"I'll sell you a beer today and you sell me one tomorrow"

Percentage of working age population working at food services and drinking places:
Percentage of working age population working in "leisure and hospitality" jobs:

Market Getting Realistic Again?

• BTU approaching lows
• EXXI hovering at 50ma
• Spot crude completed head & shoulders?
• June 2016 crude put in series of lower highs
• ACI approaching lows
• LINE approaching lows
• CCC yield turning higher
• JNK weak after putting in lower high

Trump Recognizes the Corporate Governance Crisis

“It does bug me," Trump said. "It’s very hard if you have a free enterprise system to do anything about that. You know, the boards of companies are supposed to do it, but I know companies very well and the CEO puts in all of his friends.”

He cited Macy’s, which cut ties with him after his controversial comments about immigrants from Mexico, saying, “They put in their friends as the head of the company and they get whatever they want.” “You see these guys making these enormous amounts of money, and it’s a total and complete joke,” Trump said.

The board of a corporation should be constituted automatically from the largest shareholders. A good size for a board is about five people. Thus, a 20% owner would have one board seat.

Forget about dealing with all the dirty tricks in corporate bylaws (staggered boards, non cumulative voting), which are terrible. If the board was automatically reconstituted after changes in ownership (and there shouldn't be restrictions on changes in ownership, either), then ownership and control would be tightly coupled, as they should be.

A Theory of Narrowing Breadth

Worth revisiting my theory of narrowing breadth, since breadth is getting very narrow indeed:

"Narrowing breadth is a mania concentrated in fewer and fewer speculative vehicles. It's created by momentum investors with stop loss rules who consolidate into their winning positions."

The new NASDAQ high came from... Google. And - to a lesser extent - Facebook. Meanwhile, new highs minus new lows aren't confirming.

Three Categories Of Investors

This was from a magazine called Derivatives Strategy (dead link), and by "investors" the author was talking from a sell side perspective about buyers of structured products.

In my mind, I grouped investors into three basic categories. First there were the simpletons. They'd say "Wow, I can get 3 percent over there, but I can get 6 percent over here. I don't really understand it, but I want it." They didn't even ask how they were getting that coupon. They just wanted to buy something that would go up when rates went down.

Second were the selfish investors who understood what they were doing but had their own agenda. Maybe their agenda was yield enhancement, maybe it was their bonus. They figure they'd buy a structured note and hold it for a short time while earning the above market rate; it would help the fund's performance. If you're a mutual fund manager, you get a salary and a bonus based on your performance and on how big your asset base grows. If you could buy a bond that could give you an above market coupon, you could report in your newspaper ad that your current yield was higher than your competitor's. New money would flow in and then you'd collect a big bonus. These guys were smart. They were in and out of these trades in six months or less.

The third class was the smart, sophisticated players. They really knew what they were buying and wanted to buy it because they had an economic rationale for taking a position in the market or because they could not use OTC derivatives and had no other way to put on the trade. I didn't talk to many people like that. I don't know if my experiences are representative, but there seemed to be a lot of accounts that I would put somewhere between the simpletons and the selfish.

Simpletons, selfish, and sophisticated. A lot of retail investors are simpletons - that would be the category that buys things based on dividend yield.

Chart of New Highs Minus New Lows

Check out this chart from StockCharts.com for $USHL5

Fewer and fewer net new highs even with market rallying this year. Bearish indicator.

Another Prediction Request: S&P 500 For YE 2015

A request from the comment gallery:

"I think you should have another contest to have posters give their 90% confidence interval on the closing high and closing low of the S&P 500 in 2015. I hate to give away the ending, but I'd bet that the S&P ends up outside far more than 10% of the predictions."

OK, let's do it. I included the second sentence of the request because research shows that people still make overconfident predictions even if you warn them before they make the prediction that they need to be careful because most people make overconfident predictions!

My 90% confidence interval is 1200 - 2400 on the S&P 500.

"We're selling everything that's not nailed down"

Barron's,

That is, the private-equity giant is a net seller because things simply can't get much better. "We think it's a fabulous environment to be selling," he says, noting Apollo has sold about $13 billion in assets in the past 15 months. "We're selling everything that's not nailed down. And if we're not selling, we're refinancing."

Example of NYSE Delisting for Missing Filings

From a recent press release,

"Torch Energy Royalty Trust today announced that it received notice from NYSE Regulation, Inc. that NYSE Regulation has determined to delist the Trust's units from the New York Stock Exchange (the "NYSE"), with trading of the units to be suspended prior to the opening of NYSE trading on Wednesday, January 30, 2013. The Trust expects to commence trading on the Pink Sheets on that same day, under a symbol yet to be determined.

NYSE Regulation indicated that it reached this determination based on the Trust's delay in filing its Annual Report for the year ended December 31, 2011 on Form 10-K ("2011 Form 10-K") and Quarterly Reports for the fiscal quarters ending in 2012 (the "Quarterly Reports") with the Securities and Exchange Commission ("SEC"). While the Trust had received a six-month and subsequent three-month extension of the filing date for the Annual Report to January 16, 2013 from NYSE Regulation, the Trust was unable to file the Annual Report by this extended deadline. NYSE Regulation declined the Trust's request for further extension under the NYSE Listed Company Manual of the filing deadline. NYSE Regulation also noted that the average closing price of the Trust's units had previously fallen below the NYSE's continued listing minimum share price standard of $1.00 over a consecutive 30 trading day period and the Trust had been working to regain compliance with such standard within the six-month cure period provided in Section 802.01C of the NYSE's Listed Company Manual. The Trust had previously reported on such NYSE notices and extensions. The Trust has not been able to complete the filing of its Annual Report and Quarterly Reports due to a delay in obtaining and compiling financial information required to be included in such reports."

So this supports the theory that the NYSE is much better about kicking non-filing companies off its exchange in a way that is less disruptive to price discovery.

Earnings Calendar

Earnings season is about to start for the companies that we follow. Here are the announced dates so far.

K-V Pharma ?
GMXR July 30
AONE July 31
PQ August 2
CHK August 6
CNRD expected ~ August 15
HOV September 5

It would not surprise me if KV never filed another earnings report before filing for bankruptcy. The GMXR and AONE reports should be pretty bearish. We are hoping that CHK can announce some major asset sales for good prices.

A Market in Need of Disruption

Bond trading:

The trading here has resisted automation because companies that only have one stock have many different varieties of bonds, each of which carries its own price. Banks have found trading these bonds profitable because they have greater leeway over the pricing than if they traded in a market with transparent prices.

Today's Market

Looking over the names that were up today, the rally this week has focused exclusively on high beta and high short interest names - similar to the monstrous October rally. Neither big cap growth nor any type of value is doing well; again, similar to the October rally. Remember that at the end of October when optimism had prevailed, the market then proceeded to drop 5% in two days.

Earlier this week, Prechter called for maximum short exposure. He is not infallible, but he is worlds better than whoever (or whatever) was buying solar stocks today, and I would weight his advice about 20 percent in a decision function.

The latest AAII survey will be out soon and should be instructive. I would imagine that retail is embracing the rally and is even more bullish than last week. That would be another high quality decision input.

I feel inundated by commentary of people who are looking at lagging indicators, like growth in consumer credit. This is a data series that peaked in summer 2008, close to nine months after that recession began. Read Hussman's column about this data interpretation problem. Similarly, in past recessions neither the level of job growth nor its short-term trend had any predictive power regarding the subsequent direction of the economy.

Reflecting further on the mania or upward panic today: it may be explained by managers who were down in 2011 and cannot stomach any further losses. That would explain why they are so skittish. It would cause short squeezes in the dogs and dumps of value stocks, just as we saw today. I do not think it probable that managers who have lost heart will be able to make money.

8 And the officers shall speak further unto the people, and they shall say, What man is there that is fearful and fainthearted? let him go and return unto his house, lest his brethren's heart faint as well as his heart.

A trading process that attempts to avoid any drawdowns by violently and immediately covering shorts and selling longs at the first sign of difficulty is unlikely to work. If it was possible to invest without drawdowns, then no one would need any capital to invest; you could leverage infinitely on margin. Whoever trades according to that process is going to systematically buy high and sell low.

January Effect

Even though you can hardly tell that it's January in the Rockies, you can see the effect in the stock market where all the dogs are bouncing. Once again, this has totally suckered in retail.

The tell is the divergences that are popping up, e.g. the one between the Chinese and U.S. stock markets. There was a divergence between Chinese and U.S. markets that started in the spring of 2008 and resolved to the downside when the U.S. market collapsed in the fall of 2008.

The other notable divergences which I mentioned - the dollar rally, gold and silver collapses, etc. - are still in effect.

Noticing Divergences

USD above October high.
EUR/USD below October low.
Commodities index in a clearly descending trend.
Gold below October low.
Silver below October low.
Silver/gold ratio has fallen below the October low.
Shanghai well below October low.

The only thing missing are U.S. equity indices! They need to catch up...

"Secrets of Professional Turf Betting"

Interesting observation from Speculative Investor, in reference to the book Secrets of Professional Turf Betting, regarding the analogues between investing and betting on horses:

The principle of only putting money at risk in cases where there is an attractive overlay applies perfectly to stock market speculation. An "overlay" in the stock market would, for example, occur if the stock of a company is dramatically under-valued based on the cash that it is currently generating or is likely to generate in the future (the market value assigned by the public is low compared to the company's intrinsic value).

Well said, and the analogy seems apt. The turf betting book looks like it would be good although it seems to be out of print.

WSJ: "Whatever the Strategy, Hedge Funds End 2011 With A Whimper"

All seven trading strategies tracked by the Dow Jones Credit Suisse "Core Hedge Fund Index" are showing losses as of Wednesday, Dec. 14, with the entire index dropping nearly 8%. Investors would have been better off in the Standard & Poor's 500-stock index, which dropped only 4% over the same period.

Skill Imbalance in the Labor Market

There’s a similar excess of many postgraduate skills. Take law, which flourished in a society that had easy access to credit. Now, with the economy tepid, law schools are churning out many more graduates than the market wants. Roughly 30 percent of those passing the bar exam aren’t even working in the profession, according to a survey by the National Association for Law Placement. Another EMSI study indicates that last year, in New York State alone, the difference between the number of students graduating from law school and the number of jobs waiting for them was a whopping 7,000.

Buffett

“The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do.”

October Biggest Monthly Gain Since 1991! (10.77%)

Excellent comparison graph at Dynamic Hedge.

WSJ: "Stock Market Cracks"

"Amid the wild swings of the past few weeks, cracks are appearing deep in the workings of the stock market... Hedge-fund traders and mutual-fund managers say it has become increasingly tough to trade an individual stock without causing a big swing in its price. That's led many large investors to step back from the market instead of risking being stung by the trading difficulties."