Seriously CNN?

I am sitting here, doing homework for an auditing class I must take in order to be able to sit for the CPA exam and I thought I would take a quick break and check the news.

What an ignorant mistake!

CNN, instead of focusing on the debt ceiling debate in D.C., which may be the most important economic news in the last 100 years, was interviewing a woman with "the world's longest" (and most disgusting in my opinion)...here it comes... fingernails.

Seriously? Is this what the American people want to hear about?

On the other channel (FOX), they were talking about Casey Anthony's scheduled release for Monday.

Unbelievably...unintelligent, ignorant, and unimportant.

I hope this is not a sign we are going the way of Rome...but fear it may be.

Love The Charts

If you can't see the pattern I am sorry for you. DJIA since 1900(above) GMCR, PCLN & NFLX ...

I know...I am a huge geek. When I see charts like this I get giddy...I mean it is so obvious...

How Are Assets Valued?

From Wikipedia:

Valuation of financial assets is done using one or more of these types of models:

1. Absolute value models that determine the present value of an asset's expected future cash flows. These kinds of models take two general forms: multi-period models such as discounted cash flow models or single-period models such as the Gordon model. These models rely on mathematics rather than price observation.
2. Relative value models determine value based on the observation of market prices of similar assets.
3. Option pricing models are used for certain types of financial assets (e.g., warrants, put options, call options, employee stock options, investments with embedded options such as a callable bond) and are a complex present value model. The most common option pricing models are the Black-Scholes-Merton models and lattice models.

I am going to add a fourth:

In fairy tale valuation land (U.S. Stock and Bond Markets), assets are currently valued by watching TV, and speculating about whether the FRB is going to keep buying up assets to artificially inflate demand. In fairy tale land, you don't but an asset because it has real value, or because you expect it to produce steady cash flows, you buy it because it is going up. Or, even better (worse in my opinion), you buy it because you have nothing else to do with your money

Right now Wall Street Traders are like an 8 year old at Target. "I already have that, but I want more." "But I brought $50, and I can't find anything I like." "So save it until you know what you want,"says mom. The 8 year old might listen to mom; Wall Street is not listening. They are just wasting their money on more plastic, valueless crap from China. In the end, their money will be gone (oh, wait, it already was, but their mommy, the government, gave them more) and they will be left with a pile of plastic crap. Except this time, mommy is broke.

Wall Street is dreaming...denial is abundant...many current valuations are unsustainable. Fairy tale valuation land might be a fun place to live, until it is not.

Out Of $

Wow, are we really out of $?

Looks like it...

http://www.cnn.com/2011/POLITICS/07/12/debt.talks.republicans/index.html?hpt=hp_t1n

Think on that...

Don't Underestimate Risk

One of the biggest mistakes investors make is underestimating risk.

Over and over again we have seen it happen.

Commercial real estate in the 80's, junk bonds, tech bubble, commodities bubbles, China in the summer of 2007, housing market, etc.

Now it is sovereign debt, that is government bonds, of almost all of Europe, an unfortunately the U.S.

I have a sense that risk is terribly under priced in just about every class of bonds at the current moment.* Corporate, municipals, treasuries, etc.

The government has been holding interest rates artificially low for a very long time...too long. This has caused a massive miss pricing of what I call "debt risk", or the risk that the borrower will simply borrow too much, and, regardless of the interest rate, will be unable to repay what he owes. Governments, corporations, and individuals all over the world are in this position.

Think of the government holding interest rates artificially low (causing a miss pricing of risk) as a force. We know from physics that for every force, there is a counter force. Massive defaults are the counter force. They will happen, just as everything that goes up eventually comes down, defaults are the inevitable consequence of too much borrowing.

Please read the following if you are interested at better understanding of how quickly risk can be repriced, and what affect this might have on your investments:

http://www.marketwatch.com/story/no-debt-limit-deal-your-investments-plummet-2011-07-12

Don't underestimate risk.

*None of the commentary on this website is "investment advice", but mere intellectual discussion. Any positions you take are 100% your own responsibility. As always, trade and invest at your own risk.

Timeless Wisdom

Happy Fourth of July!

This was posted by Marc Cenedella in an email from theladders.com, but I love it, and want to share it all with you.

It reminds us to live fully and fearlessly, to strive to better ourselves even when we come up short.

So don’t live life on the sidelines…get out and live it!

“It is not the critic who counts, not the man who points out how the strong man stumbled, or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena; whose face is marred by the dust and sweat and blood; who strives valiantly; who errs and comes short again and again; who knows the great enthusiasms, the great devotions and spends himself in a worthy cause; who at the best, knows in the end the triumph of high achievement, and who, at worst, if he fails, at least fails while daring greatly; so that his place shall never be with those cold and timid souls who know neither victory or defeat.”

-Teddy Roosevelt

Zero Equity Exposure

For the next few months at least...that is what this guy is saying: