August 2006


Back on July 26 I wrote a quick note about Scottish Re (SCT) emphasizing the amount of cash they held relative to the market cap. Apparently the long downtrend was prescient about the prospects of the company at large. On July 31the stock price went into free-fall when they announced revisions to earnings and the CEO resigned.

The stock quickly dropped from $15 to a low of $3.50. Wow. After about two weeks of recovery it seems to have stabilized in the $6 to $8 range. In my previous post I said “wait for an uptrend” and that seems to have been the right approach — simply buying because of fundamentals would have been the equivalent to trying to catch a falling knife.

It’s also interesting to me to look at the technical indicators on the SCT chart. Having RSI below 30 is typically a sign of being over-sold, where SCT had an RSI below 30 for almost 3 months!

After all the carnage the stock was up 15% on Friday on rumors of a buyout. I don’t think Scottish is an Enron or a WorldCom… it is still a strong company and worth watching for a trend change (assuming they’re not bought outright). I might consider it again if it spends some time consolidating at current prices then breaks out above $8.

Ok, so the definition of maudlin is “drunk enough to be emotionally silly”.? Not sure that really applies to John Mauldin but I couldn’t pass up the obvious similarity between the word and his name.? I’m a sucker for puns.? But my general purpose is served to use some sort of adjective with a negative spin.? Do I have negative thoughts about John Mauldin?? The jury is out.? But I wanted to talk about some interesting data collected about his newsletter that does little to shine a positive light on the man’s market opinions.? (more…)

On the LTCM disaster:

I don’t yet know the balance between whether this was a random event or whether this was negligence on theirs and their creditors’ parts. If a random bolt of lightning hits you when you’re standing in the middle of the field, that feels like a random event. But if your business is to stand in random fields during lightning storms, then you should anticipate, perhaps a little more robustly, the risks you’re taking on.

Michael Covel (quoting someone else)

Yes, Virginia, you can time the markets. It begs more careful research but this is an interesting read for the more passive investor. You have to be careful about ever-changing cycles and transaction costs etc. but I like the idea that this is based not just on observed correlations but on a logical explanation for the occurance of this correlation.

Here’s a run down of the bullet points that make me think the US equities market is headed for a 10% or greater correction: (more…)

Many, many people are talking about the Fed Funds Rate, but I have a feeling most don’t even know that the rate is not set by Bernanke or the FOMC… they set a “target” rate for the Fed’s open market activities.

You can see here that the number in practice does deviate from the target slightly on a day-to-day basis. Even though the target rate is 5.25% there are several days where the average rate was 5.31% or even 5.17%.

There’s nothing sinister or conspiratorial here, it’s just the fact that the Fed is in less control than everyone thinks. They are subject to some variance just like the rest of the markets…

To quote NowAndFutures.com: “The Federal Reserve Bank is a private company, authorized in 1913 by a Congressional Act called the Federal Reserve Act of 1913. In a very real sense, it outsourced the control of U.S. money and banking to bankers themselves.”

I was visiting my commercial mail drop today to collect my mail.? All my mail is sent there and all my accounts show that address as my home address.? Nowhere is my name linked to my home address except in the records of utility companies, something I couldn’t avoid easily (though it is possible).? As I was leaving the maildrop, the proprietor informed me that a Durham County Sheriff had come in looking to serve me with papers.? (more…)

With my current >90% exposure in equities, I’m feeling that I’ll be one of the first victims of a bear market.? With the recent minor run-up in the US equity markets, I’m thinking that the time is ripe to move at least a 10% chunk of my US equity exposure out and into either a money market account (like the VMMXX with it’s 5% yield) or into Bonds.? I’m becoming increasingly alarmed at the market conditions now and I’m interested in moving my main holdings out into cash in stages and allow my dollar-cost-averaging approach to continue on with my current asset allocation plan.

What are your thoughts?

I’m thinking that if the market continues to show strength throughout the day, I probably will move 5 – 10% of my Large and Mid-cap US equity positions.? I’m feeling very much exposed on these fronts.? Areas I’m probably not going to touch for now are my Small-cap, Foreign and Energy holdings.? Small-cap has already had a tough year and I’m probably going to keep those relatively untouched for now.? My international holdings are all up around 8 – 10% YTD and showing no clear signs of pulling back at the moment, so I’m planning on leaving these untouched for now.? I still feel that Energy has plenty of upside and I’ll continue to hold these funds for the foreseeable future.

Let me know if you think my concerns are unwarranted or you think I need to lay out my case for why Large and Mid-cap equities are heading for a significant drawndown in the future.

Check out the International Networks Archive, a project at Princeton University attempting to “map” globalization in new and creative ways.? I had particular fun with the Infographics (I thought the indication that the IRS?was the only non-police government agency?authorized to carry a firearm was hilarious) and Interactive Maps sections.? There?is plenty of data and links to data also.? While at first glance this doesn’t jump out as investment-related, I think this project might provide some interesting inspiration or clues that could aid in financial outlooks.

John Hussman has a good article on jokes and how investors are following the wrong story line. He argues that “stagflation” is now present in the economy and it’s going to take a while for everyone to realize it.

Hussman’s analysis is insightful… when the consensus changes (like he’s arguing it will) that changes the way the markets behave, react to news, etc.

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