Rhody Trader

Yesterday Suze Orman appeared on CNBC at least once during the day expressing the opinion that the Fed absolutely must bailout AIG. Her reasoning was that the company which insures so many people and businesses all over the world. Basically, she was implying that policy-holders were at risk.

Someone with such a large profile must be more responsible.

As the state insurance regulators have been saying repeatedly this morning, and as AIG stated yesterday (and I’m almost positive was stated elsewhere yesterday), policyholders were never at risk. By implying otherwise (as she did again last night on Larry King), Suze did something akin to setting up a bank run.

In times like this, the people like Suze who have a loud voice have to be sure they get it right. The flood of people to the AIG offices in Asia is an indication of what can happen when misinformation is disseminated.

One thing I need to correct in this whole Fed AIG loan story is the impact this has on the US taxpayer. It has none. Oh sure, you can talk about indirect impacts of money supply considerations, interest rates, etc. That’s not my point. My point is that the US federal government – and thus taxpayer money – is not involved in this deal.

The Fed is a self-contained entity. It’s income statement and balance sheet are not part of the federal budget in any way (aside from the excess interest income on Treasury securities it pays back). That means when the Fed loans money to AIG (and takes an equity stake) or backstops the JP Morgan purchase of Bear Stearns there is no implication to taxpayer money. The federal government will neither make nor lose any money on the deal. The Fed will, but not the government.

This is something that’s driving me nuts. The media is getting it wrong when they suggest this is a government takeover.  This is a little peave of mine.

Now the Fannie/Freddie situation is completely different.

In case you were wondering just how crazy things are in the markets, a look at the Treasury market will help. Check out the changes since Friday.

Flight to quality is driving the Treasury move. It’s also got Gold up. Oil is down because of major economic concerns. The Dollar move is the real thing to watch. It’s under pressure now, mostly because this is so far a US issue, but given the moves in some of the European banks (I saw HBOS down 25%), don’t expect it to remain that way.

One question I’ve heard a couple of times is “Why isn’t it worse?”

Keep in mind a couple of things. First, traders have been preparing for this for a while. Second, the financials are a much reduced proportion of the market. Had this sort of thing happened a year ago it would have been a huge negative reaction.

It’s been a while since I joined Facebook (my profile), but I’ve never really made a great deal of use of it. That’s something I’m thinking about changing. To that end I purchased a copy of I’m on Facebook – Now What???.

I picked up this book to learn some ways I could make use of the social network to first and foremost expand and improve my business and professional efforts, but also to reconnect with friends, classmates, and colleagues from the past. There’s a lot of great stuff in the book – lots of tips, insights, and suggested resources. It’s a quick read unto itself, but leaves you will loads of things to do beyond it’s pages – practical stuff to better understand Facebook and make use of it to achieve your desired aims.

Definitely recommended if you’re thinking about signing up for Facebook or already have, but want to get more out of it.

Oh, and if you’re on Facebook and have some suggestions for me, by all means let me know.

I’ve had a rant building and it’s coming out now.

At what point did we start believing that everyone who participates should be given a trophy just for doing so? That it shouldn’t be about winning and losing? That we shouldn’t keep score?

I know it was some time after I was a kid, that’s for sure. That definitely seems to be the theme in youth sports these days, though. And it’s ruining the upcoming generations.

I started hearing from a professor friend a while back about how the students in class had started to change. He was starting to see a sense of entitlement creaping in progressively. We’re talking a small state school here, not some Ivy League institution where rich kids expect everything handed to him (as the stereotype would suggest – having worked at one I can say that’s not really true). These are “normal” kids from middle class families who are expecting everything to be done for them and presented on a platter.

Blame it on those youth programs where every kid gets a trophy just for turning up.

If you’re a blogger, web author, or someone looking to do that sort of thing, a couple of quick points.

First, if you mention someone in one of your posts, spell their name right. A fellow blogger recently lifted some of my stuff and didn’t even get my name right when saying who’d written it. It’s like the old saying goes: There’s no such thing as bad publicity as long as they spell your name right.

Second, if you use someone’s content or refer to it, have the common courtesy to provide a link back to the original source. A lot of stuff out there is copyrighted. If you just grab it without permission you could have the author giving you grief. Since links are a type of currency among websites, if you at least provide one back to the original source the original poster will probably let it slide, and may even be happy.

Third, keep in mind that the search engines (like Google) can penalize sites for duplicating content. That means if you grab someone else’s content, especially if they have a higher authority than you, you could actually see you own search ranking reduced. Not good if you want traffic.

I’ve already commented in an earlier post on how pointless I think it is to just cut and past a whole article or blog post (A Short Rant on Repost Bloggers).

And if you think the owner of the site from which you pinched the content won’t find out, be careful. It doesn’t take a great deal to find out when someone’s doing that sort of thing. I personally have a few Google Alerts set up to let me know when I’m getting mentioned, someone cites my book, and other things. I know others do the same sort of thing.

A hedge fund manager who records indicated has been long a bunch of airline stocks has done a study which, to his mind, puts the blame for the increase in oil prices squarely on speculators. I haven’t seen the actual report, and very much would like to do so. Based on the articles about it I’ve seen, I’m dubious.

One of the big reasons for my suspicions is that the numbers being quoted in terms of money flowing into and out of the market ($60 bln in during the first part of the year, $39 bln out since July) is based on futures market activity from the looks of it. By definition, the futures market requires a short for each long, so there were just as many sellers as buyers.

There’s also something about swaps, but that sounded like it was partly inclusive of clear hedgers.

It’s also worth noting that the trend in open interest in the crude oil futures market has been lower for the last year (granted with many ups and downs), and really started dropping off rapidly back in June.

Here’s the Bloomberg article.

A senator from Texas is proposing that the Fed would be required to maintain a $500/oz gold value. This would be accomplished through open market operations where the Fed drains reserves (sells Treasury securities) until the target is reached. This is the same thing the Fed does to manage the Fed Funds rate. Here’s his plan.

The concept is interesting, but there are some issues with his arguments.

My first one is the part where he suggests that since the monetary base has risen $45 bln since the last time gold was at $500/oz (12/09) that should be all the Fed needs to sell in securities to bring the metal back to the target price. That rise in the base is about 5%, but gold is up more like 60%. I’m not seeing the math working out there.

Also, the Senator does realize that selling Treasury paper like that would push rates higher, right?

He also makes the following statement:

Unlike capital, the amount of money in the economy should not be limited by anything physical. It should be determined by the demand for money, which depends upon the transactions people want to do and how much money they want to hold.

Ummm…That’s exactly what’s going on now. When we borrow from the bank money is created. It’s demand pull. The more we borrow, the greater the increase in money supply. This doesn’t solve the basic problem of over spending and overconsumption based on debt.

Next month my employer is going to have an open access period for the stock market analysis product I work on – Thomson Squawk Box (part of Thomson Reuters). It’ll run for 2 weeks during prime earnings season. I’m not sure of the specific dates just yet, but I’ve been given permission to release the special login information to anyone I want. I’ll be setting something up to do that, so keep a look out if you trade stocks.

The product I write on is primarily geared toward shorter-term traders (though we do have some longer-term commentary mixed in as well). We cover individuals stocks, sector ETFs, and the major indices overall. There’s a lot of new and rumor stuff. We look at what’s going on in the options market (and often are ahead of the likes of www.optionmonster.com) in identifying major plays developing. We’ve got technical commentary and fundamental stuff, as well as a healthy dose of intermarket analysis too. We also have some external contributors, one of which is my trading mentor.

In other words, there’s a lot of great stuff.

Normally our target audience is just institutional traders, but this open access period will be for anyone.

I’ll be back with more specifics soon.

A reader of my trading education blog posted the following question via a comment to the Is there a way to guage when a market will break out and which way?  post. It’s a bit too specific for me to answer in that educational venue, so I’ll tackle it here.

John – Here’s one I’d be interested in your take on – AUDNZD has been in a tight sideways channel for over a week now. It appears to have a slight bias downward. Is there any way in this case to get a “tell” on which way its going to break out of the channel, other than waiting until it does so?

Now I realize I’m writing with hindsight here because AUD/NZD has already made the break lower, but I’ll carry on anyway.

The things I would have used to say that a breakdown was more likely than a breakout to the upside is the number of failed rally attempts. Look on the chart how many times the cross made attempted rallies (as note by the arrows), but wasn’t able to hold onto those rallies – seeing them very quickly reversed either the next day, or more frequently intra day. That is a real clear indication of weakness in the market.

Another way to look at this situation is to view the hourly chart (not included) to see how the action is playing out there. In the case of AUD/NZD there were a number of very sharp sell-offs as opposed to somewhat slower rallies. That means the market is having a harder time making progress higher, and relative ease falling. That’s another sign of underlying weakness.