Friday, November 21, 2008


I mentioned earlier that I have bought 10 books to read to read while the market finds its footing and my buying having been placed in deep freeze.  After reading the Goldman forecast for the economy, I may need to buy another 90 books to get me through this down period,  and that may not be enough even though I am a slow reader.  Goldman says the economy will shrink by 5% this quarter, and by lesser amounts in the first half of 2009. Yahoo! Finance  
Goldman further sees profits dropping 25% in 2009, the largest fall off since 1938.   Unemployment is expected to hit 9% in the 4th quarter of 2009, and my prediction is only different in that I expect that number to be hit sooner.  Goldman does not expect trend growth to resume in 2010 with unemployment continuing to tick up.   I am more optimistic about 2010.  However, the current action in the market suggests that the length of the current recession will exceed even the pessimistic forecasts a few weeks ago.

The turning point was the failure of Lehman Brothers, looking at it in hindsight.  The VIX soon spiked to levels never before seen thereafter. Paulson gave a  speech yesterday explaining how brilliant he has been during this crisis. Paulson Defends Moves, Questions Wall Street Pay - You have to remember that it was Paulson who went before Congress in 2000 and requested the lifting of the SEC Rule which restricted investment bank leverage to no more than 12 to 1. Hank Paulson-Savior! When that restraint was lifted in 2004, it took only three years for the investment banks to strangle themselves with 33 to 1 or even higher leverage.  Looking at Paulson's haphazard performance over the past months, and knowing that he was the former head of Goldman Sachs which I guess means that he must be the best and brightest of the Wall Street Titans, it is no wonder that these people have wrecked the world's financial system.  Maybe our next Treasury Secretary should come from somewhere other than an investment bank.  Really, did Rubin put his finger in the dike at Citigroup?  How many of these Wall Street brains appear to have a clue?

My first book to read is "Alex and Me", an entertaining portrait of an African Grey Parrot named ALEX that appears to me to have reached a greater state of wisdom in his 3 decades or so of life than W and Hank ever will.  I am an animal lover and have always believed that many animals do not receive an appropriate recognition of their learning ability, problem solving abilities and overall intelligence. Alex learned a great deal and could speak.  Here is a link to two videoa on youtube about this true bird brain who just passed away:YouTube - Alex The Talking Parrot

The CBOE volatility index was not in existence during the crash of 1987.  I have reviewed some work by someone who tried to re-create it for the period prior to 1990.  In that effort, I noticed that volatility was meandering in the 10 to 20 range prior to 1987, with its first spike up to 30 in January 1987. Just before the crash in October, it spiked again to over 40.  This article from seekingalpha has the details.    Seeking Alpha  I do not know the author of this study but he seems to have thought some about volatility and asset allocation models.   My variation is that my models just say stay away and don't come back until the VIX falls to below 20 and stays below 20 for at least 3 months. All models are just theories used to explain and/or predict what is observable and have to be adapted to reflect changes in observable events.  My models are changing just as a result of the unprecedented spike in VIX to 80, with 50 to 60 now being the low end of the range when 50 would have been a new event prior to October 6, 2008.  The CBOE VIX index chart goes back to 1990.  

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