Still holds true

Now that the world economic markets are mired in a global banking crisis, this skit about the mortgage crisis created about a year ago is even more pertinent.

Financial Bingo

Something to do while watching the news....

Note to HingeFire Screener Users

HingeFire Inc. stopped offering screening service on September 26th. The company was not able to obtain the financing necessary to continue forward. I would like to thank the many users who supported our vision for the past year.

Thank you,

- Greg Boop

WaMu becomes biggest bank to fail in US history

This is my "I told you so moment". I have warned people about WaMu for over 2 years. Urging them to get their funds over the FDIC limit out recently. Now the bank has failed....

WaMu becomes biggest bank to fail in US history

Fannie and Freddie

Obviously the biggest news on Wall Street this week was the Federal Government seizing Fannie Mae and Freddie Mac before both of these mortgage giants failed in a catastrophic manner. These companies have been faltering for many months while looking for lines of credit to bail them out, the government went one step further and completely took over the firms while giving top executives the boot.

The entire situation is also another example of intervention not allowing proper capitalism to play out in the market. The term “moral hazard” comes to mind in which businesses do not take responsibility for their risky behavior; this only entices other businesses to take poor risks. Especially in an environment where it appears that “gains for privatized and losses are socialized”.

While the government takeover may have buffered the mortgage market in the short term and cheered up Wall Street on Monday, the long term picture is much less clear. The U.S. tax payer is going to be stuck with the tab. The question remains on just how big the tab will be – estimates range from $250 billion to $5 trillion. The actual cost is very dependent on how the housing market and associated credit recovers. One recent article outlined how the seizure of these mortgage giant is the taxpayer’s risk (If takeover tanks, we're holding bag).

Similar too many previous government interventions, this action with Freddie and Fannie may help alleviate the short term crisis, but the toll down the road will be much greater and more painful.

WaMu CEO given the Boot

Past HingeFire articles have outlined in detail the issues at Washington Mutual and urged banking customers to pull out funds over the FDIC limit. News today shows that Washington Mutual has ousted CEO Kerry Killinger. WM stock is down over 15% in mid-day trading.

It is also interesting that Washington Mutual agreed to further oversight by the Office of Thrift Supervision concerning aspects of its operations. This demonstrates the high level of concern regarding the solvency of the institution from a regulatory perspective.

Are Banks at a bottom?

A recent Motley Fool article asks if it “Is It Time to Buy the Banks?” The KBW banking index is down over 40% from the year before levels. The constant stream of news from the banking sector appears to be negative; more FDIC takeovers, increasing write-downs, and larger banks as take-over targets.

One point of view says the entire banking industry will be in trouble for the next 12 months with increasing failures and negative headline press. The other side of the coin outlined by Motley Fool states that banks offer a compelling value purchase situation and the KBW index may have seen its trough.

Investors can look at yield, P/E, book value, Justified P/BV, or other ratios. Using the math, it appears that banks may be near a historic valuation low and are due for rebound. At minimum, it is time to start investigating stronger individual stocks in this sector for purchase.

Bank Safety Ratings on the Web

Bankrate now offers bank safety ratings for free on the web. See the Safe and Sound page of the Bankrate website - http://www.bankrate.com/brm/safesound/ss_home.asp

You can search using many different criteria to find the banks you are interested in. Bankrate provides the following summary to describe the service.

"Bankrate.com's Safe & Sound® service is a proprietary system designed to provide information on the relative financial strength and stability of U.S. commercial banks, savings institutions and credit unions. The system employs a series of twenty-two tests to measure the capital adequacy, asset quality, profitability, and liquidity (CAEL) of each rated financial institution. Individual performance levels are determined from publicly available regulatory filings and are compared to asset-size peer norms, industry standards and key absolute benchmarks. Combined results form the basis for our Composite CAEL and Star Ratings, which are described below. When possible, the system also produces a report that provides a detailed explanation of our findings, for each rated financial institution."

Earlier we had warned everyone to get their money over the FDIC limit out of Washington Mutual. It is interesting to note that WaMu recieved the lowest possible ratings, for both the Bankrate star rating and CAEL rating. - http://www.bankrate.com/brm/safesound/thrftmm.asp?fedid=1000508551

The Socionomics of the Russia Georgia conflict

Socionomist and EWI Analyst who predicted Russia-Georgia conflict to appear on Bloomberg TV today at 5:30 p.m. ET.

In November 2007, the Socionomics Institute’s Alan Hall issued the 20-page research report, "Sizing Up A Superpower." It assessed the relationship between Russia's turbulent history and its then-current social mood.

More specifically, he spoke of "Georgia's desire to bring its pro-Russian separatist regions under control, but Russia has military plans to stop any move by Georgia to secure these regions."

Mr. Hall will discuss the developing situation in the region today, Tuesday, August 12 at 5:30 p.m. ET on Bloomberg television. Be sure to tune in! You can stream Bloomberg TV live online here.

See http://pages.tvunetworks.com/ to download their player.

Gas at the Pump

A HingeFire survey early this summer asked readers about the projected price of gas at the pump on August 1st. The results showed the following:

Over $4.50 23%
Between $4.00 and $4.50 43%
Between $3.50 and $4.00 17%
Between $3.00 and $3.50 13%
Below $3.00 2%

The actual nationwide average price was $3.84 at the beginning of August. Congrats to the 17% who selected the $3.50 to $4.00 price range (I actually believed it would be above $4.00).

The good news for consumers at the pump is that it appears that the short term speculative bubble associated with oil has burst over the past couple of weeks. This will help both the market and your wallet when filling up the tank. As a note, 68% of readers in the most recent HingeFire survey believed that oil was in a speculative bubble. At this point, many analysts would say this perspective is correct.

How to Screen for Strong Banks

Amidst all the carnage in the financial sector, how can you screen for the stronger banks and financial institutions that are likely go come out of the credit crunch as leaders.

The best starting point is creating a screen that searches for potential candidates. The key question is what criteria should be in this screen. Basically you need to hunt for financial institutions that display the following characteristics.

• The earnings are still positive.
• The yield is above 0.5%.
• The bank stocks trades at reasonable volume above a price of $2
• The bank stock price performance is exhibiting strength against both the S&P 500 and the bank stock index over the past 3 and 6 month periods.
• Technical the bank is exhibiting positive moving average trends in the short term and the rate of change is positive.

A basic bank screen that meets the points above can be created within HingeScreen. A user can go to create mode and add the following criteria. In this case, we are searching for financial institutions priced above $2 with volumes over 10K that have outperformed the S&P 500 and KBW bank index. The trailing dividend yield must be above 0.5% (forward yield can also be considered). Technically the rate of change (ROC) must be positive, while the recent 20 day moving average must be above the 50 day. These technical points will show a recent positive trend in stock pricing.

The screen is saved as BankScanOne.

The next step is to jump to Execute Mode and run the screen. The results align with expectations; it is a mix of stronger regional banks, REITs (primarily with a healthcare focus), and some financial service organizations.

The stronger banks in the results such Valley National Bancorp NJ (VLY), and Wilshire Bancorp (WIBC) are examples of regional institutions that avoided obscene mortgage lending and maintained their balance sheets in good order over the past few years.

The majority of the REITS that show up in the results such as Health Care Property (HCP), Health Care REIT (HCN), and Healthcare Realty Trust (HR) are examples of REITS that are focused on stronger market segments and have easily avoided the worse aspects of the real estate downturn.

A few financial service organizations such as Northern Trust (NTRS) and PNC Financial Serv. (PNC) also show up in the results. A number of players providing financial services have used the downturn to strengthen their offerings and market position.

Using HingeScreen it is easy to save the results to a spreadsheet for further evaluation. Simply press the button on the right that looks like a floppy disk and the results are saved to a spreadsheet format file that can be opened using Excel. By default the saved result files are placed in the C:\Program Files\HingeFire\Results directory.

HingeScreen is a powerful tool to find stocks that meet the performance and diversification needs for your portfolio. It is useful for identifying candidates that are likely to come out of a downturn as leaders in a sector. HingeFire provides an excellent video library outlining how to use the tool at: http://www.hingefire.com/Education/KnowledgeBase/HingeVideos.aspx

Fear grips banking customers in Venezuela

The march towards nationalization continues unabated. Over the past year the oil, telecommunications, electric, and steel-making sectors have been impacted in President Chávez’s ceaseless drive towards a socialist paradise.

Now the crisis has spilled over to the financial sector as the government seized control of a large Spanish-owned bank, Banco de Venezuela. Nervous depositors lined up seeking reassurance, and many fear a run on the bank in the coming week. Not helping matters, the central Venezuelan bank has been vague in attempting to reassure depositors that the banking system was solid.

Nearly all the companies seized by the government have been run into the ground over a short period of time; productivity has dropped and the feeble earnings have not been reinvested back into the companies.

Venezuelan bonds fell Friday for a second day reflecting “fears over the possible collapse of several banks because of rules forcing them to sell $5 billion of complex securities called structured notes. Banks bought the notes last year at values tied to high black-market rates of the dollar, exposing some of them to huge losses after the local currency, the bolívar, strengthened this year.”

Attempts of individual banks to negotiate their way out of the crisis has not paid returns as the IMF and World Bank have effectively shut off the spigot after being threatened with expulsion by Mr. Chávez.

Even the high price of oil can not cover the cost of large scale programs in Venezuela beyond the next couple of years. Any significant drop in the price of oil will cause an immediate fiscal crisis. At 32%, Venezuela also is experiencing the highest inflation in Latin America. Food-based inflation is above 52%, a crushing level for most of the population. The fiscal crisis and high inflation levels can be directly linked to government policies. This has left the poorest portion of the population, which Chavez claimed would be helped by the government’s policies, in even greater despair.

Is your online bank account safe?

A recent report by researchers at the University of Michigan demonstrates that bank & brokerage websites are plagued by security flaws. These widespread design flaws make it easier for accounts to be compromised. According to Finextra, an examination of 214 bank websites revealed that more than 75% have cracks in security that hackers could exploit to access customer information and accounts.

‘Says Atul Prakash, professor in the department of electrical engineering and computer science: "To our surprise, design flaws that could compromise security were widespread and included some of the largest banks in the country. Our focus was on users who try to be careful, but unfortunately some bank sites make it hard for customers to make the right security decisions when doing online banking."’

This should be a cause for concern for all banking customers, the prospect of going online and finding your account cleared out is a nightmare. Security remains the top concern for banking institutions, and regular steps have been taken to improve the situation. The state of affairs is not as dire as outlined by researchers because many of the security flaws are difficult to exploit.

The real issue with the banking industry is the lack of a systematic defined approach to security testing their websites. There needs to be a single standard that all online financial institutions are tested against.

Cisco has some excellent initiatives such as SAFE that improve the security of customer deployments by defining configurations and testing steps that reduce vulnerabilities. The company also has service-focused teams of specialists that aid customers in securing their networks.

During my time at Cisco, I drove an initiative called SITE (Security Integration, Test and Evaluation) which defined a structured process for evaluating potential vulnerabilities, performing boundary & penetration testing, and evaluating the results in a logical matter. This approach was incorporated as part of the quality system and utilized across the company in testing multiple product lines. The process could be scaled from “light” to “heavy” based on the needs of the team performing the evaluation. The use of automation tools for “fuzzing” (sending in deliberately mal-formed packets) and other security testing was crucial for meeting tight deliverable schedules within the framework of SITE. Over the years, the original SITE initiative has evolved and now is included within the scope of other security enhancement programs (run by some real sharp engineers) that raise the standards to even a higher level.

What does the banking industry lack? Basically the online financial industry needs to define a SITE type of initiative and a set of common standards for securing their websites. The problem is not the inclusion of vulnerabilities (which will always pop-up), but the lack of screening for vulnerabilities in a structured manner. Banks do not have a methodical approach to find the vulnerabilities, nor a structured system for ranking and resolving the issues. Most banks are flying blind to what potential vulnerabilities currently exist on their websites because testing has only been performed piecemeal over time.

Banks and brokerages have a lot at stake; losses from compromised accounts continue to mount. It is time to raise the bar in the financial industry and reduce the exposure faced by customers. This requires a change in direction for security practices, and includes a need for information services cooperation between competing institutions. The best approach would be to create a focused team with IT representatives from multiple banks to define a central testing standard utilizing a structured approach for evaluating the security of online banking websites. After adoption, the methodology would need to be driven as a requirement across the industry.

Important: Funds over the FDIC limit at WaMu

If there is one post to sit up and pay attention to this month - This is the post.

Get your funds over the FDIC limit out of WaMu now! There appears to be a run on the bank forming and one likely end-game will be the FDIC seizing the bank; similar to the situation with another large bank, IndyMac, recently.

Knowledgeable investors have been removing funds for several weeks and now the situation has caught the attention of the mainstream press. A recent report by Gimme Credit cited liquidity concerns with Washington Mutual.

"We won't use the phrase `run on the bank,' but we would be remiss if we did not observe that many creditors have quietly been pulling funds,'' wrote Shanley, based in Chicago. Their actions are "presenting an increasing funding challenge,'' she wrote.'

The bank disputes the findings stating that 7 billion cash infusion led by TPG Inc, cost reduction plans, and a lack of need for commercial paper will help Washington Mutual ride out the storm. Many analysts are skeptical. These restructuring actions are helpful but will not enable the bank to survive a crush of depositors withdrawing funds from an institution that is increasingly looking like a house of cards. Standard depositors are likely to follow the lead of savvy unsecured creditors over the upcoming weeks as more bad press continues.

The second day of WM stock in free-fall is a more telling sign about the challenges facing the institution. While some would state that withdrawing your funds over the FDIC limit does not help the stability of the bank, the other side of the coin states that why should your be out of your funds from a personal finance perspective because you did not take action in the early stages while the crisis was unfolding.

Ignore the Press, Hedge Funds are still a Viable Investment

The hue and cry from the press regarding Hedge Funds continues unabated. Obviously a good number of funds have blown up over the past year, causing a sizeable investor headache.

One recent article “4 Reasons Why Investors Should Avoid Hedge Funds at All Costs” outlines issues with oversight, managerial churn, investment concentration, and short life spans. These aspects should be concerns for many individual investors, but should not serve to rule out hedge funds as appropriate portfolio component for qualified investors. Despite the recent turmoil, Hedge Funds have a long history of serving the needs of qualified investors; one excellent summary of Hedge Funds can be found in the Knowledge Base section on the HingeFire website.

One financial industry issue is that everyone and their brother opened a Hedge Fund in the past few years. Most chased similar strategies involving credit spreads that all fell apart at the exact same time as the black swan came for a visit.

Most of these funds did not have a long track record and a number of the managers simply marched down the street and opened a new fund after the wheels fell off their previous effort. Investors need to differentiate between hedge funds with long track records, some spanning decades, and those opened within the past few years.

Hedge Funds should only be used by investors who understand the risks and expectations. During the past few years, the sales of Hedge Funds have gone down-market as the funds were sold to people who were marginally qualified, many times wrapped up by major brokerage firms as fund-of-funds (or a pyramid of fees). Certainly the unscrupulous account representatives made plenty on commissions but they were not selling a product that was appropriate for the customer. Many investors were convinced to place nearly their entire portfolios into Hedge Funds will the promise of huge returns, a good number of these individuals are now crying foul to regulators.

Hedge Funds are only appropriate for institutions and qualified investors who understand finance. These customers recognize the investment is long term and are using the funds as a diversification mechanism in context of a larger portfolio. Hedge Funds do have an appropriate place in the market. It would remain best that they are not regulated except for stronger restrictions on the qualifications of investors who can utilize these vehicles.

Before advent commodity ETFs and mutual funds, many well-heeled investors used funds requiring investor qualification for exposure to the commodity markets. Most of the funds were CTA/CPO run by individuals with Series 3 licensing. This was a very appropriate diversification method for investors with sizeable portfolios.

Hedge Funds are also in the forefront of offering products that are difficult to obtain exposure from using standard retail financial products; some examples include currency, private equity, and credit spreads. For qualified investors the Hedge Fund products serve as an important diversification tool.

Investors who meet the qualification requirements of Hedge Funds should not automatically rule out these investment vehicles due to all the recent bad press. An investor should evaluate the needs of their portfolio in regards to diversification, returns, and timeframe in order to make an informed decision about Hedge Fund investment. It is important to use on-line resources to properly investigate the returns, longevity, and track record of Hedge Funds rather than simply investing in a fund-of-funds pushed by major brokerage firms. Hedge Funds can serve an important role in your portfolio, and investors should approach these vehicles with an open mind, and more importantly with open eyes.

Wachovia Earnings Call

Wachovia held its earnings call Tuesday. As expected the news was bleak; headlined by an $8.9 Billion loss, a steep dividend cut, and 10,750 job cuts. However, the stock rallied on the news and earnings call. While the loss and job cuts are painful, it appears that Wachovia has a plan to turn its operations around and deal with the bank’s mortgage exposure.

The stock rally demonstrates the confidence that Wall Street has in new CEO Robert Steel. Some of the points in the turn-around plan were outlined in the conference call transcript. Wachovia will not be raising more capital or selling additional stock that would dilute current shareholders stake. The dividend cut to 5 cents per share will save $700 million per quarter, while the wholesale mortgage operation will be shut down. Analysts expect that the bank will remain an independent operation.

Wachovia: Turning the corner

The recent press headlines for Wachovia have been bleak recently; auction-rate security investigation raids, analyst downgrades, and sliding share prices. It seems that the bank can't catch a break from the negative media coverage. This is on top of all the earlier problems that led many to question the underlying integrity of the entire institution which in the past has joined telemarketers to scam it's own customers, and was fined $145 million from the Feds.

Despite all the difficult news there is a bright spot -- and his name is new CEO Robert Steel . Right from the initial conference call it appears that he is on the right track. He is going to first evaluate the "challenges" faced by the bank with particular focus on the residential mortgage portfolio and exposure to commercial real estate. Steel promises to outline his strategy on July 22, when the bank is slated to report its second quarter earnings. In a couple days we will be able to see how Wall Street reacts to the earnings and the vision of the new leadership.

Based on his reputation in both capital markets and government; Steel is likely to restore what is most important to Wachovia - a reputation for integrity.

FREE forecasts for all the major commodity markets

We're excited to announce that our friends at Elliott Wave International are offering a FreeWeek of expert commodity forecasting services from noon Wednesday, July 16 to noon Wednesday, July 23.

FreeWeek is always exciting, but we're especially excited to share this one with you, as EWI opens its new Futures Junctures video portal to you. The new portal combines all of EWI's world-class commodities analysis onto one easy-to-navigate webpage. It allows you to easily toggle between near-, intermediate- and long-term forecasts and analysis, plus the hottest commodity opportunities presented in both video and text. And, only during FreeWeek, you get totally free access with no obligation to buy – ever!

Having an independent forecasting and opportunity-spotting service on your side is more important now than ever. FreeWeek lets you see for yourself, giving you top-level access and FREE forecasts for all the major commodity markets. This is an opportunity you don't want to pass up.

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Crushing the American Family

Once in a while a cartoon comes along which really drives home a point. Despite political pundits waving their arms and claiming that we are not technically in a recession, the circumstances facing American families are so dire these proclamations are nearly meaningless.

The credit crunch, housing market, gas prices, job losses, and rising food costs have left consumers in a tough position. Families are having to cut back many activities and purchases simply to cover necessities - this is not good news for the two-thirds of the economy dependent on consumer spending.

Well for the good news - At least we are not technically in a recession!

Is Your Bank Next?

A slew of mainsteam press articles a month back stated that the credit crunch was over. Not so fast! As outlined in articles on HingeFire in May (see Is the Financial Crunch over?) the financial sector is ripe for continued turmoil.

The top headline news today outlined the shares of U.S. banks plummeting amid stability fears. Sizeable regional banks such as Wachovia, WaMu, and National City are near the top of the list that investors believe have the likelihood to fail.

‘"It's the cockroach theory. You don't just have one bank failure -- when you have a big bank go under, there's always more than one," said James Ellman, president of hedge fund Seacliff Capital, who is short some financial stocks.’

The failure of IndyMac in many ways was a standard run on a bank. Panicked depositors lined up outside the doors pulling out $100 million a day causing what regulators called the second-largest bank failure in U.S. history. It was clear to regulators, politicians, and investors that IndyMac was in trouble, leaving only the question of degree. This type on depositor driven panic could easily happen to other struggling regional-type banks.

'One woman leaned on the locked doors, pleading with an employee inside: "Please, please, I want to take out a portion." All she could do was read a two-page notice taped to the door.'

At some point the FDIC will not be able to handle the level of defaults. While the FDIC has staffed up expecting more failures, the federally sponsored insurance agency is primarily focused on merging banks in trouble. The FDIC does not have deep pockets to bail out a chain of sizeable cascading failures.

Regional banks are not the only concern. Fannie Mae and Freddie Mac are in deep trouble. To avoid total financial market panic, the White House administration has ask Congress this past weekend to approve a plan that would provide a credit line of some $300 billion to the troubled GSEs and buy their stock. The Fed passed measures to allow both Freddie Mac and Fannie Mae to borrow at its discount window. Clearly, the government's hand was forced by a $3 billion Freddie auction scheduled for today that would have revealed the extent of the disaster without government intervention.

Is your bank next?

Will you be lined up at the door of your local institution begging to get your money out while the door is slammed in your face?

This is a time to carefully evaluate the safety rating of your local bank where you have deposited your money. If the bank looks the least bit shaky then your should get your funds out before a wide-spread panic develops.

Hitting Top Returns in midst of Market Turmoil

What does it take to hit solid market returns even when market conditions are leaving the most experienced investors fearful? It comes down to proper stock selection and having the appropriate tools to find the best investments on both the long and short side of the market.

The FREE HingeFire stock screener is a powerful product that merges fundamental and technical indicators in a single tool. This helps put the market edge in the corner of investors.

GregB is now ranked 267 out of 18824 players in the Wall Street Survivor Contest (Traders Wanted - Play $50,000 Stock Trading Game). The evening before the contest, I ran the HingeBuy and HingeSell screens in the HingeScreen 1.5 product. These screens normally produce 30 to 50 results. HingeBuy provides a list of stocks that have the potential to out-perform the market; while HingeSell produces a list of stocks that are likely to under-perform.

It comes down to proper stock selection enabled by the HingeScreen product. I only had to pick a set of stocks once, at the very beginning of the contest to be successful. No need to churn the portfolio or trade.

A summary of the results to date are provided below. Note that all of the longs are still above water despite the violent downtrend in the market over the past few weeks. The balanced long and short portfolio is an excellent example of how to squeeze excess alpha out of the market. The overall return of the portfolio was +14.74% over a few weeks (72.68% on a yearly basis).

Longs
Symbol Return
------------------------
MOS +15.92%
XEC +0.86%
AXYS +0.46%
DAR +10.36%
BMI +0.06%

Shorts
Symbol Return
------------------------
FSNM +53.83%
GSAT +31.12%
CIX +22.65%
LYTS +19.54%
MEDX -5.19%


Disclosure: These stocks have been selected in a fantasy stock selection contest. They are not held in my real portfolio. Investing involves risk. Your results using software screening informational tools may vary. Proper portfolio diversification is important and any outlined investments may not be appropriate for your financial objectives or risk tolerance. This is not a solicitation to buy or sell securities.

The Gold prediction

A few months back we held a survey regarding the expected price of Gold on July 1st. The results were as follows:

Above $1100 24%
Between $1000 and $1100 24%
Between $900 and $1000 22%
Between $800 and $900 15%
Below $800 15%

The actual price of gold on July 1st was around $937. Congrats to the 22% of poll takers that correctly predicted the $900 to $1000 price range.

Since the start of July, gold has been looking bit toppy as if the momentum has disappeared in the market for this precious metal. It sunk to near $916 before staging a rebound in the past couple of days. This may be setting the stage for the next leg of the run up, however it is more likely a small bounce before further downward action. The next few weeks will be interesting to watch in this market.

Cisco dashes 2008 recovery hopes but there is light

Earlier commentary associated Cisco outlined hopes of a tech sector recovery in 2008. Recent comments on Tuesday by CEO John Chambers dashed those hopes. He stated "I think most of us realize that it's probably going to be a little bit longer than the one to two quarters that some people had hoped for.”

In reaction most analysts cut their forecasts for CSCO citing that both the remainder of 2008 and 2009 could be challenging for the company.

Cisco stock dropped to $21.76 late Wednesday afternoon. Despite the bearish trend of CSCO and the overall market recently; a basic predictive analysis spreadsheet that utilizes volatility, mean return, standard deviation, trend, and other factors indicates the future is not so gloomy. A quick run of the spreadsheet shows that CSCO has a 5% chance of hitting $30 in the next 90 days and only a 1% chance of hitting $16.

This shows that a basic short-term analysis is leaning towards a more bullish case for Cisco stock – hopefully the market follows through and provides shareholders with some type of short-term rebound. However the long term price is always driven by the fundamentals, which in this case is dependent on an overall tech sector recovery.

At minimum a soft economic patch will provide the 800lb gorilla Cisco the opportunity to shake some of the smaller competing monkeys out of the trees. Cisco has tradition of leaving competitors in the dust; especially taking advantage of downturns to enhance their position in both existing and newly emerging markets.

Screening for the Top 2%

How does an investor land up ranked in the top 2%? It takes a serious approach to screening the universe of stocks to sort out the wheat from the chaff. Screening a list of potential candidate stocks is just the first step.

GregB is now ranked 284 out of 17989 players in the Wall Street Survivor Contest (Traders Wanted - Play $50,000 Stock Trading Game). The evening before the contest, I ran the HingeBuy and HingeSell screens in the HingeScreen 1.5 product. These screens normally produce 30 to 50 results. HingeBuy provides a list of stocks that have the potential to out-perform the market; while HingeSell produces a list of stocks that are likely to under-perform.

The next immediate question is how did I narrow these lists down to 5 stocks as longs and 5 stocks as short to use in the Wall Street Survivor contest.

In terms of the five stocks I selected from the HingeBuy list for the contest. I pulled up each stock on the list at the time (there were about 30 to 40) and took a detailed look at the charts, industries, fundamental info, and technical indicators to narrow down the selection. For the HingeSell (short) candidates I basically look for the inverse of the outline below.

Basically the following were evaluated for each potential long stock:

1) Strength of the chart over the past year. Look for a chart where the stock is continually rising with some minor pull-backs. Look for strong increases in the past six months. Do not want a stock where the stock price had a one time big bump due to a news event; nor a stock where the chart is basically flat but still outperformed the associated indexes.

2) Evaluate the industry that the company is in and the industry performance over the last six months compared to other others.

3) Rank the stock within the Industry from a relative performance perspective.

4) Fundamental information evaluation with a focus on earnings growth, revenue growth, cash flow, debt and their associated ratios. Do not focus on forward P/E etc. because many times the projections are nonsense.

5) Technical evaluation of the price chart looking for divergence between the price action and technical indicators (MACD, RSI, etc.). Divergence may indicate an impending change in price action. Also look for extreme readings in oscillator-based indicators which may show that a bounce-back is overdue. Keep in mind that technical indicators are good for evaluating short term action; long term price is driven by fundamentals.

6) Take a look at news from corporate press releases. Look for management churn, re-orgs, layoffs, product cancellations, guidance (vs. price reaction), and regulatory action. These are generally not positive developments.

Basically rank all the stocks on the HingeBuy candidate list from 1 to 5 using the criteria above. Five being the strongest. Select the five stocks with the highest rating.

For HingeSell and shorts - look for the inverse.

Note in my terms, the outline above is my light-weight starting point evaluation. I normally dig into the 10Q / 10K reports when selecting stocks for my actual portfolio. I would urge everyone else to do the same. A stock screener is a tool to find stocks that meet your basic criteria - a more detailed follow-up analysis is needed to find the best stocks for your portfolio that meet your diversification and risk-tolerance needs.

Disclosure: These stocks have been selected in a fantasy stock selection contest. They are not held in my real portfolio. Investing involves risk. Your results using software screening informational tools may vary. Proper portfolio diversification is important and any outlined investments may not be appropriate for your financial objectives or risk tolerance. This is not a solicitation to buy or sell securities.

Global Inflation: The New Crisis

A new monster has raised its ugly head to spook investors. Inflation is accelerating at a rapid pace providing policy makers with a new set of ulcers. Unfortunately basic antacid tablets will not cure the unsettled guts of national regulators.

The spike in inflation gives flashbacks to the dreaded 1970s with stagflation era. Many older investors do not enjoy reminiscing about interest rates above 14%, food rising in price each week, investors hoarding gold coins, and long gas lines. The dilemma is that all the statistics indicate that we are heading towards a scenario with run-away rising inflation worldwide.

Regulators have commented on rising inflation, raised interest rates in hopes of moderation, and are shocked to see the numbers running upward like an out-of-control train down the tracks. With rising commodity costs, pent up wage increase requirements, and tightening credit; there is not very much the regulators will be able to do to apply the brakes.

Certainly the news flow has not been encouraging, the ECB raised lending rates today amid record inflation, while U.S. Treasury Secretary Henry Paulson said inflation was becoming the top economic focus of many countries.

Inflation is a global phenomenon; impacting countries as diverse as Iran (with 26% inflation), the Philippines, Brazil, India, Russia, South Korea, Mexico, and Indonesia. No country is immune and no market is safe. Rapidly increasing inflation is the top concern in most nations, and the situation rapidly appears to be heading towards stagflation.

The immediate question becomes how should an investor prepare for this situation? The first emphasis is that a greater portion of your portfolio needs to be placed in commodities and precious metals, or in stocks focused on these industries. There is also a need to have your income oriented investments placed in vehicles which are inflation indexed in regards to interest rates. The other alternative is the keep cash in shorter term CDs as inflation and interest rates rise, allowing an investor to ride the rising curve.

Successful investing in a rising inflationary environment is difficult. Usually the stock market returns are dismal and many other investments are also victims of an inflationary spiral. Still it is best to keep your focus on the long term, and maintain a diversified portfolio of stocks that have wide economic moats. These companies invariably become stronger in downturns as competitors fall by the wayside.

Investors should pay close attention to news about inflation during the remainder of 2008 and start making appropriate adjustments to their portfolio to ride out the storm.

Dark Pools going strong

Despite regulatory concerns and consolidation worries, the Dark Pool business is still showing enormous strength. New dark pools venues are implemented regularly and the profits are looking solid.

Reflecting this strength, LiquidNet has now filed for a $500 million IPO. Goldman Sachs and Credit Suisse Securities are overseeing the transaction. Despite the generally weak IPO markets, there is the expectation that this will be one of the strongest public offerings of the year.

Circuit City: So Toxic that Nobody Wants It

Is there such a thing as a bride so ugly that no one will marry her? Apparently there is such a thing as a business so toxic that everyone steps away from buying it.

One of the great fears of any party seeking to close a deal to purchase Circuit City (CC) is that the due diligence would reveal information so negative that potential acquirers would drop their bids. Apparently this scenario is playing out.

Blockbuster (BBI) dropping its bid may be due to other bidders pushing up the price; more likely it is that further disclosure revealed that Circuit City is already deeply entangled in its death throes. Blockbuster's Chief Executive Jim Keyes cited "market conditions" as a reason for withdrawing its offer, valued at up to $1.3 billion, and said the deal was not in the best interests of its shareholders.

Circuit City dropped over 16% on the open on Wednesday after this news. Blockbuster climbed over 12%, the shareholders gleeful that this proposed merger has been dropped. It is interesting to note that Blockbuster had offered at lest $6 per share for Circuit City. CC stock now sits at $2.19; effectively the proposed deal was at triple the price of Circuit City stock. The failure of Circuit City management to grease the skids on this deal will probably go down in financial history as one of the worst executive decisions ever; unless some other suitor actively closes on a transaction.

Philip J. Schoonover, the CEO of Circuit City, kept hope alive for a deal by commenting, "Our exploration of strategic alternatives is intended to serve the interests of our shareholders by considering every possible alternative to enhance shareholder value. The board's review was not dependent on Blockbuster's (BBI) participation. We are diligently working with the parties involved in the process, and intend to continue our thorough approach until such point as the board determines upon a particular strategic course of action. The board has not established a deadline for completing the review."

Loosely translated this means, “We are trying to find a deal that will leave the existing management team employed with large compensation packages despite our ruinous track record. The board is hoping some magical deal materializes shortly with a private equity fund. If something does not pop up soon; the company will be dead as we complete the review of the bankruptcy paperwork.”

The only constant is that the long suffering Circuit City stockholders will continue to be disappointed.

Are You in the Top 5% of Investors

GregB is currently ranked 350 out of 15872 investors in the current Wall Street Survivor contest - Traders Wanted - Play $50,000 Stock Trading Game

This is the third time I have selected 5 stocks from the HingeBuy list as longs and 5 stocks from the HingeSell list as shorts the night before a contest opened and held the picks with no trades. The outcome has been the same in all three contests, the results are in the top 5%.

Isn’t time that you used information that could power top-ranked investing results? This is the power of the automated HingeBull and HingeBear selection process that is integrated in the FREE HingeScreen product.

One of the primary beliefs of the founders of HingeFire is that investors do not need $3000 seminars to be successful in the market. Investors simply need the tools to provide an edge in the market and a community of like-minded investors to work with. The objective of HingeFire is to build the tools and community to enable the success of investors at all levels.

I will confess that my results when I try to simply pick stocks that are “hot” or I got a “tip from a friend on" – are dismal. This is why it is important to use tools that can objectively screen the universe of stocks to define the stocks with the most potential. Start using the HingeFire stock screener today and get the information that will give you this type of edge on the market.

Disclosure: These stocks have been selected in a fantasy stock selection contest. They are not held in my real portfolio. Investing involves risk. Your results using software screening informational tools may vary. Proper portfolio diversification is important and any outlined investments may not be appropriate for your financial objectives or risk tolerance. This is not a solicitation to buy or sell securities.

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Introducing the Hinge Awards for inferior financial reporting

Every week brings its own set of inane articles in the financial press. The time has arrived to start awarding prizes for the worst examples of mainstream financial articles. Maybe in some small way this will help enable the improvement in business reporting, however unlikely the probability.

To kick this off, a set of three Hinge Awards have been created that will be presented quarterly. Naturally none of these awards are for excellence in financial reporting; in fact they are to outline examples of inferior business press.

The three categories for the Hinge Awards are provided below:

HingePitch – an article which is really a disguised pitch for a company, product, or service while pretending to give useful information. These pitches are common in the industry. Nearly 20% of the articles read in the mainstream financial media are effectively "paid-for" placement pieces. However some of these articles perform such a commendable pitch for a product while pretending to be an unbiased neutral resource that they are worthy of an award - especially if the product or service is really not in the best interest of most consumers.

HingeDuh – awarded for personal finance article where the information is obvious even to the most dimwitted consumer. The majority of these articles of fluff pieces containing meaningless quotes from selected "subject matter experts" with the simple objective of enabling the article to be at least an entire page long. Leading to the immediate question - don't the editors have something more meaningful for these business mavens to be writing about.

HingeCrock – the underlying facts are absolutely wrong in the article or the conclusions make no economic sense. Many of these articles use the selectable parsing of "facts" to slant the conclusions towards a designated point of view. A vast majority are politically oriented and have a pre-selected bias. Most turn plausible financial ingredients into inedible economic gruel.

Send your nominations to gregb@hingefire.com
Please list the award category in the subject header.

This week’s trite “that’s obvious” personal finance article

Every week a slew of personal finance articles appear in the mainstream press across the county. Many of these articles don’t go beyond what should be obvious to even what a consumer with a very low IQ should intuitively understand. You would hope that the “hard-hitting” financial news media would be able to provide useful information with some depth instead of the junk that is put out as meaningful financial reporting in this era.

In a world ruled by 30 second sound bites, it is easy to understand why not all articles are lengthy. At least consumers could hope that they could make points that are not obvious even to the most dimwitted.

With the continual pile of trite articles put out each week, maybe there is a need to establish an award for the most useless personal finance article of the week – sort of an Ig Nobel prize for personal finance. As long as they don’t name the trophy after me I would be quite content to see this happen.

This week’s winner would be a gem from U.S.News & World Report titled “Tips on Selling an Unloved SUV”. The article makes the obvious points of:

• Sell to individuals, not dealers.
• Don’t strip the bells and whistles from the SUV.
• Lower your price.
• Wait for winter to sell.

Where is Captain Obvious when we need him?

Sticking it to investors: SEC does not want to hold Credit Rating agencies accountable for their ratings

So what does a regulator do went they find out that the credit ratings applied to money market accounts are basically meaningless? Do they:

A) Get tough with the credit rating agencies and demand that they properly evaluate and grade interest bearing instruments.

B) Open the credit rating market up to new companies, hoping that the competition fosters an improvement in credit ratings.

C) Propose reducing reliance on credit ratings, including proposing to eliminate a requirement that money market funds hold highly-rated securities.

If you selected C then congratulations - you are a winner. The SEC is moving forward with a policy of weaning investors and Wall Street institutions from over-reliance on credit ratings, instead of fixing the credit rating firms. While the proposal does require that fund managers assess a security's liquidity and inform investors, we have seen quickly a formerly-liquid credit market can lock up. The major focus is to deemphasize credit rating agencies and effectively get them off-the-hook for the terrible job they have done in terms of properly rating securities. There is no need for the agencies to reform their processes.

Worst yet, investors are now basically being told that they are on their own when if comes to evaluating the safety of money market funds and interest-bearing funds. This is setting the table for a future crisis. At some point in the future there will be a large number of grandmothers spread across the nation who will be quite unhappy with this change in regulatory mindset.

SEC proposes reduced reliance on credit raters

Who wants to buy Circuit City?

An earlier summary regarding Circuit City outlined how all of the vultures that have been sitting on the sideline would be drawn out once Blockbuster started bidding. It is time to either fish or cut bait for all other potential suitors.

An article from Reuters today stated that Circuit City has received buyout interest from several strategic and financial bidders. A sale is expected to be announced over the next month.

The only question at this point is how much the carcass of this poorly managed electronics retailer will go for? I believe that many long suffering stockholders will be sadly disappointed at the price.

Wall Street Survivor Update

Is anyone else earning 88.57% returns on a yearly basis?

HingeBuy and HingeSell can help you achieve this type of return.

At the beginning of May, I entered the latest Wall Street Survivor contest. I selected 5 stocks from the HingeBuy list as longs and 5 stocks from the HingeSell list as shorts the night before the contest opened. Wall Street Survivor provides each player with $100,000 in “cash” for investing in the contest. I placed $10,000 into each stock on the first day of the contest and have not made any trades whatsoever since this time.

The longs were:
Symbol Return
------------------------
MOS +24.84%
XEC +11.49%
AXYS +6.16%
DAR +12.72%
BMI -7.92%

The shorts were:
Symbol Return
------------------------
FSNM +33.44%
GSAT +7.25%
CIX +21.57%
LYTS +17.25%
MEDX +1.37%

I did not use leverage (i.e. excess margin) in the contest. The portfolio is currently worth $112,617.93; this is a 12.62% return over a few weeks (or 88.57% on a yearly basis). Player GregB is currently ranked 326 out of 14762 players. Most other players in the contest trade regularly. My result is not bad for simply picking ten stocks, not trading them, and not using leverage.

This demonstrates the power of the HingeBuy and HingeSell automated selection process. Start using the HingeFire stock screener and get the information that will give you this type of edge on the market.

Traders Wanted - Play $50,000 Stock Trading Game

Disclosure: These stocks have been selected in a fantasy stock selection contest. They are not held in my real portfolio. Investing involves risk. Your results using software screening informational tools may vary. Proper portfolio diversification is important and any outlined investments may not be appropriate for your financial objectives or risk tolerance. This is not a solicitation to buy or sell securities.

See the HingeFire Videos

Want to lean how to use HingeScreen to improve your investing? See the excellent videos at the HingeFire website that explain how to use the tool.

The website also contains a wealth of other educational material. Explanations of all the indicators can be found within the Knowledge Base. A full set of documentation for HingeScreen can be found under Support.

HingeFire provides the tools and information that enables investors to improve their understanding of the market. So heat up your investing today, check out the HingeFire resources!

New Wind ETF

The First Trust ISE Global Wind Energy Index Fund launched this week. The ETF is trading under the symbol FAN – in another example of gimmicky ETF naming.

If oil prices remain high, companies involved in the wind turbine industry may gain significant traction. Wind turbines are common in Europe. The U.S. and Asian markets have huge potential, assuming people don’t get all NIMBY about seeing wind turbines from their backyards.

A couple of recent articles discuss the introduction of this new wind energy ETF:

Should You Buy an Alternative-Energy ETF?

Is Electricity From Wind Just A Lot Of Hot Air?

FreeWeek is Back!

We’re excited to announce that our friends at Elliott Wave International have announced a FreeWeek of expert financial forecasting for U.S. Stocks, Bonds, Gold, Silver and the U.S. Dollar from noon Wednesday, June 18 to noon Wednesday, June 25.

FreeWeek is always exciting, but we’re especially excited to share this one with you, as EWI has opened its new Financial Forecast Service delivery portal to you. The new portal combines all of EWI’s world-class analysis onto one easy-to-navigate webpage. It allows you to toggle between near, intermediate and long-term forecasts and analysis with ease, including recent archives. And, only during FreeWeek, will you get totally free access with no obligation to buy – ever!

You’ll get analysis and commentary from EWI’s top three analysts, including Robert Prechter himself, who’s latest Elliott Wave Theorist is interestingly titled Stocks and Oil; Barack and Hillary.

In today’s markets, having an independent market forecasting and analysis service on your side is more important now than ever. FreeWeek lets you test drive EWI’s U.S. forecasting service, giving you top-level access and FREE forecasts for U.S. Stocks, Bonds, Gold, Silver and the U.S. Dollar. This is not an opportunity you’ll want to pass up.

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How come Mutual Fund Managers don’t invest in their own funds?

Once again, an article highlights that the majority of mutual fund managers avoid their own funds. Why would a customer want to buy fund when the manager won’t touch it?

Maybe the manager knows that the expense fees in most mutual funds eat you alive over time, and most knowledgeable investors are better off investing directly in stocks. John Bogle, the former chairman of Vanguard group, talks about this trend in his discussion about the “The Battle for the Soul of Capitalism”.

Morningstar reported that 47% of the managers of U.S. stock funds reported no ownership in their own funds. 61% of the managers of foreign stock funds and 66% of taxable bond funds do not own their funds. Similarly 71% of the managers of balanced funds will not include the funds in their holdings.

Do they know the funds are so toxic or poorly run that these managers will not even pick up a small number of fund shares – maybe this would be a good display of confidence.

Once again this is a dismal reflection of the mutual fund industry, and demonstrates that many managers do not believe their “gimmicky market-driven funds” are designed for the long haul. Investors should focus on low fees when investing in mutual funds and take a look if the manager actually holds shares.

Does HingeBuy and HingeSell really work?

Yes, you better believe it!

At the beginning of May, I entered the latest Wall Street Survivor contest.

I selected 5 stocks from the HingeBuy list as longs and 5 stocks from the HingeSell list as shorts the night before the contest opened. Wall Street Survivor provides each player with $100,000 in “cash” for investing in the contest. I placed $10,000 into each stock on the first day of the contest and have not made any trades whatsoever since this time.

The longs were:
Symbol Return
------------------------
MOS +24.77%
XEC +11.44%
AXYS +6.47%
DAR +5.11%
BMI -7.16%

The shorts were:
Symbol Return
------------------------
FSNM +25.89%
GSAT +13.29%
CIX +12.48%
LYTS +9.82%
MEDX -2.73%

I did not use leverage (i.e. excess margin) in the contest. The portfolio is currently worth $109,847.18; this is a 9.85% return over a few weeks (or 79.78% on a yearly basis).

Player GregB is currently ranked 373 out of 13850 players. Most other players in the contest trade regularly. My result is not bad for simply picking ten stocks, not trading them, and not using leverage. This shows the power of the HingeBuy and HingeSell automated selection process.

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Go to My Broker Feature

One of the additions to the new HingeScreen 1.5 release is a “Go to My Broker” feature. This functionality in the Execute Mode pane allows you to go to your stock broker’s website with the click of a single button. This is a very useful feature at times when you are screening the market for new opportunities.

The image of the gentleman at the top of the screen is the link to your selected default brokerage website.

Under the Options menu at the top, there is a My Broker item. Pulling up this menu shows an Edit Brokers item at the top of the list. The remainder of the list consists of direct website links to major online brokers.

Pressing on the Edit Broker item pulls up a pop up that allows you to add, delete, and edit brokers in the list. Three buttons are at the top, Create New Broker Entry, Save Broker Details, and Delete this Active Broker. A drop down box below this contains a list of brokers, selecting an item displays the broker’s url in the text box below.

The user can select a broker and press the Default button at the bottom to have the broker set as the default (when you press on the image in the Execute Mode pane). Remember to hit the Apply button at the bottom left after all transactions to make them permanent.

The Go to My Broker website feature is a very useful function in the HingeScreen 1.5 release. Users can perform screens and easily pull up their broker’s website to perform trades or get more information.

Is the Housing Crisis at its apex?

The news cycle continues a downward cycle on housing. Homeowners can not open a newspaper, turn on the news, or browse online without immediately getting hit with the latest negative housing commentary.

On the front page today, US foreclosure filings surge 48 percent in May. The continuous stream of downbeat real estate news may be a sign that the housing market has finally hit the bottom. In the same way, that the endless stream of news on how to get rich speculating on real estate in 2005 marked the real estate market peak. Interestingly, the spin today is how to get wealthy buying real estate foreclosures.

There is continuing statistical evidence that indicates that housing has turned the corner. In many markets, the number of days on the market is falling, along with the amount of unsold inventory. Coupled with the rate of price decreases slowing as buyers and sellers come into alignment of the new expectations regarding the proper value for a house now that the speculative bubble has burst.

The mortgage situation is also easing, as banks have returned to traditional lending standards. Financial institutions now have an improved comfort level for underwriting and re-selling proper quality loans – the credit crunch is slowly moderating.

The summer of 2008 may mark the actual bottom of the real estate plunge on a national level; some markets will face further price correction. However the path out of the crisis across the country will still be lengthy and painful, extending well into 2009.

How to use Market News at HingeFire

One of the innovative community features offered at the HingeFire website is Market News. Users can submit financial news story links, and allow other members to discuss & comment on the articles.

It is easy to submit a link, simply go to Market News à Submit News at the top after you are logged into the site. A form appears asking you to provide a Title, Summary, url, and category before hitting “publish” at the bottom to post the news.

A direct link to submission is here (need to be logged in).

Market News is a great community feature and I would urge users to try it out!

Great News! HingeScreen 1.5 Now Available

The new HingeScreen 1.5 software client includes many features asked for by the user community; more fundamental indicators, additional technical indicators, and new candlestick & chart pattern indicators. The 1.5 software client contains links to many community features at the new website including a Forum, Market News, Broker Ratings, and the Blog.

There is a wealth of educational information at the new HingeFire Site. Some of the best information to see on using the new HingeScreen 1.5 release includes:

Take a Tour
http://www.hingefire.com/Education/TakeaTour.aspx

Videos on usingHingeScreen
http://www.hingefire.com/Education/KnowledgeBase/HingeVideos.aspx

User Documents
http://www.hingefire.com/Support/Documentation.aspx

Information on Indicators
http://www.hingefire.com/Education/KnowledgeBase/Indicators.aspx

One of the primary beliefs of the founders of HingeFire is that investors do not need $3000 seminars to be successful in the market. Investors simply need the tools to provide an edge in the market and a community of like-minded investors to work with. The objective of HingeFire is to build the tools and community to enable the success of investors at all levels.

Coming Wednesday: HingeScreen Release 1.5

Great News! HingeScreen 1.5 has arrived.

The new software release 1.5, and the totally updated website will become available during the day on Wednesday June 11th.

This does have a couple of important ramifications for the user community.

1) Users will have to download the new HingeScreen 1.5 software client at the new site in order to keep using the tool. The earlier 1.2 client is no longer supported. All of your existing screens, and results will automatically transfer on your PC when you upgrade to the same directory, so you will not lose any information.

2) All users' passwords have been reset to your username plus 123. For example an account with the username "paul" will have a default password of "paul123". Users will be able to immediately change their default passwords at their profiles on the new site.

The new HingeScreen 1.5 software client is still FREE, and includes many features asked for by the user community: more fundamental indicators, additional technical indicators, and new candlestick & chart pattern indicators. The 1.5 software client contains links to many community features at the new website including a forum, market news, broker ratings, and the blog. For a full list of the exciting new features in release 1.5, please see the Products section in the new website. A wealth of educational material and training videos are also provided on the new website.

I would like to thank the beta testers who gave feedback over the past couple of months. Our team is working to have a smooth transition tomorrow, and get the full-featured website and software release available to the entire community.

Dark Pools: A Regulatory Tangle

An increasing vocal chorus is asking when regulators are going to step into Dark Pools. The Dark Pool market represents the wild frontier in equity trading. Dark pools now represent over 10% of stock market volume and over 20% of all trades in NYSE stocks.

In years past, ECNs represented the upstarts that were edging in on the business of the exchanges. The proliferation of electronic exchange networks fractured the market and siphoned trades off the major markets. ECNs were seen as a threat to the orderly operation of the market according to many older-schoolers. Over the past years the ruckus died down as many ECNs were merged out of existence; many being acquired by the very exchanges that squealed about the menace they posed. One glaring example is the Archipelago ECN, famous for making fun of Wall Street exchange floor market makers, being acquired by the NYSE.

In comparison the major exchanges seem to be awfully quiet today about all the trading volume appearing on Dark Pool networks. These exchange mechanisms were created by major brokerage firms to move large blocks of stock.

One primary concern is the lack of transparency in the market. Exchanges and ECNs provide details of every trade. These venues allow all the participants in the market to discover pricing and be fully included in the overall market. The hidden fractioning of price information with Dark Pools has led to gaming of the market within Dark Pool networks, as traders utilize the mechanism as a profit driving instrument rather than simply as a tool to execute large orders without moving price.

Regulators appear to be absolutely confused in regards to the proper way to address the Dark Pool phenomenon. At most they mention the subject in speeches without outlining any policy or actions. The lack of action is disturbing considering the requirement for proper transparency in the markets in order to maintain the confidence of the investing public.

With the increasing number of Dark Pools, there is the expectation that consolidation is coming. The proliferation of dark pool networks has led brokerages to offer interfaces that link dark pool and “light pool” networks, or offer access to multiple dark pools. These offerings have simply increased the gaming of the system and the utilization of algorithmic trading over the networks.

At some point the news media will start focusing on the abuse of Dark Networks causing regulators angst, and leading Congress to demand more transparency for the investing public. This day may not be far off --- as the Dark Networks continue to quickly grow in market share and an increasing number of trades are hidden from investors.

Legal Nirvana

Nothing warms the hearts of corporate executives at public companies like the vision of class action lawyers being locked up in a cell. Especially when the visualization includes the lawyers responsible for 50% of the class action suits in the United States over a decade period.

Even more amusing is having one of the lawyers derided in the front page of a major newspaper for declaring that he is innocent, despite all the obvious evidence to the contrary. I expect that lawyer jokes will be at the top of the list in the executive happy-hour circuit during the month of June.

Serving Time, but Lacking Remorse

Q: What's wrong with lawyer jokes?
A: Lawyers don't think they're funny and other people don't think they're jokes.

Saving on Food: Avoiding the checkout coronary

The cost of food keeps going up. Most customers cringe when going through the checkout line at their local grocery store these days. Coupons are back in vogue, and many people are comparison shopping between brands and stores to save money.

One problem is that the most standard items like milk, eggs, and bread that have risen in price significantly don’t normally have coupon discounts. One way our family is saving is by going to big wholesale discount centers such as Sam’s to buy these items. Milk at Sam’s is cheaper than any of the local groceries. Until recently we were not focused on using discount centers for food purchased; when I used to think of Sam’s it was for cheap electronics, office supplies, and other stuff. Times have changed – thanks to the rapid inflation in food prices.

On an interesting financial note, regulators are proposing to increase the margins for agricultural products in the commodities markets to curb speculation. This step was recently enacted for energy futures to reduce volatility, apparently it has not worked out very well – Oil jumped $10 today.

One recent article outlined “How to Save $400 a Month on Groceries”. The piece outlines some of the websites and strategies for finding coupons that will help you save in the checkout line.

Is Oil in a speculative bubble?

Oil continues to trend upward with some pull-backs. It is an open question if the increases merely reflect a speculative bubble, or is indicative of real supply and demand.

Take the new survey at the top left of the blog to voice your opinion.

One interesting regulatory change over the past couple of weeks is the tripling of margin requirements at the energy exchanges. The New York Mercantile Exchange (Nymex) and ICE Futures Europe in London have boosted the margin required by speculators to make trades. The exchanges are hoping that the margin calls will reduce volatility and keep the lid on speculative price increases in the energy markets. On the day the changes were implemented, oil dropped by more than $7. Since this time however, the price has recovered to near $130.

A number of officials such as U.S. Treasury Secretary Henry Paulson have stated that high oil prices are here to stay, and are reflective of the world supply and demand situation. Jim Rogers agrees, stating that the oil bull market has years to go.

Other sources state that oil is in a classic bubble. No different than houses, dotcoms or tulips. The article in The Times makes the case that the oil price increases are not attached to reality, and outlines the case with some compelling numbers.

This leaves the question. Is oil in a speculative bubble that will pop before the end of 2008? Or do the price increases have years to go?

One truth is that bubbles always tend to go on longer than any pessimist ever believes it can; and eventually crashes harder than any optimist ever believed was possible.


The last survey – Gas at the Pump

The last survey on the price of gas at the pump showed that 43% of the poll takers expected gasoline to be between $4 and $4.50 per gallon on August 1st. 67% of the responders expected gas to be above $4 per gallon.

Is Lehman Next?

Lehman Brothers has plunged over the past few days as Wall Street is speculating if it is the next Bear Stearns. The bank has fought these allegations with a string of press releases and appearances stating that it is properly capitalized and reducing debt. (Wait a minute, this sounds familiar – didn’t Bear do the same thing).

A string of major articles outlining Lehman’s woes has not helped the situation. The Wall Street Journal stating that the bank’s “balance-sheet troubles threaten to harm the wider financial system unless the bank takes decisive action”. The paper went on to say the firm will be forced to sell all or parts of itself to stay above water. Naturally this news has LEH stock targeting 52 week lows.

Lehman’s has not taken the press sitting down; it has come out swinging at parties that portray the bank in a negative light. At the top of the list is head fund chief, David Einhorn, who runs a $6 billion hedge fund called Greenlight Capital. (Lehman Battles an Insurgent Investor). He has been a vocal critic of Lehman’s and has profited on their pain by shorting the stock. According to most market watchers, “Mr. Einhorn instigated the latest dive in Lehman’s stock price two weeks ago when he encouraged other investors to short the stock at a large conference in New York”. He followed this up by agitating for a reduction in debt ratings for Lehman Brothers.

The firm is trying to portray Mr. Einhorn as a short-seller who is simply trying to pad is pocket by spreading negative news about Lehmans. Many on Wall Street simply point to the many times he has been correct in the past. In any account, the situation will play itself out over the next few weeks. It is unwise to underestimate the headwinds facing Lehman Brothers, their eroding mortgage portfolio represents a systemic risk not only to themselves but other Wall Street firms. The media is most likely right on target when stating that a merger is needed and the bank is at serious risk.

The question remains of how much LEH will sink below $31 in the next couple of months. Will the firm regain investor confidence or is it doomed for a big fall?

Wall Street’s Graveyard

Bear Stearns was not the first firm to implode and float belly up on Wall Street. Portfolio.com takes us through the colorful history of other firms that have gone kaput since 1970.

Greed and lack of risk control is not a new story. However the danger in the modern era is that many of the firms are built on a mountain of derivatives and the collapse of one can lead to a cascading failure of others. Increased regulation of the derivatives market is needed to prevent this type of event.

Is Quantitative Trading alive or dead?

Scores of quantitative hedge funds have taken hits over past year that make NFL hits in Sunday football games appear to be minor league. Many have questioned if there is a future to the quantitative approach to trading the market, all the current models appear to be completely discredited. Yet to entire industry continues to drive forward, new algorithms are being created, however most are still focused on wringing raw profit out of the market based on differences in data input.

Similar to the movie Groundhog Day, repeating the same mistakes will only lead to a cycle of the same results. The continuing flawed premise is the over-optimization of models to focus on profit while ignoring risk.

A recent study by the CFA Institute outlines many of the issues with quantitative models used by Hedge Funds. Many factors have led to a complete decay in performance, leaving funds scrambling to unwind exposed positions. The information reveals that profits opportunities for quants are harder to find and exploit, while the updated strategies expose firms to increasing risk. The concept that firms will trade strategies that increase risk while possible gains are minimized bodes poorly for the industry.

A couple of HingeFire briefs have touched on this subject in the past (see Is there a future for Quant Funds and Quants search for new math). The complete 100+ page study from the CFA Institute is available for free in PDF format and is very educational. It can be downloaded here - http://www.cfapubs.org/doi/pdf/10.2470/rf.v2008.n2