NEWS #73

From Octobver 24, 2006 to ?

April 23, 2007

I include here a link to Bill Gross on the PIMCO site. This is required reading for me once a month. I quote below.

"...The chart shows the amount that home prices or mortgage rates (or a combination of the two) need to decline in order to revert back to affordability levels in 2003, a year which might have been the last to be described as a 'normal' year for home price appreciation. Since then, 10+ annual gains have been the rule whereas average historical estimates provided by Robert Shiller may have suggested something on the order of 4-5%. By that measure alone, homes are likely 15-20% overvalued (3 years x 5%+ annual overpricing). Chart 2, in addition suggests much the same thing. If mortgage rates don't come down, home prices need to decline by 20% in order to reach prior affordability levels. If rates do come down, home prices will drop less.

...This study's important conclusion for PIMCO and our clients is that if home prices in the U.S. have peaked, and are expected to stay below that peak on a real price basis for the next three years, then the Fed will cut rates and cut them significantly over the next few years in order to revigorate an anemic U.S. economy. Strong global growth (not part of this study's assumptions) may temper historical parallels and provide a higher floor than would otherwise be the case."

So Gross is saying that over the next three years house prices have to fall or rates do, and that a combination of both is the most likely prospect.

Ben Smith sends along comments that state that the Bears have built huge walls of worry of late. The next wall of worry may well be the 'sell in May and go away' worry.

Florida comments that my trade in NVEC has only limited upside potential. He looks at a move to the 30 to 31 dollar range as the end of this cycle. NVEC has been stuck in a price pattern for a very long time now and I will watch for any strength. If I fail to see any I will be out of that stock.

Florida also says we could see market move higher over the next six to eight weeks, but the next two trading weeks look to be rather neutral.

April 16, 2007

I have a couple of related links. The first is to 'Among Taxpayers, Inequality May Equal Cheating', by Shankar Vedantam of the Washington Post.

A related link is to 'I.R.S. Audits Middle Class More Often, More Quickly', by David Cay Johnston of the New York Times.

Over at Forbes.com is a standing column of interest. It is 'Digital Rules', by Rich Karlgaard. Please read the blog 'Stocks Never This Cheap. I quote it below.

"But for now, and probably for another 18 to 24 months, the case for buying stocks has never been stronger. Because of the roughly 3% earnings-yield/bond-yield spread, companies will be motivated to borrow money to buy back their own stocks. Or, private equity firms will do it for them. Either way, you can follow along and make great returns."

Finally, here is a link to an article from last week: 'Subprime Drag Worse Than Expected' by Evelyn M. Rusli of Forbes.com. I quote below.

"The trade group significantly lowered its 2007 outlook for existing and new home sales. It predicted that prices of existing homes will decline further. New-home sales are now expected to plummet 14.2% — a much deeper cut than the group’s earlier estimate of a 10.4% dive. Meanwhile, home resales should edge down 2.2%, which was also below the initial estimate of a 0.9% fall. Existing home prices are expected to drop 0.7%, to 220,300, after slightly rising in 2006."

April 2, 2007

Duncan sends along a link to this story titled 'U.S. stocks seen falling in coming week', by Carla Mozee of MarketWatch.com. I quote it below.

"Equities marked the end of the first quarter Friday with the Dow Jones Industrial Average recording its first quarterly loss since 2005. The broad index now sits in negative territory for the year so far. The S&P 500 Index and the Nasdaq Composite, meanwhile, were clinging to modest gains for the year. Jolting stocks on Friday was news that the U.S. has imposed trade sanctions on China.

'We're in a nervous market,' said Goldman, chief market strategist at A.G. Edwards, who said the news of the sanctions triggered the market's hatred of uncertainty."

Ben sends along word that Jim Rogers likes agricultural commodities and sees recession ahead for the U.S. Here is a link Ben sent along to 'Commodities Trounce Stocks, Bonds on Oil, Soy Revival', by Tan Hwee Ann and Pham-Duy Nguyen of Bloomberg. I quote below.

"'When we look at the supply and demand' of most commodities, there's a lot 'to be very bullish about,' said Larry Kantor, co-head of research in New York at Barclays Capital Inc., which told customers last week to buy tin, gold and corn. China has 'a voracious demand for raw materials.'

Imports of copper jumped 12 percent in February from a month earlier and were almost triple the level of a year ago, according to the Customs General Administration in Beijing. Crude oil purchases rose by 8 percent in the month and palm oil by 20 percent, the administration reported."

Rich Kolon also noted the latest from Jim Rogers. Readers should note that Rogers runs a commodities fund and has a vested interest in the success of commodities. However, that does not make Rogers wrong. Demand for commodities by India and China may well keep that a hot market for years to come.

Here is a comment from Florida:

"I agree with your call of a credit crisis, but for a localized look: When I left the keys, in the upper keys alone (40 miles on US1) we have over 900 new condos coming to market in the next year starting anywhere from 850,000 to 2mil for waterfront. I would consider this a bankruptcy in slow motion, denial being the normal human emotion to a problem which has NO solution. It will be empty condos for 3-10 years. Therefore it is a housing crisis.

There will be no jobs created in serving the needs of empty homes. And in the years it takes for any stabilization in the price of these and all related and competive exisiting empty real estate properties there is now and will be a crisis in housing."

Florida makes his point well. These and many other homes were financed by cheap money coming out of the FED and cheap money coming at us from the Chinese and Japanese in the form of U.S. bond purchases. Those purchases put an artificially high support level on our bonds, thus guaranteeing artificially low interest rates.

Now as housing unwinds we will see our economy pull back as more people involved in the construction find themselves out of jobs. People out of word don't buy homes themselves, or cars, or any other big ticket items. I would expect all large ticket sectors of our economy to suffer. I would also expect the home sales problem to creep geographicly from the keys into the rest of Florida, and from other over-built areas in the country into areas that are right now 'healthy' economies.

March 29, 2007

Ben Smith sends along this link to the Dow Jones Home Construction chart. I looks like a classic head and shoulders pattern to me.

I found this link to 'Far From the Bottom', by Jonathan R. Laing of Barrons. I quote it below

"At this point, Shiller still holds to his earlier scenario for home prices — a cumulative 20% to 30% decline in nominal (non-inflation-adjusted) prices over the next five to 10 years. In other words, the slide is unlikely be sudden; prices could fall instead by, say, 2% annually for 10 years.

Already some slippage in prices is appearing in Shiller's composite 20-city index. The December figures showed a price decline from November in 17 of the 20 markets (the composite was down 0.4%), though the December reading was up a modest 1.7% from a year earlier."

I will repeat my warning here. This is not a housing crisis so much as it is a credit crisis. It looks to me like the FED is trying to burst this bubble carefully so as not to kill the whole economy. It will be interesting to see if they can pull it off.

Readers should know that I sold my HAL today and that I am looking to sell my CMED.

March 25, 2007

Here is a link to 'Soon the Fed Will Have to Face Up to Inflation', by Donald Luskin of SmartMoney.com. I quote it below.

"Why shouldn't the Fed just print an infinite amount of money and send bales of it to everyone in the world? That would be the ultimate form of this new religion.

The reason, of course, is inflation. Inflation is too much money chasing too few goods. Print too much of it, and the prices of the goods that money can buy go up.

So if the Fed prints too much money, it may succeed in buffering the economy from risk as it is doing now. But the cost of that buffering is inflation."

While I may agree with much of what Luskin says, I recognize that he is in serious disagreement with what Bill Gross thinks the FED's agenda is. These two gentlemen strongly disagree about what the FED's next move is going to be. Luskin thinks the FED is going to raise rates to fight inflation, while Gross thinks the FED is going to keep these current rates until enough damage has been done to asset prices. Then, Gross thinks the FED is going to lower rates. One of these guys is wrong.

I think my money is on Gross's arguement. This is helicopter Ben we are talking about. The FED has lied to us for years about inflation. It is substantially worse than the FED admits. How else could house prices be where they are? That being so, why would the FED even worry about an inflation it to which it won't admit?

In my last comments I gave a link to Bob Hoye's comments. Hoye has done a good job of analyzing Gold markets lately. But readers should note that while I gave the link, the link is not an endorsement of Hoye's views. The reader should also note that I do not own gold right now, and have no plans to do so in the near future. Gold has been tough to play lately. People just getting into gold in recent months have been handed their heads. Beware. There be dragons there.

March 23, 2007

Good news for the gold bugs. Here is a link Ben Smith sent me to 'Good News for Precious Metals' by Bob Hoye of 321Gold.com. I quote below.

"The decline from $692 to $635 has likely put in the bottom of the correction in gold bullion. While the basing/consolidation phase could carry into mid April the next move of significance is expected to take out last May's high of $735 by a significant amount. Timing models now point to late July through mid August for the next interim high."

March 18, 2007

I found two articles worth reading. The first link is to 'Silver lining in subprime mess - Commentary: Plus, the benefits of amnesia', on MarketWatch.com. I quote it below.

"A row of failures would certainly follow a well-worn pattern. As long as credit bubbles last, lenders compete to get business. That pushes down the quality of the loans for all the institutions. When the bubble bursts, the weakest lenders suffer first, but the strongest lenders usually turn out to have surprisingly weak portfolios. So institutions tumble, one after another.

That's what happened in the UK in 1973, when the secondary banking crisis spread from London and County Group to the entire sector. It was the same in Texas in 1987-8. After oil and commercial real estate prices dropped, every bank either failed or was forced into a merger. Texas Commerce Bank, which was supposed to be a cut above the others, only lasted a few extra months."

This next link is to 'Gold -- a victim of its own success', by Myra P. Saefong of MarketWatch.com. I quote it below.

"Traditionally, the precious metal has been seen as a way to hedge against losses in times of financial crisis and economic or political uncertainty -- and there's certainly been a great deal of that in the global markets recently.

But, 'the gold market has thus far been frustratingly unable to summon its historical safe-haven attributes,' said Jon Nadler, an analyst at Kitco Bullion Dealers.

'When you have bullion moving in tandem with equities, you have to scratch your head,' he said. And 'the last thing the traditional buyers want from gold is for it not to perform when the going gets tough in paper assets.'"

Last, but not least, The Orange Section sent word that I should read Bill Gross's latest Investment Outlook - March 2007 on the PIMCO site, actually titled 'Ten Little Assets'. This is a must read for all Benders.

Gross often has the best insight into what the FED is up to. It is his contention that the FED has raised the discount rate to exactly the level where it will begin to negatively affect the prices of assets. It is his contention that the damage done by the interest rate affects asset prices in a particular order, hense the title of the piece: Ten Little Assets. Here is that order: Yen, Bonds, Housing, Commoditites, High Yeild Mortgages, High Yield Bonds, Stocks, Emerging Market Bonds, Emerging Market Currencies, and Private Equities. Gross says that the FED may be content with damaging prices of assets at the front of the list, and may lower rates before the damage works its way to the end of the list. That is why he anticipates the FED lowering the rate sometime before the end of the year. Here are a few quotes.

"What I've been saying over and over again on the investment side is that the Fed will cut rates later this year and that their two key criteria will be employment and asset prices. With construction laborers about to hit the unemployment lines and the U rate in jeopardy of rising more than the Fed feels comfortable with, an ease as soon as mid-year may be in the cards. I have a strong sense as well, that mortgage credit availability is in the midst of a cyclical squeeze due to subprime defaults and 'better late than never' moral suasion/congressional supervision of mortgage bankers. This should not only continue to floor the housing sector but dampen consumption, as the combined effect of layoffs and Mortgage Equity Withdrawal, 'withdrawal' produce a 2% or less real and a 4% or less nominal economy. Those numbers when extended for three or four quarters (which they now have been) are the stuff leading to output gaps, rising unemployment, declining inflation, and an easing in overnight Fed Funds rates.

Because of the importance of asset prices, the Fed has in my opinion targeted not only the standard Humphrey/Hawkins components of employment and inflation, but houses, stocks, and risk spreads of all types as indicators of the future course of the economy. They may publicly announce that higher inflation is enemy #1, but such is hard to believe with worldwide prices and the U.S. core moving towards, and in some cases resting on safe ground. It's stocks, private equities, corporate buyouts and levered risk spreads that really are front and center on the Fed's agenda because they - not CPI inflation - represent the future threat to steady growth via their exuberance."

March 16, 2007

Duncan sends along this link to 'Subprime Market -- Isolated or a Tipping Point?', by Gene Sperling of Bloomberg. I quote it below.

"Subprime loans, which constituted 20 percent of all mortgage originations since 2005, come on top of a surge of risky ARMs to credit-worthy borrowers in recent years. Because many of these ARMs included features such as teaser rates for two years, no money down, alternative documentation methods, and interest-only options (to defer repayment of principal), they bear the potential of future payment shocks.

In a speech last May, Fed Chairman Ben Bernanke said that 30 percent to 40 percent of all mortgage originations in 2005 fell in this 'nontraditional' category. Considering these figures, the subprime story starts to look like a chapter in a book about how lenders relaxed standards across the board in 2005 and 2006, in order to keep up fevered origination volume even as home prices and interest rates rose."

Rich Kolon writes that earlier he had pointed out the U.S. rise in M3 (money supply) and how that tends to feed speculation in stocks and other investments.

Here is a link that shows M3 trending near 12 percent a year.

"This is not just an American phenomenom," writes Kolon. "Many countries have gunned their own M2 or M3 money supplies at +10% or more increases to remain trading competitive and keep their people working. It's a simple concept: when credit is plentiful (as in high M3 growth), borrow money cheap and buy real things. With the excess, buy liquid assets, like stocks or bonds.

This creates some bubbles, but the money will just swing to some other speculation, and then back into the long term themes. The Japanese had extremely low interest rates, near 0.5%. Speculators borrowed the Yen and bought precious metals, Chinese stocks, uranium stocks, etc. When the Japanese announced an interest rate increase, the speculators sold their precious metals, Chinese stocks, uranium stocks, etc. to buy Yen to repay their loans, before the Yen appreciated too much. So all these markets collapsed.

BUT ... no one is really stopping the printing presses. Therefore we have a long term buy opportunity now, in all the things that had heavy speculation. Most individuals don't understand what is happening, so we some nervous Nelly selling here and there in the meantime.

Don't be taken in by immediate economic collapse scenarios under these conditions. Helicopter Ben is a different man than Paul Volcker. Bush needs someone to finance his war spending, and Ben is his man to do the job thru credit (money) creation.

...Keep speculating where demand is greater than supply. It is practically guaranteed that the dollar will go down in value versus limited supplies. In other words, limited supplies will go up in value (paper currency)."

Here is a link to 'Corporate profits can't sustain their current pace', by Shawn Tully, Fortune editor-at-large. This article puts current corporate earnings into proper perspective. I quote it below.

"By smoothing earnings, Asness gets an adjusted P/E of around 25 for the S&P 500. That's well above the historical average of 14 or 15. That's expensive, and buying in at high prices has always been the ticket to low future returns.

Third, dividend yields are extremely low, frequently a signal that stocks are overpriced. They stand at 1.8%, less than half the average over the past century. One reason is that P/Es are so high; another is that companies are retaining a higher portion of their earnings."

"China's economy grew 10.7 percent last year, the fastest pace since 1995, driven by surging exports and investment. The economy expanded by at least 10 percent for the past four years.

'China has maintained relatively steady and fast growth over the past few years, but this is not a time for complacency,' Wen told reporters at the National People's Congress meeting. 'The biggest problem in China's economy is that the growth is unstable, imbalanced, uncoordinated and unsustainable.'"

Ben also sends word along that Jim Rogers expects the mortgage crisis to baloon into a general real estate bubble burst in the U.S. That, he concludes, will hurt every growth and every 'emerging' economy in the world.

March 15, 2007

Here is a link to a real horror story titled 'Credit Crunch Snares Another Subprime Lender', by Will Swarts of Smartmoney.com. Here is a second link to 'In subprime mess, another dumb theory falls', by David Callaway of MarketWatch.com. I quote it below.

"In the media, the general rule of thumb is that the next big crisis in the financial markets will come from something totally unexpected. An earthquake in Japan (Barings collapse); a plunge in Asian and Russian currencies and debt (Long-Term Capital Management); a shell game in the executive suite at one of America's most respected new economy companies (Enron).

The thing about the brewing mortgage scandal, however, is that everyone saw it coming. They just refused to believe it."

Loyal readers will recall words from the Orange Section about this very problem posted over a year ago. For my part, I said that what we had was not a housing bubble so much as a credit bubble.

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Ben Smith sent along this link to 'An objective look at silver', by Jack Chan. It seems that a lot of gold bugs want to switch away from gold and into silver. Jack Chan warns against moving into either.

March 13, 2007

I include a link to an article I found yesterday titled ' Have an Exit Strategy for the Stocks in Your Portfolio', by Jonathan Hoenig of SmartMoney.com. I quote it below.

"You bought XYZ at $30 and it rose to $40. Now, amid a selloff, XYZ has fallen back to $35. In our rush to 'do something,' we are too often tempted to grab the profit now, holding the cocky belief that we'll be able to re-enter the trade later at a cheaper price.

And while it always sounds like a plausible plan in the midst of market turmoil, rationally one can see it's an almost unbelievably arrogant fantasy. Just because we were right in buying XYZ, we believe ourselves prophetic enough to know that shares are likely to fall further. We believe we are smart enough to be able to determine exactly when its decline has stopped. Then, so the thinking goes, we'll be able to jump back in with an appropriate position size and ride the stock back up to the previous highs.

If a position of mine has corrected and I'm concerned about further loss, I'd much prefer to simply reduce my exposure rather than exit completely with the hopes of re-entering at a lower price.

... This is why I think it is vitally important for every trader to have some assets outside the capital markets sitting in an old-fashioned savings or money-market account that is unaffected by market risk.

Simply put, this "rainy day fund" helps gives one the confidence to hold positions and take appropriate risks during stressful periods. It's much easier to exit a low probability trade or take on a high-risk exposure when you know you've got a safe cushion of cash."

Followers of the Bender Paper Portfolio know that I often have a huge proportion of it in cash. The writer above is correct. Cash gives one a certain psychological edge in the market. Right now I do not have that edge because I have committed all the reserves to the market. There is a reason. That reason is that I beleive that for a short time here virtually all the risk, in the stocks in which I am interested, is gone. When that happens, and it happens two or three times a year, that is when you commit reserves. Later, when you have sold, you should build that cash reserves back up.

I committed most of my horde of cash to NVEC. Was it the absolutely best time to buy NVEC? No. But it was a great time to get back into the markets and NVEC was, by far, the best stock in my system at this time. So when I decided to leap, I lept onto my best stock.

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A reader, I will call him Florida, does not like CMED here and wanted to know why, besides NVEC, I also bought CMED. Here is my resonse.

My focus for all three stocks I own is short term. When I sense the market is topping out (if I can), I will liquidate all three positions because there is likely one more big leg down to this market.

I like CMED, like NVEC, because of its fundamentals and its ablility to rise in the short term. Right now I think risk is very low in all the stocks in my system, and particularly in the three I own. I think as days go by the risk will begin to rise. So my intention is to liquidate and not go into the next dip with anything but cash.

With CMED, it has clearly formed a temporary bottom and, along with the other China stocks, has already taken its lumps...at least for a while. Also, this whole drop has a very Neyian feel to it, one of behind-the-scenes manipulation. Much has been made of Greenspan's teleconference to the Chinese and the supposed reaction by the Shanghai market, which started the whole ripple felt by the world. But, really, all he said is what he has been saying for quite some time now. So, with markets a bit high in February, it was easy to take them down, and quickly at that.

Ney even warned us to look for a 'computer glitch' where you suddenly find the market much lower with no other rational explanation other than the glitch. That, he said, was a clear sign of manipulation. Isn't that exactly what we saw? Having seen what we saw then, the only conclusion is that the intention of 'insiders' is to take markets lower. The other logical conclusion is that we have not seen the end of their efforts yet, that there will certainly be one more leg down.

While I think it is becoming more and more difficult to manipulate markets, I also think at natural market highs, it becomes much easier for insiders to take markets down.

No, my play is not a long term one at all. And I fully expect the markets to go lower after a stealthy and healthy run up. Also, readers should note the heavy Merger and Aquisition activity that occurred yesterday. Nothing like a market drop to get you the price you'd like to pay. The irony there is that prices are likely to go lower yet.

March 12, 2007

This could be a short little stealth rally. Duncan writes that we have yet to get through another dip that likely will be even sharper than the last one. So I am watching this leg up even more closely than usual.

For the gold bugs, here is a link to 'Got Gold Report - COMEX Commercial Gold Traders Dump Short Bets Again', by Gene Arensberg of ResourceInvestor.com. This was sent to me by Ben Smith.

One correspondent last week described NVEC in terms of a parade. He said that it did not look like the NVEC 'float' was ready, and would not be ready until this week to join the 'parade'. From its actions today, I would have to endorse that view. It has certainly entered the parade now.

March 9, 2007

Jay Steele points out that the put-call ratio on Wednesday of last week was 2.0, the kind of level we typically see for a short term bottom. That's the territory it was in after 9/11. He goes on to point out that the ratio has been 1.5 or greater for four days in a row recently. For him, that is a clear signal that a big change is at hand.

I think we are in for a stealth rally.

Latest: After some consideration I went all in today, buying a lot of NVEC and also some CMED.

March 8, 2007

Ben Smith sent this link to 'Gold - Another Corrective Phrase', by Bob Hoye of 321gold.com. I quote it below.

"However, because this is a major turn in the cycle, not a subset, a minor low can be anticipated after March 9th but gold prices can be expected to stay under pressure for a total of six to eight weeks (April 9th to 23rd) before being capable of the next sustainable rally."

Ben Smith also sent along this link to 'Current signals and positions', by Jack Chan of 321gold.com.

"There will be opportunities this week for short term scalpers, as the metals are deeply oversold and should see a relief bounce. But for position traders, our current signals suggest being in cash or short are the only viable positions."

Things are not good in the gold world. We keep getting snippets of news about yet more bad loans out there. I think those will keep coming in. In the meantime I think we should be on the lookout for a stealth rally. I just am not sure about the timing. I think a smaller, yet equally sharp, downturn in stock prices would set up just that kind of rally.

March 1, 2007

Duncan sent this link to 'If you invest in stocks, don't look Dow-n', by Robert Reich of the New York Daily News. I quote it below.

"The wakeup call this time around was Alan Greenspan, whose visage had been beamed by satellite to a group in Hong Kong on Monday (New York time). Though sounding generally optimistic about the economy, Greenspan - in typically cryptic fashion - warned that there was lots of money sloshing around global financial markets, leading to overoptimism, and he didn't completely rule out the possibility of a recession later this year. Boom!

I predict we will indeed have that recession - but it's too early yet to tell how big the explosion will be.

So, should the average investor - the worker with the 401(k), the retiree with a pension or the casual trader - be worried? Yes, but don't head for the hills. For one thing, there are no hills to head for. You've got to put your money somewhere, and capital markets are so globalized there's no place to hide.

You'd be stupid to put your savings under your pillow - or to throw everything into gold or T-bills or any other passing fad. Just as before, keep your savings diversified in a broad mix of stocks and bonds."

Yesterday, Ducan and Ben Smith both sent along this link to 'China's meltdown no surprise', by Jim Jubak of Money Central. I quote it below.

"The Shanghai market was a stock speculator's wildest dream come true, with that speculator's worst nightmare waiting in the wings. The game was fixed, and everybody knew it. While it lasted, the profits were too good to pass up -- the Shanghai index was up 170% since mid-2005. Every investor hoped to be first out the door when the day of reckoning came -- exactly the kind of rush to the exits that took place today.

Notice I say the Shanghai market and not the Chinese stock market. Not all of China's stock markets panicked. On the same day that the Shanghai Composite Index fell 9%, Hong Kong's blue-chip Hang Seng Stock Index lost just 1.8%.

This isn't a one-time differential, either. On Jan. 12, the Shanghai index fell almost 4% while the Hang Seng actually climbed by more than 1%."

Ben Smith also sent along the link to this article titled 'Templeton's Mobius: 'No good reason' for global stock sell-off', by Polya Lesova of MarketWatch.com. I quote it below.

"'Short-term investors, you've got to be cautious and ready for a downturn,' Mobius added. 'If you're a long-term investor, you should do quite well. These (emerging) markets, on a price-earnings basis, are not highly expensive, and there's no good reason for a massive correction.'

That said, barring any intervention by the government in China to slow the economy, the China pullback can last awhile, Mobius noted.

'We might see a 20% correction on the A-share market in China,' he said, referring to the country's domestic stock exchange that tumbled almost 9% on Tuesday.

He recalled the painful correction in emerging markets in May, noting that such tumbles are always unpredictable. China was never an exception to emerging-market volatility, he added."

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In late February a gentleman wrote to me a critique stating that I seemed to be in information overload. He was right. I was, and made the same discovery about 6 months earlier. That is when I began taking steps to simplify my trading style so that I may 'keep my eyes on the prize' as it were.

I have long used a blend of fundamental and technical data to make my investing decisions. The blend changes as I see a need for change. I try to achieve an ideal situation where I turn over my money - get into the market and out of the market - three times a year. That is only an ideal. A stock may not cooperate and may take longer than 4 months to 'develop'. Oh well.

One set of factors (certainly not the only) I use to select the 48 stocks in my system is PE, both Trailing Twelve Months (TTM) and Forward PE. Because I am trying to move my money in and out of the markets I prefer a stock with a higher PE over a stock with a low one. A higher PE tells me that other investors also recognize the potential of the company behind the stock and have ponied up the money to buy the shares.

Other companies may have great potential also but have low PEs. That is because the markets have yet to catch onto them. I find it difficult, at best, to pick a low PE company that is just about to catch on with the market herd. I like the odds of picking the spot where lightning is likely to strike, if it has already struck there once or twice already. So in my system I numerically reward stocks with higher PEs.

I also calculate what I call the PE Ratio. That is the TTM divided by the Forward PE. A really great growth company will often have a PE ratio of 2 or more. These are the companies most likely to report surprise earning to the upside.

I don't have time or space here to go further into the factors on the fundamental side of things. But, let me say that I try to skim off those companies that have the factors most likely to cause stock prices to rise suddenly and sharply.

Google and Apple both have a lot of those factors and both are in my system. But I would not dream of buying either right now because they are both close to their highs. It does me no good to buy a great stock at its high. At the other extreme, it does me no good to buy a dog of a stock simply because it appears to have bottomed. No, I want to buy a great stock at a really good price. So, the second phase of my system is to track where, in the price cycle, each of my 48 stocks are.

In my system all this boils down to a single number that is a blend of both the fundamental and the technical. I review all 48 stocks twice a month. Day-to-day I look at just the top 8. Those are posted above, in descending order.

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The Bender Paper Portfolio

On January 1, 1998 I began a paper portfolio to compete with the Motley Fools' own portfolio. They have since shut their's down. I keep mine going. I have used it to both reflect what I am doing in the market personally, and to experiment with different trading strategies. Over the years this have evolved to all of the former and none of the latter. I keep running this on my pages to encourage other private investors. I do not make a dime from these efforts.

I try to keep the portfolio as realistic as I can. Most years it makes money, and some years it loses. I charge a realistic fee for every trade. If I make a profit in a year, I charge off an 'IRS' fee from the next year before April 15. Here is a chart that shows how the Bender Paper Portfolio has been doing.

October 25, 2005 through February 28, 2006:

This commentary missing due to an accidental deletion.

October 24, 2006

OK, so I overshot the next weekend. It is Tuesday and I am back and functioning just fine.

Ben Smith sent me some recent quotes from John Mauldin. I include some below.

"In conclusion, the soft-landing bulls are getting it wrong and are altogether confusing cause and effect when they argue that lower oil prices are good news and good signals for future economic activity in the US: oil and commodity prices are exactly falling because we are now experiencing a US and global economic slowdown; so such price action should be interpreted as bad news rather than good news. This is the typical fallacy of non-economists that take a partial equilibrium - rather than a general equilibrium - approach to analyzing data; an economist would ask himself or herself: why are oil and commodity prices falling at the same time? What is the cause of it?

There is only one clear and consistent explanation of this generalized price fall: the US is sharply slowing down, dragging with itself the global economy. So, paradoxically, falling oil prices are bad news for the economy: they are the proverbial canary in the mine warning us of the recession risks ahead. Indeed, what both the oil and commodity markets and the bond markets and the housing market are telling us - or screaming at us - is: slowdown and recession risks ahead!

The fact that the stock market is allegedly now providing a signal that is different from the bond market and the oil and commodity markets can be then interpreted - as I have since August - as the typical suckers' rally that accompanies slowdowns where the Fed is expected to come to the rescue of the market and the economy. Remember that in 2001 95% of all economic forecasters predicted in March 2001 no recession that year; too bad that the economy had already entered into a recession by March 2001. The wishful hope of forecasters and markets was that the Fed easing would rescue the economy and that the economy would experience a second-half rebound."

I could not agree more with Mauldin's analysis. Beware investors. Buy only when you find a bargain, and then buy only lightly. Bargains are very hard to find right now. The Fed is more likely to ease than to raise rates. That tells us, or should tell us, that the peak of this boom has already been, and won't come back no matter what. Yet I think Duncan could be right about this stock rally lasting through the beginning of the new year. It well could. Markets and the economy can be way out of synch with each other. But I am only going to buy bargains when I find them. Period.

The economy in general is rolling over, slowly, ever so slowly. Housing is shrinking. Autos are fading fast. There you have it folks, the one-two punch, the two biggest investments a typical family makes and they are both weak or comatose (seen the Ford quarter lately?). Both commodities and oil prices were propped up by rampant speculation. But as soon as the U.S. economy started slowing the legs got kicked out from under all that speculation. Speculation in oil and commodities is a one-way ticket. It only works in expansion. When the expansion stops the ride is over. Gold, however, may still work in the future because of our scandalous balance of payments. The dollar can not hold forever.

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I fear that I have not explained my objection to the use of 'average income' by the Feds and the FED. So here is another try.

Here is a link to 'Democrats Focus On Income Gap, Health Care Costs In Election Campaigns', from MedialNewsToday.com. I give the key quotes from it below.

"Since 2001, the U.S. economy has expanded by 15% after inflation, but the median household income remains lower today than in 1999.

According to the U.S. Census Bureau, households with incomes in the top 20% accounted for 50.4% of all income in 2005, compared with 45.6% in 1985."

You see it is quite possible for the 'average' income to rise dramatically while the folks earning the the exact middle incomes, or lower, never see an increase. Here is how that works.

Let us say that in the first year of measurement the following nine workers are earning the following salaries:

15k, 18k, 25k, 30k, 35k, 40k, 80k, 150k, 300k

In this grouping the guy in the middle, the median, is earning $35,000 per year while the 'average' earning is $77,000. Note that the average is a statistical entitiy not actually representing any one of these real earnings, and lieing somewhere between the sixth earner's wages and the seventh earner's wages.

Four years later, in this example, the same nine workers are earning the following salaries:

15k, 18k, 25k, 30k, 35k, 48k, 98k, 233k, 470k

In this second grouping the median salary is still $35,000 per year, but the average is $108,000. The average is still a statistical entity and is still not associated with with any one of the actual earnings. Now it lies somewhere between the seventh and eighth earners' wages. No one from the middle on down is making any more than he was four years earlier. But the folks at the other end of the spectrum are doing very well indeed. That is what the quotes above are saying. In this example, which of course comes only from my own mind, the median wage is unchanged, but the 'average' wage has increase by a little over 40 percent. This example is exaggerated, of course. I exaggerated it to make a point. The 'average wage' any government entity talks about does not exist in reality. It is a statistical anomoly. Yet we have become so used to hearing it that we accept the word 'average' as if we really understand what it means ... and we don't really understand at all.

I suspect, and I can not prove, that the example I give above represents what has been happening in our economy. The rich have been getting richer. But that has not been much help to the rest of the workers. To drive this point home, I give those quotes again:

"Since 2001, the U.S. economy has expanded by 15% after inflation, but the median household income remains lower today than in 1999.

According to the U.S. Census Bureau, households with incomes in the top 20% accounted for 50.4% of all income in 2005, compared with 45.6% in 1985."

Now some will argue that 1999 was the peak of the tech boom. Well, not quite. I think that Spring of 2000 was. These same folks will argue that we are in another boom right now. The economy is growing right now, isn't it?

Tops are very hard to see when you are on them. But, for arguement's sake I will agree with these folks. I figure the top of this boom is just behind us. That being the case then, aren't we measuring from one boom-peak to another boom-peak, when we measure from 1999 to today? Well, aren't we? If the quote is correct then, I think it safe to conclude that even as the median income has declined, the average income has risen. That would certainly explain the housing boom. The median and lower wage earners never participated in the housing boom. Only the folks making quite a bit more did. Most of those mortgages have monthly payments that exceed the gross monthly earnings of the median wage earner.

But I will never be able to prove what I suspect. The numbers are all mush anyway. The Feds and the FED have been manipulating the data for so long they don't have a lot of meaning.

There are some unkowns that the Federals, and I can not calculate. Here is one. I was on the central coast of California this last week. I noticed farm workers setting up fields to begin growing some new crops. The thought that struck me was this:

There are twenty workers out there. Does the farmer accurately report that fact, or does he deal in cash only and report only ten workers? If so, how can the Federals know what the wages, the incomes, of those farm workers in any accurate manner? We may be gaining up to a million illegal aliens a year. How can our government possibly have a handle on their earnings? This unknown would certainly pull the median down, if it could be determined. But it can't.

Beware of the numbers folks. Have a big handful of salt handy when economic statistics are being bandied about.

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Meanwhile here are some relevant remarks from the Orange Section:

"I still think these kinds of statistics don't tell the whole story in regards to income. It is much easier for someone making 400K/ year to increase his income than someone making 35K. However, the finer point to me should not be about taxation being fair in terms of incomes. Incomes are not static, they change.

In my opinion, taxation is an income inhibitor, it takes money away from people so they cannot use it for other things. Now, I am not saying there should be no taxes. I think we all agree that there is some necessity in taxation. However, I think our tax policies should be designed around making it easier for the 35K guy to save and eventually become the 100K or 400K guy.

This is why I think repealing the Bush tax cuts is stupid. The Arguments against the dividend tax cut solely rely on the fact that most dividend earners are filthy rich. What they are not talking about is the fact that they will also resume taxing the dividends on everyone's retirement accounts. This is a classic case of inhibiting my ability to improve my financial standing.

As far incomes not growing, I would suspect it is a problem far outside of the realm of government intervention. What can the government do to shrink the wealth gap that does not involve capital destruction?"

Aye, Orange Section, there it is in a nutshell: what can government do to shrink the wealth gap that does no involve capital destruction?

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