LUNAR CYCLE

There has been a strong correlation between lunar activity and the market cycles the last few moons.

ARE THE HIGH BETA'S GOING TO LEAD THE WAY

This is a 1 minute chart of the IYR index, can it be a prelude to the next leg down. I hope so but I don't think so. As I expressed already, these short term calls are random hunches nothing more.

EW BLOGGERS IRRITATING ME

Maybe it is because I am been squeezed by this bear and therefore I am not in a particulalry good mood.
I am just browsing through all the EW blogs I read and find each one scratching their head trying to fine tune the squiggles so as to be able to say I called the top. Corrective patterns are always frustrating to trade against and looking for wave perfection is near impossible to call real time.

US REIT LONG TERM WAVE COUNT

It feels like a new recovery high is on the cards.

 

 

WESTFIELD LOOKING HEAVY

 

HEAD & SHOULDERS IN THE HOME BUILDERS

 

US REIT LONG TERM WAVE COUNT

NAREIT 2009

Last year I attended NAREIT 2008 in San Diego and the mood was particularly bleak.
I recall one day checking my iPhone to see the market (US REIT Index) was down 14% in one day so clearly the mood was somewhat down.

I am currently reading that NAREIT 2009 in Phoenix is UPBEAT.

RBC Capital Markets analysts Rich Moore, Dave Rodgers and Mike Salinsky in a Nov. 12 report offered their thoughts on Day 1 of NAREIT's REIT World conference.

First, they noted the mood among attendees is "upbeat, substantially more so than in either of the past two NAREIT conventions," and that discussions of fundamentals, acquisitions and future opportunities have replaced the previous "obsession" with balance sheet issues. 

McCulley from PIMCO - brilliant summation of the financial world as it is today

 

 

The Uncomfortable Dance Between V'ers and U'ers

by Paul McCulley

Around the world, in investment committee meetings and on trading floors (and at the Fed!), one question dominates discussion and debate:

How can it be that risk assets, notably common stocks, have been roaring ahead, presumably discounting a robust V-shaped economic recovery, while Treasury bonds are holding their own with a bull flattening bias, presumably rejecting the V-shaped hypothesis, instead discounting a U-shaped recovery as the base case, with a W-shaped outcome the dominant risk case?

One of these markets is wrong, it is commonly argued; the only question is which one. In the longer run, we here at PIMCO certainly agree, siding with the U-shaped camp. But that does not necessarily mean that one of the markets must necessarily capitulate to the other in the months immediately ahead. And the unifying explanation is simple: The Fed is committed to maintaining "exceptionally low levels of the Federal funds rate for an extended period." The Fed is also openly committed to being extraordinarily careful in reducing its elevated balance sheet, implying that a very elevated level of excess reserves/liquidity will be sloshing through the financial system for a long time.

To be sure, the Fed has been communicating repeatedly, with academic flourish, the technical details of its ability to eventually hike its policy rate, even with a bloated balance sheet and massive excess reserves:

• Hiking, via its newly-granted powers of last fall, the interest rate it pays on excess reserves (IOER), which should act as a floor for the more visible Fed funds rate; and
• Reducing excess reserves directly through massive reverse repurchases, including using tri-party repo arrangements, effectively augmenting the universe of counterparties beyond the capital-constrained primary dealers, to include liquidity flush end users.

But the Fed has also gone out of its way to communicate that discussions are about the "how" of its exit strategies, not a signal as to the "when," in the phraseology of the Financial Times' Krishna Guha. Thus, not only is the price of Fed liquidity set to hover near zero for an extended period, but the sheer volume of Fed-supplied liquidity is also likely to be flush for an extended period. In turn, as long as the Fed retains ownership of its longer-dated assets, sterilizing their liquidity effect via reverse repos, the Fed will remain not just the arbitrator of the Fed funds rate, but will also be a holder of market risk previously borne by the private market.

Thus, while rich risk asset prices can certainly be viewed as a consensus expectation for a strong recovery, such lofty valuations can also be viewed as a consensus expectation about the Fed's commitment to erring on the side of being too late, rather than too early, in starting a Fed funds tightening cycle. Indeed, one could actually be agnostic, even antagonistic, about a big-V recovery and still be favorably disposed to risk assets, in the short run. Historically, what pounds risk asset prices is either a recession or unexpected Fed tightening; or worse, both. Right now, it is hard to get wrapped around the axle about recession, since we've just had one, which might not even be over.

To be sure, the economy could have back-to-back recessions, as was the case in 1980 and 1981–1982. But that episode was associated with massive Fed tightening in 1979–1980, followed by massive easing in the middle months of 1980, followed by massive Fed tightening yet again, as Paul Volcker waged a two-step war against inflation. Presently, the Fed is openly declaring that it will maintain near-zero short rates for an "extended period," in the context of inflation below its implicit target.

Thus, as long as economic recovery appears underway, even if stoked primarily by (1) policy stimulus and (2) a turn in the inventory cycle, there is no urgent reason for investors to run from risk assets. Put differently, investors can be agnostic about (3) the strength of private demand growth until the one-off forces supporting growth exhaust themselves, as long as they don't have fear of Fed tightening.

In turn, a bull flattening bias of the Treasury curve, with longer-dated rates falling toward the near-zero Fed policy rate, can be viewed as a consensus view that the level of the output/unemployment gap plumbed during the recession is so great that disinflationary forces in goods and services prices, and perhaps even more important, wages, will be in train, even if growth surprises on the upside. Accordingly, Treasury players, like their equity brethren, need not fear the Fed, as there is no economic rationale for an early turn to a tightening process.

Thus, both rich risk markets and the lofty Treasury market can be viewed as rational in their own spheres, even if they are seemingly irrational when compared to each other. The tie that binds them, that allows them to co-exist, need not be a common view regarding the prospective strength of the recovery, but rather a common view as to the Fed's friendly intent and reaction function.

But, you retort, this can't go on forever – at some point, risk assets will have to capitulate to reality if the big-V does not unfold, no? Yes, but it is not quite as simple as that. Without the big-V, Treasuries will tend to bull flatten, soothed by rational expectations of an extended period of the Fed funds rate pinched against zero. In turn, such a path for Treasuries would provide valuation support for risk assets. How so?

All risk asset prices are analytically the Net Present Value of expected growth in cash flows, discounted by the appropriate-duration risk-free rate plus a risk premium. Thus, expectations of a friendly-for-longer Fed policy would be supportive of risk assets, as they (1) tend to pull down long-duration risk-free rates, while also (2) pulling down the market-required risk premium (which moves inversely with investors' animal-spirited risk appetite, which moves inversely with fears of Fed tightening).

To be sure, this fundamental valuation framework – known as the Gordon Model – also implies that in real terms, the positive P/E effect of low long-term risk-free rates is moderated to the extent that the non-big-V scenario also implies lower growth in real profits. There are no free lunches. But since real long-term Treasury rates trade in real time, while "new-normalized" real growth rates are uncertain, subject to animal-spirited conjecture, friendly real long-term interest rates will tend to dominate the formulation of P/Es.

Thus, ironically, the biggest intermediate-term risk for risk assets is not that the big-V doesn't unfold, but that it does, inciting the Fed to bring the extended period of a near-zero policy rate to a close. But again, you retort, doesn't that imply that in the absence of the big-V, risk asset prices could levitate into bubble valuation space? Yes, it does mean that. And that is a very, very uncomfortable proposition for those grounded in fundamental analysis, as I am.

The Efficient Market Hypothesis in Retreat
But such discomfort is likely to be an enduring fact of life on the journey to the New Normal. Recall, a core tenet of "fundamental analysis" is the efficient market hypothesis, which presupposes that rational investors will, given time, always pull nominal – and real – values back toward their "fundamentally justified" levels. Yes, there will be noise in real time, the hypothesis allows, but it also holds that neither irrational gloom nor irrational exuberance will go to extremes: momentum players will, in the end, always be trumped by value players, before momentum players have done any great harm. Market failures, capitalism's equivalent of estrangement in families, are simply assumed away. They are not supposed to happen; therefore, they won't.

But they do. Such was the case with the Forward Minsky Journey¹ that unfolded alongside the Great Moderation for twenty-five years after the recession that ended in 1982. Ever-increasing private sector leverage was applied on the presumption that the Great Moderation was a perpetual motion machine, rather than an epoch that would eventually implode on its own debt-deflationary pathologies, as Minsky envisaged. Nominal asset prices, notably property, became bubbly-unmoored from "fundamental" value, yet both borrowers and lenders were willing to "validate" those unmoored levels with legally binding nominal debt obligations – hedge debt units followed by speculative debt units followed by Ponzi debt units.

It all blew up, of course, with not just trillions of net worth destroyed, but also the wisdom of religious belief in the efficient market hypothesis. Thus, as we look forward, a huge amount of humility is warranted in projecting asset returns on the basis of tight bands around what "fundamentals" suggest constitute fair value. Yes, there is no substitute for fundamental analysis; it remains at the core of investment management. But asset values can stray far, very far, away from their putative "fair" levels, much, much further than was the case during the middle-aged years of the Great Moderation. The efficient market hypothesis may not be dead, but it is most assuredly in retreat.

Behavioral Economics and Finance in Ascendency
In contrast, the insights of behavioral economics and finance are very much in ascendency. This personally brings me great satisfaction, as both of my macroeconomic heroes, John Maynard Keynes and Hyman Minsky, were quintessentially behavioral economists, starting with the proposition that developing a theory as to how the world does work is much more productive than developing a theory as to how the world should work. That's not to suggest that there is not room for both types of theorizing. Indeed, one without the other is silliness, and both Keynes and Minsky did both.

And the envelope between those two modes of theorizing is the fact that the future is inherently uncertain. That might not sound like a profound assertion, and it isn't. We all intuitively know that. But the efficient market hypothesis conveniently assumes away that reality, in what is technically called the "ergodic axiom" – that past and current relationships between variables are reliable predictors of future relationships between variables. This assumption holds in astronomy, which is why astronomers can forecast with incredible accuracy when the next lunar eclipse will unfold.

This assumption also holds in calculating the risk of any given hand in a defined card game – there are 52 cards in the deck and it is quite possible to calculate with great precision the odds of winning the game, such as Blackjack or Poker. That doesn't mean that you can know with precision whether you will win, simply that you can forecast the odds of any given player winning, given the cards in their hands and other players' hands, in the context of what cards are left in the deck. Indeed, I find it amusing when television shows broadcasting such games flash up the odds of any player winning after each card is dealt. There is risk, but not uncertainty – we know there are 52 cards in the game and we know what constitutes a winning hand. The ergodic axiom holds.

In investment markets, however, the ergodic axiom doesn't hold, even though it is implicitly assumed in the efficient market hypothesis (but ironically, not in the legal disclaimers of all investment presentations, which state that past results are not necessarily indicative of future results!). In investment markets, genuine uncertainty exists: We can't assume that we know how many cards will be in the future deck or what will constitute a winning hand. That's not risk, but rather uncertainty.

And how do we deal with it? As Keynes explained in Chapter 12 of the General Theory, we deal with it by falling back on convention, or rules of thumb. In his words:

"Certain classes of investment are governed by the average expectation of those who deal on the Stock Exchange as revealed in the price of shares, rather than by the genuine expectations of the professional entrepreneur. How then are these highly significant daily, even hourly, revaluations of existing investments carried out in practice?

In practice, we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention – though it does not, of course, work out so simply – lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. This does not really mean that we really believe that the existing state of affairs will continue indefinitely. We know from extensive experience that this is most unlikely.

The actual results of an investment over a long term of years very seldom agree with the initial expectation. Nor can we rationalize our behavior by arguing that to a man in a state of ignorance; errors in either direction are equally probable, so that there remains a mean actuarial expectation based on equi-probabilities. For it can easily be shown that the assumption of arithmetically equal probabilities based on a state of ignorance leads us to absurdities.

We are assuming, in effect, that the existing market valuation, however arrived at, is uniquely correct in relation to our existing knowledge of the facts which will influence the yield of the investment, and that it will only change in proportion to changes in this knowledge; though, philosophically speaking, it cannot be uniquely correct, since our existing knowledge does not provide a sufficient basis for a calculated mathematically expectation. In point of fact, all sorts of considerations enter into market valuations which are in no way relevant to the prospective yield.

Nevertheless the above conventional method of calculation will be compatible with a considerable measure of continuity and stability in our affairs, so long as we can rely on the maintenance of the convention. For if there exist organized investment markets and if we can rely on maintenance of the convention, an investor can legitimately encourage himself with the idea that the only risk he runs is that of a genuine change in the news over the near future, as to the likelihood of which he can attempt to form his own judgment, and which is unlikely to be large. For, assuming that the convention holds good, it is only these changes which can affect the value of his investment, and he need not lose his sleep merely because he has not any notion what his investment will be worth ten years hence.

Thus investment becomes reasonably 'safe' for the individual investor over short periods, and hence over a succession of short periods however many, if he can fairly rely on there being no breakdown in the convention and on his therefore having an opportunity to revise his judgment and change his investment, before there has been time for much to happen. Investments which are 'fixed' for the community are thus made 'liquid' for the individual."

Those few paragraphs, my friends, are the foundation of modern behavioral economics and finance. Human beings, including investment managers, face both risk and uncertainty, and deal with uncertainty by resorting to conventions, notably that yesterday is the best predictor of today, and that today is the best predictor of tomorrow. George Soros calls it reflexivity.

But when that comforting convention is overwhelmed by a new reality, all hell breaks loose. Uncertainty can no longer be simply assumed away. And when that happens, human beings tend to disengage, eschewing investment in favor of building up cash reserves. And if this proclivity becomes both widespread and profound, we find ourselves in Keynes' Liquidity Trap – there is plenty of money around, but risk-averse investors, infected with uncertainty, refuse to "put it to work" – on either Wall Street or Main Street. Such was the case a year ago, following the fateful decision to let Lehman Brothers fall into a watery grave.

The way out of that lacuna was for (1) the fiscal authority to step into the breech and borrow money from the newly risk-averse, putting it to work to recapitalize the banking system and on Main Street in support of aggregate demand; and for (2) the monetary authority to drive the interest rate on money to zero and promise to hold it there for an extended period, making holding cash very painful while reducing uncertainty, re-exciting investors' risk appetite.

Bottom Line
Fiscal and monetary authorities around the world have done exactly that over the last year, and since April, in the words of the G-20, it has "worked." Well, at least on Wall Street, where risk appetite is in full bloom. Whether or not that renewed risk appetite finds its way to Main Street is the key question beyond the immediate horizon.

We here at PIMCO think it will, but only in a muted way, not a big-V way. We also recognize, however, that markets can stray quite far from "fundamentally justified" values, if there is a strong belief in a friendly convention, one with staying power. And right now, that convention is a strong belief in a very friendly Fed for an extended period. Thus, the strongest case for risk assets holding their ground is, ironically, that the big-V doesn't unfold, because if it were to unfold, it would break the comforting conventional presumption of an extended friendly Fed.

Simply put, big-V'ers should be wary of what they wish for. U'ers, meanwhile, must be mindful of just how bubbly risk asset valuations can get, as long as non-big-V data unfold, keeping the Fed friendly. But that's no reason, in our view, to chase risk assets from currently lofty valuations. To the contrary, the time has come to begin paring exposure to risk assets, and if their prices continue to rise, paring at an accelerated pace.

 

HOMEBUILDERS

Well what do you know Toll Brothers the largest homebuilder of luxury homes beat expectations, what happened the share price popped a cool 16.5% on the day.

Good thing I hadn’t placed my shorts at the open, but I got a few away at the high of the day. Lets see how things unfold.

 

 

CRISIS LOOMS

Commercial Real Estate ‘Crisis’ Looming for U.S.: Chart of Day

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By David Wilson

Nov. 11 (Bloomberg) -- “A crisis of unprecedented proportions is approaching” in the U.S. commercial real-estate market, according to Randall Zisler, chief executive officer of Zisler Capital Partners LLC.

The CHART OF THE DAY displays quarterly returns on commercial property -- apartment buildings, hotels, industrial sites, offices and stores -- as compiled by the National Council of Real Estate Investment Fiduciaries. Returns were negative for the past five quarters, the longest streak since 1992.

Property prices have fallen by 30 percent to 50 percent from their peaks, Zisler estimated yesterday in a report. The plunge has wiped out the equity in most real-estate deals that relied on debt financing since 2005, he wrote.

Zisler, whose firm focuses on real-estate investment, estimated that building owners will default on $500 billion to $750 billion of mortgage debt. This equals as much as 54 percent of the $1.4 trillion in loans that will come due in four years, by his count.

“Much of the debt is likely worth about 50 percent of par, or less,” the report said. Many banks will end up insolvent as they reduce the value of their holdings, he wrote, adding that regional and community lenders are especially vulnerable.

California, in particular, is experiencing a downward spiral in commercial property as prices decline and a growing number of tenants default, Zisler wrote. His analysis was included in Controller John Chiang’s monthly review of the state’s finances.

(To save a copy of the chart, click here.)

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

Last Updated: November 11, 2009 11:11 EST

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HOUSING

I think it is time to start selling this housing bounce, I have missed the 1st leg down but I think now is quite an attractive place to short the bounce.

REMEMBER FANNIE

 I dont know why but I just had the urge to see where Fannie Mae is trading as I am told the force behind the home loan lending almost in its entirety has been Fannie, so if things in the housing market are turning up then so should the price of Fannie.

Well I was shocked it is down 50% since its high September (6 weeks ago).

Is granny fannie trying to tell us something.

AS IF IT NEVER HAPPENED

I am reading through one headline after another putting forward a bullish case. In many instances the euphoria is even worse than pre the crash because now, punters have the ability to say that the crash is behind us and has set the market up for a prolonged bull market.

Even the not so sanguine investors are saying the carry trade brought about by the ridiculously low rates in the US and other parts of the world is fuelling the fire. Of course they are right about this but it is a bubble and every bubble bursts.

I have been a professional money manager for 8 years and I have read more books on market history than many people will read in their entirety throughout their lifetime, and I know with certainty how this will end. Only I believe the tears on the next leg down will be more like floods as people realize not only how greedy they were to risk so much in the face of so much risk, but more how dumb they were not to have realized it.

The greed part people will be able to deal with, because it is part of the inner struggle that we all face throughout our lives, but I believe the feeling of depression caused by being plain old stupid will take much much longer to heal.

I just read that JP Morgan has lifted their pay freeze, instituted at the height of the crisis. You have 3 banks in the US paying more than $30bn in bonuses for this year when in March everyone thought the world as we knew it was over.

Come in lets get real here, except for the ever growing % of US unemployed how many of us really felt this recession. Hardly come on be truthful, it was more felt at arms length via lower share portfolio's or lower pricing in our homes but how many people were out and out desperado's?

If history is anything to go by this painfull experience is what is needed to cure the ill effects of blatantly mismanaged companies and governments. I don't wish this hardship on anyone and the more I think about it the sadder I become because I am realizing how many more people will have to experience this because of the lack of truly honourable leadership.

If you want a career that will pay have an endless supply of customers then study psychology or psychiatry, or if you are a dumbo like me buy psychiatirc drug manufacturers.

Lastly, remember that no party continues forever, and if you have been lucky enough to enjoy this one, why not quit while you are ahead and you still have your sanity.

DIFFICULT TIMES

For a bear the market action last night was quite tough!! There is still no clear pattern right now so we hang a little longer.

UNCERTAINTY in CERTAINTY

I am sure you have all experienced a feeling of knowing with differing degrees of certainty, but cannot fully explain it. The most common way of explaining this experience is to attribute the level of certainty with a higher degree of knowledge or some prefer to rely on a meta psychic experience such as intuition. I am going to attempt a more philosophical explanation using the natural sciences and try and link it to the way I have experienced the markets over the last few months. The learning experience has given me a good perspective of this seemingly crazy world of financial markets. As a non scientist I extend fair warning that I may not be doing these iconic subjects true justice, so please bare with my superficial understanding and before we dive in, I owe credit to physicist/theologian Gerald Schroeder for the germination of the idea from his book, "The Science of G-d".

 

The story begins with the birth of a famous French Mathematician in 1749 by the name of Pierre-Simon Laplace who took the Newtonian mechanical approach of cause and effect and pioneered a whole new field of study called Causality or Determinism (there is a difference but lets leave Determinism for another "Back to School" section). In staying with this approach of cause and effect, Laplace introduced the idea of accurate forecasting, believing that every aspect of the universe and by extension life could be predicted by knowing the cause and applying empirically validated formulae (e.g. Newton's 2nd law) to derive the effect. These insights were further strengthened early in the last century by Einstein's, "General Theory of Relativity".

 

Now this is where things get interesting, lets meet Mr Heisenberg an Austrian Physicist who discovered in 1927 that the more precisely one is able to identify a physical property the less precisely one can predict natures causative effect; his discovery called Heisenberg's Uncertainty Principle is the foundation to the ever  growing field of Quantum Mechanics. According to the Uncertainty Principle explained by the equations of Quantum Mechanics it is impossible to measure a microscopic particle with any degree of accuracy or certainty and the more microscopic you go the less certain the equation becomes. To my simple mind the more confined the space it would make sense that the more accurate your predictions are likely to be, but the reality of nature is not so intuitive. Another way this discovery is often unknowingly explained is that the more you know about a certain area of specialty the more you realize how little you know. This is counter intuitive but is the reality of the experience.

    

So lets try and apply these fascinating discoveries to the trading of financial markets and see what philosophical insights we can draw so that we become wiser in our approach to money management.

 

Laplace taught us about cause and effect; Economics left to its true free market essence is after all a reflection of life and therefore suffers the same causative effects so beautifully described by Adam Smiths "invisible hand". In other words there are certain causes and effects that observed from a distance must in fact take place. Take an economy that consumes more than it produces, by simple deductive laws of logic this economy will self destruct (US currently); another cause and effect example would be where an economy backed by fiat currency continues to print money faster than the real growth of the economy (US currently), the only logical cause and effect result will be a currency that devalues.

This I believe is where most economists, chartists and fund managers chasing short term predictions come unstuck in their analysis and pursuit of precision. They are missing an important part of the equation. Heisenberg with his Principle of Uncertainty has taught us that as we attempt to use ever more precise detail with our Newtonian based  economic/finance/technical tools we are not in fact  achieving greater certainty with our forecasts but in fact the opposite is true. These insights are all counter-intuitive and my interpretation is that just like with the natural sciences forecasting accuracy is more assured over a longer term (cause and effect above the subatomic level) than over a shorter (more precise subatomic) term; hence the title of this essay Uncertainty in Certainty. Yes we know with certainty how things will end in general terms, the problem remains that as we try and predict how things will unfold in the short term we are introducing Heisenberg's Principle of Uncertainty, and our certainty diminishes as we become more specific.

 

To conclude this does not mean that I believe we cannot make better than random short term forecasts, rather I believe that as ones predictions move to a micro level the uncertainty factor increases, it is a law of nature, and therefore one needs to ensure that our money management processes compensate for this uncertainty.

A GANN FAN

I am not professing the GANN fan as a market timing system, but I do believe it provides some nice support and resistance points.

STILL FANCY HOMEBUILDERS TO LEAD THE WAY DOWN

 

Today is the Day - DOWN!!!

WESTFIELDG STAPLE

 

SAME CHART IN MORE DETAIL

 

SOME UPSIDE TO THE ALL ORDINARIES

 

THE GREAT DEPRESSION

Look familiar??

EMOTIONALLY DRAINED

These markets have taken their toll, I am usually able to hold it together but of late I have felt particularly keen on the market, almost wishing it to do what I want it to do. It is time to take a step back and let some of the intensity out. The market is what the market wants to be.

UNCLEAR

The wave patterns of the US REIT market from the Sep 23 high remain unclear. Other markets are displaying clearer patterns with A-REITs impulsing lower along with UK REITs.

 

Give or take another day or 2 of jacking around, my sense is that we are going to THRUST lower shortly. I am hoping this to be the case or it could mean a more extended rally is still ahead.

HENRY HAZLIT - AUSTRIAN ECONOMIST

To quote Henry Hazlitt’s Economics in One Lesson:
Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.
A young hoodlum, say, heaves a brick through the window of a baker's shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier's gain of business, in short, is merely the tailor's loss of business. No new "employment" has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

US REIT OPTION STRATEGY

Any weakness in the US REIT market during the month of November should be highly profitable.
As protection if the markets should rally from current spot of $41 to above $47 then we will also profit handsomely.

FW: Pimples...

Received this from a mate:

 

Copied and pasted from Macquarie’s daily communiqué…

 

Wall Street posted its best day in three months as investors rushed into the market on stronger-than-expected economy growth figures. European markets were buoyed by the better-than-expected economic growth figures from the US. The Australian sharemarket is expected to open significantly higher as Wall Street had its best day in three months on better-than-expected United States economic growth figures.

 

“Best day”… “investors rushed”…“stronger-than-expected”… “markets were buoyed”…“better-than-expected”… “significantly higher”…”best day”…“better-than-expected…

 

Are these guys professional analysts or pimple-faced cheerleaders?

 

D J

A DAY LATER

There is never a dull moment, I certainly expected a bounce and some volatility so the bounce of 4.5% last night wasn't totally unexpected. However, with the bounce I am once again left with the doubts of my calling a top in the countertrend rally.

This is one tough game.

UNCERTAINTY WITHIN CERTAINTY

I am sure you have all experienced a feeling of knowing but cannot fully explain it. The most common way of explaining this experience is to attribute the knowledge to a meta psychic experience called "intuition". I am going to attempt an explanation using the natural sciences and try and link it to the way I have experienced the markets over the last few months. The learning experience has given me a good perspective of this seemingly crazy world of financial markets. As a non scientist I extend fair warning that I may not be doing these iconic subjects true justice, so please do your own research for a greater understanding, and before we dive in, I owe credit to physicist/theologian Gerald Schroeder for the germination of the idea in his book, "The Science of G-d".

 

The story begins with the birth of a famous French Mathematician in 1749 by the name of Pierre-Simon Laplace who took the Newtonian mechanical approach of cause and effect and pioneered a whole new field of study called Causality or Determinism (there is a difference but lets leave Determinism for another "Back to School" section as I have been working on an idea for quite some time and look forward to sharing it with you in the future). In staying with this approach of cause and effect, Laplace introduced the idea of accurate forecasting, believing that every aspect of the universe and by extension life could be predicted by knowing the cause and applying empirically derived formulae (e.g. Newton's 2nd law) to derive the effect. These insights were further strengthened in the last century by Einstein's, "General Theory of Relativity".

 

Now this is where things get interesting, lets meet Mr Heisenberg an Austrian Physicist who lived after Einstein and discovered that the more precisely one is able to identify a physical property the less precisely one can predict natures causative effect; his discovery called Heisenberg's Uncertainty Principle is the foundation to the ever  growing field of Quantum Mechanics. According to the Uncertainty Principle explained by the equations of Quantum Mechanics it is impossible to measure a microscopic particle with any degree of accuracy or certainty and the more microscopic you go the less certain the equation becomes. To my simple mind the more confined the space it would make sense that the more accurate your predictions are likely to be, but the reality of nature is not so intuitive.

    

So lets try and apply these fascinating discoveries to the trading of financial markets and see what philosophical insights we can draw so that we become wiser in our approach to money management.

 

Laplace taught us about cause and effect; Economics left to its true free market essence is after all a reflection of life and therefore suffers the same causative effects so beautifully described by Adam Smiths "invisible hand". In other words there are certain causes and effects that must in fact take place. Take an economy that consumes more than it produces, by simple deductive laws of logic this economy will implode; another cause and effect example would be where an economy backed by fiat currency continues to print money the only logical cause and effect result will be a currency that becomes devalued. This I believe is where most economists and fund managers chasing short term predictions come unstuck in their analysis as an important part of the equation is absent.

 

Heisenberg with his Principle of Uncertainty has taught us that as we attempt to use ever more precise detail with our Newtonian based economic/finance/technical tools we are not in fact  achieving greater certainty with our forecasts but in fact the opposite is true. These insights are all counter-intuitive and my interpretation is that just like with the natural sciences forecasting accuracy is more assured over a longer term (cause and effect above the subatomic level) than over a shorter (more precise subatomic) term; hence the title of this essay Uncertainty in Certainty. Yes we know with certainty how things will end, the problem remains that as we try and predict how things will unfold in the short term we are introducing Heisenberg's Principle of Uncertainty.

 

To conclude this does not mean that I believe you cannot make better than random short term forecasts, rather I believe that as ones predictions move to a micro level the uncertainty factor increases.

 

 

Phew

I really enjoyed last nights selloff as a continuation of the recent weakness.

Today with GDP numbers out in the US I need to expect some news related volatility. I have been buying protection for my month end and to lock in some profit, however, instead of closing out my calls on the bounce I intend to write some volatility.

Once again if this is the start of the next wave 3 down then expect surprises on the downside and therefore my approach will be pretty rough as opposed to fine tuned as things are about to get volatile.

GOT MONTH END ON MY MIND

I am trying my best not to take month end too seriously. There are 3 trading days left of the month, we are on the edge of a cliff, more so than in the past as this is starting to really feel like P3.

I will probably buy some near dated calls after hopefully a gap lower open. Nothing cute, just some course management.

LIBERTY INTERNATIONAL LOOKING LIKE IT HAS REVERSED COURSE

Technically this chart is looking quite weak.

WESTFIELD

This stock appears to be one of the leaders on the way down.

IF ONLY

These homebuilders are getting a right royal canning, if only I had a position.

STAND BACK

It is at junctures like this that it is important to stand back, there is every possibility that the market has topped out in P2. Yes the REIT waves are far from convincingly impulsive, however, there are options in which to count a bearish stance, but one would never count them as such real time as their probability is just way too low.
Having said that market action is looking generally pretty weak with lots of distribution taking place.

Lets give this baby some room.

RANGE BOUND

I am expecting a sharp move out of this range bound trading.

DAVID EINHORN

This guy is a noted bear, but a top long-short hedge fund manager. He comes from a bottom up approach but felt the need to express his macro views, he ends his summation with this chilling observation:

For years, the discussion has been that our deficit spending will pass the costs onto "our grandchildren." I believe that this is no longer the case and that the consequences will be seen during the lifetime of the leaders who have pursued short-term popularity over our solvency. The recent economic crisis and our response has brought forward the eventual reconciliation into a window that is near enough that it makes sense for investors to buy some insurance to protect themselves from a possible systemic event. To slightly modify Alexis de Tocqueville: Events can move from the impossible to the inevitable without ever stopping at the probable.

As investors, we can't change the course of events, but we can attempt to protect capital in the face of foreseeable risks.

 

WESTFIELD

I still maintain this baby topped out a while ago I can count 1-2 on a minutte level. It will be a great Fibonacci bulls-eye if it holds.

THE BEARS ARE READY TO THROW THE TOWEL IN

I am one of them that is tempted to hold back for a while until we get higher.
The one blog I am reading daily- Daneric and his fellow commentators are all about to throw in the towel for another kick up in the indices.

I am doing nothing until Monday lets see what Friday and the weekend brings. Things are at a very tight space.

A POST TO AN ELLIOTT WAVE COUNTERS BLOG

Hi Dan,

 

I just want to share some thoughts. First off, what a terrific blog you have got going and I believe you are doing the EW community a fine service. I have been a subscriber to other paid services and your work technically and anecdotally is up there.

 

I can hear the frustration in your notes, and I have to confess as a long time hedge fund manager I too am feeling the heat, but I want you to know that I think we are extremely close, and as long time bears all say "surprises on the downside" so stay open to less clear wave patterns.

 

I personally love EW trading and it influences all aspects of my life, yet it is important to acknowledge that its success rate at catching turns is probably less than 50%; however, as a trader it gives you a vital edge in terms of where to place stop losses and profit objectives, therefore it can be a highly profitable trading system for disciplined traders.

 

My point therefore is to stick with the EW aspect of ones trading but to very importantly build a robust money management component to ones trading as with out it you can become the worlds best bankrupt Elliott Wave counter.

 

An ending thought; my experience tells me that having the emotional fortitude to withstand all these false starts is what is required to be a successful EW trader. The harder it gets to trade often the more profitable the trade.

 

Wishing everyone good luck on catching most of P3 whenever it may start (if it hasn't already).

 

M

FOCUSING ON MICRO

This is a squiggle 1 min chart

GLOBAL REITs

This baby continues to climb like no other but momentum is starting to diverge.

REITS

I am sticking with my view that the US REIT high is in back in September. Only concern for me is that the wave count from the wave 2 high is not yet impulsive.

I am expecting one more move higher to 43.75 or thereabouts before tumbling down.

VOLATILITY

The broader market volatility as in the VIX is making new 2009 lows. I don't believe this is sustainable given the economic backdrop. Expect a volatility breakout.

HOME BUILDERS LOOKING WEAK

I noticed how a couple of the home building names I follow were quite weak in todays strong market.

KNOWING WHO YOU ARE

I must say I am really happy that I have been able to keep some momentum going on this blog whilst I am hurting with my positions.

In life we are often placed in akward positions that define who or what we should be to satisfy the maximum number of stakeholders, but not who we really are. Unfortunatelty this same force called life, comes back and tests our ability in the new circumstances we often find ourselves in.

What am I trying to say? Let me bring it down to my case as a fund manager and one can easily extrapolate this further into ones own life.

I am trying to raise money for my funds I manage so that my business can become successful.

Now there are different types of investors who will help me get there. I want to just focus on the one type which is your institutional investor. They invest large sums of money and can take me to my destination very quickly. The problem for me is that there requirements are at odds with my style. So as many have suggested to me over the years, adapt your style.

I wish it was so easy the problem is that my track record and confidence is built along the lines of a more proprierty capital/trading fund type approach and therefore a switch even if it is just lowering the leverage in line with an institutional mandate is still not the same. So while on paper it may seem easy to adapt to something that will ensure one component of success, i.e. funds under management, the problem is with this success often comes the failure to perform as a fund manager under the new criteria you have adapted to, which really is failure if you examine the essence of what we are trying to achieve in this business.

So yes one could reach the goal of having a business that makes money even though your performance is poor because unfortunately the correlation between performance and FUM is not as strong as the marketing people would like you to believe.

Coming back to knowing who I am; over the years I have developed a distinct approach to managing money. I do not plan to change this approach even if it will cost me raising money in the short term. Call this idealistic as I have been called this before. The point is that in order for me to feel comfortable and truthful I need to stay true to the system that I believe in. I have found in the early to middle part of managing this fund as the statistics were producing numbers that were really placing the fund in a special place I was falling more and more in love with something that I am not.

I do not produce symmetrical returns
I risk appropriate amounts of capital to make large returns
I am not scared to stick with a position as it gets more and more out of favour

In the long run I know this will make my funds money and in so doing it will hopefully make my business very profitable. This journey called life needs to be lived on a level that inspires life, too many people myself included live life according to what our circumstances dictate and this leads to life being sucked from us. It is time to be courageous and not allow others to dictate but rather live life according to what you know is true to life.

BUYING CLIMAXES

ANOTHER ATTEMPT

 

 

PRE FRONTAL CORTEX

Continue to be blown away with the book Decisive Moment. Their is a really interesting section on impulse control and problem solving, I will post a short essay soon on this fascinating subject.

THE TESTER

CHESS BLIND SPOTs & OVERCONFIDENCE

I will be writing more on the blind spots I seem to encounter when a losing pattern develops.
I also wish to place on record that I undoubtedly have been feeling a sense of overconfidence in my chess player as I started beating higher ranked players and my ranking improved.

If I wish to improve there has to be more structure introduced to my play. In other words I need to play to a set of rules.

A LITTLE TESTER

As I suspected there would be a bounce at the open with an attempt at a new wave 2 recovery high. There is a lot of nervousness at these levels, even staunch EW bears are expecting one more high.
I have a feeling a new high ain't coming and the sellers (shorts) and (profit takers) may get a nasty surprise if a new high doesn't come and the selling becomes a little more than anticipated leading to aggressive selling and a mild dose of panic.

It is still early days Europe is currently up as are the US futures, but I think those that hold their ground through the little tester will be handsomely rewarded.

We shall soon see, I haven't read John Hussman's piece yet save for the headline that the market is the most overbought it has been in 9.5 years. I am practising gamblers fallacy that a correction is coming. No amount of statistical manipulation will convince me that a movement this far from the mean wont revert. True I cannot say when exactly but I can certainly shift the odds from 50:50

SAVINGS INSIGHT

Everyone including the Politicians and Central Bankers (who actually are politicians as I see it) know the only sustainable way out of the current financial mess is to save more and consume less.

However, in diametric opposition to this sound approach, the powers that be have encouraged consumption which is so short term thinking and by artificially lowering the interest rates for consumption and investment they have taken away the only real carrot for saving.

So in conclusion the so called all knowing leaders of the world have actually compounded this problem into something far worse. Of course the average Joe sucker and the not so average Joe who is actually quite sophisticated has fallen for the scheme in their HOPE that they can continue living the wonderful life they have grown accustomed to.

There is only one way for this problem to be solved and it isn't pretty and it won't be this softly softly BS, because human nature is at the root cause, and until such time as society is forced to take its medicine the pollution in the system cannot be flushed out.

I don't WANT this to happen as the pain and suffering will be terrible and my heart breaks for all the people who will truly feel this down swing; but anyone who thinks that we have suffered through this GFC is dreaming, that was nothing more than a bad day dream, the nightmare of all nightmares is almost upon us, the USD collapse is a not so subtle way of saying this cannot carry on much longer.

DEFICIT ISSUES

 
 
The federal government's promise to extricate the U.S. economy from this recession involves more spending (increasing public debt) and more subsidies for consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt. In previous letters we have discussed the fact that the government spending multiplier is zero (read Professor Robert Barro's book, Macroeconomics - a Modern Approach, p. 370).
This means there is no long term income benefit from stimulus programs. According to the latest academic research, the most recent $800 billion stimulus plan will boost economic activity in the short run, but will surely depress economic activity over time. The government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time. More recent research (Barro & Redlick, September 2009,"NBER Working Paper 15369"suggests that a 1% cut in the marginal tax rate would raise GDP in the ensuing year by 0.6%. With the deficit rising due to a zero spending multiplier, the tendency will be to try to raise taxes to pay for this higher level of expenditures, which will further depress aggregate spending and output.