that oil spill thing
They probably could have gotten away with this a lot easier in a less popular ocean for sensational media coverage, say the Arctic or Indian. I'm not seeing them pull this of very smoothly. But who knows, they probably hedged against them selves in some really douchebaggy way. If I was going to make a play on BP (which I probably wont) it would be on mid-term volatility(1 to 5 years).
So... All that stuff about the benefits of the oil spill still stand (it's a great protagonist for environmental conservation, and oil Independence / alternative). However, the negative effects may be much larger than anyone anticipated a couple of weeks ago.
It's been like a month and a half now.
- What if it goes on a year?
- What are some of the most realistic approximations of that that would mean?
- Would anything like this ever naturally occur, due to say an earthquake?
I'm not real sure about the last one, but I'm pretty sure the first two can be restated as: What happens if the Atlantic Ocean stops working? A: Probably bad
I'm going to say: Value investing, and bow and arrow practice.
shakedown
The delay of the economic stimulus packages intended to help the EU is causing a lot of businesses on the verge of collapse to bite the dust. It would be a real shame to let an house cleaning opportunity like this go to waste. I think this will be a turbulent 6 months because of sensationalized news about companies failing, but most of those companies had been on their way to the compost for years. The fear of cascading collapse is similar to most peoples' fears of Darth Vader. The only difference here is that the bad guys have probably the biggest disadvantage in history. Democracy and the transparency afforded by the internet keeps almost anyone from getting away with anything for long. I'm sure there will be some exceptions - a handful of corrupt businesses dodging the bullets of new reform, and a few legit businesses slipping through the cracks. But all in all the economy is in the best position it may have ever been in to grow. Define a dollar cost averaging strategy to keep in affect until November and STICK WITH IT.
5 year predictions
Wow the VIX has really been up, may have been interesting in 2007. The economy has recently changed long standing historical averages. It just goes to show that technical analysis of almost any kind is a magic trick that eventually becomes defunct. I'm just being cynical, and its pretty easy to argue that fundamentals are just a delusional subset of technical analysis. The conclusion is anything can happen, and interestingly the most unforeseen things usually shape the economy in the most bastardly ways.
it was the internet in the 90's and the car some time before then. Other major influences were less tangible - legislation, tariffs [(from the Arabic تعريفة, transliterated taʿrīfah, "notification"; derived from the verb ʿarrafa, "to announce, inform") is a tax... source= wikipedia.org], and political divergence.
KKD looks way over priced - Just checking it out. Also sad to report that Frito-Lays is not publicly traded. Who's the biggest manufacturer of Rockie-Road?
prediction #1) I am sure there are a lot of hippies out there who think Jerry Garcia is coming back in 2012 to prove everyone who doesn't get stoned at 9:30am wrong, and somehow send everyone into the woods to get stoned and dance until the sun explodes - but it's not gonna happen. The internet has atleast another decade if fast-paced innovation in store. It seems like it hasn't changed in a while, until you try to use a computer thats 2 years old to do anything. There will be growth in the internet. What are the side effects? A: probably more fat people who know a lot about things you can learn on the internet. So - there is definitely going to mean more money in the "fat-people market place". Strong BUY diet things, big clothes, fast food, soda, donuts. mmmmmm donuts.
2) thinking about it
Moose Pick
The markets been pretty volatile the past couple of weeks. Looking at longer term charts is a good way to calm your nerves and keep you head level. Notice the ttm still seems to be pointing pretty directly in the recovery direction.
SSW - another great buying opportunity in a market shaken up by EU credit concerns and offshore oil leaks.
Recent plans to drill off the Atlantic coast have been canceled due to the leak in the Gulf of Mexico. This could slow inflation/economic growth, but is not anywhere near significant enough to turn things negative. I have a desire to see the environment conserved, so there are lots of benefits for me personally. Besides the environment, it's just another motivating factor in the race to lose dependence on oil. We're on the brink of an alternative energy source. Once it's clear what it will be there will be massive growth. Most significant prospects are much more environmentally friendly than oil as well.
Greece has agreed to Austerity measures that would reduce government spending. I am sure there are some social services that will suffer from these measures, but hopefully it will have a much greater positive effect, perhaps creating greater transparency of government spending, and hopefully helping clear up some of the worst cases of corruption in the EU.
The biggest concern in the EU is no longer Greece, its other countries which may need similar bailout packages. There will be waves of good and bad news related to economic legislation being cranked out like sausage to deal with the economic bottlenecks. They will eventually pass, and markets will respond positively (in the long run).
Deciding whether a down day like this is a buying opportunity or a good time to run is like asking yourself if you believe in the boogeyman. I can't say with 100% certainty that he doesn't exist, but I have a feeling his bad reputation has been blown way out of proportion. This is a great opportunity to average down. I have made 2 fairly reactive trades in the past 2 days. They are largely based on technical analysis(recent lows) even though they are in companies with strong valuations.
I need to keep in mind that negative inflation can occur temporarily, and that temporarily can mean years. I have definitely taken some steps to profit from the inflation that will almost certainly counteract the recent dips in the market. So if I am using the car shocks metaphor, it's like my shocks have begun to absorb the impact of these couple of down days (by averaging down my cost basis), but I want to make sure my shocks don't bottom-out. I will evaluate the steps I've taken and how much travel I have left (ability to average down farther if there is a lower local minimum). Hopefully I could absorb a shock to say Dow 9000 level.
Update: Wow bad week. I've firmed up my bear market plan: another buy in if Dow gets to 10,000 level, another at 9,500 level, and save a real mother load for a 9,000 level market which I suspect we won't see.
Moose Pick
Reinforcing GSH with some calls. This is the biggest loser in my portfolio, so I closely scrutinized my valuation of it. It's pretty hard for me to imagine that the low price is anything other than a strong BUY opportunity.
Look at that damn P/E(<10 at the time of this post)!
Margin Interest Deduction
So I was feeling like testing the waters of margin after I found that the interest can be deductible. I looked before I lept, but not well enough. The interest is only deductible from investment income. The IRS definition of this is pretty confusing, but from websites that attempt to filter through the smoke it looks like it most often means qualified dividends. Qualified dividends have in recent years been taxed at a reduced rate - capped at something like 15%. What I was unaware of is that when you have a margin account, as opposed to a cash account, then the broker can lend your shares for short sells, and then the dividend you receive is not qualified, but a In Lieu Dividend /Substitute Payment. This type of dividend still counts as investment income[or does it? the IRS is so vague about it], however according to what I've read so far, it is not eligible for the 15% tax cap that qualified dividends are offered. Most of the information I found seemed like it was put together by someone approximately as intelligent as Aunt Bee, including the IRS site which is full of broken links, and blatantly wrong information. I'm not done with my investigation, and will try to cite the sources I've already mentioned, but I am just trying to get this new category started for now. So check back later if links aren't here yet.
here is the site claiming that In Lieu Dividends are not eligible for the 15%ish tax cap. I find this slightly hard to believe, since the type of dividend you receive is out of your control, at least pretty far removed from deciding if you want a cash or margin account.
Follow up: looks like Aunt Bee was right this time. The preferred tax rate that qualified dividends are eligible for is a fairly new rule, and I imagine the rest of the tax law simply hasn't caught up.
I still don't have a clear answer to whether or not substitute payments count as investment income which investment interest can be deducted from. Substitute payments do have a small subsection in the investment income section, which is little more than a link to a section explaining how different they are than dividends.
IRS Publication 550, Investment Income >> dividend section - "Certain substitute payments in lieu of dividends or tax-exempt interest that are received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. See also Reporting Substitute Payments under Short Sales in chapter 4."
from the "Report Substitute Payments" sec. - "Do not treat these substitute payments as dividends or interest. Instead, report the substitute payments shown on Form 1099-MISC as “Other income” on line 21 of Form 1040."
I guess writing these tax laws actually require less work than driving a bunch of tax payers to the middle of a desert then pillaging their house before they get back.
From "Other Income" sec. -
"Bribes. If you receive a bribe, include it in your income."
also
"Illegal activities. Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040..."
but no mention of "substitute payments" WTF
I finally called the IRS and they told me it was too complex of an issue for them to answer and that I would need to visit a CPA that specializes in this type of deduction. So, look here for an answer in the spring of 2011.
Here is a link to a really good article I finally tracked down from Aunt Bee's article,
referencing this Investment News article "A nasty surprise on dividends" , from January 26, 2004
update: After talking to a wise-ass(a tax professional) I've been advised this is a losing game. The amount of special circumstances regarding investment income classifications makes the potential deduction not worth it. Stick with the qualified dividend tax shelter and save yourself a headache.
Flash to be buried next to ColdFusion
Back in 2007 I had a strong belief that open source software would, in the long run, crush proprietary. The biggest historic example I was closely familiar with at the time was Macromedia's ColdFusion hybrid scripting templating language. At the time I had, and this article has a perspective largely focusing on the web. Back in 2007, and not so much differently now, the two major exceptions, or existing paradoxes, were
1) Microsoft Windows, and
2) Macromedia/Adobe Flash.
The biggest reason I saw for the death of proprietary at the time, was the cost to students to gain exposure to development platforms. Microsoft most clearly attempted to deal with this by releasing Express versions of their IDEs. I'm not sure what Adobe has done, but I imagine there were similar attempts to make sure they had a good share of developers, especially recently graduating ones. These attempts as far as I can see are failed. I'm not exactly sure why, but there is something about proprietary software practices that places lots of serious obstacles in the way of upgrades and major future modifications. They are somewhat cornered into sticking with existing code bases much more so than their open-source counterparts. The inability to revitalize significant portions of code base eventually leads to slowness and memory leaks. In the case of ColdFusion which I have close personal experience with, this was painfully obvious. There are similar quotations from Apple's Steve Jobs about the state of Flash, most interestingly citing security risks [I imagine buffer overflow exploits]. Just recently I read that Microsoft has jumped on the HTML5 bandwagon and shown interest in kicking Flash to the curb.
OK, I did a surprisingly good job of predicting this 3 years before it happened. But now I am one of the biggest skeptics of my own prophecy. The reason? Flash has found a way to implant itself in graphic design departments at all college/universities. I still believe it's day will come, but it will be a slow painful death with lots of people wearing berets clinging onto outdated and substandard technology.
Maybe I shouldn't be so hard on the pseudo technocrats from the design world, after all Steve Jobs is ready to move on. I guess the main question is, where is the new IDE that's going to fill all of these gaps?
CDOs, the SEC, and economic regulation
The SEC is trying to look like its busy by attempting to amplify the public anger over the 2008ish economic downturn. The fundamental argument the SEC is using is that the popular public opinion is that banks are the bad guys, and should be punished for the recession. The recession has many clear connections to cascading credit defaults - credit in general is a business of a bank. Not to mention one of the key fundamentals of the modern global economy.
There are a few key concepts of the credit derivatives markets that need to be kept in mind before pointing fingers:
- Legislation deregulated this market for the reason that anyone trading these securities is a "sophisticated investor": most of the people buying and selling these things are banks, or institutions.
- The integrity of the credit rating associated with these things is completely inaccurate.
- The underlying asset valuation is similarly completely inaccurate/ often ignored/ not in the interest of the buyers or sellers, until there is unforeseen volatility.
Essentially these things are assets created out of little more than thin air to help balance the sheets, and keep the credit flowing. Then they are sold by highly efficient sales people. Eventually at the bottom of the transaction is a sucker taking a variable-rate sub-prime loan that closely resembles a time bomb.
The most obvious way to insure cascading credit defaults never happen again is to stop lending. Something that no one on any side has enough self control to actually follow through with. People are greedy, and credit is a manifestation of that greed. It allows people to have things without first working for them, and for lenders to ensnare people in debt. Personally I don't like pushy sales people, or people who never keep their promises. My natural distaste of slimy bastards, and douche bags kept me from feeling much of the impact of "the meltdown".
Words of advice for anyone who was hit hard:
- If anyone reminds you of a used car salesman, don't do business with them.
- If you know someone has maxed out credit cards, don't lend them money.
I feel without a doubt things will be back to normal as far as banks and credit are concerned before long. But the extra turbulence created by the recent SEC finger pointing is causing me to put a 6 month hold on any banks I own shares of. So, hold off on adding to banks so soon. See how things pan out. Maybe there will be a better buying opportunity around November 2010.
I decided to make "Legislation" red because after having some time to sort out my thoughts it became obvious who is most at blame for CDOs being as big of a problem as they were. The argument they had for deregulating things was that, if they didn't, then the markets would just move out of their jurisdiction - London being the most likely destination since it has a deregulated credit derivatives laws. Really this just leads us back to the words of wisdom. Re-summarized: Bawlers, Brawlers, and Bastards.
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