Part I: Yet another last word on Market Timing or why Jim Cramer is not your friend.

How many times have we done and over done the old debate about timing the markets?  Too many to count and yet the conversation doesn't end. There is a good reason for that.  It is core to one of our central needs as humans: there is an intense human need to control those things that are, to variuos extents, beyond our control  - the weather, our health, life, death, and above all, the future.  That is the heart of the matter in this debate.  It is in our nature to look for advisors who might have an edge or give us some insight into the future, and put us on the path to riches.  So many of the hundreds of clients and potential clients who have sat across my desk over the last 10 + yrs have essentially been asking me one question, "Can you help me predict the future?" 

Let me set the record straight, can it be done?  Can a person with enough foresight, intuition and depth of research be able to make the right call on their investments such that the future markets will reward them handsomely?  Absolutely, no question about it, and history is loaded with examples of men and women who have done so.  But, can it be done consistently, with manageable risk over long periods of time?  Absolutely not.  And that is the key and the ultimate truth.  I would never deny that certain advantages in certain times can be gained in investing thanks to research, proximity, education, hard work, intuition and a little luck.  I would unequivocally deny that these advantages can be maintained indefinitely.  It can't be done; the world is too complex, there are too many people and macro global emotional factors such as uncertainty, fear, greed, regret, interest, excitement and doubt with unlimited variables at play that are waiting to sobotage every next "system" or magic ratio or investment insight. 

I should be clear, I am not suggesting blind faith in failing and expensive investment schemes.  And I am not simply shouting "buy and hold."  I believe strongly that we need good people picking and choosing good buisnesses.  But that is where our abilties end.  Buy a good company and own enough of them in sufficient diversity and you'll be rewarded  - trying to time the market's highs and lows and going all in or none in only when our forecasting feels right is a recipe for disaster.  If you do things properly, there will inevtiablty be periods and cycles when your perfectly good shares in a perfectly good company will decrease in value.  And predicting when those periods come and go is an absolute exercise in futility. 

It wouldn't be fair to pick on Jim Cramer since he's really in the entertainment business not the business of advice giving, if it were not for the fact that he protrays himself as one of the great seers and at least implicitly suggests he "knows".  So how did he help his legions of market timers profit throughout the last bear market?  Check out the link below:

http://www.youtube.com/watch?v=FP3YyJz3HsU

In this iconic showdown between Jon Stewart and Jim Cramer both sides really miss the point.  Jim in profiting from creating the illusion that he knew, and jon in profiting from the the delusion we have all shared that he should have known better.  They both miss it. 

But don't take my word for it, look at the facts.  Let's start with the experts.  

William Sherden, author of The Fortune Sellers, reviewed leading research on forecasting accuracy from 1979 to 1995 and actual forecasts made from 1970 to 1995, this is what he concluded:

1. Economists cannot predict the turning points in the economy.  Of the 48 predictions made by economists 46 missed the turning points. 
2. Economists forecasting skill is about as good as guessing.  For example, even the economists who directly or indirectly run the economy (US), the Federal Reserve, the Council of Economic Advisors, and the Congressional Budget Comittee have forecasting records that were worse than pure chance. 
3. There are no economic forecasters who consistently lead the pack in forecasting accuraccy. 
4. There are no economic ideologies whose adherents produce consitently superior economic forecasts.
5. Increased sophistication provides no improvement in economic forecasting accuraccy.
6. Consencus forecasting offers little improvement.
7. Forecasting may be affected by pshycological biases.  Some economists are perpetually optomistic and some are perpetually pessimistic. 

In laymens terms, if you're watching BNN to get a sense of where analysts think the markets are headed, you'd be better off saving your half hour and flipping a coin. 

This leaves us with a few importnant considerations: 

1.  What is at stake when we try to time market cycles.  What do we have to lose.  Or put differently, what is the most propable impact from our attempting to time markets.  It isn't pretty. 

2.  How can we differentiate the noise from helpful and genuine advice. 

3.  What is the best way manage money in a age of unpredictable and uncertain markets.

Stay tuned...

Building condos again, really?!

http://www.industrymailout.com/Industry/View.aspx?id=313279&q=378401494&qz=664c90

Economic update -Euro gold of no help!

http://www.industrymailout.com/Industry/View.aspx?id=313530&q=378897027&qz=fe2713

Eurozone debt update

A good summary of where the fraud in Greece currently stands by ATB analysts.  Not designed for advice purposes, just some more context:


Nov. 2, 2011 Eurozone Debt Update

Last week’s Eurozone agreement to deal with sovereign debt problems contained three main items:

 Private holders of Greek debt will roll over their holdings but in doing so accept a 50% writedown to their nominal or face value; this essentially represents a default with a 50% recovery rate

 European banks will be required by their regulators to raise their capital levels by about 106 billion Euros. They are to do this by increasing retained earnings rather than by deleveraging or selling assets.

 The 440 billion Euro value of the European Financial Stability Facility (EFSF) will be “leveraged” into 1 trillion Euros worth of protection by using it to provide first-loss protection on new debt, and by engaging private capital to participate in the fund.

Writedowns In return for the writedown of their bonds’ nominal value, private investors receive the assurance of ongoing Euro-area aid for Greece. Without this, a Greek default could easily wipe out 90% of more of the bonds’ value and this part of the agreement brings more certainty to the situation for private investors.

Approximately 200 billion Euros worth of Greek government bonds are held by private investors, which excludes holdings by the European Central Bank and any other governments. The writedown will therefore eliminate about 100 billion of value – which coincidentally is the amount of additional capital European banks will be required to raise.

Greece benefits from the agreement because the haircut instantly reduces the Greek government’s interest payments by half, but still allows it to continue borrowing from Euro-area governments until the austerity measures eventually bring its government budget into balance. In contrast, a complete default would completely eliminate Greece’s interest payments but would also completely preclude any further borrowing from private investors or other Euro-area governments.

Because Greece still runs a primary deficit (i.e. the Greek budget is in deficit notwithstanding the effect of interest payments), even after a default it would have to undertake austerity measures which would be more severe than the gradual adjustments it’s enacting under the current program. Essentially, lending from other governments allows Greece to get its fiscal house in order at a more measured pace and with less immediate economic pain than were the credit tap turned off instantly.

EFSF Leveraging The use of the EFSF to provide first-loss protection (“credit enhancement”) can hypothetically magnify the fund’s effectiveness. For example, if a country’s creditworthiness is suspect and it is generally believed its bonds can lose 20% of their value in a default, then by guaranteeing the 20% first-losses of the country, the EFSF largely transforms the country’s bonds into risk-free bonds. It thereby lowers the interest rate for the entire issue, which in turn lowers the chance of default and the likelihood that the monies providing the guarantee will ever be drawn. In this manner, the EFSF can protect bond issues worth many times more than its own asset base.

But this ability to “lever up” the EFSF’s protective capacity diminishes as the prospective default losses grow. Loss rates for sovereign defaults historically average about 50%-70%.

Moreover, it’s not clear that the first-loss guarantees represent anything new: the EFSF was never meant to repay that part of a country’s debt it could repay by itself, but only the part it could not (i.e. the losses). The only difference arising from last week’s agreement is the intent to explicitly guarantee against first losses in advance rather than after the fact, in the hope that borrowing rates can hopefully be kept lower. But because the EFSF’s existence and mandate is well-known by bond investors, it is likely that the guarantee against losses is already reflected in bond yields.

Details about the private sector contributing in some manner to the EFSF are very sparse. But since the EFSF’s purpose is to provide funding for governments that cannot borrow of their own accord, it seems unlikely that private investors will be eager to lend to those governments through the EFSF channel when they are unwilling to do so directly.

New Financial Commitments Conspicuously absent from the agreement was any commitment by the respective governments to raise additional monies. The agreement by private sector holders of Greek debt to accept a 50% writedown rather than “roll the dice” helps remove some uncertainty from the overall equation, but no new resources came to the table. For practical purposes, very little changed.

Even the modest debt-writedown proposals are not assured, since Greece’s Prime Minister made a surprise announcement this week that the proposal would be put to a referendum. With yields on Spanish and Italian debt rising again and some concerns about France also swirling, the potential cost to bail out an ever-growing list of Eurozone countries would fall on an ever-shrinking list of creditworthy borrowers, particularly Germany.

MF Global Bankruptcy The Eurozone sovereign debt crisis claimed its first (and possibly last) North American victim as MF Global, a commodities and derivatives brokerage, filed for bankruptcy this Monday. MF has approximately $41 billion of assets against only $1.3 billion of equity, leverage of about 97%. The company was ultimately undone by a $6 billion trade in Italian and Spanish sovereign bonds that prompted a credit-downgrade of the firm, which quickly led to the bankruptcy filing

MF allegedly comingled its own accounts with those of its clients, which is strictly prohibited by regulators. It remains to be seen whether all client monies, which were to be segregated from the firm’s trading business, will be recovered.

Disclosure The information contained in this article is taken from sources believed to be reliable and complete. However, ATB Securities Inc. and ATB Investment Management Inc. assume no liability or responsibility whatsoever for the completeness or accuracy of the information. This is not, nor should it be interpreted as, a solicitation to buy or sell securities. Always consult with your investment advisor before buying or selling securities.

ATB Securities Inc. (Member Canadian Investor Protection Fund), ATB Insurance Advisors Inc., and ATB Investment Management Inc. are wholly owned subsidiaries of ATB Financial and are licensed users of the trademark ATB Investor Services. ATB Financial is a registered trade name/trademark of Alberta Treasury Branches.

Michael Lewis was responsible for piquing my interest in finance in the 90s by his book Liar's Poker. The intrigue and craziness of soloman bros. is now in Greece . They're in the headlines but see their culture by someone who has been there and seen it first hand. 

You won't believe what you're reading...

http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010