Lotta News, Lotta Noise + Rogue Director

With the EU struggling to get its act together, and with the markets thin and volatile, these past few weeks have been a great time to stay out of the market.

Sure signs of markets to stay out of are low volumes and complaints by brokers. Currently, there’s plenty of both.

But in case you haven’t noticed, America is on the mend.

US. Okay, so Oct non-farm payrolls, at +80k, were lackluster, but Sep was revised from +103k to +158k, and Aug was revised from +57k to +104k. Meanwhile, Q3 GDP was up a respectable 2.5%. (Revised to +2.0% and still respectable for a mature economy under current global economic conditions. 28Nov11)

One statistic that especially told (28Oct) was the growth in business investment in Q3, which accelerated to +16.3%, from Q2’s already impressive +10.3%. This shows that the guys who know their business are committing their cash.

And lo and behold, this past week several analysts revised upward their growth forecasts for the US Q4: JP Morgan gave 3%, Morgan Stanley gave 3.5%(!), and State Street gave 3.3%.

My hunch is that NFP will reach +200k during Mar-Apr of next year.

Meanwhile, the S&P chart, given below (courtesy of bigcharts.com), doesn’t look bullish, but it shows that we’ve made an upside breakout from the summer trading range, and that we’re supported at the top of the former range. The technical indication is that we may have seen the low of this market.

 

Trade idea. Don’t get me wrong; I’m not ready to go on a buying spree in growth stocks. I continue to recommend buying stocks that pay 5%+ dividend, with stable, or range-bound, technicals and low P/E ratios. The way I figure, you get a respectable dividend stream for the time being, and your downside risk is outweighed by a medium to long term upside potential. One example, which I recommended in my blog of 17 Oct, is the UK’s National Grid, which is paying 6%+. With a bit of research, you can surely find US stocks that have similar profiles.

I say all of this with the caveat that I am not a stock picker by trade, so you should consult your financial advisor before you whack down your cash.

Italy has been trounced in the financial press because its 10-yr debt is now trading at appx 7%. Let’s put things into perspective:

In the mid-nineties the 10-yr Italian yield was consistently above 8%, reaching an historical high of 13.75 percent in March of 1995.

Back then, of course, Italy’s debt traded in Lira. Now, one would need to adjust for the comparative strength of the Euro. I’ve searched the web for a Lira-Euro-BTP converter, but I haven’t been able to find one. Please let me know if you do (lenny@lennyjordan.com). 

Practically speaking, however, the market must be pricing Italy’s bonds at a historically fair value. A 7% Euro return today probably equaled 8-10% Lira return during the nineties. I wouldn’t panic over Italy.

Gold trade. While we’re on the subject, an interesting statistic emerged this week. When assessing Italy’s solvency, one analyst mentioned that the country holds appx 2,500 tons of gold, worth appx €100 bil ($135 bil).

With gold at $1700/oz, once again Gordon Brown’s decision to sell at $250-$300/oz during the late 90’s looks like one of the worst trading decisions ever. What he sold for £2 bil ($3.2 bil), as Chancellor of the Exchequer would now be worth appx £14 bil ($22 bil). 

Mind you, this was not a bad trade because it lost money. Instead it was a bad trade because he sold the low. Gold, as we all know, has a volatile history. During the nineties its price had been depressed, but it wasn’t going lower. Selling gold then was like selling your house during a recession.

Gold recently met resistance at $1800, and I still have a mind to short it. See my blog of 28Sep11, and stay tuned….

MF Global. Here’s an amusing and personal anecdote. During ’08 I interviewed with MF Global for the role of Head of European Risk. I had a great talk with the global head, whose background, as is mine, is from the Chicago exchanges. We talked about colleagues that we knew in common, and we discussed trends in options theory and product development.

All was looking well for my candidacy, but two weeks later an MFG customer out of Memphis made a rogue trade in wheat which cost the firm $141 mil. End of hiring budget.

The firm survived, however, (even without our favorite options trader/risk manager) until it became headed by John Corzine, who two weeks ago caused the firm to go bust after taking an $11 bil loosing stake in the European bond repo market. And meanwhile, $600 mil of client money went missing.

Rogue trader? Okay, so Nick Leeson brought down Barings, but that’s because the firm was undercapitalized, and management turned a blind eye to his trading.

But the most recent cases, MFG, Lehman’s, Enron, AIG, and RBS, and weren’t brought down by a rogue trader.

Instead, these firms were brought down by a ROGUE DIRECTOR.