Subprime Insight

Although Ron Paul is running for President very few people actually know of him. His policies are about as free market as free market can get. Support from Wall Street is raining in from those who understand the perilous position that we are in. These are two videos that every informed American should watch. However, for those that understand economics: his stance is too little too late (I’ll explain that later).

Ron Paul on the Inflationary “Depression” that is coming:
Ron Paul video on his stance for a strong dollar:

This video just got posted on youTube, but I could not agree more with Peter Schiff. I was going to write a post on the topic but it helps to have a CFA agree with your points. Why are stocks up during the horrible news we’ve had this week? Like I’ve been saying for the past month: the weak dollar. To understand the dynamic it is important to understand dynamics from an international perspective. The same argument for gold and oil, I’ve been proposing is the same one I’m proposing for stocks:

• A weak dollar with unchanged stocks means cheaper stocks for foreigners and their $2 trillion in cash.
• When stocks go up slower than the change in currency, the spread, or the difference between the currency devaluation and stock rise, is how much cheaper stocks are to foreigners.
• Fake catalysts are used as buying or selling excuses for foreigners to hide this effect, aka the IBM stock buyback program (I’ve studied buyback programs in depth: they are scams to longterm investors, pure robbery).
• Remember: to foreign investors there are two general components of investment return (the third is dividend yield but not important right now):

1. Capital gains, which applies to US investors also.
2. Exchange Rate, which only applies to foreign investors. Although paradoxical, if a stock declines by 5% but the currency appreciates by 10% you still get a 5.55% return, excluding transaction costs. Read the rest of this entry »

I don’t necessarily believe wave theory is as good as technical analysis, but he has some very interesting points people need to consider.

Added on January 22th, 2008:

Added February 7th on YouTube:

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For the past two weeks, I’ve been attempting to predict which direction the market would go. As they say, trying to guess the bottom is a fools game. Although, I do have a friend which called for the bottom to come at the end of February before the Fed’s last meeting. Thus, I’m moving onto something more substantive. Why try to predict an investment vehicle, the entire market, which has hundreds of forces acting on it when you can isolate certain variables through more focused vehicles? As is clearly visible, the market has not realized what road they are headed on. Which makes sense: guessing which way it is going before the events happen is speculation. Surely, we can’t expect the qualified equity traders of the world to sell stocks on speculation the worlds strongest economy is going to enter a recession. Thus, let’s work on isolating individual variables into individual investment vehicles. After all, this has been my forte for about a year now (I’ll show the stats later). Disclosure: I’m not a CFA, don’t work in Wall Street and I’m looking to invest in some of these vehicles. At the end of the day, this is just my subprime insight.

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Last week I posted two predictions for the week. My predictions had an amazing 0% success rate. We’ll review the evidence I had for the predictions I made and make revised ones for the coming week.

Predicted Last Week:

• WRONG: Stocks will trade lower this week as February put options expired last Friday (We are in a C Wave, also).
  • I argued this after noticing C had major resistance at 25.oo on Friday. Surely preventing options from entering into the money most have been affecting other stocks. With a large interest gone in sustaining prices above 25.00 at C, I thought that would hold the same for other Dow stocks. Sure enough, C finally did break through the 25.00 barrier but only to be brought back up by the Dow’s miraculous 200 point gain on Friday at 3:15.
• WRONG: Bond insurers will be split.
  • I was just going after what Spitzer said at the end of last week. He said bond insurers needed to finalize on a bail out plan within the coming days. He outlined a couple of alternatives. Surprisingly, the same news a week later before the market closed was good enough for a 200 point gain. This after Reuters reported that MBIA’s re-insurer had its rating cut.

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Here is the end of Apple’s keynote by Randy Newman.

I have been following Apple stock for about two years now. For example, have you heard of the iPhone nano? It was speculated by JP Morgan analysts last summer shortly after the iPhone was released. I’m one of the few fools out there that hasn’t made a dime on Apple because of the way I invest. I like putting my money in before big announcements that I know are going to be positive in expectation of a sharp rise in the stock price the next day. However, that has not happened with Apple for the last two years. After every major announcement, not release, the stock has never closed higher on the next day due to sell-offs. Go look up the closing price before every Apple announcement and compare it to the next days closing price. For example, the day before the iPhone was announced the stock closed at $99 and the day after closed at $90. For those that didn’t know that going into Apple’s last keynote, sorry.

I recently wrote on the topic of oil and gold. I argued we should be seeing a bull market for both mainly due to the weak dollar. This goes against the grain to what people are touting as their main excuse: demand. I already pointed out that the evidence suggests the opposite. Here is an article on Indian housewives spending less on gold. Here is an article on oil inventories going up. Here are two views on oil and gold:

Bloomberg: $1200 gold in 3 months due to weak dollar.

TheStreet: Why gold is worth waiting for: pushed up demand.

I have a personal attachment to both companies as I know people who work for each company. However, I think the weak dollar is the reason for these investments decoupling from equities.

It even amazes me just how bad things could get for the stock market. CNBC is reporting:

The Citigroup research of Meredith Whitney, executive director of CIBC World Markets, triggered a staggering global selloff, and now she’s warning that banks could face additional write-downs of up to $70B if bond insurers are downgraded.

Meredith thinks C could be borrowing up to $3 billion in reserves. That amount of borrowing just for reserves has to hurt a banks cost of capital. She sees more possible dividend cuts and capital raising for C. Don’t forget the 20% in previous shareholder equity dilution. Quoting Meredith: “That’s unheard of.” Check out the video.

Disclaimer: I currently own C puts, I am not a CFA and I am not giving you investment advise. This is just my subprime opinion.

As if things didn’t need to look any worse: analysts are now suggesting a 50% stock drop in China could be in the cards. This is bad for a couple of reasons.

China is a valuable source of capital during these times of billion dollar write downs. If things start going bad for it there then they could be much willing to spare some change for our problems. China has already commented on how they felt slightly defrauded by their investments in America. One official compared China’s investments in the US like this: China was hunting for some fat rabbits. When it found a nice fat one it got excited about the catch but soon found the rabbit was shooting back at it.

His method of valuation is comparing stock market size to GDP size between China, Japan the US. When you compare the decline possible in Japan during the 1980s and the declines in the US during the early 1990s, you can see that china’s stock market to GDP is out of whack with historical norms.

Here is the video.

My primary goal in starting this blog is to gather important information on the markets to inform and to potentially profit. For the past couple of months I’ve been playing catch up with the market: trying to figure out what information has been properly priced in and which hasn’t. For example, the large financial firms have experienced most of the price action they are going to get. Disclaimer: I have never traded either gold or oil or followed their price actions for any substantial period of time.

With that said, if you agree that:

• With every Fed cut, the dollar devalues and that for the foreseeable future we will get more. I’m thinking 1% Fed Funds rate by the end of summer as treasury yields go down below 2%.

• Oil is only traded in dollars. So every foreign country with a currency that has appreciated against the dollar has seen oil prices rise slower than that in the US.

• Using correlation trading, an ounce of gold has historically bought you 17 barrels of oil. At current valuation gold would buy you 10 barrels. Check out this article on the gold oil swap.

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