Apologies to the residents of Anatefka, from George Zachar
To the tune of “Tradition” from Fiddler on the Roof.

Positions! Positions! Positions!
Positions! Positions! Positions!

Who day and night, must scramble trading minis,
Buy and sell new issues, hit a bid on bonds.
And who has the right as master of the list,
to have the final word on line?

The chair! The chair! Positions!
The chair! The chair! Positions!

Who must know the way to make a proper count,
A robust count, a useful count.
Who must supervise the work and error check
So the chair’s free to keep his alpha up?

The minister! The minister! Positions!
The minister! The minister! Positions!

At one he started posting screeds. At 10 he sold more spus.
I hear he’s up a grillion bucks. I hope he keeps it.

Kris Rock! Kris Rock! Positions!
Kris Rock! Kris Rock! Positions!

And who does the List teach to count and test and check,
Preparing them to each earn their own cane?

The kiddies! The kiddies! Positions!
The kiddies! The kiddies! Positions!

A Little List

By V. Niederhoffer and L. Kenner

(To the Tune of “As Some Day It May Happen,” from The Mikado by Gilbert & Sullivan)

As now is a good time to finally clean up this town
We’ve got a little list
We’ve got a little list
Of charlatans and pessimists who should be underground
Who never would be missed
Who never would be missed.

There’s the foolish blusterers who never have a losing trade
And all the brokerage analysts who never say “downgrade”
And the pessimistic guru who lost hope in ’65
And the floor broker who says your order never did arrive.


We’ve got ’em on the list, We’ve got ’em on the list; and
And they’ll none of them be missed
And they’ll none of them be missed.

There’s the billionaire complaining taxes really are too low
And the tout who likes to write about his own portfolio
The journalists who publish charts with lots of colored lines
And the bear who’s always seeing a new kind of danger sign.

Then the people selling systems that with just a tweak or two
Would clearly beat the hedge fund guys with hardly a snafu
And the worshippers of Buffett who show up in Omaha
To pay homage to the miser whom the media holds in awe


We’ve got ’em on the list, we’ve got ’em on the list; and
And they’ll none of them be missed
And they’ll none of them be missed.

And the personal finance writers who take chapters to explain
Everything that’s obvious or not much of a strain
The purveyors of newsletters of technical analysis
They’d none of them be missed
They’d none of them be missed.

And whosoever will, with sophistry resist
Their well deserved inclusion on this soon forgotten list,
Shall banished be to lower realms where artful sinners dwell.
And join their brethren howling, from the seventh circle of Hell.
But it really doesn’t matter whom you put upon the list
For they’d none of ’em be missed
They’d none of them be missed.


You may put ’em on the list
You may put ’em on the list
And they’ll none of ’em be missed
They’ll none of ’em be missed.

Shades of Scarlett Conquering

By Anonymous (Joni Mitchell, Shades of Scarlett Conquering lyrics)

Out of the fire like Catholic saints
Comes Scarlett and her deep complaint
Mimicking tenderness she sees
In sentimental movies

A celluloid rider comes to town
Cinematic lovers sway
Plantations and sweeping ballroom gowns
Take her breath away

Out in the wind in crinolines
Chasing the ghosts of Gable and Flynn
Through stand-in boys and extra players
Magnolias hopeful in her auburn hair

She comes from a school of southern charm
She likes to have things her way
Any man in the world holding out his arm
Would soon be made to pay

Friends have told her not so proud
Neighbors trying to sleep and yelling not so loud
Lovers in anger Block of Ice
Harder and harder just to be nice

Given in the night to dark dreams
From the dark things she feels
She covers her eyes in the X-rated scenes
Running from the reels

Beauty and madness to be praised
‘Cause it is not easy to be brave
To walk around in so much need
To carry the weight of all that greed

Dressed in stolen clothes she stands
Cast iron and frail
With her impossibly gentle hands
And her blood-red fingernails

Out of the fire and still smoldering
She says A woman must have everything
Shades of Scarlett Conquering
She says A woman must have everything

(repeated refrain) A woman must have everything

Trading the News

By Tim Melvin

Give me news, lots and lots of news
Let’s see how the headlines affect the Spooz
Terror attack? Short some stock, get long some oil
Greenspan? Short the 10 year, watch the market boil
Why count or read, just trade the news
The talking heads are my trading Muse

But wait! Terrorist caught, oil’s down
Stocks, bonds up giving me a frown
Losing ground, my whole line to oil
Stocks keep rising, myself I’ll soil
The news said it’ll do this, it’ll do that
I traded the news! My account should be fat!

The phone, ringing, margin call
News was wrong and profits fall
Oh how the talking heads were wrong
And now no more I sing a happy song
Trading the news has ended really bad
Maybe I can move back in with Mom and Dad

Breakfast with Al

Source: The InfoFax – CLSA Asia-Pacific Markets,  15 September 2006

We have been periodically critical of Alan Greenspan during his period as Fed Chairman. But an opportunity to speak to him should never be passed over. At the Investors’ Forum on Thursday we were given that opportunity with a breakfast Q&A session. The subjects covered were broad ones. Here are a few of our highlights.

Mr Greenspan spoke in response to questions from the floor. He ranged over a wide range of subjects. Rather than report the questions and Mr Greenspan’s answers verbatim (and, in any case, we couldn’t type fast enough) we have aggregated his responses into a few key themes. What follows is true to Mr Greenspan’s comments; unusually for the Infofax, they are his opinions not always ours.

On the main drivers of the world economy

AG: There is a need to recognise a seminal event that no one noticed, the fall of the Berlin Wall. This has been recognised as important geopolitically, but its economic impact has been understated. The extent of the economic gloom revealed by the fall of the Wall caught everyone by surprise. It discredited central planning as an economic model.

In consequence there began major changes, most specifically in China. China had started to reform but the fall of the Berlin Wall accelerated the process. And in the last decade the move towards competitive markets has accelerated. It has resulted in a global decline in marginal labour costs. For example in Western Europe the possibility that production can move into the former eastern bloc has diluted trade union strength and moderated militancy. As a result wage inflation has started to flatten out.

These forces have created disinflation across the world economy which has been captured in sharply falling inflation and risk premia in both developed market and emerging market bond yields. In turn this has fed into equity markets. The period of disinflation has resulted in falling real rates that have led to housing booms in Anglo-Saxon economies.

However the adjustment pace of labour is approaching completion and therefore the period of disinflation that has caused asset prices to rise, to reflect the drop in real funding costs, is also approaching completion. Investing is therefore going to become more challenging than it has been in the last decade.

On the US housing market

AG: I have never seen anything like the current US housing cycle before. Turnover used to be relatively stable but from about ten years ago turnover began to accelerate. It began to drive the whole asset price structure upwards.

We now have a slowing down of that whole acceleration process. The level of mortgage rates is not really an issue, even now. However affordability has been squeezed because of the rise in property prices. We have not yet seen any decline in US house prices. It is hard to believe that we won’t but Australian and UK experience suggests that the adjustment process might not be all that difficult.

On China and India

AG: What is fascinating is that it is not democracy per se that is important but democracy with the protection of property rights. The irony is that China, a communist state, is doing this. There is no democracy in China whereas there is in India but India remains enamoured with Fabian socialism. There is an anticapitalist culture in government that makes it difficult to do business deals in a number of areas.

The Fabian tradition is being unwound but it is deeply ingrained. However it must be unwound if India is to exploit its advantages (for example its demographics are far more advantageous than those of ageing China).

For capitalism property rights are the end of the road. And most investors thank that capitalism is safer in China than India. It sounds ridiculous given their political heritages but it is true. However it cannot continue indefinitely. India’s bureaucracy has to dismantle itself and China has to become more liberal.

On China’s capital markets and currency

AG: It’s very evident dealing with regulators and the central bank in China that there is a cadre of very capable people who really understand how markets work in a way that is remarkable given that they were educated in a Marxist system. My impression is that reforms are moving forward however (interest) rates still can’t move as rapidly as they should.

The PBOC is sterilising its intervention but it is only being partially successful and currency intervention is contributing to rapid growth in its monetary base. The potential threat to stability that this implies is large. China’s economy is evolving rapidly and it needs flexibility in its financial and currency markets that it does not yet have.

On gold and commodity prices

AG: First of all separate gold from base metals. Base metals are going through a fairly broad inventory accumulation globally. This is the classic driver of industrial resource prices. It is likely to start to change because the inventory cycle is starting to change.

The gold price reflects something different. Gold is the ultimate means of payment in a fiat currency world. Gold is always acceptable. Its price is therefore driven by perceptions of geopolitical risk and it only needs a few people to move the price. This is the same factor that is driving the oil price. In other words the gold price has not been a measure of inflation risk. But it is a good representation of the tail of the curve of expectations of those people that are nervous about the future of the financial system.

On negative US savings

AG: We have an interesting dichotomy in the US. If you ask individual households they say that they are saving enough. They point to the capital gains on their investment plans and their 401ks and in fact if you add the value of these capital gains to current income you do end up with decent savings.

But the problem is that capital gains can’t finance new capital investment. The accumulation of new assets can only be financed from saving out of current income. And the liability side of households’ balance sheets is now increasing faster than the asset side in book value terms. The removal of equity from property has the effect of reducing the book value of household savings rates but is not seen as damaging by households. The issue is therefore going to relate to how quickly home equity extraction will slow as housing capital gains dwindle. There will then be a rising in saving out of current income and necessarily a fall in the growth of consumption. To date consumption is holding up better than I expected.

On hedge funds

AG: The combination of hedge funds and private equity finance has been a huge innovation in finance. Also everyone now uses the hedge fund investment procedure to identifying niches. These can only exist where there are pricing inefficiencies. So the hedge fund mentality has eliminated these efficiencies. And increasing market efficiency increases flexibility. Hedge funds are the way of the future.

Having said that, the number of junior partners that have left investment banking to go into hedge funds has created a surplus. And the law of supply and demand mean that when there is a surplus the price goes down.

A Tightening Farce

By Kurt Richebächer, September 2006  (Previously… It is far worse than in 2000 )

There is total detachment from the bad news that is pouring out of the economy. For several years, the booming housing market has made the difference between recession and recovery for the U.S. economy. Zooming house valuations provided private households with the collateral that allowed them to replace the missing income growth with a borrowing binge.

But as the housing market is sagging, this major source of higher consumer spending is plainly drying up, and most obviously and importantly, income growth is by no means catching up.

In 2005, real disposable incomes of private households in the United States increased $93.8 billion, or 1.2%, while their debts grew $1,208.6 billion, or 11.7%. Total consumer spending on goods, services and new housing accounted for 92% of real GDP growth.

The U.S. economy’s recovery from the recession in 2001 has been its slowest in the whole postwar period, and in addition, it has been of a most unusual pattern. Real GDP rose by 11.7% over the four years to 2005. Within this aggregate, residential building soared by 35.6%. Consumption gained 13.4% and government spending 10%. The big laggard in domestic spending was business nonresidential investment, up only 3.6%. Net exports year for year were increasingly negative.

Most economic data have softened, with the downtrend accelerating. In the face of this fact, it could not be doubted that Mr. Ben Bernanke and most others in the Federal Reserve were anxious to stop their rate hikes. In question was only whether they would dare to do so in view of the high and rising inflation rates. They dared. They even disappointed those who had predicted the combination of a declared “pause” with hawkish remarks about fighting inflation.

In its statement, the Fed conceded:

“Readings on core inflation have been elevated in recent months, and the high levels of resource allocation and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative of monetary actions and other factors restraining aggregate demand.”

When the Bureau of Labor Statistics (BLS) reported on Aug. 16 that the CPI in July had seasonally adjusted, advancing 0.4%, following a 2% rise in June, both the bond and stock markets responded with strong rallies. What, apparently, had made it so exciting in the eyes of the consensus was the fact that these bad figures had remained in line with distinctly unoptimistic predictions. Never mind that during the first seven months of 2006 the CPI has risen at a 4.8% seasonally adjusted annual rate, compared with an increase of 3.4% for all of 2005.

It is, of course, perfectly true that monetary tightening impacts the economy and its inflation rates with a pretty long delay. The trouble in the U.S. case is that there never was any monetary tightening. There were many small rate hikes, and the Greenspan Fed had probably hoped that the higher costs of borrowing would exert some restraint on credit demand. But it has not happened. It was a vain hope.

The fact is that the credit expansion has sharply accelerated during these two years of rate hikes instead of decelerating. During 2004, when the Fed started its rate hike cycle, total credit, financial and nonfinancial, expanded by $2,800.8 billion. In the first quarter of 2006, it expanded at an annual rate of $4,392.8 billion.

Over the two years of so-called monetary tightening, the flow of new credit has effectively accelerated by 56%. In 2005, credit growth was $3,335.9 billion. Over the whole period of rate hikes, it had steadily accelerated from quarter to quarter. Borrowers and lenders, apparently, simply adjusted to the higher rates, trusting that there would never be serious tightening.

True monetary tightening would have to show first of all in declining “excess reserves” of banks relative to their reserve requirements. These have remained at an elevated level during the rate-hike years of 2004-05.

In 1991, when the Fed tightened, credit expansion slowed sharply from $866.9 billion in the prior year to $620.1 billion. A sharp slowdown in credit expansion in 2000 to $1,605 billion also happened, from $2,044.7 billion the year before. Yet this still represented very strong credit growth in comparison with the years until 1997.

Like all central banks, the Federal Reserve has two levers at its disposal to stimulate or to retard credit and money creation. The big lever is its open market operations, buying or selling government bonds, thereby increasing the banking system’s liquid reserves. The little lever consists of altering its short-term interest rate, the federal funds rate, thereby influencing the costs of credit.

It is most important to distinguish between the two instruments. True monetary tightening has to show inexorably in a slower credit expansion throughout the financial system. There is one sure way for a central bank to enforce this, and that is by curtailing bank reserves through selling government bonds.

The other lever at its disposal, as pointed out, is to influence credit costs. But the influence of the central bank on credit costs begins and ends with altering its short-term federal funds rate. During the past two years, the Fed has raised its federal funds rate from 1% to 5.25%. But long-term rates hardly budged. To the extent that borrowers shifted from the low short-term rate to the long-term rate, they encountered higher borrowing costs. But at the long end, interest rates rose less than the inflation rate.

Here are still a few other credit figures illustrating the Fed’s monetary tightening since mid-2004. Total bank credit expanded, annualized, by $957.0 billion in the first quarter of 2006, against $563.5 billion in 2004. For security brokers and dealers, the two numbers were $611.3 billion, against $231.9 billion; and for issuers of asset-backed securities (ABSs), they were $663.3 billion and $322.6 billion. This is monetary tightening à la Greenspan.

Monetary tightening has one purpose: to curb credit expansion fueling the excess spending in the economy and the markets. By this measure, Greenspan’s monetary tightening since 2004 has been a sheer farce. During these two years, he presided over a sharply accelerating credit boom, for which the reason is also obvious.

To equate rising short-term rates automatically with monetary tightening can, therefore, be a gross mistake. Later on, we shall explain that this is the great error of the monetarists in assessing the development in 1929 and following years. Borrowing exploded during 1927-29, despite the Fed’s rate hikes, and then literally collapsed after the stock market crash.

It can be argued that rate hikes in the past have generally worked. Yes, but the central bankers of the past never forgot to tighten bank reserves. Tighter money to them meant tighter credit, and it always showed in sharply shrinking credit figures. So it also has, in the past, in the United States. But this time, the diametric opposite has happened.

There was reserve easing. Money and credit, moreover, only became significantly more expensive at the short end. All the time, there was nothing in this to slow the housing bubble and the associated borrowing binge. Rising house prices easily offset the effect of rising short-term rates.

Does this mean that the economy can continue to grow as before? No, not at all. All excesses, if not stopped, are sure to exhaust themselves over time. That is no less true for economies than for the human body. In our view, the housing bubble is finished not because credit has become tight, but because the borrowing excesses are running against natural barriers.

One such natural barrier is the affordability of housing and the limited number of greater fools who are able and willing to pay these inflated prices. At some point, excess supply will exceed demand. We read from reliable sources that in June, sale offers of existing single-family homes were up 35%, while actual sales were down 6.5% versus a year ago. So the year-over-year “excess” supply was 42.2%.

Affordability is way down, units offered for sale are way up and price appreciation has all but stopped. It is a radical change in the market situation, which, however, has so far impacted economic activity only moderately.

Past experience with housing bubbles suggests that the first effects are in the steep fall of actual sales and in the lengthening of time until sales materialize. The markets become illiquid. Until sellers capitulate and accept lower prices, it can take a long time. In this way, apparent price stability becomes increasingly treacherous over time.

Present American folklore has it that a protracted slump in house prices is impossible. Let us say for many people it is unthinkable. And that is precisely one reason why this housing bubble could go to such unprecedented excess. The little historical knowledge we have about bursting housing bubbles is from a study published by the International Monetary Fund in its World Economic Outlook of April 2003. It presents past experience in a very different light. Here are some excerpts on decisive points:

“To qualify as a bust, a housing price contraction had to exceed 14%, compared with 37% for equities. Housing price busts were slightly less frequent than equity price crashes… Most housing price busts clustered around 1980-82 and 1989-92, while equity price busts were more evenly distributed across time.

Housing price crashes differ from equity price busts also in other three important dimensions. First, the price corrections during house price busts averaged 30%, reflecting the lower volatility of housing prices and the lower liquidity in housing markets. Second, housing price crashes lasted about four years, about 11/2 years longer than equity price busts. Third, the association between booms and busts was stronger for housing than for equity prices.”

An important theme running through the foregoing analysis is that housing price busts were associated with more severe macroeconomic developments than equity price busts. Coupled with the fact that housing price booms were more likely (than equity price booms) to be followed by busts, the implication is that housing price booms present significant risks. For this, the authors give the following reasons:

  • “Housing price busts have larger wealth effects on consumption than the equity price busts…
  • “Housing price busts were associated with stronger and faster adverse effects on the banking system than equity price busts… All major banking crises in industrial countries during the postwar period coincided with housing price busts.
  • “Price spillovers across asset classes matter, as evidenced by the fact that housing price busts were more likely associated with generalized asset price bear markets or even busts than equity price busts.

The authors then give a fourth reason, which was true in the past, but in which the situation in America today radically differs:

  • “Housing price busts were associated with tighter monetary policy than equity price busts, reflecting the fact that most housing price busts occurred during either the late 1970s or the late 1980s, when reducing inflation was an important policy objective. The disinflation increased the real burden of debt, which exposed inflation-related overinvestment and associated financial frailty.”

Former Fed Chairman Paul Volcker once said: “Sometimes I think that the job of central bankers is to prove Kurt Richebächer wrong.” A regular contributor to The Wall Street Journal, Strategic Investment and several other respected financial publications, Dr. Richebächer’s insightful analysis stems from the Austrian School of economics.

Equities – Sell in May and Go Away

Chart of the Day - Sell in May and Go awayDow - Average Monthly Gain

Bits and Pieces

  • In 1991, Michael O’Higgins looked at data from 1925 through 1989 and observed that 85% of the capital gains, excluding dividends, was earned in the Dow during the October 31st through April 30th time frame.
  • 19 of the major world markets over the last 30 years which encompass 97% of the total market capitalization of world equity markets were studied. The result? The effect is pronounced. In every one of the 19 major markets studied, the greater part of returns for the year were concentrated in the November-April period. The findings were not insignificant. The unweighted average for the 19 markets was 10.5% during the November – April time frame, and just 1.4% for the May-October time frame.
  • It is interesting to note how the 1980-present average gain for September has remained negative despite the fact that most of this period included a strong bull market.

London Telegraph excerpt:

Nobody can be quite sure why markets so frequently drop in late spring/early summer, or when the “sell in May” strategy originated. The first recorded written reference occurs in the Financial Times in 1964. But that is no guarantee that it had not been in wide circulation for some time.

Douglas Eaton, who at 88 is thought to be what the old Stock Exchange would call the Father of the House, is still working as a broker at Walker, Cripps, Weddle & Beck. He says he remembers old brokers using the adage when he first worked on the floor of the exchange as a Blue Button, or messenger, in 1934. “It was always sell in May,” he says. “I think it came about because that is when so many of those who originate the business in the market start to take their holidays, go to Lord’s, and all that sort of thing.”

What is surprising is that not only is “sell in May” a successful strategy, it is one which is shared across the world. On Wall Street, there is: “Sell in May and buy again on Labor Day” (the first Monday in September, after which the holiday season ends and Ivy League types are supposed to put away their white shoes for the winter).
When the blossom falls