Friday, November 4, 2011

The Seven Immutable Laws of Investing

James Montier, a long-time favorite among the readers of Investment Postcards, a while ago produced a white paper entitled “The Seven Immutable Laws of investing”. In the paper, the GMO strategist presents a set of principles to guide sensible investment that I thought appropriate to revisit at this juncture.

The principles are:
1. Always insist on a margin of safety
2. This time is never different
3. Be patient and wait for the fat pitch
4. Be contrarian
5. Risk is the permanent loss of capital, never a number
6. Be leery of leverage
7. Never invest in something you don’t understand
Montier concludes as follows: “I hope these seven immutable laws help you to avoid some of the worst mistakes, which, when made, tend to lead investors down the path of the permanent impairment of capital.”

Market Gyrations and Headlines

No Deal!

Stocks down 150 because G20 meeting resulted in no deal!

G20 Fails to Agree on IMF Participation in Europe

Wednesday, November 2, 2011

Survival is the New Normal

"...the solution to this international mess is going to take years and the result will be a lower standard of living in the U.S. The idea of making money under our capitalistic system will change. The new focus will be how to avoid losing money. The new normal will be living on a survival scale. It will be slow and costly.” Richard Russell, financial market veteran

More Morose Eurozone Data

But the Dow is up 120 points. Hmmm!

Tuesday, November 1, 2011

No Risk! No Risk! No Risk!

Wall St still perceives absolutely NO risk!

Ugly Economy!

Hussman on Leading Vs. Lagging Economic Data

Read all of Dr. Hussman's weekly market commentaries here.

Accompanying the news of the "grand and comprehensive" European solution on Thursday was the news that GDP rose at an annual rate of 2.5% in the third quarter. There was already coincident data that the U.S. was not yet in contraction in August or September, so this was no surprise. Still, investors continued the habit of confusing lagging and coincident indicators for leading ones, so the positive GDP figure was taken as evidence that an oncoming economic downturn was "off the table."
I can't emphasize enough that leading evidence is in fact leading evidence. Take, for example, the ECRI Weekly Leading Index. It's certainly not a perfect indicator in itself, but its leading properties are instructive. If you look at the historical points where the WLI growth rate fell below zero, you'll find that weekly unemployment claims (a coincident indicator) were generally still about 3% below their 5-year average. It generally took about 13-16 weeks for unemployment claims to climb above that 5-year average, and even longer for the unemployment rate (a lagging indicator) to rise sharply. That's not much of a lag in the grand scheme of the full economic cycle, but allows a great deal of intervening and often contradictory action in the financial markets.
The tendency to demand predictable outcomes to also be immediate is a dangerous one, because it allows investors to be sucked in by temporary reprieves during what are, in fact, very negative conditions. As I noted in May (see Extreme Conditions and Typical Outcomes ), "It's clear that overvalued, overbought, overbullish, rising-yields syndromes as extreme as we observe today are even more important for their extended implications than they are for market prospects over say, 3-6 months. Though there is a tendency toward abrupt market plunges, the initial market losses in 1972 and 2007 were recovered over a period of several months before second signal emerged, followed by a major market decline. Despite the variability in short-term outcomes, and even the tendency for the market to advance by several percent after the syndrome emerges, the overall implications are clearly negative on the basis of average return/risk outcomes."
The same can be said here of economic prospects. Investors have almost entirely abandoned any concern about recession risk based on a few weeks of benign economic figures. Yet on the basis of indicators that have strong leading characteristics, a broad ensemble of evidence continues to suggest very high recession risks, and even sparse combinations of indicators provide a major basis for concern.
For example, since 1963, when the ECRI Weekly Leading Index growth rate has been below -5 and the ISM Purchasing Managers Index has been below 54, the economy has already been in recession 81% of the time, and the probability of recession within the next 13 weeks was 86%.
If in addition, the S&P 500 was below its level of 6 months earlier, the economy was already in recession 87% of the time, and the probability of recession within the next 13 weeks climbed to 93% (and then to 96% within 26 weeks). Under these conditions, once the PMI fell below 52, the probability of recession within 13 weeks climbed to 97%.

Stocks Tumble in Europe

Monday, October 31, 2011

F-F-F-Frightening Day in the F-F-F-Financial Markets

H-H-H-Happy H-H-H-Halloween! Dow closed down 275 points, accelerating downward in the closing hour, and especially the last 15 minutes! The markets are "spooked" again!

Stocks Plunge Following Euro-Zone Disappointments

Sunday, October 30, 2011

Corzine Destroys MF Global in Just 18 Months

Jon S. Corzine, the former New Jersey governor, raced over the weekend to find a buyer for MF Global Holdings Ltd. in an attempt to rescue the securities firm he now runs from a crisis partially of his own making.
MF Global was nearing a deal late Sunday night to file for Chapter 11 bankruptcy protection as soon as Monday and sell assets to Interactive Brokers Group, said a person familiar with the matter.
The tentative agreement, reached after a marathon weekend of negotiations, will likely end the short tenure for Mr. Corzine at MF Global.
Mr. Corzine, who took over as chief executive of MF Global last year, made big bets on sovereign bonds issued by European countries, according to people familiar with the situation. Those trades, which ballooned over $6 billion, helped knock MF Global's own debt ratings to junk and drained investors' confidence in the firm.

Corzine should go to prison for this!

Japan's Central Bank Intervenes

More Euroland Turmoil