TB’s commentary can also be accessed at his blog www.traderbill.com with the market summary updated usually by 6pm EST, overnight markets at 7:30am, and then followed by the daily commentary. It also has an index of other features. Over 5,600 served. TB
… not “This Week,” but this week, could be of major import to market participants as we have a two day FOMC meeting (Monday and Tuesday)…will they or won’t they?…cut that is…April ISM Consumer Confidence Tuesday, Advance Q1 GDP on Wednesday, plus myriad other less significant dat and culminating with Friday’s payroll numbers which could be down for a fourth straight month.
The bulls point to the “fact” that since 1974, a decline in consumer sentiment below 72 it has signaled a bottom. Just what is fact and what is casual correlation? Is 24 years a long time?…certainly in a human life, although you see guys pleading out on Law and Order all the time rather than risk a life sentence.
Just because something happened once does not mean it will happen in the same manner again. In fact, just because it happened 5 or 10 times before doesn’t mean anything if there isn’t more than a casual linkage. Doesn’t anyone pay attention to the accuracy of weather reports? Now that is pure statistics based on observed atmospheric conditions. As pointed out in the Black Swan, just because you have a hundred year storm does not mean it can’t happen again next year. Worse, when people are devising models to make money…and all are working with the same ideas and often come from the same classes is it any wonder that books like Dow 35,000 are written and cost believers a bundle?
This is not meant to knock statistics or true quantitative analysis but merely to point out why a generation of quants trained in Monte Carlo simulations think they have found the Holy Grail…over and over. They do this by ruling out endogenous variables which is precisely why we are now in a global financial crisis. This systematic elimination of systematic risk…which is necessary to create a model is also why a model can work for years…until it doesn’t. One has to replace them with another variable: the smell test or common sense which has been sorely lacking for the past 25 years or more. If the model says it’s true, it is true.
When TB entered the wonderful world of investing 36 years ago…and believe him that even that is not a long time…else we wouldn’t be seeing comparisons to the Great Depression…computers were not a factor…in fact it was IBM who thought there might only be a need for 1,000 computers in the entire world. When one submitted a bid for a municipal bond issue they prepared the bids with just a calculator multiplying the number of bonds per year times the years to maturity times the interest rate then totaled it for the entire issue to get the total interest cost, then divided that by the total bond years to get the interest cost and subtracted underwriters commissions to get the Net Interest Cost…that was the bid that was then submitted to the issuer and the lowest NIC won the deal.
Then Wang created a desk top computer…actually analog that did all this but you still paid attention to the inputs and finally CompuCorp invented an even smaller desktop version that was more like one of the technical calculators in use today…later HP invested the 21C which did the same thing but was much more cumbersome except for conceptual use…such as the CFA exams.
A few years later TB heard of a bond dealer who couldn’t submit a bid because their Compucorp broke down (by the way, the Wang sold for about $4,500 and the CompuCorp for $1,500, while the HP 21C sold for about $200) and nobody could create the bid! TB recalls, and a friend sent a fascinating interview with Robert Rodriguez, CEO of First Pacific Advisors, in which he commented on trying to do financial analysis on the old IBM mainframes…creating a series of punch cards…really not computing but mere data processing. But when you did it you had to think…if something wasn’t right you sensed it in the voluminous printouts. Not so anymore…if the computer says it’s so…it’s so. TB wonders how many billions have been lost in bidding on all forms of contracts since the computer was invented and a number popped up which was treated as gospel.
Then along came Bill Jobs with Apple…and TB remembers it well…two little 6×6x2 inch boxes with a slot for a floppy disc…and a monitor. TB tried writing programs for it but never could get them to work right but a colleague at Merrill was a pistol with one. KKR would never have become the force in mergers and acquisitions that they did without Apple. He read of crunching the numbers, coming up with a bid, presenting it…having it rejected…then plugging in new numbers and waiting for it to grind out a new bid…sometimes taking as long as 30 minutes while everyone held their breath. Today, you can merge two companies on Bloomberg, press a button and instantly see the consolidated financials…but do they mean anything?…or at least anything you can make money from? Depends on the variables.
This explains how just 6% of the mortgage market which in turn is an even smaller fraction of the global economy has brought the financial markets to their knees. Too much modeling with the same assumptions, and ultimately the same conclusions without regard to the total volume. This is akin to creating a widget, finding that it sells and then taking that price and multiplying it by the total market to create total revenue…defying the basic laws of supply and demand…but who cares, the numbers are huge, right? That is how we created huge gains that ultimately turned into losses in conglomerates like Whittaker Corporation, Litton Industries…even Levitz Furniture…and now we are doing the same thing with the Apple’s, Google’s, and more significantly the Research in Motion’s and worse yet Amazon’s of the world…the stars of tomorrow’s market have not even been born of or even thought of yet. Think of that the next time you buy a stock with 40 or 60 times earnings. IBM was trounced by Microsoft who is in turn now being trounced by Apple and Google…but as sure as there is a market, someone will do the same to them…think about it…and bet on it…creative destruction is a fundamental trait of capitalism.
A friend in the investment business was over last night and they debated whether the bottom is in for stocks. His friend cited historical evidence that the bottom is in…such as the consumer sentiment theory above…it was quite an energetic discussion that ended with both going away holding to their opinions.
TB cautions those who think bonds are expensive to look at the pullback we have had over the past four trading days. Just because the Nasdaq is down 8.6% year to date and the Russell 2000 is off 5.8% does not in itself make them good value. How the market reacts this week could have a major impact on perception. You already know where TB stands on this…now you decide.
TB has been meaning to comment on a wonderful series on American history: the John Adams series on HBO…there are six 90 minute episodes starting with the Boston Massacre and Adams defense of a British soldier, thru the struggle for independence, the presidencies of Washington, Adams and Jefferson and finally Adams retirement to his farm and the tragedies suffered there ending with the deaths of both Adams and Jefferson on July 4, 1826…the 50th Anniversary of the Declaration of Independence. TB highly recommends the series. Trivia: only Jefferson and Martin Van Buren held the triple crown: Secretary of State, Vice President and President…and it is doubtful anyone will again.
Also, on PBS is a new series that will interest former Navy geeks like TB. It is called ‘Carrier’ a ten part documentary on the USS Nimitz and just what life aboard her is like. TB’s only complaint is the constant reference to the SHIP as a BOAT by the sailors…you would have been rapped severely about the head and shoulders by any chief petty officer for making that blunder…something one-third of a mile long has got to be called a ship! First two hours were last night and it is two hours a night thru Thursday. Wow!
Have a terrific day!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 28, 2008
