Sobering

This assessment in today's Financial Times by Luke Johnson, who runs Risk Capital Partners in the UK, is quite sobering:

Prepare for a wrenching, unstoppable redistribution of wealth – and I am not talking about domestic taxes. For too long it has been more profitable in the west to finance consumption rather than production. That cannot continue. I am afraid that the west’s credibility – and luck – has run out.

This vast reordering of our economic system has only just begun. We shall have to cancel all the self-indulgence of endless welfare spending and cultivate rather more of a work ethic and a sense of self-sufficiency. Expectations must be modified and attitudes altered profoundly. Expect years of negligible growth, permanent high unemployment, declining property prices, higher taxes, crumbling currencies and falling living standards.

The Long and the Short of It (by John Kay)

Here is the first sentence of the review of John Kay's book by Stephanie Flanders, who is the BBC's economics editor:

"John Kay thinks the modern financial world is greedy, cynical and self-interested, and that we should all shun the professionals and manage our investments for ourselves."

And a few paragraphs later on:

"One word of warning: if you have any investments managed by somebody else – and like it or not, almost anyone with a pension does – this is not going to be a comfortable read. Kay’s point is not that professional investment managers are naturally wicked or corrupt, although, of course, some are. It is that inevitably, by the nature of their business, these people will rarely have your best interests at heart.

For starters, in order to remain professionals, investment managers need to make money out of your investments, regardless of whether they go up or down. You do not. If you manage them yourself, “your bonus is already in your pocket”. The regular FT reader is probably already scandalised by the scale of commissions and management fees in the retail investment industry, never more than when these percentages come on top of the double-digit losses that most investors will have suffered in 2008. But you are probably still not scandalised enough."

My sentiments exactly. John Kay writes an excellent personal finance column in The Financial Times, from which much of the material in the book was adapted.

Here is the url of the book review:

ft.com/cms/s/2/4bf99cdc-e35b-11dd-a5cf-0000779fd2ac.html

What I Love About The Stock Market

The unpredictability of market can breathtaking. Today, instead of an "Obama rally" there is widespread panic in the early going. At 10:45 a.m. the S&P 500 is down 21.84, or about 2.5%. I have no idea whether this sell-off will reverse itself as the day proceeds or whether this level of loss will either be sustained or accelerated.

Contradiction

You may wonder whether there is there a contradiction between Monday's posting in which I humorously trashed Citigroup and Friday's posting in which I revealed I had bought Citigroup stock. That is a fair question to ask. The answer is that I was trading on the momentum of Citigroup stock rather than using the stock as an investment vehicle. I'm okay holding onto the stock of a debauched corporation like Citigroup for several hours or even several days, but it's not a candidate for the old "buy and hold" strategy.

No Obama Rally on Friday

The S&P 500 went up slightly in the last two hours of the trading day (roughly 6 points, or 0.8%). This could hardly be termed a rally. I sold off the 400 shares of JPM Chase I'd bought earlier in the day at a small profit (about $175), and held on to the 300 shares of Citicorp which are down about $60 from what I paid for them. Maybe there will be an Obama rally on Tuesday when he actually becomes the president....

Overall, last week was the best trading week I've had since November. I finished the week up about $2,950.

It's hard to tell what changed in me and what changed in the external environment from what obtained during the slump period that lasted for the entire month of December, during which time I spent days at a time not being able to figure out anything to trade that I thought stood a reasonable chance of making money.

Obama Rally?

Will an "Obama Rally" start this afternoon? I bought 300 shares of Citigroup (C) and 400 shares of JP Morgan Chase (JPM) at beaten down prices earlier today with the expectation that the trading day is more likely to end on an up than a down note. We'll see what happens. At 2:03 p.m. the S&P 500 was essentially flat (down 0.73 points, or about 1/10th %). We'll see what happens within the next two hours....

Lucky

Well, I was lucky thanks to my friend Vikram Bandit, aka Vikram the Whiner, the current CEO of Citicorpse. Here is what happened. I thought financial stocks were overpriced after the Santa Claus rally that ended in the middle of last week. So on Thursday I decided to buy 100 shares of an Ultra Short Financial Sector exchange traded fund (SKF). Total purchase price including commission was $11,236. Over the weekend there were news stories about how Citicorpse is going to have a much larger than expected operational loss of over $10 billion this quarter, and is under pressure from the Feds to start dismembering itself. As a result the Citicorpse stock price dropped over 17% today. My short fund had risen on Friday and rose a lot more today. Around 3 p.m. I decided to sell it and take the profit. Total sales price including commission was $13,197.72, for a profit of $1,961.72, or 17.5%, in two trading days.

Note: I do NOT recommend purchasing this ETF. It can be very hazardous to your financial health. I could just as easily have lost 17.5% (or even more than that) on my investment in two trading days. At this point I have no idea whether I will ever have sufficient courage (or foolhardiness) to buy it again. This time the trade happened to work in my favor. I don't at all put this down to skill. I was lucky.

Direction

I no longer feel like a deer in the headlights not knowing what to do. My instincts buttressed by a careful weighing of everything I have read and heard leads me to believe that the current global economic state is one of Near-Depression at best. So I am acting accordingly, reducing long equity positions and increasing short equity positions (via exchange traded funds). If I'm right I'll do pretty well. If I'm wrong I'll lose some money.

Daily Speculations (dailyspeculations.com)

The Daily Speculations website of Victor Niederhoffer and Laurel Kenner (dailyspeculations.com), with contributions by many other individuals, always contains interesting and challenging postings, many but not all of which are related to investing. The following is excerpted from a January 4th posting by Dr. Janice Dorn:

"In the actual trading of the markets, there is no place for faith, hope or love. Markets are not entirely rational and not entirely random. They hold out hope and dash it. They hold out faith and dash it. One can fall in love with the idea of trading until your real money in on the line. Then, the mean markets show themselves and love turns to fear and loathing. Certainly, one can use the concept of empathy to understand the motivation of the herd to profit in the markets. The herd needs empathy because, for the most part, the herd loses.

The markets are neither friendly nor loving. This is a game where some 60 million people compete everyday to take your money before you take theirs. If love is truly a battlefield, there is no better place to find the battle than in the markets.

The markets demand humility, they demand gratitude, they demand that one approaches each day as a loser.

I challenge anyone who actively trades these markets every day to tell me that they are not a demanding mistress, that they are not there to take as much money from as many people as possible or that they are loving and kind."

Mini-Madoffs Relieve Anxiety (Until They Don't)

One reason -- probably the most important one -- why people trust their money to brokers and other investment advisors, many of whom are Mini-Madoffs at least in terms of results they achieve even though there in no willful intent to defraud, is the anxiety one has to confront when making one's own investment choices. This is particularly true on days when everything, well let's not exaggerate, on days when a number of things are going wrong. Take today for instance. One of the stocks I am long in was downgraded by an analyst this morning and is down six percent on the day. And the industry sector I'm shorting is going up significantly today, which means I'm losing money on that position as well. As was true in my last posting I have no clear sense of any compelling investment opportunity so I'm not buying anything. I did sell one tiny long position at a loss after finally realizing that it was clutter. Even if it did go up significantly my holding was too small for it to have any meaningful effect on my portfolio, so it really made good sense to get rid of it and leave the money in cash until I can figure out what I want to do with it.

Reading "A Fistful of Euros"

Over the past two days Edward Hugh has made three new postings on A Fistful of Euros: fistfulofeuros.net

These are essential reading. They chronicle the severe and steepening downturn in economies across the globe.

In an environment in which almost anything can happen is it possible that Depression-like declines in economic activity can coincide with non-Depression-like activity in equity markets?

At this point about 17% of my investment portfolio is long equities. Maybe I am behaving like the proverbial deer in the headlights but I am neither buying (at all) nor selling (very much). As always this could change at a moment's notice.

No Crystal Ball

I am not Criswell (as fans of Ed Wood films well know). I do not have a crystal ball. I have no inside information. The S & P 500 ended 2008 at 903. My hunch, at least as of this moment, is that it will end 2009 closer to 1500 than 600. Only a week ago my hunch was just the opposite. Why the change? Is it because of the mini-rally during the last two trading days of 2008? Is it because global economic and geo-political expectations for 2009 are so overwhelmingly dismal that it might only take a few small positive events to trigger an upward push? Is it because there is so much cash on the sidelines looking for something to invest it? Or perhaps it's because I'm in a blissfully calm state of mind at the moment contemplating my band's (Jersey Petroleum) upcoming one song mini-set this evening during the New Years Day marathon at Bowery Poetry Club? FYI: Anyone who might be interested can listen to Jersey Petroleum's studio and live recordings on our website: jerseypetroleum.com