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Today I noticed something interesting going on. I noticed how there were buyers, but they were overwhelmed. And that got me to thinking. Who on earth would sell now?

Seriously let’s think about this a bit. If you are in deep do-do with your portfolio would you sell? Probably not. Are there redemptions going on right now? Probably not. So who is selling? Shorters!

But shorters cannot sell to buyers who are not buying right?

What I feel is that any movement up is completely drowned by shorters. Though you may say, hey this is how the uptick rule would behave, yes?

No, because there would be a fundamental difference and it is a what I would call the bait and switch.

Let’s say that we have a buyer coming in at 10. Without the uptick the shorter can come in at 9.9 or 10.1. Let’s say for argument sake that the shorter comes in at 10.1, and the long goes for it. The shorter then tries 10.2, and the long goes for it.

So assuming the shorter has sold 10 and 10 the average down level is 10.15. The shorter now pulls the switch. They sell at 9.90! The original buyer is now screwed because they bought at a too high level.

Would anybody buy at 9.9? Absolutely because why would I buy at 10.2 if I could buy at 9.9. So the seller sells at 9.9, and their average down point is 10.06, with 30 shares.

The buyer on the other hand sensing a collapse steps back, but buys at lower and lower levels to which the shorter gleefully sells into.

How would the uptick rule have changed this? The shorter could not have pulled a bait and switch. If the last price were 10.20 then they would have sell at 10.21. It would then be a question of whether a long is will to sell at a lower price level.

And right now I doubt there would be a long willing to sell at a lower level! In other words a natural bottom would be formed.

When will we hit bottom?

I bid 1 Dollar for all of my equities! I kid you not here people!

The last time we had a market like this was 1929, and remember then we did not have an uptick rule. Interesting that it only took one year to figure out how good the uptick rule actually was.

One more thing that the current administration screwed up in a long line of things…

I read this article and it said, “oh there is a descending triangle forming and that spells bad news.

Really? It does? Why? Because analysts say so?

“We know only that ‘triangles’ such as this one tend to resolve themselves to the downside,” writes Dennis Gartman this morning in The Gartman Letter, which is standard reading on Wall Street trading floors everywhere. But he’s not alone by any means.

How do you know Dennis? Did you do any analysis or are you flying by the seat of your pants?

Let me figure this out, and see if the analysts are right. I have the book Encyclopedia of Chart Patterns. It is an interesting book because what it did is take a quantitative approach to chart patterns.

So we could call this chart pattern a descending triangle and that would be Chapter 48…

There are two scenarios, an upward break-out or a downward break-out. The “analysts” are saying downward is the next move.

So let’s look at those stats first:

Bull Market:

Performance Rank: 10 out of 21 (where 1 is best)

Percentage meeting price target: 54%

Bear Market:

Performance Rank: 12 out of 21

Percentage meeting price target: 50%

This means a downward break could happen, but it would be a 50-50 chance.

Let’s look at the stats for an upward breakout

Bull Market:

Performance Rank: 5 out of 23

Percentage meeting price target: 84%

Bear Market:

Performance Rank: 7 out of 19

Percentage meeting price target: 61%

Digging deeper into the statistics I look at the throwbacks and trends. From the book it said that there 592 instances where this acted as a reversal, and 574 times as a continuation. In other words a crap shot.

Would I go long or short? Long, with a partial buy. My logic is best described as follows:

If you go long a downward movement gives you more buying opportunities. However, a short and an upward movement causes you to eat your shorts since you and other people will have to cover. This means that the risk of going short is slightly-higher than the risk of going long.

So Dennis I think you are talking from the seat of your pants… 

I keep hearing Fast Money and its rants! They keep saying, “oh the automotive industry is not doing any changes”

Well I am going to keep the FastMoney crew honest!

GM Labor Deal 2007

GM, Ford Motor Co. and Chrysler have a combined $90.5 billion in unfunded retiree healthcare obligations on their books. GM reportedly will be able to shift about $36 billion of its $50 billion in retiree healthcare obligations into the trust fund.

The proposed contract also creates a two-tier wage scale, which would establish a lower pay scale for new workers hired into non-manufacturing jobs, such as janitorial and landscaping positions.

GM Cutting Costs

General Motors is starting to reap the benefits of a massive cost-cutting programme that is eliminating 34,000 jobs and shuttering factories, according to its latest quarterly figures.

The bulk of the financial improvement was in its loss-making US division, but GM swung back into the black in Europe, where its net income of $217m, compared with a net loss of $39m in the same quarter last year. The fastest growth was prompted by a marketing push in emerging countries. Its Latin America, Africa and Middle East unit reported its best result in a decade: net income of $213m, up 53 per cent.

However, even as GM shares jumped 3 per cent on the news, Rick Wagoner, the company’s chief executive, struck a downbeat note. “It’s true that our North America team has made huge improvements, and we appreciate everyone’s hard work,” he said. “But our current earnings clearly demonstrate we’ve got more to do.”

Here is question, how would these Fast Money people react if it was them?

Come on Fast Money, address this question: how would you be if tomorrow you were out of a job? Imagine if tomorrow NOBODY wanted to listen to your ranting? Imagine tomorrow if you had NO MONEY! Imagine tomorrow if you had no money a family to support? Where would you be and what would you want?

I am not a union person, actually dislike unions. BUT I have sympathy for the automotive industry!

I have to admit that my statistics model was walloped. Hey I was wrong, and that happens.

About a year ago I did simple trend analysis of the long term DOW (since 1929) and what I saw I did not like. It said that we would reach levels that we are at now. So why did I not talk about that? Because I thought it was a statistical outlier and hence not likely…

HA!!! Wrong…

Though I am glad I did not completely believe my models since I bought in dribs and drabs and hence still have enough cash to plow into the market.

Let’s look at the long term analysis of the S&P since 1950.

We have pierced the long term trend by quite a margin. And we pierced it by quite a bit. In 1974 we pierced the long term trend, like now. I strategically connected the bottom of 1960 with the bottom of 2001.

There some interesting things with this trend. The year 2000 bubble was quite a bubble and we returned to the trend. The years thereafter had a bit of a pop, but generally speaking we did not go crazy like before. This is unlike the years 1970 to 1973.

We are gyrating along the bottom here because the long term investors know that prices are good, but only so long as they stay at these depressed bottom levels. Look at the years 1974 to 1980, and there was no movement. Thus to get any returns whatsoever you need to keep buying at the bottom.

With algorithmic trading this is not a problem because you can just keep buying at the low levels without affecting the market. Add on the dividends and your return would actually be quite nicely.

So I watched Meet the Press with Tom Friedman, and here is what he says:

Remember, what was Detroit’s plan two years ago when they, when they confronted this problem?  It was to subsidize gasoline at a $1.99 a gallon if you bought a Hummer or Suburban or a big truck–that was their idea of innovation.  So, you know, it was like a crack dealer offering subsidized crack rather than, you know, going to a clinic to get–to get off the drug. And, and who is the enabler of that?  The enabler of that were the Carl Levins, all the Michigan delegation who didn’t go to these people.  The outrage of these people, “Now they–we have to save these jobs!” Where was their outrage two years ago, OK, about getting them to be more innovative, to getting them on top of the energy efficiency question?  They have been enabling the destruction of this industry.  So show me a plan.  Show me a plan that says if we give you this $25 billion you’re actually going to change. Absent that–remember, Tom, we’re going to charge this $25 billion on our kids’ Visa cards.  This goes on our kids’ Visa cards, and we have a moral obligation to make sure this is spent wisely.

I can buy that perspective, I might not completely agree with it. But I can buy that argument.

So what do you say with respect to the financial industry? Remember this is the same interview. Not even a ten minute gap.

But to Tavis’ point, we need to get money to homeowners, and we need to recapitalize the banking system.  And people say, “Wait a minute, that’s unfair.” Banks who were irresponsible are going to get bailed out, that’s true.  Homeowners who shouldn’t have taken out mortgages are irresponsible–were irresponsible are going to get bailed out along with people who worked hard and paid their mortgages.  But I–they say that’s unfair.  I say–I tell you, Tom, fairness is not on the table any more.  There’s only two things on the table.  Systemic risk in which we all get wiped out, or we find a way out of this.

WTF!

Bail out the banks, and the financial industry. You know “offering subsized crack” to the financial industry by giving them more money. YET heaven forbid that we do anything for the automotive industry!

Remember TOM, the real cause of the credit crisis is the industry that you are trying support. People should get it through their skull this is not just a GM, Ford, or Chrysler problem. It is a Toyota problem, It is a BMW problem. It is a Renault problem. It is a Fiat problem. BTW Renault is a company that has fuel efficient vehicles!

Here is a refresher on how deep the car industry crisis is:

New car sales in Europe slumped 14.5 percent in October, the sixth consecutive monthly drop as the economic crisis takes hold, the European automakers association ACEA announced Friday.

Only the Austrian car market avoided the sales drop, while Ireland and Spain crashed down 54.6 percent and 40 percent respectively in October compared to the same month last year. The Spanish figures were at their lowest for 13 years.

French car maker PSA Peugeot-Citroen has ordered a 30 percent production cut in response to a collapse in European sales while Renault is to temporarily shut down several factories in France and Europe as the global financial crisis undercuts the economy.

(And you thought you had it bad in the US….  Did you see the Spanish numbers?)

This crash has nothing to do with the car markers themselves, and if you look closer, all of the car makers are crumbling. They simply cannot sell cars!

This is the George Soros effect where when the market ceases to function we have some very serious issues and the free market economy goes out the window.

Today, I kid you not, the German Minister for Business said on the German Meet the Press type show,

“People please buy cars, you are getting the best deals that you will in a very long time. Please buy cars!”

The German minister knows how vital the car industry is, and how much this is snowballing out of control.

Where does this stop? It stops when the banks stop hording cash and start lending again.

Yes I believe in free markets, but the problem is that free markets can’t control themselves. And from none other than George Soros did I hear an argument that supports my belief.

Reflexivity, financial markets, and economic theory

Soros’ writings focus heavily on the concept of reflexivity, where the biases of individuals enter into market transactions, potentially changing the fundamentals of the economy. Soros argues that such transitions in the fundamentals of the economy are typically marked by disequilibrium rather than equilibrium, and that the conventional economic theory of the market (the ‘efficient market hypothesis’) does not apply in these situations. Soros has popularized the concepts of dynamic disequilibrium, static disequilibrium, and near-equilibrium conditions.[11]

Reflexivity is based on three main ideas[11]:

   1. Reflexivity is best observed under special conditions where investor bias grows and spreads throughout the investment arena. Examples of factors that may give rise to this bias include (a) equity leveraging or (b) the trend-following habits of speculators.
   2. Reflexivity appears intermittently since it is most likely to be revealed under certain conditions; i.e., the equilibrium process’s character is best considered in terms of probabilities.
   3. Investors’ observation of and participation in the capital markets may at times influence valuations AND fundamental conditions or outcomes.

A current example of reflexivity in modern financial markets is that of the debt and equity of housing markets. Lenders began to make more money available to more people in the 1990s to buy houses. More people bought houses with this larger amount of money, thus increasing the prices of these houses. Lenders looked at their balance sheets which not only showed that they had made more loans, but that their equity backing the loans–the value of the houses, had gone up (because more money was chasing the same amount of housing, relatively). Thus they lent out more money because their balance sheets looked good, and prices went up more, and they lent more, etc. Prices increased rapidly, and lending standards were relaxed. The salient issue regarding reflexivity is that it explains why markets gyrate over time, and do not just stick to equilibrium–they tend to overshoot or undershoot.[11]

Robert in my Jim Rogers and smoke blog entry said.

If people are still buying steel somewhere in the world, than not everyone would go out of business and there would still be supply available. The stronger players would buy assets from the weaker ones - Yes, there would be a lag time when supply would be tight while the economy first starts to recover, but it would catch up with demand… You’re also forgetting something - Why is one company able to survive and another not? It’s cost structure could be lower due to differing labour rates, currency differentials, or it may be a well structured company with less debt and more efficient steel plants… Almost any company can do well when times are good - but when times start to slow, the real test occurs. There is a reason why one company survives and another fails - economics. You can’t cheat economics - you can delay it a while.

I agree with this when everything is rational. But as George Soros points out markets have a tendency to overshoot or undershoot. And that is where the problem lies.

In his recent testimony to the US House Committee George Soros said many things, but the following bears real attention.

This remarkable sequence of events can be understood only if we abandon the prevailing theory of market behavior. As a way of explaining financial markets, I propose an alternative paradigm that differs from the current one in two respects. First, financial markets do not reflect prevailing conditions accurately; they provide a picture that is always biased or distorted in one way or another. Second, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect. This two-way circular connection between market prices and the underlying reality I call reflexivity.

While the two-way connection is present at all times, it is only occasionally, and in special circumstances, that it gives rise to financial crises. Usually markets correct their own mistakes, but occasionally there is a misconception or misinterpretation that finds a way to reinforce a trend that is already present in reality and by doing so it also reinforces itself. Such self-reinforcing processes may carry markets into far-from-equilibrium territory. Unless something happens to abort the reflexive interaction sooner, it may persist until the misconception becomes so glaring that it has to be recognized as such. When that happens the trend becomes unsustainable and when it is reversed the self-reinforcing process starts working in the opposite direction, causing a sharp downward movement.

The problem is that the market is not rational and when things become irrational then all heck breaks loose. So a company that supposedly was strong is pulled down in the muck and fighting for its own survival.

It is a death spiral and it does not stop until everything is destroyed. The most glaring example of this occurred in the 1600’s and 1700’s. At that time the markets were completely free and completely speculative. And each time (eg South Sea crisis) the market blew up it wiped out the market by about 90% of the companies.

Imagine the financial chaos that would occur if 90% of the stock market was wiped out. Our economic system would collapse.

Look at the death spiral that is happening now even though the governments and banks are pouring in billions. Nobody wants to buy stocks, cars, or anything because they are fearful. This begets more fear, and begets more fear and as George Soros points out the misplaced fear becomes reality!

I make the point with Toyota. You would say, “now this is a company that is doing everything right. Yet their stock is tanking, Fast Money is saying, ’short this stock whenever it rises because there is still plenty of meat on the bone.’” If the free market is saying that Toyota is a good company why are they not investing in it? Answer, because the free market has collapsed and fear rules.

I agree the free market works when things are pretty rational, NOT when things are irrational!

I found the following books most helpful to understand how systems can collapse:

Devil Take The Hindmost

Against the Gods

The Rise and Fall of Great Empires

I listened to Friedman’s rant on how wrong the big three are and that they should not get any money, yada, yada, yada…

Folks, I have been involved both directly and indirectly in the automotive industry since 1985! My father used to a VP/Plant Manager for Magna, and Grammer. I myself have worked for multiple car parts suppliers. And I have had many friends who have worked in the automotive industry.

So what I am going to do is lay down some facts!

Myth: The union is at fault

The union is the same wherever you are in the automotive industry. The unions in the automotive industry in America is like the union in Germany is like the union in Japan. What is different are the conditions of the individual countries. For example in Canada, or Japan the companies do not need to provide health care since the government does. But in Germany and the US the company does have to pay into health care.

Putting the blame on the union is not going to change a thing since the entire automotive industry is one big union regardless of the manufacturer. Let me be very blunt the union and automotive industry are completely intertwined and you are not going to get the union out of it. The automotive industry knows this and those on the outside don’t! My comment is deal with it and stop complaining!

Myth: Bankruptcy will help restructure

Do you even understand how the industry is structured? How on earth are you going to claim bankruptcy? The automotive industry uses JIT (just in time) manufacturing techniques and any disruption will prove fatal to the entire chain.

If you decide to claim bankruptcy how on earth are you going to change the union or the workers? Where are you going get the production facilities to produce the cars? You can’t easily restructure the entire industry on a dime.

Myth: GM and Ford are creating clunkers instead of efficient cars

This is the biggest pile of do-do. The car makers are not at fault here. Let me illustrate with GM (Opel in Germany). The Corsa is a car that was brought to America and it flopped. Or how about Ford like the Ford Focus. This car has been around in Europe for ages. My point is that these cars exist, but what do people want? Obviously not THOSE!

What people like Friedman and critics don’t understand is that people LOVE big cars. If they can afford it, then they will buy it and the car makers will build it. Let me illustrate with the Porsche Cayenne. This car is an illustrative example of inefficiency. Yet Porsche built it because people wanted it! And Porsche is not even American!

This desire for big cars was not a recent thing. We need to be reminded of the following models:

El Camino, Dodge Challenger, Ford Bronco.

These are 70’s models and in the 70’s there were fuel efficient American built cars, namely

AMC Pacer, Chevette,  Dodge Omni.

Yet AMC went under, and cars like Chevette were known as “shove it”’s. People did not want those cars. People made fun of smaller more fuel efficient vehicles for decades!

What they wanted were big cars like Mini Van’s (which actually are not that mini). The morphed end result of that is the SUV. If you want to understand the mentality of the American consumer then look at the history of the Suburban. The American consumer has always desired such a car and why blame the big 3.

After all, foreign car makers like Toyota have been making just as inefficient vehicles (EG Toyota Land Cruiser). What I find stunning is that people are not talking about Toyota. Or the Porsche Cayenne, BMW X5, etc, etc, etc.

For those thinking, “oh well that is an American flaw”, should not be so hasty. In Europe there has been an increase in BIG vehicles and in Switzerland one party wants to ban them.

Want to know what went wrong? 150 USD oil! That is what went wrong! Nothing more nothing less.

Myth: Toyota has the hybrid and GM has nothing

Hybrids are a red herring argument. Seriously! This is yet another myth that hybrids are the most fuel efficient. Diesels are more fuel efficient and the proof is at the urls (1, 2) note: these URLS are in German. Of course the most fuel efficient would be a diesel hybrid. Yet that is not what Toyota has, which is gasoline. GM has very very fuel efficient diesel based vehicles that are clean. YET they are not allowed in the US. The hybrid has not been a raging success in Europe because people drive diesels, which are more fuel efficient.

Put these points together and you should realize that the car industry is not that simple. It is not a sound bite.

Will things change? Absolutely because we are not driving the 440ci cars anymore. For those wondering how big that is, its 7.2 liters! Yes they used build and drive 7.2 liter engines!

Here is what you have to wonder about. China is a country that is suffering, and is a country that will collapse. At least that is what people are thinking.

For example here is a quote I heard in the media (CNBC Squawkbox).

“China is a construction story, and you have to wonder they are building factories for exports that don’t exist.”

Really? Let’s put this to the smell test. Walmart is doing ok, and expected to do well because people will be trading down. Ask yourself where does Walmart get its products? Mars? The Moon?

CHINA…

I was doing some thinking on the new American President and the current president. In particular I wanted to know how the market did for some presidents. So I looked back at the DOW and looked at the dates when each president was in office. I came up with the following table.

This was an interesting table because only three times has a president entered and left office with a lower market. And in each of those three times it was a Republican! Ok maybe a miracle will happen and the DOW will top 10587 before January 20. You never know.

Though I find it interesting that it is Republicans who could be construed as Screw ups… Ok there was a close call for Jimmy Carter, but then again people do consider him a screw up as well. Though probably not as bad as Nixon.

That lead me to my next question, is the performance of the market related to the president? I think so because if you look at Reagan, and Clinton, both are loved and both had amazing stock market returns.

Getting back to Bush Junior. Barring a miracle where the stock market returns to 14,000 I think history will consider George Bush Junior a screw-up.

This then asks the question is it worth it to do long term investing? After all many Fast Money crew folks are saying 2008 is the year that value investing died. Hmmm, not so quick. In the book Valuation I stumbled onto the following graphic.

The graph represents the return on three assets: Stocks, Gold, and Bonds. So if you invested 1 dollar in the stock market in 1800 it would be worth a whopping 100 million. If you invested 1 dollar in fixed income it would be worth around 50,000. And finally if you invested 1 dollar in gold it would be worth 75 dollars.

I cracked up laughing with the gold rate of return, because in 200 years I made 75 bucks! I think that is like 0.0000000x percent return per year! Yes invest in Gold because Gold is better than Fiat money or what have you.

I think this graph was nice because since 1800 we have had many many wars, depressions, recessions, bubble and what have you. And after all was done and said you should be investing in stocks.

So there Macke and you Fast Money idiots! Just because you can’t make money with investing and getting your shirts ripped off of you it does not mean value investing is dead and that Buffett has gone senile!

NOTE: At the end of this blog entry is a spreadsheet link and I assume my calculations are correct, but would like peer review.

You know sometimes the media should just be quiet! Now people are talking about the “lost decade”. They are talking about how you might be tempted to burn the bible of value investing “The Intelligent Investor” because it let you down.

People, don’t listen to the media. We do not have the lost decade, and if the media actually bothered to read Benjamin Graham they would know that we are not in a lost decade. Read page 69 of “The Intelligent Investor” and in specific dollar averaging.

Continue reading “We Don’t Have a Lost Decade, Here’s Why!”