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July 14, 2010

Wednesday Financial Briefing

NOTE: NSFW-ish pic at the bottom of full post.1

Stocks had another good day, with both the Dow and the S&P 500 indexes gaining one and a half percent. The S&P 500 closed at 1,095.34, and the Dow closed at 10,363.02. The gains were driven by optimism over corporate earnings, and not a little bit of wishful thinking. I'm happy because my 401(k) is gaining back some of the equity it's been hemorrhaging over the past, oh, two years or so; I'm sad because I know that this is a sucker's rally and it won't last. (DOOM!)

Large-cap firms (and banks) may be doing well, but small companies are still hurting. This is most of the reason I'm still bearish about the rally we're in right now -- I don't think it'll last because it doesn't have any depth or, frankly, any rationale. It's the kind of giddiness a drunk feels right before he gets behind the wheel to drive home -- he never suspects that half an hour later some green-faced Highway Patrolman will be collecting his various pieces and parts off of the highway.

I often joke about DAGGER, a high-frequency trading algorithm, being a sentient (and malevolent) being. Others make jokes about SKYNET. But as the WSJ reports, the trend towards using algos in financial trading is accelerating. Computers are on the verge of taking securities trading entirely out of human hands, and this doesn't sit well with me. Algorithms and AI heuristics are only as good as the people who program them, who are human and thus make mistakes. I also fear that HFT will make value-investing pretty much obsolete, and thus make stocks in general a purely speculator-driven pastime. It's not investing anymore; it's just gambling, because stock-picking and research are dead. The algos drive everything now, at millisecond speed.

Uncle Sugar is "generous to a fault". It's easy to be generous when you're giving away other people's money.

It looks like China is coming down off their sugar-high as well. And more speculation that the Chinese are hiding a mountain of bad debt. They may pretend to be capitalists, but remember that the government is still authoritarian Communist. They'll hide the bad news until it explodes in their faces. If you're going to invest in China, you'd best do it fast, because when the boom is over...it's over.

So the problem with public-sector pensions is this: either they use real-world assumptions for rate-of-return on their investments, and suddenly come face to face with a $2.9 trillion dollar shortfall; or they continue to make unrealistic assumptions about how much return they're going to get over the next twenty or thirty years, when the resulting meltdown may have consequences no one wants to think about. Unions, of course, are against the idea of low-risk/low-rate-of-return accounting. Pull quote:

Brainard said, “Nonetheless, it is a defensible arrangement in a corporate environment, in which a company at any point could go bankrupt or be acquired, and hand its pension liabilities to taxpayers or shareholders. But considering the very long life -- essentially perpetual -- of a public-sector entity, and its ability to stay invested throughout market cycles, requiring their pension plans to value their liabilities as if they’ll earn a return consistent with that provided by a conservative bond portfolio, is nonsensical.”
In other words, states can rely on taxpaying suckers like us to fund their madness for eternity. Eternity!

The rise and fall of the "Shadow Banking" system. Read the linked report if you're into that kind of thing: it is both interesting and scary.

Here's something I don't understand. When Greece's troubles became widely-known, markets the world over immediately pissed themselves. So yesterday Moody's cuts Portugal's debt rating to A1, and....nothing. What the hell, man? Greece gets kicked in the nuts but Portugal gets a pat on the head?

Welcome to the Brotherhood of the Boned, Kentucky! Our support group meets on Wednesday nights at 7pm down at the Loyal Order of Moose hall next to the dry-cleaners. The meetings are usually chaired by California, the founding member of the Brotherhood of the Boned.

Today's krappenfest brought to you by Miss Sally Rand.2

1 I'm going to start warning folks if I'm posting a photo of one of my vintage beauties. The stuff is pretty tame and I do try to keep things tasteful, but still, I don't want to get anyone into hot water.
2 Sally Rand actually did not perform in the nude; she wore a body-stocking.

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posted by Monty at 07:05 AM

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