VOLATILITY REVERSAL

A BULLISH VARIATION

IYR UPDATES

I THINK FIBONACCI HAS SOMETHING TO SAY

MOOD SHIFT

 

Just a note to myself, I have been in a particularly GRUMPY mood the last 15 hours. It is one of those bad moods for no reason.

As a personal insight I often get these moods when there is a big reversal about to take place in the markets. It doesn’t always mean that it is a reversal in my favour

But often times the market is about to track a new course.

 

MOOD SHIFT

Just a note to myself, I have been in a particularly GRUMPY mood the last 15 hours. It is one of those bad moods for no reason.

As a personal insight I often get these moods when there is a big reversal about to take place in the markets. It doesn’t always mean that it is a reversal in my favour

But often times the market is about to track a new course.

 

DUBAI FORECLOSURE

Something that caught my eye today is a report about the poor state of the housing market in Dubai, values are down more than 50% since last year. People have just been walking away from their mortgage obligations, and until a landmark case recently won by Barclays nobody was showing any foreclosures on their books. Well things are changing now.

 

 

THE NATIVES ARE GETTING RESTLESS

It may just be my bias’ speaking but I pickup in the media that there is growing hostility towards government, big shot bankers, and heaps of other people in seemingly powerful positions.

I sense there is a shift in mood transferring and the canary in the coal mine is the build up of hostility.

AGENT BASED MODELLING & CIRCUITIST THEORY

This is a note to myself.

 

I have gone to great lengths to prove to myself and others that the ability to forecast the market is impossible, at least to any high degree of probability yet I spend inordinate amounts of time seeking a model that puts things nicely into place.

There is no doubt it is the need within me that is seeking an answer to something I know only too well is unknowable, so I decided to be a little indulgent, perhaps it will serve me better to understand the enemy camp a little better.

 

Today was a left brain focused day, where I spent most of it researching Agent Based Modelling & Circuitist Theory.

 

The concept of Agent Based Modelling is appealing to me for a number of reasons. In essence a couple of days ago whilst studying the subject I came across a simulator model that is able to simulate an artificial stock market. The appeal to me is that if one has a really good simulator then one can firstly test some of the models we have been working on, the second appeal is that perhaps then I can forecast the markets (hmmmn what is with me on this subject). To end this section off, I have sifted through heaps of programmes and come across one that I will spend some time working with, it has built in evolutionary and social dynamic models, such like modelling how birds flock, or how rumours are spread, and 100’s more. I guess in a nutshell alot of the behind the scenes thinking in these models is game theory or genetic algorithm based.

 

Circuitist Theory is based on a closed circuit monetary economic model. Such that you break down an economy into a skeleton of variables, and then observe the behaviour of the circuit based on the actions of the agents within the model. As we know the market is not made of supremely rational agents however they do equilibriate to a point. Steve Keen an Aussie Economic Professor is one of the leaders in this field and who writings led me down this path. I find this extremely interesting and I do believe quite logical. It by no means predicts the markets behaviour but can certainly provide a probable string of events based on certain conditions.

 

SO CLOSE

It feels like we are so close to some real interesting market action.

It sure feels like the market wants to punish itself, as no matter how bleak certain macro factors present themselves, Mr Market wishes to choose a positive spin and hence up it climbs.

This cannot go on for much longer as the market internals just do not have enough momentum to drive things up more.

 

I sense the many hours of worry and lack of sleep are about to be rewarded.

POWER OF GIFTS

The Power of Gifts

The nature of social reciprocity may also underpin some of the stranger behaviour of people - the mere receipt of a gift, however pathetic and pointless can trigger reciprocal tendencies. This is partly why the rising internet concept of giving things away for “free” can create viable business models: as Daniel Caldini relates in Influence, the Hari Krishna have long used such techniques to elicit donations from people who’d really rather not give them anything other than a wide berth.

Personally, I find training myself to say “No, go away before I hit you with this handy piece of street art” a lot easier than engaging in the kind of elaborate avoidance strategies erstwhile victims of “free” are inclined to use. Someone selling you something is not your friend. Unless, of course, they are your friend in which case refusing them is almost impossible – hence the wild success of Tupperware parties. Nothing, but nothing, sells like friendship.

In the meantime, however, the lesson for sales people is easy: give stuff away for free and make sure it’s personal. Sod economics, social psychology will do the rest.

 

Source: http://www.psyfitec.com/

 

HUSSMAN ON FEDS new FANNIE MAE BAILOUT

What will be a game-changer is if Congress fails to recognize that the Treasury's action is at minimum an evasion, and possibly a usurpation of powers that are enumerated to Congress alone. If Congress does not forcefully defend that prerogative – even if it ultimately ends up voting for exactly the same policy – it will have relinquished the power of fiscal policymaking into the hands of unelected bureaucrats. This is real public money that is being spent to make bad mortgage loans whole. It may not appear to be costly at present, since risk-averse individuals conscious of credit risks, and foreign countries running massive trade surpluses, are still willing to accumulate the Treasury securities being issued, with no apparent impact. But ultimately, those securities will either stand as claims on our future national production, or they will be inflated away. Either the Treasury securities will retain value, so that holders such as China get to use them to acquire our productive assets in the future, while we ultimately tax ourselves in order to pay off that debt, or we must dilute the ability of those Treasuries to claim real goods and services, which is another way of saying we inflate away the debt. (Hussman, 4 Jan 2010)

 

DAVID TEPPER

David Tepper, Appaloosa Management, Made $7 Billion in the Panic

(GREGORY ZUCKERMAN –  WALL STREET JOURNAL) In this comeback year for investors, David Tepper may have scored one of the biggest paydays of all. Mr. Tepper's hedge-fund firm has racked up about $7 billion of profit so far this year—with Mr. Tepper on track to earn more than $2.5 billion for himself, according to people familiar with the matter. That is among the largest one-year takes in recent years.

Behind the wins: a bet worth billions of dollars that America would avoid a repeat of the Great Depression.

Through February and March, Mr. Tepper scooped up beaten-down bank shares as many investors were running for the exits. Day after day, Mr. Tepper bought Bank of America Corp. shares, then trading below $3, and Citigroup Inc. preferred shares, when that stock was under $1. One of his investors insisted more carnage loomed. Friends who shared his bullish beliefs were wary of aping his moves amid speculation that the government was about to nationalize the big banks.

"I felt like I was alone," Mr. Tepper recalls. On some days, he says, "no one was even bidding."

The bets paid off. A resurgent market has helped Mr. Tepper's firm, Appaloosa Management, gain about 120% after the firm's fees, through early December. Thanks to those gains, Mr. Tepper, who specializes in the stocks and bonds of troubled companies, manages about $12 billion, a sum that makes Appaloosa one of the largest hedge funds in the world.

Mr. Tepper, whose office overlooks the parking lot of a Hilton hotel in Short Hills, N.J., across from an upscale mall, now is taking aim at a new target. He's purchased about $2 billion of beaten-down commercial mortgage-backed securities. Among his purchases are bonds backed by chunks of the debt of Peter Cooper Village & Stuyvesant Town and 666 Fifth Ave. in New York, two high-profile real-estate deals that have fallen in value over the past two years.

Some experts predict more bad news for commercial real estate—and say that if Mr. Tepper's move doesn't pan out, it could jeopardize a chunk of his recent gains. Mr. Tepper says he remains optimistic.

Hedge funds, once darlings of well-heeled investors, suffered dearly in 2008, dropping 19%. Nearly 1,500 funds, or 16% of the total, shuttered last year. This year, hedge funds are clawing back, with gains of 19% through November, on pace for their best annual gains in a decade, according to Hedge Fund Research Inc.

A handful of funds—including Everest Capital's emerging-market funds and the stock-focused Glenview Capital—have racked up fat gains this year. In sheer dollars, though, none appear to have come close to matching Appaloosa's winnings.

Mr. Tepper grew up in a middle-class neighborhood in Pittsburgh, the son of an accountant who worked seven days a week and once won a $715,000 lottery payout. In the late 1980s, he helped run junk-bond trading at Goldman Sachs. Mr. Tepper wears jeans and sneakers to work, and can be self-deprecating, playing down his successes. He claims to have popularized on Wall Street the phrase "it is what it is" to explain the need to adjust a portfolio if facts on the ground shift.

After he was repeatedly passed over for a partnership, Mr. Tepper left Goldman to start Appaloosa in 1993. By 2008, he had a track record of annual gains averaging about 30% and a net worth estimated at about $2 billion.

Mr. Tepper lives in a two-story home in New Jersey he bought in 1990 for $1.2 million. He recently purchased an ownership stake in the Pittsburgh Steelers football team, and flies to every home game. In 2004 he gave $55 million to Carnegie Mellon University's business school, his alma mater, which renamed itself the Tepper School of Business.

The husky, bespectacled trader laughs easily, but employees say he can quickly turn on them when he's angry. Mr. Tepper keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues.

His biggest scores over the years have come from buying large chunks of out-of-favor investments. When Asian markets crumbled in 1997, Mr. Tepper added Korean stocks to a portfolio laden with Russian debt. The moves led to hundreds of millions of dollars in profits when markets rebounded two years later. He scored big on junk bonds in 2003, and his 2007 wager on steel, coal and other resource companies paid off in 2008 when commodity prices soared.

But because he sometimes places more than half of his portfolio in a single trade idea, Mr. Tepper also is prone to brutal, abrupt losses.

That approach cost him more than $1 billion last year. In January 2008, Societe General SA trader Jerome Kerviel was revealed to have lost €5 billion ($7.2 billion), one of the world's largest trading loss. Mr. Tepper sold large chunks of his holdings, fearing a market tumble. Prices held up, though, hurting Appaloosa. In the spring of last year, he turned bullish on large-company stocks and did some buying, but suffered as markets declined.

Mr. Tepper made a big wager on Delphi in 2006. But in April of last year he and a group of investors withdrew from a deal to inject as much as $2.6 billion in the bankrupt auto-parts supplier, sparking a nasty legal battle that was resolved this summer. Appaloosa lost almost $200 million on its investment in Delphi.

Mr. Tepper's largest fund dropped 25% for 2008, worse than the industry's 19% average decline.

"Investing with David is like flying, with hours of boredom followed by bouts of sheer terror," says Alan Shealy, a client of more than 18 years. "He's the quintessential opportunist, investing in any asset class, but you have to have a cast-iron stomach." (Mike highlight)

Mr. Tepper entered 2009 cautiously, with more than 30% of his firm's assets in cash, or more than $2 billion. He itched to do some buying. Mr. Tepper explains his investment philosophy with a line from Allan Meltzer, a professor at his alma mater: "Trees grow." In other words, growth is the natural state of economies, so optimism usually is rewarded.

On Feb. 10 of this year, Mr. Tepper read that the Treasury Department was introducing the so-called Financial Stability Plan. It included a commitment by the government to inject capital into banks by buying their preferred stock, or shares that carry less chance of reward but also less risk than common stock.

At the time, investors worried that the government ultimately would have to nationalize big banks. U.S. officials said they had no intention of such a move, which could wipe out common shareholders, but investors were dubious.

The news from the Treasury Department struck Mr. Tepper as proof that the government would stand behind the banks. He directed his traders to begin buying bank stock and debt.

Few investors were feeling as optimistic. The Dow Jones Industrial Average fell more than 382 points on the day Treasury Secretary Timothy Geithner introduced the plan, nearly 5%. Bank shares continued to tumble in the days that followed. Bank of America shares fell as low as $2.53 on Feb. 20. By March 5, Citigroup traded as low as 97 cents.

"This is ridiculous, it's nuts, nuts, nuts!" Mr. Tepper recalls saying to Michael Lukacs, one of his partners, on the firm's small trading floor. "Why would the government break its word? They're not going to let these banks go under, people aren't being logical!"

Mr. Tepper huddled with Mr. Lukacs and Jim Bolin, another top Appaloosa executive. Mr. Tepper insisted that stimulus spending and low interest rates would boost the economy. He said he estimated there was only a 20% chance that the U.S. would nationalize banks such as Citigroup.

Mr. Bolin, who people at the firm say tends to be more conservative than Mr. Tepper, was bullish about banks, but still thought it safer to stick to bank debt than to riskier shares. Mr. Tepper says he listened to the arguments, but said it was time to place a big bet.

Over several weeks, Mr. Tepper's team bought a variety of bank investments, including debt, preferred shares and common shares. Just months earlier, the government had injected billions of dollars to keep companies such as American International Group Inc. going, much as they were now doing with the banks. But that didn't prevent shares of those companies from tumbling.

At one point in March, the firm was down about 10% for the year, or about $600 million. Mr. Tepper got on the phone to make more trades, something he often left to subordinates. This time, he wanted to talk directly to Wall Street brokers to test how bad things really were.

The answer: really bad. Mr. Tepper says he was told that he was the only big investor doing much buying.

"Clients were nervous that the game had changed and capitalism wouldn't be the same. There was real fear," recalls Timothy Ghriskey, chief investment officer at Solaris Asset Management, a $2 billion investment firm, who says he only bought a small amount of bank shares during this period.

One day in late winter, Mr. Tepper heard from a skeptical client of his own, Mr. Shealy.

"This thing is far from over," Mr. Shealy recalls saying, referring to the bank problems. Still, Mr. Shealy, who runs an investment firm in Boise, Idaho, stuck with Mr. Tepper. "I figured the positions were fairly liquid, so if he was wrong, he would get out."

Mr. Tepper hadn't paid his investors' nerves much heed since 2000. That year, he bet that the tech-heavy Nasdaq index would fall. But so many investors complained that Mr. Tepper was straying from his roots in debt investing that he canceled his bets. When the Nasdaq collapsed months later, Mr. Tepper fumed.

By late March of 2009, Citigroup shares had tripled, and Mr. Tepper's other holdings, including junk bonds, were rising. He and his team bought more, spending more than $1 billion, when various banks conducted share sales. Mr. Tepper says his average cost for shares of Citigroup was 79 cents; for Bank of America it was $3.72.

At one point in the summer, Mr. Tepper had recorded about $1 billion of profits in shares of just Citigroup and Bank of America, and his overall gains soared past $4.5 billion, or 70%, since January.

After Mr. Bolin, the Appaloosa executive, urged caution, Mr. Tepper did some selling to lock in gains. But the firm remains a big holder of both Bank of America and Citigroup shares, which now trade at $15.03 and $3.40, respectively.

Mr. Tepper remains upbeat. He says he expects interest rates to stay low, and argues that stocks and bonds are reasonably priced.

This belief is driving another risky bet. At the end of each quarter this year, Mr. Tepper noticed that investors were dumping holdings of troubled bonds backed by commercial properties. He had never dabbled in these investments, but he and his 10-person team did some research and judged them attractive, with some seemingly safe debt trading at yields above 15%.

Mr. Tepper slowly spent more than $1 billion to gain ownership of between 10% and 20% of highly rated slices of commercial mortgage-backed securities, or CMBS. He focused on debt backed by loans of properties including Stuyvesant Town and 666 Fifth Ave. in New York.

His bet: If the economy improves, he'll earn hefty interest payments on the bonds. But if the properties can't make their payments, Mr. Tepper believes he owns so much of the debt that he'll have a big say in how the properties get restructured. That means he could ultimately end up ahead.

He's taking a big risk, some analysts warn. The value of commercial real estate continues to fall. Owners of debt classes don't always have much power to influence a commercial real-estate restructuring. And because the debt of these big properties was carved into many pieces, and many investors are involved, any battle for control will be complicated.

Mr. Tepper says the worrywarts have it wrong: "If you think the economy will be fine, as we do, then we're going to do very well."  Full: http://online.wsj.com/article/SB126135805328299533.html

 

BURJ KHALIFA

The financially troubled Gulf emirate of Dubai has opened the world's tallest building, a glistening concrete, glass and steel pinnacle rising 828 metres out of the desert sands.
He renamed the building, previously known as Burj Dubai, Burj Khalifa in honour of United Arab Emirates President Sheikh Khalifa bin Zayed al-Nahayan.

Opened with a bang ... fireworks explode around the world's tallest skyscraper. Photo: Reuters

Sheikh Khalifa is also ruler of Abu Dhabi, the emirate which came to Dubai's help late last year to the tune of $US10 billion ($11.15 billion) to bail out troubled property developer Nakheel, a subsidiary of Dubai World.
"Today the United Arab Emirates achieves the tallest building ever created by the hand of man... and this great project deserves to carry the name of a great man. Today I inaugurate Burj Khalifa," Sheikh Mohammad said.
Emaar Properties, the partly government-owned developer, had maintained the suspense about the skyscraper's final height, saying only that it exceeded 800 metres.
On Monday it said the tower had more than 200 floors, only 160 of which would be inhabited, while the remaining floors were for services.
Burj Khalifa has a total built-up area of 530,000 square metres, including 170,000 square metres of residential space and more than 28,000 square metres of prime office space, Emaar said.
This amounts to 1,044 apartments and 49 floors of office space, served by 57 lifts. It also has a hotel carrying the Georgio Armani logo.
Bill Baker, a structural and civil engineer and partner in Chicago-based Skidmore, Owings and Merrill (SOM), which designed the tower, said it has set a new benchmark.
"We thought that it would be slightly taller than the existing tallest tower of Taipei 101. (Emaar) kept on asking us to go higher but we didn't know how high we could go," he said.
"We were able to tune the building like we tune a music instrument. As we went higher and higher and higher, we discovered that by doing that process... we were able to reach heights much higher than we ever thought we could."
A spiralling Y-shaped design by SOM architect Adrian Smith was used to support the structural core of the tower, which narrows as it ascends. Higher up it becomes a steel structure topped with a huge spire.
To reach the final stages, concrete was propelled to a height of 605 metres - a world record.
The inauguration of the tower comes, however, after the once-booming real estate sector of the emirate has crashed, halving the value of most Dubai properties in comparison with peak prices recorded in the summer of 2008.
It also comes as Dubai battles a serious debt crisis, resulting from the heavy borrowing by some of its state corporates to finance imposing property projects.

TATTOOS

Apparently towards the end of 1929 there had been a dramatic increase in the number of people sporting tattoos. In Australia and Sydney in particular the number of people with tattoos is quite staggering.

Already in the US there appears to be a large increase in the number of people seeking their removal.

As a kid growing up I recall seeing very few people with tattoos and the bulk of the people were either from England or sailors.

I suspect we will see a decline in Australia only once unemployment reaches levels of concern. By the way there are 2 reality shows in the US focusing on the art of tattooing, so that just gives you an idea of the craze. And of course if little miss popular Miley Cirus just got one then you know that we are still in a bullish social mood.

PARITY ????

As a contrarian, I am not so convinced.

Analysts tip $A parity with greenback by year's end

CLANCY YEATES

January 1, 2010

THE Australian dollar is set to climb higher this year as the economy moves up a gear, analysts say, and parity with the US dollar remains a strong prospect.

AUSSIE SMACK

The people in this “lucky” country (Australia) as they call it have developed an economic/success arrogance just like their cricket team of the late 90’s early 2000’s. Aussies have enjoyed tremendous wealth through the commodities and housing boom, this has lead to consumption economy used to high levels of debt. It has also built that self fulfilling feedback loop that things can only go on and get better. Just like being number one in cricket the only place left is to go down. I believe this is what awaits the future of the Australian economy.

 

It is clearly impossible for the current levels of debt to be sustained. Take a look at this startling factoid that appeared in the local press a few days ago. What has in fact happened is that the belief in the success has resulted in a bubble economy, i.e. housing/mortgage and commodities. Any deflation in these assets and the result will be devastating.

 

MB

 

IN a new record, Australians now owe more in household debt than the country's entire economy earns in a year.

Reserve Bank figures show mortgage, credit card and personal loan debts now stand at $1.2 trillion, up 71 per cent from just five years ago and equating to $56,000 for every man, woman and child in the country, News Ltd says.

Our spending binge, fuelled most recently by the federal government's First Home Owner Grant, means personal debt now totals 100.4 per cent of Australia's annual GDP - one of the highest ratios in the developed world.

"It's the first time household debt has cracked 100 per cent of annual GDP and it's a terrible, terrible sign,'' University of NSW economics professor Steve Keen told News Ltd.

"It shows we are living beyond our means and many highly geared borrowers are now extremely vulnerable to further rate rises - they are already saturated with debt and will not be able to tolerate much of an increase to their repayments.''

Our financial headache is likely to get worse before it gets better. We are in the midst of the peak spending season when billions goes on the plastic, yet the Reserve Bank data dates back to October's debt levels only, so that means there are another two months of First Home Owner Grant-fuelled mortgage activity still to be taken into account.

The extra cost is expected to add billions to the burgeoning debt tally.

 

STAR FADING

I cannot help but feel this Star is about to start fading. He has become way to much a part of the popular press and is enjoying his current oracle status.

I think he is Long and Wrong.

 

Paulson Has Never Been More Long   posted by holdenr on Wednesday 9 Dec 2009 08:45 GMT
From Post Chronicle - see full story

From The Post Chronicle: Billionaire hedge fund manager John Paulson said on Tuesday he still sees compelling long-term returns in equities even after their sharp run-up this year, while holding no short positions in the credit markets.

"Today our net long exposure is perhaps the highest it has ever been in our portfolio," Paulson said during a luncheon presentation at the Japan Society.

 

BAD DEBT

quote from Carmen Reinhart, “In America, the Fed has injected a lot of money into the economy as a response to the crisis. Right now the Fed has about a trillion dollars of Fannie and Freddie on their balance sheet, and that's not going to turn out very well, and it hasn't been recognized.”

A COUPLE OF REIT CHARTS