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2010-05-02 15:53 by Karl Denninger
in Musings , 1 references Ignore this thread
Why I Write Tickers And Run A Forum

On Sunday April 1st, 2007, I began publication of The Market Ticker.

I've expounded a few times on Blogtalk as to why; in short, this is the second time around that our government and its "regulatory apparatus" has conspired with private interests to fleece this nation, and yet nobody wants to talk about it - or what it means going forward.

If you read the first several postings, you will find they all deal with the housing market in some form or fashion.  This should be no surprise, since that's where the bubble was - just like it was in Tech Stocks back in 1999.

Likewise, I set up Tickerforum on the 26th of June 2007 because there simply wasn't any place that I was comfortable with as a "home" to talk about the capital markets in a "multi-way" format.  I had been using the Yahoo forums and got exasperated with the idiocy - the drive-by "Countrywide is going to the moooooooon!" commentary that was often sent out.  It still is, if you want to "bathe" in such nonsense.

I was fortunate in this regard, in that I already had forum code.  More than two years prior I had set up Scubaforum due to the same sort of stupidity - and "capture" - on some of the other diving forums.  That frustration literally drove me to spend a couple hundred hours writing from scratch the forum software, using the same general design techniques that I knew about from my previous forays into that area of the Internet, going back to text-mode BBS software in the 1980s.

I also wanted a place where people could comment on my Tickers, while I retained some sort of control over the content of those postings without having to make everything moderated - that is, pre-approved for viewing.

As such creating another "instance" of the forum software was easy, and Tickerforum was born.

As I have repeatedly said (but some refuse to read) The Market Ticker is not, and never has been, intended as a short-term trading vehicle.  It is not a newsletter, a tout sheet or anything of the sort.  Indeed, if you've been following The Market Ticker I warned in late 2007 and early 2008 that it was impossible at that time, and likely would be for years to come, to be an investor in the markets - and that someone with that view should consider being in CASH.

Everyone wants "do overs" in life.  Unfortunately you don't get them.  Let's recap in picture form:

What are you complaining about?  You didn't make a lot of money as an investor from the bottom?  How about a dose of reality here - you got out somewhere between the mid 1400s and mid 1300s, and have avoided what is still - today - a roughly 15% drubbing, depending on exactly when you walked calmly through the exit door.

As a trader I was buying selected things near the 2009 bottom.  I sold a metric ton of $5 PUTs on GE, as just one example, with every intention of getting assigned on purpose and being long GE.  I didn't expect the company to fail, and was willing to buy quite a few lottery tickets at $5 each on that belief.  It didn't happen - the price didn't fall quite far enough (it bottomed at $5.73), and for that I'm sad, because GE is now trading $18.86.  But a number of "stink bids" that I had sitting out there did get hit leading up to and during the climax. 

My complaint as a trader, and my failing, is that I sold them too soon, with Ford and Textron being two of the better examples of profitable trades that would have been insanely profitable. 

But that was all done with "risk capital" - that is, money I'm willing to lose if I'm wrong.  You don't invest with risk capital, you trade with it, and you will get yourself in a lot of long-term trouble if you confuse the two.

I have people who are investors asking me all the time whether I think they should "buy back in" (after selling out at the bottom!)  I'm not a registered investment advisor, but as someone who has had all of his long-term capital in cash since late 2007 (and paid taxes on an enormous amount of capital gains from the previous four years to prove it) I don't have any more of an answer for the investor than I did at the bottom in March of 2009.

Why not?

Because there are two sorts of markets - those that make rational sense and those that do not. 

Most of the 1990s didn't make much rational sense.  It was a decade of greed and fraud, in the main.  I ran a firm in the middle of the snakepit and what was being peddled to "grow" the Internet would stun most of you if you really understood it.  The early "gains" were to a large degree driven not by ordinary Americans desiring to communicate with one another but with people wanting to get their hands on stolen software and pornography - including some very, very illegal pornography.  MCSNet, my firm, grew more slowly (by a considerable margin) than others in the industry because I refused to knowingly provide the features and functionality that the people doing that sort of thing wanted, and they were a plurality of the user base of the Internet at that time.  I'm sure some of it went on within my network, but for those who were hellbent and determined to make this their "reason to be online" (and there were a lot of them) they went somewhere else.

It shouldn't surprise that sex sells, of course.  The VCR became a household item primarily because of the desire of people to purvey and consume smut.  Sony lost the Beta/VHS war - with a superior product - because they refused to license tapes to pornography distributors and studios; JVC didn't give a damn and thus VHS won.

My objection wasn't to legal porn, it was to the blatant theft that was driving the "growth" in the Internet industry, along with the child porn which is just flat illegal - period.  When you have a Usenet newsgroup called "alt.binaries.pictures.teen-f$ck" (with a "u" where the dollar sign is) what do you think is inside there?  Yes, that's a real example of what I refused to store and transport; another was "alt.binaries.pictures.preteen" - and no, there weren't baby pictures taken by proud parents found inside.  Worse, ninety percent of the total volume of Usenet traffic was, at one point, comprised of either stolen material or flatly-unlawful images, which would have forced me to spend literal hundreds of thousands of dollars on hardware simply to keep up with a flood of lawbreaking. 

And by the way, despite repeated public exposition of this mess by myself on The Internet itself, discussions with law enforcement and various arms of government, including some high-level people in the Clinton Administration, not a damn thing was done about the blatant and outrageous lawlessness.

Well, that's not quite true - I received dozens of death threats for having the balls to stand up and raise hell about it, and my customer service department took an unending stream of abusive phone calls from people who discovered that we wouldn't serve up their kiddie porn for them.  Obviously none of the threats turned into actual death or I wouldn't be writing this today, but I did "significantly improve" my security profile for obvious reasons.

Why do I go into all this detail about events of more than a decade ago?

Because they play directly into what happened then - and what what happened this time.

Government knew damn well what was going on in the 1990s and intentionally looked the other way at not only massive theft and scams, but also at the outrageous exploitation of children for the sexual gratification of a bunch of perverts rather than demanding that every ISP in the nation shut that crap off.  And yes, they could have, which is proved quite simply by the fact that I did.

No, it wouldn't have stopped it all.  Nowdays there are "peer-to-peer" networks and other similar things that are used, in the main, for such filth.  They would have come into existence anyway, and people would have bypassed the newsgroups and used encrypted email (which was available, even if a pain to use) to do their thing.  But the effectiveness of blasting a picture of 5-year-old Sally getting raped to 3 million people at once would have disappeared - and all it would have taken was a strong warning from the FBI, followed by immediate criminal charges laid against those knowingly passing this crap on and making it available to their customers in exchange for money.

Because of this total disconnect between rationality and stock prices in the late 1990s I was mostly sitting in municipal bonds in my investment account.  I traded rather actively - after all, why not if you can get an allocation on an IPO and flip it a day later at a 200% profit.  I mean, c'mon.  But invest in such a market?  Certainly you jest.

Fast-forward a few years.  I'm sitting in a hotel room in Sandestin, FL in the early spring of 2000 with my daughter.  We're down here looking at houses; I wake up and turn on CNBS and see the market imploding.

"Gee, you think the gigantic bubble blew up?"  Yep. 

Then we had 9/11 and coming out of it a curious thing happened. 

The government did it again with intentionally and willfully ignored lawless behavior, this time by virtually every large financial institution in the nation.

The people prosecuted in the wake of the 2000 blowup were show trials.  Oh sure, Enron got a lot of press, as did MCI, and some people went to prison.  I met the "fine executives" from MCI on more than one occasion.  I thought they were best analogized to snakes in the grass, all with big fangs, and dealt with them accordingly, making damn sure to have iron-clad contractual protection against anything that might "go wrong." 

But this was a tiny fraction of the damage intentionally done by the banksters - myriad firms that were sold to investors via IPOs that had no possible chance of ever making a profit, simply on a basic mathematical analysis, yet they were peddled as good investments, numbering in the hundreds.  And just like this time around, we had bankers and "analysts" touting things with "strong buy" while at the same time calling their stock "pieces of crap" behind the scenes in emails between themselves. 

Note that essentially nobody in the banking business went to prison in the ENRON and MCI scandals, nor in any of the scandals relating to the worthless companies that were IPO'd and fleeced investors out of several trillion dollars in aggregate.

So why was I invested in 2003, and yet not invested off the bottom in 2009, and why am I not invested now?

Several reasons:

  • In 2003 the nation's debt load was more reasonable.  Too high, but more reasonable.  It was about 275% of GDP, as opposed to about 375% of GDP today.  While it was obvious that 275% wasn't sustainable either, it did not threaten to blow everything to Mars at any time without warning.  We didn't have Medicare Part D either.

  • The Government was spending $500 billion more than it was taking in via direct economic subsidy.  This was ~4% of GDP.  I believed we might be able to get that number back to zero, as we did in the 1990s, with strong economic growth.

  • While the stock crash in 2000-2002 was bad, we never saw meaningful unemployment stack up.  Yes, the march to offshore anything not nailed down (and much that was) continued, but we certainly didn't see 8 million+ Americans lose their jobs.  That is, consumer spending capacity in the economy remained reasonably solid - most of the recession was in business CapEx.

By 2007 it was clear that this belief in a true recovery was wrong as the sharp decline (that is visible in the below chart, blue line) never happened.  In fact we got down to 4% only begrudgingly and stayed there.

In 2007 I was looking for a reason to be concerned and walk through the door (before I got crushed in the stampede), and the early rout in Asia was all I needed to start looking for the why.  I found it, and thus The Market Ticker was born as a means of trying to prevent people from being snookered once again.

Unfortunately I can't at this time find anything that supports the idea that we're going to see a meaningful downward motion in that blue line in years to come.  But for us to have a real economic recovery - one that's durable, produces prosperity and thus stable, increasing markets, we have to.

There is no evidence that this is forthcoming - anywhere.

Now let's talk about trading a bit.

One of the most-damning things you can do as a trader is to let your emotions get the better of you.  If you trade frequently, ask yourself this: have you ever found yourself covering a short into a high tick, or selling a long into a low tick? 

If you don't know what I'm talking about here, you need to learn and fast - while you still have money left.

But if you have, you have almost certainly let your emotional responses dictate your trading.  This costs you money - lots of it - and is a major part of, if not the primary reason, that most active traders (9 out of 10 if you read the statistics) lose money.

Tickerforum is a place to discuss virtually anything about the markets - and contains a number of subforums that are specifically dedicated to short-term traders.  There are a decent number of active traders who think it's a great place to chat up each other during and after the trading day, and for that I'm glad.

But as real unemployment has run up to near 20%, those with jobs have seen their salaries, benefits and hours cut dramatically, and yet despite this real misery the market has come strongly off the 2009 March lows, two very disturbing dynamics increased significantly on the forum.

  • A significant number of people joined and started "contributing" either outright nutty moonbattery nonsense best relegated to late-night shortwave radio - or worse.

  • A handful of forum users began to think that it was appropriate and legitimate to try to stoke an emotional response in the other users of the forum in the trading areas.  Some of them had quite-high post counts over the previous couple of years.

Let me be clear: It has never been acceptable to either "cry in your beer" or "beat your chest" with one and only one exception - in The Bar, which is, as you might surmise, a virtual bar.  That area of the forum is open to gold donors as well as those who have been on the forum long enough and contributed enough in the form of posts to have "earned" your way in. 

This sort of "baiting" reached a ridiculous level in a number of these threads.  Warnings didn't cut it, and so a few bans were handed out.

In case it's not obvious from the rather long history I posted above I have no problem with taking wildly unpopular actions - which in this case means removing a few people from the system - if I believe I have to in order to stick with my mission statement and intent in doing something.

Tickerforum is not the place for you if you want to play "Queen Bee" (and there are plenty of people who do on The Internet) or if you take some sort of perverse joy in trying to goad other people into actions that might hurt them financially.  If you're going to trade actively this sort of activity - such as the statement that got one person banned - "Toasters are plugged in and on high for the bears that overstayed their welcome on the GS hoopla" - are in my opinion the mark of someone who lacks the maturity to be involved in the markets at all.

The danger of listening to such taunts is exposed by the following chart:

The closing price minutes before that taunt was posted was $159.98.  If you reacted emotionally to it and bought Goldman stock, you're now $15/share poorer.

Of, if you prefer:

The S&P 500 closed at 1207.17 minutes before the taunt, and this evening stands at 1186.69, or nearly 2% lower. 

Clearly, in hindsight, the correct thing to do that day (if you were going to do anything) was to go short, not long.

Of course this all could (and might) change tomorrow.

I banned the poster before I knew whether or not the claim was accurate or not or how it would play out.

In fact, I didn't care if the taunt would prove accurate or not.

If you want to be exposed to this sort of garbage, you can find lots of it over on Yahoo Finance.  You're welcome to go there, create as many screen names ("sock puppets") as you want, and have lots of fun.  There are other forums that "won't ban you" for this sort of conduct as well.

But Tickerforum will never be one of them for as long as I operate it, because this sort of thing is intended to and does incite people to trade in anger, to trade on emotion, to trade on fear.

Those who purvey this sort of thing on purpose into a trader's forum are, in my opinion, doing real harm to those who are trying to make money trading what has been for the last few years and is likely to be for a significant time to come a very difficult market to read. 

Oh sure, for the last year the simple trade was to "buy buy buy" and sit, and I'm sure many will claim to have "nailed it", just as happens every single time there's a big move in the market.

But the test isn't whether you nail a move, it is whether you can keep your cool and perform whatever sort of analysis you use as a trader, then execute that trading plan mechanically and coldly predicated on your analysis.

If you can accomplish that you have a shot in this or any other market at making money, and if you fail to do so it will be because your analysis was flawed.

If you cannot do so, however - if you become the victim of emotional response instead, you are virtually guaranteed to lose your shirt.

Tickerforum is neither a "bull" or "bear" board. It is a collection of people examining the markets and forming conclusions, then sharing what they believe.  I post nightly videos and market observations during many trading days and over the last year have pointed out more upside potentials than down, the possible formation of parabolic blow-off tops (which are dangerous as hell to trade, but some people get off on that sort of highwire act) and similar things.  I'm bearish as it gets on the long-term stability and prosperity of our economy, but that doesn't necessarily translate into market movement today, as we saw in 2003-2007.  

That macro-level view, which is what The Market Ticker provides, puts in stark relief that if it does not change I believe there will be another crash, and this next one may be the one our nation and economy do not survive.  That's a message I believe every investor should hear and understand - and take into careful consideration.

But when it comes to Tickerforum, I will not now or ever in the future allow it to become a vehicle for people to create a destructive emotional cycle in others attempting to trade actively - whether intentionally or otherwise.  If this means that you don't believe that Tickerforum is worthy of your visits and, if you like what's there, donations to the forum, that's a choice I respect.

But my view, as people discovered in the 1990s when I ran my ISP, will not change in this regard.

May you have a profitable week, months and years to come.