Last Price

It looks like we managed to test (and break) the lows again today, and it looks like once again we had a massive rally off of the 825 level on the S&P 500.  First I want to admit that I was incorrect.  I called the bottom during the week of October 6th to the 10th, and that intraday low was violated yesterday. 

I still give myself part marks if that general area ends up being the low, but I was wrong the low did not occur that week (as I had originally predicted).  Secondly I want to bring your attention to a chart that was shown in a presentation my colleagues recently attended (see below).  This chart is probably the single greatest piece of work ever done on market theory, since it more or less describes it all.  We are at our happiest when we are taking the absolute most risk, mostly because we don’t realize we are taking that risk.  We are at our saddest (most suicidal is probably more apt) when we are taking the least amount of risk.  The problem, of course, is that we never truly know where we are on the scale… and that uncertainty is what has aged me about 2 decades over the last 2 months.  By the way the chart was produced by someone at National Bank, I’m not sure who or I’d give them credit.

Since it’s Friday and we’re all in a good mood after a massive rally I thought that I would keep the topics light(ish).  Michael Lewis (author of Liar’s Poker) has an excellent article in Conde Nast Portfolio magazine (http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom), it’s long but I highly recommend you take the time to read it.  The bulk of the article centres around Steve Eisman and his experiences shorting the subprime mortgage market, but the end of the article provides the most poignant insight into our current situation.  Mr. Lewis points out that the decision to take Salomon Brothers public in 1986, may ultimately have been the cause of this situation.  By going public Salomon Brothers (and all the investment banks after them) were taking risks that were no longer being funded by the partners of the business, but by outside investors.  Hedge Funds are being taken to task for charging 2%/20% on their funds, but investment banks have gotten away with charging at least double that for decades.  Goldman Sachs (although only newly public) is a good example; in their fiscal year ended Nov 30 2007 they had $42.8 billion in shareholder equity (for the sake of argument call that their fund size) and gross profit (let’s call that the gross gain on funds invested) of $45 billion.  So if Goldman Sachs were a hedge fund, they would have earned $42.8 billion x 2% plus 20% of $45 billion = $9.856 billion.  They take the same (or greater) risks than a hedge fund, and are generally viewed more as a hedge fund than an investment bank… so why were they paid $28 billion (equivalent to about 2%/60%) to do the job that normally costs $9.8 billion anywhere else?  The employees were (are) taking massive bonuses while the shareholders take massive risks.  Maybe the compensation committees should have Joe the Plumber or Jane the Shareholder on them instead of Dick the Half Billionaire.

And finally, they released oil inventory data today and it incensed me.  CNBC of course got some idiot to go on live TV and explain how a build in crude and gasoline inventories is extremely bearish and it proves that demand hasn’t come back.  Yes it’s true that demand is lower than at this point last year (in America) and yes it’s true that higher inventories are more bearish than lower ones, but maybe it’s time to insert some responsibility (or accountability) into the reporting.  When the price of crude was moving higher every day, crude inventories were dropping, which people claimed was bullish.  The simple fact is, when the price is high you sell… when the price is low you buy.  I know that’s the opposite of how it works in stock and commodity (at least for the traders) markets, but that’s the prudent way to run your business.  It’s also important to note that despite the build in gasoline inventories, the inventories remain below normal seasonal levels.  If I were a refiner I would be buying as much crude as I could and turning it into gasoline as fast I could, which is probably why utilization was 87%.   Three months ago, as a refiner, I would have been able to sell gasoline for $3+ a gallon… so I sold my inventory.  Now you’re telling me I can rebuild that inventory for $1.25 a gallon… so I build my inventory.  Best trade of my life.  The good news is despite an initial bad reaction to the data, the market eventually started trading on fundamentals.  The fundamentals are pretty simple, the OPEC nations are probably furious.  They incurred the costs of boosting production when they said the market didn’t need the crude, as a favour to the US.  Now they are incurring the costs of cutting that excess production (and more than that), and all because oil speculators drove oil prices way too high and then a little too low.  If I was in OPEC I would probably cut more than I needed to just to get a little revenge for this whole debacle.  My view (and I don’t know them from Adam) is that they are probably most comfortable with an oil price in the $75-$85 range and as a result of the volatility and the annoyance its caused them, they will probably try and keep it in the upper end of that band.