November 9, 2009

Global Market Comments
November 9, 2009

Featured Trades:

1) Ouch! Another 190,000 jobs went down the crapper in October, taking unemployment rate to a new 27 year high of 10.2%. Add in discouraged job seekers, and that puts the jobless rate at gut churning 17.5%, and over 20% in California. Along with yesterday's stunning, gob smacking 9.5% increase in Q3 productivity, the figures point a giant arc spotlight on what is really happening in the economy. Companies are still firing workers en mass to boost profits. After getting blood from a stone, they are returning to the same rock for one more drop. I guess if I fire myself, the profitability of my business would go through the roof too, and maybe even my stock would rise. At least then, I would be rid of my oldest, most expensive, but least productive employee, who is the most difficult to get along with, maxes out his sick and vacation days, and wears the same clothes to work every day, even when there lipstick on the collar. But then who would write this daily letter? Maybe Cecelia, my cleaning lady would do it. She's cheap. You don't mind getting this letter in Spanish, do you? ¡Andale! This explains why when you go into Office Depot these days, there is only one minimum waged employee standing at the cash register, the hours on the phone I have to wait to get technical support from Dell, and the endless unmovable lines at Citibank. America's service economy has become all about denying service to customers. The scary thing is, with companies firing their way to prosperity, what happens when we get another dip? My theory is that the US has entered an era of chronically high unemployment that is never going away, no matter what the government does. Goodbye USA, hello Germany!

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Unemployment-1.png picture by madhedge
2) Every few weeks I get a warm and fuzzy feeling when I see my old house for sale in the Wall Street Journal. It was an 8,000 square foot two bedroom white elephant perched on a mountain peak, with panoramic 360 degree views of the San Francisco Bay Area. I picked it up for a song from the Sultan of Brunei in 1998, when crude crashed to $8/ barrel, and he was dumping properties to meet a cash flow crisis. The actor, Steve McQueen, had owned the property once, and the local teenagers used to park out front and make out, taking in the stunning view of the Golden Gate Bridge and shimmering city lights. The parties! Oh, the parties! But one day in 2005, my gardener, José, mention that he had just obtained a $500,000 loan to buy a new place in which to house his seven kids, along with a home equity loan to cover the first year's mortgage payments. How would he make the next year's payments? The broker said the value of the house would go up, and he could then increase his home equity loan to cover that too. I knew I had to sell my home immediately, hitting the bid for a tidy $12 million, along with the rest of my real estate holdings. Regretfully, I had to let José go. I have been renting ever since. The last price I saw for my former 'Xanadu' was $7 million, or I could lease it for $19,500, which I know is 20% of its carrying cost. I'm not a person who normally wishes ill on people, but really, what were these buyers thinking? When people urge me to buy it back, I lie down and take a nap, and when I wake up, the feeling has refreshingly gone away. And to the pundits and prognosticators who tell me that we are about to launch into a 'V' recovery in residential real estate, just as the stock market has already done, I tell them I have this really neat bridge in Brooklyn that I'd like to sell them. And no, I won't be uttering the word 'rosebud' on my deathbed.

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4) Trade School

I am asked daily about my favorite financial books by the legions of subscribers who are using my blog to educate themselves about the markets. That is one of my goals. Below are my picks, which are entertaining, if not insightful. I have left out books about specific trading systems guaranteeing windfall profits, because they all eventually blow up. The good books on the current financial crisis have yet to be written. The best trading strategies will never be written about, but only whispered after work in poorly lit bars , the kind where your feet stick to the floor restrooms are foul. Successful traders are a notoriously secretive bunch who don't want copy cats hanging on to their coattails, spoiling their markets. When I do hear about these, I pass them on to you through my newsletter. Give yourself an edge as well as a decent education and foundation by reading the list below.

Security Analysis
by Benjamin Graham and David Dodd
The Bible of security analysis. If you are only going to read one book, make this it.

A Random Walk Down Wall Street
by Burton G. Malkiel
The history of risk analysis on Wall Street.

The Black Swan
by Nassim Nicholas Taleb
An iconoclastic, rock throwing, in your face rebuttal to convention risk analysis theory.

The Snowball: Warren Buffet and the Business of Life
by Alice Schroeder
The biography of the greatest investor of our time.

Extraordinary Popular Delusions and the Madness of Crowds
by Charles MacKay
The history of bubbles, from tulip mania, to the South Sea bubble, to the 1929 crash. Boy, does history ever repeat itself!

The Crash
by John Kenneth Galbraith
A must read history about the big one. You'll be amazed by the parallels today.

Reminiscences of a Stock Market Operator
by Edwin Lefevre
Biography of one of the most famous speculators of the roaring twenties, who sadly committed suicide in a public bathroom in 1941. You won't believe what they did in the pre-SEC days.

The Strategic Bond Investor: Strategies and Tools to Unlock the Power of the Bond Market
by Tony Crescenzi
The bond side of the equation. You need to know where interest rates are going and how they will get there

by Paul Samuelson
What you missed by not going to the Harvard Business School. Your classic education about Keynesian economics that lets you ignore all that fluff in the broker reports. He got a Nobel Prize for this.

Hot Commodities: How Anyone Invests Profitably in the World's Best Market
by Jim Rogers
The former George Soros partner tells you why you've been buying all that copper.

Crash Proof: How to Profit from the Coming Economic Collapse
by Peter Schiff
Nicely outlines the rationale for moving out of the dollar and into foreign stock markets, gold, and silver, although he is a little extreme in his views of the future on the US.

Market Wizards: Interviews With Top Traders
by Jack D. Schwager
How the pros do it.

The Complete Guide to Investing in Commodity Trading and Futures: How to Earn High Rates of Return Safely
by Mary B. Holihan
The ABC's of commodity investing.

When Genius Failed: The Rise and Fall of Long Term Capital Management
by Roger Lowenstein
Why you're not shorting deep out of the money volatility in big size.

Against the Gods: The Remarkable History of Risk
by Peter L. Bernstein
How ancient trade routes grew into the global financial system we all know and love.

Liars Poker: Rising through the Wreckage on Wall Street
by Michael Lewis
My friend's first book, what it is like to work at Goldman Sachs, except then it was Salomon Brothers. When it first came out many thought I had written this book with a nom du plume.

Beat the Dealer: A Winning Strategy for the Game of Twenty-One.
by Edwin O. Thorp
How to win at Black Jack by card counting. I put myself through college on this book, and so did Pimco's Bill Gross. Not so easy now. Every trader at Morgan Stanley was required to read this book. A nice introduction to probability analysis under stress.

The Money Game
by Adam Smith
How Wall Street Works. A peek into the Wall Street I grew up in during the sixties. How little has changed.

The Little Book that Beats the Market
by Joel Greenblatt
The traditional value approach to picking stocks

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'It's amazing how the hawks got de-taloned going into the last meeting at the Fed,' said Yra Harris at Praxis Trading, about the agency's reluctance to raise interest rates for the foreseeable future.

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'Many economists think that rising unemployment benefits create rising unemployment,' said Larry Kudlow at CNBC. Most unemployed people I know would give their left arm to get a job. Maybe this is an insight into who Larry hangs out with.

Idiot1.jpg picture by madhedge