Musings for July 19, 2007

At "A Dash" we try to do longer analytical pieces on subjects where we hope to add some value.  Sometimes we have some thoughts, but not a full-scale article.  There are good ideas from top bloggers where we have made a note of the topic.

In "Musings" we reveal our thinking and writing agenda.  The reactions are first thoughts and comments are always invited.

Bespoke Investment Group takes up a question on the minds of all– whether private equity activity has peaked.  They have a nice chart with an indicator showing a decline.  Our contacts in the investment banking community confirm that August is always a quiet month.  We confidently predict a further decline into August.  This will, no doubt, be interpreted by some as the "end of private equity."

The question is how traders should deal with this likely phenomenon.  Comments welcome on both the seasonal effect and how to trade it.  This situation is similar to the one posed in David Merkel’s excellent discussion of how to balance one’s fundamental position with technical considerations.

Calculated Risk analyzes Fed Chair Bernanke’s testimony on the popular notion of the home as an ATM machine.  They are skeptical.  Our own view is that the Fed and Bernanke have done a pretty good job with both data and policy.  Are we the only ones going back a year to the "soft landing is impossible" forecasts (getting the prize for the most expensive investment research of 2006) and comparing this to what has happened?  Most pundits enjoy having open season on the Fed.  The questions during his testimony show that members of Congress, while acting polite, also enjoy this posturing for the cameras.  We believe that investors consistently underestimate the resources and ability of the Fed and forget that they hold the policy reins.  Listening to Bernanke is important.

CXO Advisory has a nice analysis of how the Fed should respond to energy price spikes.  It is supportive of our prior observations that the Fed cannot control energy prices through any policy means, but must control expectations.  It is worth reading carefully.

The Daily Options Report has suggestions about how to play earnings using options.  We are thinking about this, since we generally use our own volatility estimates and then increase them when there is a critical earnings report, so we are often on the other side.  We do this selectively, but it is an interesting topic for professional fund managers and traders who use options.

Econocator has some nice pieces on the Chinese economy and data.  Their summary is supported by today’s CNBC interview by Erin Burnett and Mark Haines featuring the CEO of Genko Shipping — buying more ships to deal with Chinese demand.  They make money even if the ships are empty on the return run.  Also worth noting is Bernanke’s testimony on the need for China to have an "independent monetary policy."  He argued that Congress should not invoke trade sanctions against China for currency manipulation, but that the Chinese should review this as a matter of their own interest.

Dr. Brett looks at opening gaps and finds no sustainable edge in buying.  Going back to our days at the CBOE, traders view it as routine to fade an opening gap move.  The question was not "Did you sell?" but rather "How much did you sell?"  It continues to be viewed as automatic by these professional traders.

Abnormal Returns has a very thoughtful article, drawing upon diverse sources, examining the effect of specific concerns versus an overall perspective.  This is exactly what we were trying to highlight in our lessons from Blackjack.

There is so much to muse about and so little time….

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