Thursday 3/32/2013

Good Thursday Morning... It is a great morning to be alive.

I missed yesterday, although I do not think that is a big deal for any of my readers. I did hear from 2 of my German friends who wondered what my final thoughts on Cypress were.

And as for thoughts on Cypress -- Bernanke - Cypress did NOT really have an effect...

Yes and No, Dr. Bernanke... I suspect, but can't prove, that the Central Bankers (probably with your knowledge if not consent) floated a trial balloon to see if confiscating people's savings was acceptable.

The answer around the world was "NO"... That baloon and the answer were the only reason Cypress gained so much press. The only kind of governments that confuscate people's savings are dictatorships -- Communists, Dictators, and other Despots. I sincerely hope, Dr. Bernanke that our leaders (elected leaders) think very seriously about this.

But Gentle Reader -- you need to understand this down to your very soul. Inflation steals people's savings (but the theft is more subtle than the Cypress plan). You need to realize that never (not once in history) has printing fiat money resulted in anything but inflation.

And put this in your hat as well. We, the People, do not elect the Federal Reserve Chairman or the Presidents of each Federal Reserve area. Whatever they do stands above the people, and with the Banks (that depend on the Federal Reserve) TOO BIG TOO FAIL, we can only observe what is going on AND Pray (or hope if you are not Christian or Muslim) it will turn out all right. It will take a crises of substantial magnitude before any new monetary strategy can be put in place.

One final thing to remember... Dr. Bernanke was put in by President George W. Bush. Dr. Bernanke has reigned the full term of President Obama. Therefore, we can only conclude that Dr. Bernanke's program is acceptable to both parties, and may help to explain that with the exception of the Tea Party, the Republican's do not raise more furor.

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Currencies are a reflection of the policies of the governments that issue the curriences. If we follow the currencies, we also have to look below the covers when price change is unusual. (This is different than suggesting we - you or I -- invest in currencies. Investing in currencies takes much deeper study than I do.)

FOMC

The FOMC meeting did not change anything. Policy makers revised their economic growth of the USA from 3% to 2.8% in 2013. (Actually, something dramatic has to happen if we even achieve 2.8% growth, as we are nowhere near that at the moment.)

FOMC seemed (stress seemed) to feel that the recent good economic data for the USA was not going to offset the negative impacts of spending cuts and tax increases from the sequester. 

Most of the FOMC members think that the first raise in interest will be in 2015.

What the bond traders want to know, and what we should also want to know, is when the Federal Reserve will start reducing their bond purchases. Dr. Bernanke was very vague about that saying: "As we make progress toward our objective, we may adjust the flow rate of purchases from month to month to appropriately calibrate the amount of accommodation. We think it makes more sense to have our policy variable, which is to say the rate of the flow of purchases will respond in a more continuous or sensitive way to changes in the outlook."

Wow... that would make the most hardened politico applaud with envy. So you kind of maybe understand the outlook -- economic growth and improvement in employment. So, FOMC will remain accommodating as long as FOMC' projection is going down (from 3 to 2.8%) and unemployment (as defined by questionable data) is > 6.5%

Is NOT he saying that economics of the USA are still unstable, and that if and when they pull back QE, if next month the indicators change they could re-institute QE?  If so, that is QEternity unchanged.

Basically, Dr. Bernanke and the FOMC are saying we will continue to provide drugs of a stronger and stronger sort in order to keep the good feelings going.

So, my good readers... When is printing currency providing too much currency? When does the "tipping point" occur that the money is worthless, and cannot be used to buy foreign goods?

If you are fiscally conservative, then be afraid, be very afraid. Why? Because Janet Yellen very likely will take over from Dr. Bernanke, and she is a financial liberal the likes of which only occurs in Nancy Pelosi (her friend).

Currencies -- not much change

Currencies are treading water after Dr. Bernanke's speach yesterday. All that is happening is in general the currencies world wide overnight are slightly moving up against the dollar. Gold is also moving up slightly.

The currency traders world wide do not seem to be worried about Cyprus. The media is the one that made a big deal of it. The banks in Cyprus remain closed, and probably won't reopen until at least tomorrow, and it may be Monday. Look for Russia (yes Russia) to make some deal with Cyprus banks. The EU should be very worried about that, especially Germany.

Can you tell me why they should be worried?

UK Pound

UK pound reached a three week high against the $$$. Why? Mostly due to a big surge in retail sales, and that surge brought hope that the UK will not slip into a triple-dip recession.

The UK is adding more tax revenuers (tax collectors) to improve their collections. UK Chancellor Osborne plans to cut taxes for low earners and finance that with better collection of existing taxes. Good luck Master Chancellor.

UBS thinks this bounce will be short lived.

Economic Indicators Today -- Big Day? No Big Deal so far

·         Existing Home sales -- Missed expectations, but is still pretty good. The actual number of existing homes on the market is at its lowest point in 14 years. -- Result -- mixed

·         Leading Indicators -- GOOD -- beat expectations

·         Philadelphia Fed Survey -- EXCELLENT -- beat expections by a mile.

·         Results -- stock market is chopping; going nowhere on small volume. Unless things turn around in New York Later, the stock market is giving no signs of going higher (after a new record in the DOW yesterday) or down (or in other words, there is no real worry).

·         VIX (Volatility Index) is 13+ - no worries here either.

·         Oracle had a terrible report, and is weighing in on the tech sector. VIX is not indicating, however, that the market is going to correct based on Oracle. Now if Google should have a negative report like that, things would be different (why? don't ask me, as Oracle has real assets, and Google has marketing.)

Risk and Reward

A small number of my newsletter readers wanted to know how they could eliminate all risks.  I have a theory that life is a risk, and there is no way to eliminate all risks.  We cannot forecast the future with any accuracy in any area of our lives.

We must remember:  To gain we must risk something.  

I often think about education, and the investment we must make in our own lives and the lives or our children.  Today, how do you guide your child into making the correct decisions about education?  Many years ago, we could educate ourselves and become an employee of a large business, and spend our lives there.  Life-time employment is a very rare occurrence in the USA at this point.  We could once tell our children, join the armed services, and they will train you and provide a college education afterwards.  With the new viewpoint on cost cutting (after the sequester) they won't pay for college education. 

Once your sons or daughters could train to become an MD, and if successful become a very economically successful part of society.  Today, one would spend $100,000s of dollars to become a doctor, and make an upper-middle-class income as an employee if fortunate enough. 

All these decisions are risks we take.  Becoming an MD is a large risk in money and effort.

Investing (or trading) is about taking risks, minimizing those risks, and hopefully garnering the reward.  Since risk is a part of life it is better to embrace risk.  And by embracing it, we learn to manage it. 

Risk brings on worry, and lots of worry brings on stress.  Then it makes sense to minimize worry, and in turn that suggests minimizing risk.  Risking little on a single investment lets you worry much less, reducing stress.  And therefore, my newsletter readers know my methodology for portfolio allocation which limits the risk I take on any single investment.

One of the things I had to overcome was the idea that investing (or trading) was gambling.  I was raised by grandparents who came through the Great Depression, and anything outside being an employee with a labor union was gambling. (Which means of course, that they did not own their own business.)  I then had to learn that owning your own business was no more risky than being an employee of Hewlett-Packard which HP at this point in history lay people off without any remorse (or warning).  And the older I got, the harder it was to get a new job after being laid off (for example when MCI was bought by World-Com, and we were released without ado and no more than 2 weeks' severance pay). 

Then I realized that Bill Gates, Larry Ellison, Warren Buffet are all speculators.  In fact they are all "BIG" risk takers.  Speculation on a business or investing in other business is speculation on the future, and the "hope" there will be a reward to the risk taken.  The kind of speculation the folks mentioned above take is not gambling, but that distinction is for another diatribe when I have nothing else to share. 

After investing for a while, I came to the realization it was not so much when I invested whether I would be successful, but how was I going to exit?  (Yes, Dr. Bernanke, you've risked a huge stake of my future and my fellow citizen's future, and you have not yet discovered and/or revealed how you will exit.) 

So then to make investing more than gambling, I must have an investment plan, and that plan can be related to a business plan.  That plan needs to include what I will invest in, how I will invest, how much per investment, when to take a loss and when to take a profit. 

(Please note, when I was in San Francisco at Microsoft R&D during the late '90s, I observed people risking everything on Internet stocks using leverage.  I watched them hold the companies until it went to zero.  I came to the realization that psychologically, people do not want to take a loss, and they only do so only when they are forced to do so - either through a margin call or through the company going out of business.  I escaped those losses because I never invested in stocks in those days (except what came to me through options granted by the company I was working for). 

The other side to the coin was "greed".  Greed is built into our natures.  Greed is "always wanting more".  I observed people in Internet days having a large amount of paper wealth, and leveraging that wealth into the same companies (and those companies had no assets or profits).  The investors wanted more.  People use to go to the lunch room and trade on the computers like it was some video game.  Did they have a profit target?  No... Did they know when to get out if the market corrected?  No...  In effect without a game plan, they were gambling; not running a business. 

Summarizing Investing and Risk:

1.      Have a detailed investment Plan

2.      Know what the signals are for entry

3.      Know how much to risk (suggest no more than 2% of your equity on any trade)

4.      Know when to take profits

5.      Know how to use compounding to accumulate wealth...

And yet wait:  The Gambler knew the answer to this.  The ideas are all in these lines.

You got to know when to hold 'em, know when to fold 'em,
Know when to walk away and know when to run.
You never count your money when you're sittin' at the table.
There'll be time enough for countin' when the dealin's done.

Now Ev'ry gambler knows that the secret to survivin'
Is knowin' what to throw away and knowing what to keep.
'Cause ev'ry hand's a winner and ev'ry hand's a loser,
And the best that you can hope for is to die in your sleep."

Kenny Rodgers, The Gambler Lyrics

So are we gambling?