Archive for 2008

Housing Discussion

Here’s an excerpt from: 

Housing: Why was Kudlow so wrong?

by CalculatedRisk


Note: It is not my intention to embarrass Mr. Kudlow, rather to simply show why his analysis was wrong (typical of many back in 2005) – and why the "housing bears" were correct.  

Back in June 2005, Larry Kudlow wrote: The Housing Bears Are Wrong Again

"If [the housing bears] had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades.

Although year-to-date housing starts have kicked up to 2 million, average new construction since the early 1970s has hovered around 1.5 million to 1.75 million new starts per year. During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences. So it should not be shocking that home prices have tended to rise on a steady basis, averaging 6.5 percent price gains over the last 35 years."    Click here for more.

Oil Speculation

As one of the readers who sent Michael Masters’s testimony to James Hamilton, hoping he would share his thoughts, I’m particularly happy to post James’ article on Oil Speculation.  I also recommend the subsequent article "Understanding crude oil prices" which introduces his latest research paper (see below).   Thanks, James! – Ilene

Oil speculation

Courtesy of James Hamilton, Econbrowser.  

Several readers call our attention to testimony by Michael Masters, of Masters Capital Management, before the Senate Committee on Homeland Security and Governmental Affairs, on the role that speculation has played in recent commodity price movements. Here is what I think Masters is missing.

Masters testified:

What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant….In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels.8 Over the same five-year period, Index Speculators demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!


Source: Masters (2008).

One notices right away that one problem with trying to compare demand from index speculators with the demand from China is that the two concepts are measured in different units-- the Chinese demand is measured in barrels per year, whereas Masters’ speculation-based number is measured in barrels, with no clear time interval associated with them. But a more fundamental reason you can’t add the two numbers together to get total demand is that there is an underlying physical commodity to whose spot price instruments such as the NYMEX oil contract are ultimately tied. There are individuals who use this physical commodity-- namely, consumers who use the gasoline to drive their cars-- and separate entities that produce it-- most importantly today, the national oil

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They’re wrong

As Phil noted earlier, the oil theme he’s been writing about for a long time is finally catching on; here’s an excerpt from an article in TimesOnline, by Anatole Kaletsky.

They’re wrong about oil, by George

"Rip up your textbooks, the doubling of oil prices has little to do with China’s appetite.

Just as the credit crunch seemed to be passing, at least in the US, another and much more ominous financial crisis has broken out. The escalation of oil prices, which this week reached a previously unthinkable $130 a barrel (with predictions of $150 and $200 soon to come), threatens to do far more damage to the world economy than the credit crunch.

Instead of just causing a brief recession, the oil and commodity boom threatens a prolonged period of global “stagflation”, the lethal combination of high inflation and economic stagnation last seen in the world economy in the 1970s and early 1980s. This would be a disaster far more momentous than the repossession of a few million homes or collapse of a couple of banks.

Commodity inflation is far more lethal than a credit crunch for two reasons. It prevents central banks in advanced economies from cutting interest rates to keep their economies growing. Even worse, it encourages the governments of developing countries to turn their backs on global markets, resorting instead to price controls, trade restrictions and currency manipulations to protect their citizens from the rising costs of energy and food. For both these reasons, the boom in oil and commodity prices, if it lasts much longer, could reverse the globalisation process that has delivered 20 years of almost uninterrupted growth to America and Europe and rescued billions of people from extreme poverty in China, India, Brazil and many other countries.

That is the bad news. The good news is that the world is not as impotent as is often suggested in the face of this danger, since soaring commodity prices are not the ineluctable outcome of some fateful conjuncture of global economic forces, but rather the product of a typical financial boom-bust cycle, which could be deflated – especially with some help from sensible political action – as quickly as it built up. 

The present commodity and oil boom shows all the classic symptoms of a financial bubble, such as Japan in the 1980s,

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Bribery, Kickbacks, Indictments, Ratergate

More fraud and greed stories, reported on by Mish

Bribery, Kickbacks, Indictments, Ratergate 

Fraud, greed, and market tops go hand in hand like clockwork. We saw that in housing, we are seeing it other places as well such as a Fraud, Antitrust Investigation Involving JPMorgan, Jefferson County, and a Fraud Probe At Moody’s.

The third fraud story in two days is More indictments for Wall Street as stock-loan probe widens.

Five additional people, including former employees of Morgan Stanley Co and Janney Montgomery Scott LLC, were indicted on Thursday as part of a large federal investigation into the stock-loan industry.

The latest indictments on securities fraud and other charges arise out of an ongoing probe into bribery and kickbacks in the industry, where people called “stock loan finders” seek stock to cover short sales of shares.

Investigators have found some stock-loan traders steered millions of dollars of fraudulent finder fees to conspirators, often in exchange for no services, in exchange for outright bribes or payments to relatives. So far, 18 people have pleaded guilty in connection with the schemes, said a statement from the U.S. Attorney’s Office in Brooklyn, New York.

Those indicted Thursday were named as Darin DeMizio, a former Morgan Stanley supervisor; Robert Johnson of Tyde Inc; and Joseph Lando, a former manager of the stock-loan desk at Janney. Andrew Caccioppoli, another former manager at Janney’s stock-loan desk, had been indicted previously but was re-indicted along with his sister, Donna Macli and her husband Thomas Macli.


Moody’s is back in the news again, this time with cohorts in crime, Fitch and S&P. Here is the Latest in Ratergate.

Moody’s Corp’s credit rating unit Moody’s Investors Service switched analysts from covering deals of particular investment banks after the banks requested changes, the Wall Street Journal said on Friday, citing people familiar with the matter.

An analyst in a group that rated collateralized debt obligations was moved off an investment bank’s deals after bankers requested an analyst who raised fewer questions about their deals, the newspaper said.

Moody’s also moved another investment banking official to its surveillance unit, which monitors the performance of deals already rated, after an official agreed with an investment banker’s opinion that the analyst was too fussy, the newspaper added.

According to the newspaper, Moody’s and Fimalac’s Fitch Ratings acknowledge they have switched analysts who rate bonds after

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Nut case solutions

Or should I call it "weekend humor" if not taken too seriously, I actually couldn’t help laughing,….  Courtesy of Mish -- thanks for digging this up:

Rising Oil Price Brings Out Nut Case Solutions

The price of oil has been soaring and nut case solutions are coming out of the woodwork in response. I have talked about this twice recently in Congress Threatens Oil Producers and Congressional Insanity: Sue OPEC over Oil Prices.

But as silly as those actions are, it is nothing compared to the stark raving lunacy proposed by Martin Hutchinson in Time to do something about oil.


Operation Iraqi Freedom has been a smashing success, and only appalling Wilsonian wimpiness in the US government has prevented the United States from taking full advantage of it. Iraq’s known oil reserves have been increased by about 100 billion barrels since the invasion, as competent US oil companies have been free to explore for new oil employing techniques more advanced than the 40-year-old dowsing sticks used by Saddam’s oil operation. At today’s oil price of $130, less a generous $20 for drilling and extraction, those additional reserves have a value of $11 trillion – approximately 10 times the most alarmist estimate of the cost of the war to date.

The problem is that the US did not secure itself a proper royalty on the new oil finds (even 10% would have been worthwhile — $1.1 trillion over the next few decades.) Nor did it ensure, by setting up a privatized oil company and a trust fund for the Iraqi people diverting oil revenues from the Iraqi government, that the new oil finds would be exploited in an efficient manner and the supplies directed properly into the world oil market. Any future invasion of an oil producing country should avoid these two mistakes and thus make itself self-financing.

The obvious place to invade is Venezuela (even if current estimates of Venezuelan and Saudi reserves are wrong and there is in reality more oil in Saudi Arabia that could be unlocked if ExxonMobil and the boys were given free rein, the Saudis are nominally our allies, so an invasion would be considered unsporting by world opinion.) Since the 1.8 trillion barrels of Venezuelan oil deposits consist largely of the Orinoco tar sands, a Venezuelan oil-related invasion would impose an additional requirement: to keep the environmentalists away, in order

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Saved by the Bell! (ISRG)

ISRG Review & Analysis by my friend David Gordon:

Saved by the bell!


Long time readers recognize that I view trends differently than most chart readers, including how and when trends die and reverse. For example, there was my recommendation to sell 1/2 of our position in Intuitive Surgical/ISRG at ~$335, while Wall Street (Jim Cramer included) were ga-ga for the shares. Although not explained at the time, one perception I employ is the difference between the momentum, price, and breadth high prices. (And vice-versa for the low prices.) Market watchers will recognize these chart points as double, triple, and head & shoulder tops (and bottoms); I prefer to sell during the momentum high but purchase during the breadth low.

Well, the price and news from yesterday verged on the need to liquidate the remainder of the ISRG position, but as this post’s topic header has it, the position was saved by the bell. First, the ‘news’ that the company’s CEO stated during a conference yesterday morning that slower growth and lower margins for the company loomed dead ahead, which caused traders and investors to sell hard, was later refuted to be rumor. Then the share price closed spot-on at multiple levels of support (200 day sma included) that set up the possibility for a downside price gap on today’s open. After the markets closed, however, came news that Intuitive Surgical/ISRG will become a member of the S&P 500 index, which news typically causes index funds to purchase immediately the shares of the new addition. Intuitive Surgical/ISRG shares reacted accordingly to the sudden onslaught of buy orders by surging to ~$287, and continue near that level this morning in pre-opening trades.

But how likely will ISRG be to hold these levels, and not turn lower once again? Remember that the shares have merely reversed, at worst temporarily, and not broken above any levels of resistance. For that preliminary answer, we investigate how strong are the hands that buy and own the stock at this level…

[click on each chart to enlarge]

The chart above shows volume at price (left scale) and on balance volume (bottom scale), two technical studies that measure the accumulation or distribution of the total volume. Neither study involves price, etc, which makes each study an excellent secondary analysis. (Explanations of these studies and how to use them can
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Trichet, “Shocks” not over

This article’s from our friend Trader Mark, commenting on a variety of things from Jean-Claude Trichet, to inflation, to Kimberly Clark, to his favorite topic Kool Aid.

WSJ: Trichet Says "Shocks" are not Over for Economy

For those who do not know, Jean-Claude Trichet is the European Union’s version of Ben Bernanke. Further, unlike the United States Federal Reserve who is supposed to be balancing 2 missions – growth AND fighting off inflation (although they’ve totally forgotten about the latter in their desperation to stimulate growth – at any cost), the European Union’s bank has 1 mission – fight inflation. That is why when CNBC says every 3 weeks "the EU will be cutting any minute now, just you wait" and hence "the dollar should rally", it is really hard to take them seriously. But they’ve been repeating it now for about 3/4 of a year – they don’t understand the psychology over there – unlike the US, people actually have a memory over there – and the hyperinflation era of Weimer Republic hangs over their head every moment.

At the end of World War I, Germany was crushed, Britain and France emerged exhausted winners, and there were a lot of big questions at the time, such as, would revolution in Russia spread to the rest of Europe?

Enter the Treaty of Versailles, June 1919, which placed responsibility for the war on Germany, while France demanded that Germany pay in more ways than one. The German military was to be reduced to a shell of 100,000 volunteers and about 6 cruisers, plus the government was to pay reparations of some 132 billion marks (about $35 billion, depending on how you value the currency at this time), along with other payments such as of all extracted coal. French Prime Minister Clemenceau said, "We will squeeze the German lemon ’til the pip squeaks.’" 

Germany was reduced to economic chaos after the armistice. In 1920, prices plummeted around the world in a great deflation. This price and wage deflation was reinforced by the economic policies of conservative governments. Germany’s new Weimar Republic inherited the vast burden of debt and the crushing weight of reparations. Add in the fact that tax revenues were low due to the weak economy, while the outflow of

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Bubble Troubles

Here’s an excerpt from another Bubble article by David Merkel which I enjoyed reading. 

Toiling Over Bubble Troubles

There is a religious war aspect to what I will discuss this evening. It surprises me, but there are many people who believe that bubbles cannot exist, because economic players are rational in aggregate. I question the latter assumption — anyone who follows the equity markets understands the fads that sweep through the markets, leading to a lot of disappointment later.

From one of my comments in the RealMoney Columnist Conversation:
From my piece, Real Estate’s Top Looms:

‘Bubbles are primarily a financing phenomenon. Bubbles pop when financing proves insufficient to finance the assets in question. Or, as I said in another forum: a Ponzi scheme needs an ever-increasing flow of money to survive. The same is true for a market bubble. When the flow’s growth begins to slow, the bubble will wobble. When it stops, it will pop. When it goes negative, it is too late.

As I wrote in the column on market tops: Valuation is rarely a sufficient reason to be long or short a market. Absurdity is like infinity. Twice infinity is still infinity. Twice absurd is still absurd. Absurd valuations, whether high or low, can become even more absurd if the expectations of market participants become momentum-based. Momentum investors do not care about valuation; they buy what is going up, and sell what is going down…..’

At present, we are hearing murmurs about a crude oil bubble. Here’s my initial question: Who is borrowing money to buy oil? When we had the housing bubble, we had many investors that had to feed their properties to keep them afloat. They were relying on capital gains to keep themselves solvent. That is always a sign of an overheated market. With the tech bubble, we had vendor financing, and stock options on which people had a hard time affording the taxes. In the commercial real estate bubble 1989-92, rents were not sufficient to cover financing costs.

Think of it this way: at the end of a bubble, someone looks at buying an asset, and concludes that it is not worth buying because of the likely stream of payments he will have to make after the initial purchase.

But what of crude oil? There are a number of

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Blowing the Bubble Bigger

Here’s an excerpt from David Merkel’s

Blowing the Bubble Bigger

Maybe there is something different about the way that neoclassical economists and historians approach things. I am a bit of a generalist, so I try to look at things from many angles. The two books that I cited in my recent book review on bubbles were written by historians, not economists. Let me cite my summary of Kindleberger’s paradigm:

  • Loose monetary policy
  • People chase the performance of the speculative asset
  • Speculators make fixed commitments buying the speculative asset
  • The speculative asset’s price gets bid up to the point where it costs money to hold the positions
  • A shock hits the system, a default occurs, or monetary policy starts contracting
  • The system unwinds, and the price of the speculative asset falls leading to
  • Insolvencies of those that borrowed to finance the assets
  • A lender of last resort appears to end the cycle

That’s not the way a neoclassical economist views the world. Either men are rational, or, their errors tend to cancel each other out in the short run. Certainly there are never destabilizing feedback loops. Errors on the part of one person don’t lead others to make the same errors.

It is said that neoclassical economics cannot explain the existence of marketing and financial markets, without relaxing their rationality assumptions significantly. As an economist trained in the neoclassical school, I think we forget that these are assumptions that are made in order to get the math to work, not the way things actually work in the world. People are influenced by other people, and they do stupid things as a result, even when there is money on the line. (Maybe, especially when there is money on the line, due to the effects of fear and greed.)

Anyway, when I wrote my last post, I figured that someone would take issue with the concept of bubbles. …

Read more here.


Weekly Wrap-Up

"In a week where the SPX is down over 3% my mostly LTP style virtual portfolio has a small gain due mostly to rolling and taking out callers. I am in better positions than I was when the week started. All due to things I’ve learned here that I didn’t know was possible a few months ago. I have a long way to go but that’s progress. Thanks, Phil." – CBTC, 5/23 3:55 pm 

"Phil, thanks for the follow up Friday AM on the mattress plays.  These things are what is keeping my virtual portfolio green and the pre rolldown to the July 122 puts is something I never would have thought of." – James, 5/24 7:31 pm

"Phil – Thanks for the explanation.  You covered entering and maintaining a position.  All this stuff is finally sinking in for me.  Starting to make money and being less stupid." – Grant, 5.23 2:42 pm


Make money and be less stupid – I think Grant may have found us a new mission statement!

Our Long-Term Virtual Portfolio did have a very small (1%) gain for the week but, as CBTC, says, we are in far better position than we were when the week started with long positions that have been rolled to lower strikes (and our targets haven't changed!) and we were even able to risk 25 (out of 55) naked positions, hoping for a bounce next week.  When you are ahead you can afford to take chances and our LTP is up 139% in the first half of the year so a little risk-taking is appropriate.

Our major risk-taking paid off in spades as our oil ship finally came in with a tremendous pullback off Wednesday's highs on the positions we ended up focusing on (CVX, DUG, EOG, HES, SU, XOM) and, after a few weeks of annoying losses, they performed like trained ponies for us this week as my Tuesday 9:57 am comment was: "Now is the time I want to buy DUG!  In our Stock Virtual Portfolio I’m going to sell 20 $26 puts for $1.50 as they can be rolled to July $24s and that’s $135 oil and I am willing to bet against that!  XXX

That was our only new oil play, but we rolled and…
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Zero Hedge

Americans' Economic Hope Has Collapsed

Courtesy of ZeroHedge. View original post here.

Which came first, the confidence or the stock market rally?

One thing is for sure, the crash in stocks in December has crushed the hope of Americans that their economic future is going to be better under President Trump.

Overall confidence dipped to 58.1 - a 4-month low, but, U.S. consumers this month were the most downbeat on the economy since November 2016, a third straight drop after expectations reached a 16-year high just three months earlier, as the partial government shutdown wears on toward a fourth week.


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Kimble Charting Solutions

Triple Breakout Test In Play For S&P 500!

Courtesy of Chris Kimble.

Is the rally of late about to run out of steam or is a major breakout about to take place in the S&P 500? What happens at current prices should go a long way in determining this question.

This chart looks at the equal weight S&P 500 ETF (RSP) on a daily basis over the past 15-months.

The rally from the lows on Christmas Eve has RSP testing the top of a newly formed falling channel while testing the underneath side of the 2018 trading range and its falling 50-day moving average at (1).

At this time RPS is facing a triple resistance test. Wil...

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Phil's Favorites

Brexit deal flops, Theresa May survives -- so what happens now?


Brexit deal flops, Theresa May survives -- so what happens now?

Courtesy of Victoria Honeyman, University of Leeds

As the clock ticks down to March 29 2019, all of the political manoeuvring, negotiating, arguing and fighting is coming to a peak. In the two and a half years since the 2016 EU referendum, views on both sides have hardened and agreement still seems as far away as it was the day after the referendum.

With Theresa May’s withdrawal agreement disliked by all sides, and voted down by an unprecedented majority in the House of Commons, everyone is wondering what can and should be done next?


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Digital Currencies

Crypto-Bubble: Will Bitcoin Bottom In February Or Has It Already?

Courtesy of Michelle Jones via

The new year has been relatively good for the price of bitcoin after a spectacular collapse of the cryptocurrency bubble in 2018. It’s up notably since the middle of December and traded around the psychological level of $4,000... so is this a sign that the crypto market is about to recover?

Of course, it depends on who you ask, but one analyst discovered a pattern which might point to a bottom next month.

A year after the cryptocurrency bubble popped


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D.E. Shaw Investment Calls For Leadership Change At EQT

By ActivistInsight. Originally published at ValueWalk.

Elliott Management has offered to acquire QEP Resources for approximately $2.1 billion, contending the oil and gas explorer’s turnaround efforts have done little to lift the company’s share price. The company responded and said that a thorough review of the proposition is imperative in order to properly act in the best interests of shareholders, “taking into account the company’s other alternatives and current market conditions.” The news came only a month after Travelport Worldwide agreed to sell itself to Siris Capital Group and Elliott’s private equity arm Evergreen Coast Capital for $4.4 billion in cash and two months after Athenahealth was bought by Veritas and Evergreen for $5.7 bi...

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Insider Scoop

UBS Says Disney's Streaming Ambition Gives It A 'New Hope'

Courtesy of Benzinga.

Related DIS Despite Some Risks, Analysts Still Expecting Double Digit Growth From Communications Services In Q4 ... more from Insider

Chart School

Weekly Market Recap Jan 13, 2019

Courtesy of Blain.

In last week’s recap we asked:  “Has the Fed solved all the market’s problems in 1 speech?”

Thus far the market says yes!  As Guns n Roses preached – all we need is a little “patience”.  Four up days followed by a nominal down day Friday had the market following it’s normal pattern the past nearly 30 years – jumping whenever the Federal Reserve hints (or essentially says outright) it is here for the markets.   And in case you missed it the prior Friday, Chairman Powell came back out Thursday to reiterate the news – so…so… so… patient!

Fed Chairman Jerome Powell reinforced that message Thursday during a discussion at the Economic Club of Washington where he said that the central bank will be “fle...

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Members' Corner

Why Trump Can't Learn


Bill Eddy (lawyer, therapist, author) predicted Trump's chaotic presidency based on his high-conflict personality, which was evident years ago. This post, written in 2017, references a prescient article Bill wrote before Trump even became president, 5 Reasons Trump Can’t Learn. ~ Ilene 

Why Trump Can’t Learn

Donald Trump by Gage Skidmore (...

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Opening Pandora's Box: Gene editing and its consequences

Reminder: We are available to chat with Members, comments are found below each post.


Opening Pandora's Box: Gene editing and its consequences

Bacteriophage viruses infecting bacterial cells , Bacterial viruses. from

Courtesy of John Bergeron, McGill University

Today, the scientific community is aghast at the prospect of gene editing to create “designer” humans. Gene editing may be of greater consequence than climate change, or even the consequences of unleashing the energy of the atom.


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Mapping The Market

Trump: "I Won't Be Here" When It Blows Up

By Jean-Luc

Maybe we should simply try him for treason right now:

Trump on Coming Debt Crisis: ‘I Won’t Be Here’ When It Blows Up

The president thinks the balancing of the nation’s books is going to, ultimately, be a future president’s problem.

By Asawin Suebsaeng and Lachlan Markay, Daily Beast

The friction came to a head in early 2017 when senior officials offered Trump charts and graphics laying out the numbers and showing a “hockey stick” spike in the nationa...

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Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.


This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...

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Free eBook - "My Top Strategies for 2017"



Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:


·       How 2017 Will Affect Oil, the US Dollar and the European Union


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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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