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.