you were still sending in that same payment at age 69 -- in effect for ten dollars of life insurance coverage. The risk to the life insurance company grows as you age and they change the price.

With term life insurance that charge is up front and understood. (as a hint, in the competitive term life market it may pay to shop for a new policy every five or ten years. If you do find a much better deal in the future, be sure to own the new policy before you cancel the old)

Let's expand this discussion back up to investment vs speculation.

When that investment adviser, financial analyst, insurance salesman, hedge fund manager, broker, or other finance professional calls -- they have a huge list of "financial products" available -- some with high commissions and management fees, others that might fit you perfectly.

Which ones do you think they want to talk about?

Learn to analyze and handle your own financial needs.

The first speculation rule:

No one cares more about your money than you do - unless they plan on taking your money.


Friday, March 24, 2006

Doug Casey - A Mentor On Speculation

Doug Casey is always worth the read - you can learn a lot and probably make money reading Doug.

Even more important you can preserve capital reading Doug Casey and thinking about the larger implications of his insights.

Doug Casey's most recent warning is a high value taste of using non-standard metrics to analyze a market - in this case the uranium juniors. This is taken from the 321Energy site, a valuable resource for mostly balanced information.

Read this not because you are interested in Canadian moose pasture, but because Doug shows several indicators that a market, any market, is overheated.

If you have very little money - subscribe to Doug Casey's International Speculator - and follow his advice closely. You will probably make money - you will definitely learn a lot about speculation.

(Doug Casey did create a course for Bastiat Free University, but I receive nothing for recommending him, he has taught me a lot and helped me make money speculating, that is enough for me.)

If you have a lot of capital - subscribe to Doug Casey's International Speculator - and several of his other services also. Doug tries to position himself for moves years ahead of the crowd - he did that with uranium when it was a hated investment, I've seen him do it in other markets also.

Doug may also help get you out a bit too early on his market segment calls. That should help preserve your capital.

An important
Speculation Rule:

Don't try to get the last 10% of a run.

Learn from Doug Casey - and maybe make or preserve some money also.

I have.



Monday, March 20, 2006

Pay Me In Silver And Gold

This is a great little song put out by Steve Dore on the excellent 321Gold site.

He has written several similar tunes recently, this one seems to fit nicely with G.M. and the airlines.

When the four too bigs fail, they get bailed out by hurting the healthy and the small.

Kind of like what Doug Casey said, "Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries."

In the same cadence, although not as well written: Large corporate bail outs might be defined as a transfer of wealth from savers and taxpayers to bureaucrats.

An airline goes broke, has its contracts and pensions redone in court, and is now a low cost provider. All the other airlines now lose money and go broke since they can not compete.

Don't expect the politicians to let GM and Ford vanish and by doing so clean up the system. You will pay to rescue them - one way or the other.

A little free enterprise - unencumbered by huge national regulations - and they could be replaced by entrepreneurs with more direct and simpler technology.

It ain't gonna happen.

Maybe it is time to join in the chorus:

Pay Me In Silver And Gold.


Friday, March 17, 2006

Liquidity - Is It Really Your Money

The most commonly recognized sign of massive illiquidity is a run on the banks.

may not happen again in most western countries - anytime soon. It will happen again however.

Each market has their own liquidity issues - peculiar to that market.

One aspect of wealth retention is diversifying your speculations into markets with low correlation to each other.

This starts on the simplest level - don't count on a company you work for to provide your retirement - and also own that companies stock. The correlation of the value of those two positions with each other and the companies long term future is way too close.

Fortune 500 and Dow 30 companies can and have imploded and disappeared.

The currency of the USA has visited worthless a couple of times before. Both the continental dollar and the civil war greenback dollar were sold at huge discounts - or refused acceptance entirely.

We know that today's dollar is being discounted for inflation - with the Federal Reserve printing huge amounts of them for decades - they are not a safe bet to store value.

If everything you own is in USA dollars - you may continue to lose money to the printing presses of the Fed. You are likely over correlated in US dollar exposures.

If you are in another nation - they are certainly going along and following the Fed's lead - you are probably over correlated in currencies for your entire portfolio. A side bet on resources may reduce that correlation.

Banks fail - nations fail - companies fail or have courts reverse their commitments - nothing in our world beyond personal relationships has eternal value. God is only taking one thing off this planet - that is people. All temporal assets are therefore fully correlated at this extreme.

What you can do now if you have wealth to protect - is seek to diversify.

Also important in the long run is not to use leverage in markets where there may be a liquidity surprise. I'll write more on that latter.

For now - just think of how your overall net worth would be impacted if all world markets shut down for the next month. Perhaps only your country's markets and currency no longer trade - will you be left with anything?

A speculation rule:

Wealth is made through concentration - wealth is preserved through diversification.

If there are no markets - is your money really your money?


Tuesday, March 14, 2006

The Mine Field Of Custom Derivatives

I'm not talking about standardized derivatives contracts such as stock or futures options that perform a useful function in risk control.

Consider if major banks, hedge funds, insurance companies, and scores of major corporations have created trillions of dollars worth of complicated and interwoven contracts that
no one really understands.

These illiquid contracts are financial land mines that interconnect the financials of major players and are intractably rigged with cross party risks. Not if but when a derivatives land mine field blows up - it will trigger the explosion of other fields, which may trigger the explosion of still other financial mine fields.

When LTCM blew up it admitted a 4.6 Billion dollar loss. LTCM almost took out the world financial system - The Federal Reserve worked a recovery - triggering inflation that is continuing to grow today.

Since LTCM the Federal Reserve has apparently helped quietly orchestrate several mergers of key derivatives players. Banks have combined to decrease over-all exposure - and those contracts where they were effective counter parties to each other were retired.

There are probably far more derivatives today, and they are likely far more dangerous than when LTCM blew up. No one knows for sure.

I think it was Warren Buffett that described these hidden and poorly understood derivatives as a financial nuclear bomb.

I'll quote another Buffett quote:

"A given [derivatives] contract may be valued at one price by Firm A and at another by Firm B. You can bet that the valuation differences - and I'’m personally familiar with several that were huge -– tend to be tilted in a direction favoring higher earnings at each firm. It'’s a strange world in which two parties can carry out a paper transaction that each can promptly report as profitable." - Warren Buffett

The truth is neither party may know the value or danger of the contract - but it does instantly improve both of their earnings per share - or so they report.

The difference in real value may be huge depending on market conditions - In a meltdown some of these contracts will dissolve and disappear - others will represent huge expenses as they are unwound.

If you wondered how some companies always seem to hit their earnings target - this is just one way - create a custom derivative contract and give it any value you wish. A penny more then estimated earnings per share sounds good.

The FALLStreet article the Buffett quote was taken from, What'’s New with the Accounting Shell Game? More Shells, is well written and worth the read.

The effect on us?

There is a very real risk of an international financial meltdown. While probably under 30% for the next few years the risk is growing. The short term destruction of economic systems could start today.

Of course my 30% risk assessment is a guess about something seen in the dark, at a distance, behind a curtain.

No one knows the real risks.

Protect yourself.


Saturday, March 11, 2006

In Speculation - Math Is Seldom The Answer

Using physics theory some solutions are best apprehended considering the universe as two dimensional with another five dimensions as illusionary.

Does that help you decide if IBM is a good short?

Quantitative analysts (quants) are math and science geniuses that are hired by wall street to discover market anomalies that yield to sharp financial finesse or even blunt arbitrage.

We are not likely to compete with these professors that have given over their lives to studying phenomena such as the intersection of Euclidean geometry with quantum theory.

Most of us would not want to be a quant.

If it is not in math we can profit, where in the investment landscape can we survive and thrive?

It is in understanding of the
concepts - and then speculating in niches that are ignored by wall street - that we can excel personally.

As an instance take a look at the most pervasive option pricing models. These models were created by quants for specific people - option specialists trading options on the floor for short term profit.

Even if we don't understand the model's math, we can see the concept of a different value based on a longer holding period with different profit goals. pricing on leaps (long term options) has several attributes that allow for novel plays - seek them out.

Get books that explain the markets, like Jim Rogers' book on commodities to the right. If you understand how the markets work, you can find a spot and method that fits your personality.

Trading by concept with personally psychologically comfortable methods may be the key to your speculation success.


Wednesday, March 08, 2006

Financial Fairy Tale -- #3 - Humpty Dumpty

The Humpty Dumpty story fits so many markets we need to start with a caution.

It was Mark Twain that said something like: "
History does not repeat - it rhymes."

It is easy, and many do take the easy path, to look at the last depression to predict the next.

there are similarities of the last depression to the coming greater depression - but it will be attitudes more than facts that rhyme.

The Federal Reserve was created in 1913 to maintain a stable currency. The business men and government officials were proud of their knowledge and modern tools that made recessions obsolete. You of course can read similar boasts in today's paper.

There was a recovery after the 1929 crash, the market was higher again just as the Dow Jones is back up today. Everyone patted themselves on the back and assumed that was the last crash ever.

Then the economy went from bumpy to broken eggs ugly.

The recovery came for America when Europe was kind enough to blow up all their manufacturing capabilities during World War Two. The socialist countries helped out by destroying initiative, only big well connected companies and well connected people prospered in much of the world for decades.

That has changed. China is capitalistic, Asia is very productive, and America is borrowing against our aging capital base to buy toys.

The ride is about to get bumpy.

We have a new Humpty Dumpty up on a very high pedestal today. We are assured by our leaders that we have the tools to control the economy.

  • sadly all the kings horses and all the kings men
  • are going to watch an omelet created again

Friday, March 03, 2006

How Wall Street Works

One thing we know for sure - Wall Street does not work the way Wall Street says it works.

How Wall Street works can be seen in two of their business models.

The first method is Wall Street trades for their own account. They do this as specialists, market makers, and traders seeking high returns from small risks with minimal capital exposure.

The second way Wall Street works is by generating commissions. Wall Street gets relatively consistent and predictable cash flow from suggesting and implementing trades for others.

This is not just a broker on the phone, it is also the information on the days action provided to the media. Wall Street also provides analysts that help move investors in and out of investments by their constantly changing recommendations.

They have other business models such as investment banking. The Wall Street business model aimed squarely at your assets however is commissioned trades.

Learn to understand markets for yourself - make your own decisions. This alone will keep your nest egg from shrinking due to turnover.

If someone calls with an investment idea - ask them to mail you the particulars. If they say there is not enough time or they can't do that -- hang up the phone. If they say they will send you material - tell them if and when you are ready you will call them back.

No one cares more about your money than you do - unless they plan to take your money.

Wall Street is very profitable - for Wall Street. If you want to profit in the markets you will have to be in control of your own speculations.

If you have asked how Wall Street works here is your answer - Wall Street works on investors money.