The Teddy Bears' Picnic

Mon, 2010/05/24 - 11:55am | Your editor

If you go down to the woods today,

You're sure of a big surprise.

Today's the day the teddy bears have their picnic.

Sorry about that, but I have been spending the last week with three grandchildren under 8. I think you will find the tone of the rest of this note pretty grandmotherly too. Me, I have experience with tantrums, whines, potties, and bears.

Today the teddy bears are out in force again, helped by the newspaper and TV headlines switching from “happy days are here again” back to “the end is nigh!” We seem to be back to the latter, perhaps because no major earnings reports of economic data are expected this week. Jamaica is in the hands of drug gangs; Thailand is not smiling; an American-born Yemini preacher is backing Jihad in his homeland; North Korea did sink that South Korean warship; Australian bank note paper was sold by a government-owned entity using prostitutes; little American children are being driven to suicide by school bullies; another deviant priest was charged with molesting choirboys in Brazil; Germany banned naked short selling (as other countries including the US did earlier); the oil slick grows and nobody knows how to stop the bleeding; the financial reforms are both loopholed and harmful to Wall Street; bike racers are doped.

Gloomy news led U.S. Index futures to fall. Commodities are down except for gold. We face more nastiness, Mr. Market seems to be saying.

In fact the world is entering a double-dip collapse because Round I was not enough to “teach us a lesson” about how bad things can be. This according to Jewish puritan Seth Klaiman in Saturday's Wall Street Journal. We need a repeat of the 1930s. Let's try a balanced budget and pro-cyclical policies. Let's get rid of the FDIC. Let's investigate Goldman Sachs for misleading its customers (Oh never mind. We are doing that already.) Let's unleash a congressional committee to investigate Wall Street. (Forget it. We are doing that already, but not with Pecora heading it.) Let's try “beggar-my-neighbor”. Let's burn Keynes' books. Let's fire Keynesians.

My technical analyst friend Tom McClellan likes to joke that fundamentalist traders are useful because he can sell his positions to the fundis when his charts tell him to exit them. And frankly the last two weeks have not been gratifying for those (like me) trying to invest logically based on fundamentals like: economic outlook, corporate profits, currency trends, risk, reality.And the fact that some governments have learned how to avoid the 1930s repeating.

We had a modest boost in markets Friday but nowhere enough to put the bears back into hibernation. The boost came from a very slight increase in the investment community's excessively low appetite for risk. This unethusiastic move led to marginally higher prices for stocks and commodities, and slightly lower ones for treasuries and the Greenback. But nothing is telling is that the correction is over. The bears are still running around the woods scaring the kids away.

I think this May correction has been the result of insane blind total panic in the wake of the still unexplained flash crash. There was no other reason for it, unless you listen to Tom and his correlations between the VIX and the price of 3-mo Treasuries 2 years earlier. No, this is not a chart I would use when making investment decisions, but frankly there is no other explanation I can poffer either.

Logically nothing explains the selloff, nada, nichevo, nichts, rien. To talk about a second round of global economic crisis is ridiculous. A miniscule number of Club Med countries are being forced to adopt austerity policies. But to imagine for a moment that tiny periferal Greece will kill Euro zone growth would be to forget that its economic movers and shakers are Germany, France, Belgium, and The Netherlands.

Britain is betwixt and between, a coalition government flirting with some symbolic deficit cutting measures, but not likely to undertake sharp cuts (because that will bring Labour back with a bang.) Today the govt outlined GBP 6.25 bn in spending cuts. They will cut civil service recruitment and require govt. officials to travel tourist rather than first class. They will renegotiate contracts with the private sectior and cut spending on IT and ads. Children's savings accounts will be taxed. Britain will cut employment training expenditures (because they do not work in motivating the work-shy) and reduce the number of consultants across the board. Sounds ok to me.

After measures like these, I count Britain in the expansionary group too. These northern countries account for 80% of Europe's gross national product. So they will go on growing whatever happens to Greece, or even the PIIGS. Europe's locomotive economies are pulling out of recession.

To imagine that Greece is going to pull down Britain, the Benelux, Germany, and France is simply ridiculous. Meanwhile recovery is happening in most of the world. The US, Canada, Australia, China, the rest of Asia are not dependent on stimulus or grwoth even in the topmost-tier Euroland countries. The IMF, once a font of gloomy statistics, predicts world growth in 2010 will be 4.2%. US GNP is rising at 4.4% annualized this spring.

Outside the headlines, economic contagion is about as likely as swine flu contagion. Fundamentals are just not being considered today.

More for paid subscribers follows from Canada, Portugal, Brazil, Spain, India, Euroland, Israel, Switzerland, and Britain.

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Mandy Rice-Davies Note

Fri, 2010/05/21 - 10:08am | Your editor


It's time for Schadenfreude in Britain over Germany, the hereditary enemy in all late-night TV moveis. Here is the Daily Telegraph's Jeff Randall's take on the problems of the common currency Britain is not part of:

The euro has many flaws, but its weakest link is Greece, whose fundamental problem is that for years it spent too much, earned too little and plugged the gap by borrowing in order to enjoy a rich man's lifestyle. It flouted EU rules on the limits to budget deficits; its national accounts were a moussaka of minced statistics, topped with a cheesy sauce of jiggery-pokery.

By any legitimate measure, Greece was unworthy of eurozone membership. That it achieved card-carrying status was down to the sleight-of-hand skills of its Brussels fixers and the acquiescence of central bank bean-counters. Now we know the truth, jet-hosing it with yet more debt makes no sense. Another dose of funny money will delay but not extinguish the need for austerity.

This is why the euro, in its current form, is finished. The game is up for a monetary union that was meant to bolt together work-and-save citizens in northern Europe with the party animals of Club Med. No amount of pit props from Berlin can save the euro Mk I from collapsing under the weight of its structural dysfunctionality. You cannot run indefinitely a single currency with one interest rate for 16 economies, when there are such huge fiscal disparities.

To quote Mandy Rice-Davies, of the Profumo Case, “he would say that, wouldn't he?” I know that recalling this sex and spy brouhaha of the Macmillan prime ministry dates me, the fact is that the anti-euro Daily Telegraph is only preaching to the converted.

Preaching to the converted is also big in the USA. While I think the Euro is the source of concerns about a double dip recession coming to the fore yesterday, there are people citing political developments stateside as the cause, like controls to protect consumers of some financial services (like brokerages). That's self-serving too.

Wall St collapsed yesterday not because of anything done on Capitol Hill. It collapsed because of a global shakeout in optimistic long positions: Australia, platinum, oil, Europe, the euro, Brics, and whatever else you may have been tempted by. There was a rush for the exits. So what do you do now?

Firstly, while I may have been premature, you take Gutele Rothschild's advice. There will be a reversal of the downtrend, probably as soon as next week.

You might want to buy protection against volatility with an ETF which goes up with the VIX. Remember that you absolutely do not want to use stop loss positions on your portfolio because the new circuit breakers will not necessary save you from these sales which can cost you dearly even if the price drop is not ten percent.

And you protect yourself with yields.

Shares bearing a high payout can be bought at a discount using borrowed money, to produce a steady income stream.Today's issue for subscribers is about a strategy to enhance your income in the present selloff using other peoples' money. I call it a reverse loan. Details for subscribers only. You can also subscribe to a copycat account tracking my plays with

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The Word from Gutele

Thu, 2010/05/20 - 10:59am | Your editor

The time to buy has come. Do not head willy-nilly to the place where there is blood on the street, namely Thailand. But think about some other places that sound more troubled than they are, and some global players' stocks which are misunderstood.

Whitney George, Co-Chief Investment Officer of Royce & Associates figures that, by historical standards, investors are woefully under-allocated in equities.

Which presumably means they will now start buying equities.

Here is a note from Adam Carr, senior economist at ICAP (the Australian brokerage)

European markets had to digest the news that Germany had imposed short-selling bans, so equities were smashed. Of all the bearish influences flying around at the moment, regulation, or rather excessive regulation, is the one threat that I think is genuine. The other stuff - European disintegration, a Chinese collapse are low probability events.

They might make for interesting dinner conversation, but in my opinion if they are placed anywhere other than at the periphery of an investment decision, you are going to lose money on a 6-12 month view.

That said, I'm the one losing money at the moment, and I've been completely wrong about how long this bearish relapse could last (we're getting into our third week).

Vivian adds, me too. Angela Merkel, the German Chancellor, has not helped matters by talking about “dangers for the euro” and the need for tough measures. These will be cyclical, reinforcing the crisis, and poorly coordinated within Europe to say nothing about with the USA>

It was her delaying tactics which brought the crisis over Greek debt to a fever pitch in the first place. She is not a chemist like Maggie Thatcher was, but a physicist, which may be why she has a slower reaction time and makes silly remarks which add to the mess. Chemists are like micro-economists while physicists are macro-minded.

Carr resumes: I do remain confident this is transitory blip though. A modest correction in what will turn out to be a very aggressive bull market.

Vivian adds, me too.

With Wall Street now at a 10% correction (even if it may close higher today) remember Gutele Rothschild. Gutele, mother of the famous five, was on her deathbed in the early 19th century when she was 99 years old. Her sons kept telling her she could rally and live to be 100. To which the old lady replied, "Why should God take me at 100 when he can have me at 99?" And she died.

Don't wait for an 11% correction. Settle for 10%.

So what to do now? where in the world do we go?

Some ideas for paid subscribers follow.

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Back from the Brink

Tue, 2010/05/18 - 9:33am | Your editor


Writes Adam Carr of ICAP, an Austalian brokerage:

China worries are overdone and without something to support them, they will die out. Major Chinese export markets have bounced backed and there is still, as I highlighted many months ago, a long way to run on the domestic development. Actions by Chinese authorities are less about slowing growth and more about absorbing excess liquidity. Seeing the Shanghai composite off 20% over the last month shows us these actions are working. But the growth story remains intact. Indeed the actions by the Chinese government make it more likely a sustainable recovery is underway.

Don’t get confused by stories of excess capacity either – when you’re an economy growing at 10% or more that excess is easily filled. So with growth data still showing a robust recovery underway, China pessimism is very easy to dismiss.

From cousin Simon in Bangkok (Monday):

Central BKK ( where the red shirts are camped out) is now cut off, the skytrain, and subway trains are no longer stopping there. If my dental appointment had been today I wouldn't have been able to get to it. From the TV pictures it resembles a war zone, more like Kabul or Beirut or somewhere, running battles between the troops and protesters, burning buses and rubber tires,and shocking pictures of soldiers firing their guns through the railings of our dragon park (poor old dragons, not fair on them I think!).

A lot of schools, colleges here were due to open tomorrow, but now can't because of the violence. However, Rainbow's school is not affected and she's been going every day. [In-laws] Pook and Yut would be unable to come to see us because so many of the roads are now blocked and out of bounds. This afternoon I took a bus a few stops down from the supermarket, and from a sky walk was able to look down at one of the roads that's been cut off by the red shirts (May would kill me if she knew I'd ventured that far!!) At the far end there were burning tires in the middle of the road, during lunch today from our sitting room window we could see a huge column of black smoke probably also from burning tires.

There has been less violence and shooting on the streets today, but still no sign of an end to it. The government has apparently now changed its mind about imposing a curfew in Bangkok, but introduced a state of emergency in 5 more provinces in the north. [Our friend] Adrian who returns here from Ireland tomorrow, lives almost next to the main red shirt encampment, he's been phoning me the last few days to get up to date news, May thinks I should have advised him to delay his return for a few days, so I'm now feeling bad that I didn't! However, he's aware of the violence and shooting, and will have seen the dramatic pictures (as you have) on TV. Also I think he was here when the red shirts first camped out near his apartment.

Sorry to go on and on! The govt have given a deadline of today for the elderly and children to move out of the camps. The soldiers will then move in and try to clear the camps. If there's a confrontation between soldiers and hard-line red shirts it could surely result in a bloodbath. My fear is that IF that happens the millions of red shirt supporters in other parts of the country might rise up in anger, and there'll be real civil war-- hopefully just a bad dream in my head!


Simon's worries seem to be shared by the government which is aiming to again schedule the elections the red shirts are demanding. One of my readers in Thailand called my cousin a red shirt sympathizer; he is not. His wife May is firmly for the yellow shirts, but he does think for himself. And not being in specialized retailing he is closer to real trends in sales and tourism in Bangkok than some investment pros.

No newsletter tomorrow because of the Jewish Pentecost holiday. My daughter-in-law has flown to London via Shannon, Ireland, and by now is at her conference in Nottingham. Her plane was delayed taking off from Boston not by strike or volcanic ash, but because on of the booked in passengers failed to get on the plane, causing a security alert. She flew Aer Lingus, not BA, perhaps because her PhD program is at Boston College, with links to the Auld Sod.

More for paid subscribers from England, Switzerland, Rwanda, Uganda, Israel, and France follows. Rwanda and Uganda for real. Read on.

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Mon, 2010/05/17 - 12:03pm | Your editor


In a brilliant example of “Schadenfreude”, happiness at the troubles of others, Christopher Wasserman, President and founder of the Zermatt Summit, an independent Swiss business business meeting run by the Zermatt Foundation, delivered a statement. He said:

“The continued loss of confidence is hurting our economies, and ultimately the root cause is loss of trust which has fallen to an all time low and could fall further. [It is] due to the high risk approach to debt, leading to a collapse in trust of our political and business leaders.

“Already we are sowing the seeds for a second asset bubble.” Nonsense.

The euro has fallen two a 4-yr low, below the Fibonacci support level of $1.22 to the dollar, according to Dutch chartist Charles Nenner.

What will the impact of a weak euro be? First of all the poor non-euro Swiss from Zermatt, Zurich, and Zug should not be listened to now as they seem to be gloating from their Alpine fastness. Hard money advocacy is an easy thing to preach if you are not in a monetary block with countries facing both deficits and the risk of social unrest.

And the euro adjustment will hurt Alpine Swiss profits (and prophets). The Swiss, who earn most of their francs selling goods to neighboring countries will not have an asset bubble. Instead they will have lower profits from their multinational corporations like Nestle and ABB, Credit Suisse or Novartis. They will lose business and profits.

As the euro began life at parity with the dollar, there is nothing inherently wrong with it falling back to that level.... if you are in Europe.

The odds are that a lower euro will boost exports, lower debt, and help all Europeans, including the PIIGS, to adjust. Germany, leider, will have less to spend on imports, and sell still more goods produced by its efficient mid cap companies, but the profits translated into euros will be higher than what the Swiss will book, thanks to a cheaper currency to convert to.

Forget the fear of inflation. This bogeyman is not going to emerge into the daylight. The European central bank is crafting a way for banks to put money on deposit with the ECB to offset the new government loans from Greece it has now bought, to prevent a soaring euro money supply and inflation. Central banks have tools that nip asset bubbles, if they choose to use them.

The booming emerging markets will get nipped. Lower European demand for raw materials will hurt Brazil and Russia. Higher prices for their goods and services in Europe will hurt China and India sales to Europe.

The slowdown in the EU, forced on its southern tier countries, will be shared by all, even the most virtuous low spenders. The adjustment will be on one currency block, not on bits and pieces of it.

And Germany is not going to abandon the euro despite the pain its companies will suffer. Recession is back.

For the rest of us, there will be problems too.

For North America, things are not as dangerous as for Switzerland because while our banks have problems, they have not been shut out of the business of providing a tax haven, which Switzerland has been in since the 18th century. Because we tend to export more that Europeans do not produce for themselves, like software and airplanes and grain. As the loonie moves toward parity with the greenback (it's close) the Canadian edge will become less sharp.

The loonie, the greenback, and the euro may all reach a common level. Less so the odds that the Oz dollar will join the pack. The lucky country is going to suffer.

Raw materials prices cannot hold up against a European recession. The price of oil has already fallen and there will be more impact on other commodities in the next 18 to 24 months.

Gold may hold up for its own independent reasons, but not the rest.

For the USA, I would like to see a new higher tax on gasoline to offset the fall in the price of crude, mainly to protect alternative fuel spending and US geopolitical interests and independence. There could be a bit of money turned over to poor Americans driving gas-guzzling clunkers to faraway jobs The rest can be used to slash the deficit.

I've been calling for global level gas taxed since 1976 when I worked for the US Senate Foreign Relations Committee after the oil price was quadrupled. We need to stop drugging ourselves with cheap oil. I worked then for Sen. Clifford Case, Rep. NJ, who called for an oil tax.

But of course I am a New York subway child who only learned how to drive at age 28, so you don't have to listen to me. Even the Senator was lampooned because he had commuted by train from Rahway to New York City before going into politics. Red-blooded Americans drive all over the place and it is their right. Or maybe their obligation, I note, as today I took Sophie to the Dana Farber Elementary School, Theo to kindergarten at a synagogue, and Jules to art and music at the Newtownville social center.

The latest news is that my daughter-in-law will be flying off to her conference in Nottingham after all, and that I will be babysitting the rest of the week. It has been a fraught morning.

More for paid subscribers follows. Read more »

Louise Yamada and the TA Guys

Fri, 2010/05/14 - 12:10pm | Your editor


It is hard to be a technical analyst or chartist these days. What are you going to do with the still evolving figures about what happened last Thursday? Louise Yamada has a bit of advice to her TA colleagues: “just put your thumb over it” the price blip, she reportedly has said. (I learned this from McClellan Market Report group, a chartist outfit, whose Tom McClellan in the MCOscillator raised the question of what to do with May 56 data)

He notes that actually working out how to do this thumb covering mathematically is not so easy. What will you do with the busted trades? what will you do with the trades which wrre out of line but not off by a full 60%?

It is not too surprising that a woman TA has taken the lead in sorting out the chartists' dilemma. Women are ultimately not as purely mathematical as men. They have differently-wired brains, although I am not sure I have any more right to say this than Larry Summers did. Women don't as well in advanced mathermatical theory because they are not as autistic or prone to Alsperger's Syndrome. Women don't collect and remember baseball statistics.

Having gone to the Bronx High School of Science, and uncertain of what I wanted to major in when I arrived as a freshman at Harvard, I enrolled in a course in three-dimensional trigonometry. Oy vey. There were no other women in the class and I was in over my head big-time. I quickly switched to a course in astronomy taught by the only female full professor at Harvard at the time, Cecilia Helena Payne-Gaposhkin. She taught cosmology which while a “hard” science is also intuitive and surprisingly unmathematical.

Now here are some numbers, just to show that I am not really a softie. The price of gold hit $1249.40 before falling back. That means either that this is a barrier to further rises or a trace to be kicked over en route to $1250. As already noted, my TA newsletters (one noted above) are in disagreement about the future trend of the yellow metal. The American one is bearish and the European one bullish. That may have to do with the currency they price gold in on their charts. It has fallen back but very modestly.

The Euro meanwhile fell below $1.25 before recoving. Again, is this a hurdle or a straw? No idea.

Indian inflation hit 9.59% last month. Will it hit 10%? My guess is yes, but I may be wrong. If this continues you can see lots of gold trading but I am not sure if the bracelets will be bought or sold.

China's market is now off 20% from its high last autumn, formally in a bear market according to the rules. Is it time to buy, as Mark Mobius told Bloomberg? Or is the trend your friend? Will Chinese buy gold too? Who knows?

Meanwhile the markets went to ground last week, showing flight to quality (or perceived quality) according EPFR fund flow trackers.

As Greece became a Cassandra, “investors sold perceived riskier asset classes during the second week of May,“ the Cambridge MA service wrote.

“Outflows from High Yield Bond Funds hit a 5-yr high while Emerging Market Equity Funds suffered their 2nd straight week of net outflows. Global Bond Funds saw their 54-week inflow streak come to an end while flows into US Equity Funds hit a 19-week high, nudging year to date flows into positive territory. Commodity Sector Funds set their second consecutive inflow record, with a gold ETFs again driving investor interest, and bringing the 3-wk inflow total for commodity funds to nearly $6 bn.”

It added: “Money Market Funds attracted a year-to-date high of $23.5 bn. It was the 1st weekly inflow into these low yielding and ultra-safe funds since the week [one] of 2010, which [has] seen $388.5 bn of outflows year to date.“

More for paid subscribers from Korea, Chile, Indo-Swiss and Scottish Britain, francophone Canada, Israel, Switzerland, Germany, and Flemish Belgium. Read more »


Thu, 2010/05/13 - 2:24pm | Your editor

I was asked by another publication to write up the difficulties of the exchange-traded market last Thursday and am sharing the gist of the article with my subscribers, with permission of course.

The selloffs in the ETP (exchange traded portfolio) market May 6 were very different depending on the size and the complexity of the ETP. But about 2/3 of the trades blocked by the NYSE and and Nasdaq since then involved exchange-traded instruments, the overwhelming majority ETPs rather than closed-end funds.

The multiple short and long ETPs behaved very differently from what the prospectuses promised. That is because these entities depend on options trades to go double bear or triple bull or whatever on some market or market category. When the options markets seize up in a period of wild volatility, the trades cannot be done.

In fact tracking error can be considerable even in normal boring non-volatility times.

Another factor in ETP tracking during a crisis is the fund's size and liquidity. The very biggest funds were much less badly effected by the sell-off and the lack of counterparties to trades than the newer and smaller funds. By now everyone knows that the Rydex Equal Weighted S&P ETF was the one with the most busted trades (and of course also the ETP with the worst showing before the trades were cancelled.)

There is a simple reason for this. As of April 30, according to Bloomberg, which tracks this data, Rydex funds, collectively, had $67. bn under management. This sounds like a lot but in the ETF space it is pretty marginal. iShares have over $400 bn under management. State Street has $200 bn under management. Vanguard has $109 bn.

What we are facing here is a problem of asymmetrical information. Buyers of ETPs have not been worrying about the fund size. They have not considered the degree to which the ETP trading prices are supported by specialists and marketmakers. They have not concerned themselves about whether or not the authorized intermediaries have enough incentive to arbitrage between the funds' net asset value and their trading price. With small funds the intervention costs more. So the institutional investors don't intervene as often and the spread between the NAV and the price can grow.

However, these seemingly marginal factors seriously affect performance in a market selloff or even in a buying panic.

That means first off that the boom in press promotion and recommendation of ETOS, sometimes generated by the heavy advertising that funds engage in, will have to be reconsidered. The barrage of boosting comes from the printed press, websites, newsletters, magazines, and other sources. Nobody is questioning whether the fund can track the intended index or group of shares or bonds in market reversal.

Currently, the regulators are not considering these issues. Instead, the Securities and Exchange Commission is opening the door to so-called managed ETFs which are introducing even more risks.

There will be more scrutiny and more regulations from now on.

Another trend I forecast is that the spate of copycat funds from different competing management groups will come to an end. There will be consolidation in the ETP industry, instead of the current proliferation.

In truth, I am not that enchanted with the exchange-traded portfolios we now are being offered. My disillusionment is probably shared among savvy investors and even journalists. But for various reasons, you will not find this skepticism widely available in the financial press or on market websites. The secret reasons: ETPs do a lot of advertising. Yes, Virginia, financial journalists do not look too hard or critically at those financing their publications.

ETPs are decades old but are still being written about in “gee-whiz” articles as a new smart way to invest. A teenager is being presented as a new-born. This is not objective journalism so much as marketeering. Presenting the contrast between ETPs and traditional funds, frankly, is old news.

A spate of new media has grown up to help people pick ETPs from respectable publication groups, and from some more disreputable ones as well. The subject is written about in magazines and on websites. There are specialized reports from brokerages and advisors, on financial TV and in the press, in specialized subscription products of varying sophistication and validity. There is plenty of interest in ETPs and you can make money by catering to it. I don't because my publication is supported by subscriptions.

However trivial it seems, the weekly exchange-traded portfolios list (for example in Barron’s) seems to get longer and longer, the alphabetization ever more irrelevant, and the type font smaller and smaller. Finding the right ETPs causes eye-strain to senior citizens like me. Despite the barrage of ads, the print for the ETPs list gets tinier and tinier.

For more information, readers can purchase the Global Investing ETF report which is for sale on our website. ETPs is a term invented by Barrons' to cover exchange-traded notes and portfolios, not just funds.

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Down Memory Lane

Thu, 2010/05/13 - 12:21pm | Your editor

Today I am going to lecture the majority of my readers who are males (80%), rich (of course) and older than their wives (standard.) You need to include your wife in your investment decision making. Women live longer than men. Your wife is more likely than not to survive you.

There is an idea floating around that women should not trouble their pretty little heads about money. That way lies disaster. When you have gone to your reward, the odds are that your widow will live on for many years. She needs money, but she also needs knowledge.

I write this because a reader married to a Hungarian Argentine wanted to meet with me without the Senora. I refused, and not because I do not meet men solo on business. It is because this is silly. While I am not sure we want to go as far as Japan, where the ladies run the household and investing budget and give their husbands an allowance, we do not want to leave the ladies stupid, barefoot, and pregnant like in the Moslem world either.

If you do not train your lady in managing your assets they will either be turned over to a venial bank trust department or mismanaged or squandered. One of my relatives at 94 has run out of money, although it should be noted that she was of a generation when ladies did not do money. But it is a warning to us all.

Today I write about today's key players in the past. Down memory lane.

From The Economist I learned that Mervyn King, governor of the Bank of England, the British Fed, has supported the Cameron-Clegg coalition govt call for cutting the deficit by raising taxes and cutting benefits. King in 1981 was one of the Keynesian “wet”academics who signed a letter urging Maggie Thatcher, the then-Prime Minister, not to cut the deficit. I guess he grew up. And also noticed that Britain did very well after the heretical Thatcher policies were put in place.

Another recollection is June 1968 when I was a young journalist in Paris with The Sunday Times (of London) but in Paris and made the “splash”, the top story after Pres. Charles de Gaulle one Sat. night refused to devalue the French franc as his minister were urging. De Gaulle wanted to block the speculators shorting the franc. He got no support from other countries, unlike Mrs. Thatcher, becauase he had earlier demanded that the US give France gold for the dollars it was holding.

A few weeks later the devaluation occurred, and France imposed exchange controls, to stop its residents from spending money abroad, and requiring that business receipts be converted into francs immediately. Import finance required that French companies apply for controlled amounts of foreign exchange. The system did not work.

But two of the key players in today's Europe were around then, Dominique Strauss-Kahn, head of the International Monetary Fund, and Jean-Claude Trichet, governor of the European Central Bank. They learned that you cannot create a bear trap without holding ammunition, which colored their reaction to the Greek crisis. They did not learn from Maggie Thatcher, of course, any more than the USA did.

Their histories will be of importance as these policy-makrs deal with the present crisis. George Papndreou was a kid in a US college town (and so was Benjamin Netanyahu) so don't count on their memories.

Portugal, my favorite PIIGS country, reported today thatits Q1 GNP rose sequentially by 1%, the highest level in the EU and 1.6% year over year, ditto. Moreover, Premier Jose Socrates (who is of course Portuguese, not Greek, despite the name) and opposition leader Pedro Passos Coelho, jointly presented a bunc of measures to raise taxes and cut spending, just as was done in neighboring Spain. The difference is that growth will make it easier for the Portuguese. Our stock pick there is of course not really a Portugal play at al.

I wrote for paid subscribers yesterday about conflicting advice from two chartists about the future price of gold, which we acted upon. Of course one is in Holland and influence by European perceptions, and the other in the Pacific Northwest, which is mostly American (and influenced occasionally by Canada.) That may be enough to explain their divergence. But we did bail out of a Canada gold play all the same.

A new vending machine in the lobby of Abu Dhabi's Emirates Palace Hotel sells guests gold in 1, 5, and 10 gram amounts and also sells coins. The only other machines like this are in Germany.

Today's New York Times website reports that Gen. Khattiya Vavartdiphul, also known as Sieh Daeng, the military advisor to the Thai Red Shirts, was shot in the head while being interviewed by the newspaper's Thomas Fuller. I am being given a hard time by our Thailand correspondent Paul Renaud for not being sufficiently bullish about Thailand Paul edits and of course has to pitch Thailand to international investors. We remain there but I am reluctant to put new money in as long as the situation remains fraught. No I have never been there, but I have dispatches from my cousins in Bangkok who counter Paul's optimism, and I am meeting in NY with Thai experts to make sure I get it right.

More for paid subscribers from Israel, Spain, Mexico, China, Britain, and Australia follows for paid subscribers. The blog is late today because of web management business. Note that your editor will be in Boston next week babysitting for three of her grandchildren while their mother attends a British academic conference, and not also that there will be no blog on May 19th which is Shavuoth, the Jewish Pentecost holiday.

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Wed, 2010/05/12 - 11:53am | Your editor

Marketmakers and Authorized Intermediaries

Wed, 2010/05/12 - 11:43am | Your editor


After my ladies who lunch lunch yesterday I know whom to blame for the Thursday sell-off last week, and it is not Goldman Sachs, Morgan Stanley, or Citigroup. It is the way specialists or marketmakers operate, according to one of my lunch partners, and ultimately because of how markets are organized.

Marketmakers post bid and ask prices for stocks they deal in. NYSE specialists use round lots, but some of the dark pool marketmakers use even smaller blocks, for example on Archipelago. If a stock is at $30 there is a bid-ask around that price, but the specialist will also have a couple of lower bids in place, at $29, $28 and change and so on. At lower prices the number of shares bid for goes up. The dark pools traders are doing the same thing but using very low numbers of shares to avoid being swamped.

They also offer to buy as many as a million shares at some ridiculously low price.

These offers are not about trading. They are about making the intermediary known to the market. They are “place-holders”, my lunch date explained. That means they are something like advertisements.

If there is a shutdown on the NYSE as last Thursday, brokers head for the dark pools. One by one the bids are taken down, but if there are large sell orders (probable), the final ridiculous price is triggered.

Now about circuit-breakers. The NYSE circuit breaker triggered on Thursday. That is what drove the trading to dark pools. But if there is no circuit breaker, the situation can be worse. Another experienced market participant, an old Asia hand, explained that in Singapore, before the circuit breakers were put up, during the so-called Asian Contagion, there was a panic sale and prices fell without any possibility of stopping the bleeding. The marketmakers there just stepped boldly to the trading floor and bought fast-dropping Singapore stocks for their own accounts. Then these fine upstanding citizens of the Island retired.

Another factor in the US contagion was the existence of index-linked Exchange Traded Funds, or ETFs. Among the largest of the busted trades last Thursday was shares of the equal-weighted Rydex S&P 500 ETF. ETFs have their own specialized marketmakers, and they also have mechanisms whereby institutional investors (authorized intermediaries) are supposed to support the price of the ETF by buying it when the price drops below the net asset value of the shares it holds. And the reverse. But in a chaotic situation the ability of the ETF intermediaries to act was limited.

Readers of my special report on ETFs will remember that even in normal times the arbitrage mechanism often fails. It should be noted that some ETFs did better than others, and that the focus of the horror show was the largest and most liquid shares and the least experienced most marginal ETF issuers.

Apart from Australia, where there had been another interest rate rise (which means bond prices go down), the contagion was relatively contained in the world outside the USA. Canada arbitrageurs seem to have limited the damage to Canadian stocks.

For my paid subscribers I published tables as of the close of trading Friday on the website last night. These are purely for the record as many of the stock prices are still not confirmed. Over the weekend when I normally do this, it was impossible to get prices at all using my brokerage accounts.

Another European-born reader says that the official who spoke in 1980 about how the bombing of the Rue Copernic synagogue also killed “innocent Frenchmen” was not Raymond Barre, but the then Mayor of Paris, Jacques Chirac. Success has many fathers; failure has none. I have been unable to confirm who the speaker was. But this reader says there were demonstrations against the Mayor by Jewish and civil rights groups at the time, which probably means he was the culprit. Later as president Chirac ended the silence about French officialdom's helping hand to the Holocaust, perhaps making up for this lapse.

News about our companies from Britain, Israel, China, South Africa, Germany, Burkino Faso, Niger, and Canada follows along with a sale.

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