Finance and Stuff

Thoughts on finance and other stuff by Johan Lindén

Month: September 2011

The Truth Behind the Trader on BBC

If you have not seen it yet, see the clip from BBC about the trader who spoke frankly about what he thought about the market. Some of the things he says is:

  • The smart money, do not buy the European rescue plan. The stock market is finished. The Euro is finished.
  • That he and most traders do not care about how the economy goes. He says that he goes to bed every night dreaming of a recession since they equal opportunities.
  • A trader or any person can make money if he is prepared.
  • This economic crises is like a cancer. It will just grow if not taken care of. Get prepared.
  • Governments don’t rule the world, Goldman Sachs does, and Goldman Sachs does not care about the European rescue package.
  • In less than 12 months the savings of million of people will vanish, and that is just the start.
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I mostly agree with him, and think he has some good observations. But there are two main issues here that I want to point out. Firstly, from a contrarian view it is very bullish when mainstream television like BBC air such an ultra negative outlook like this.

Secondly, what is really interesting is that many newspapers today write about this interview. But instead of focusing on what the trader said, they focus on him as a person trying to discredit him. When people trying to hide their heads in the sand by discrediting sources instead of statements, then that should be seen as very negative from a contrarian view.

Market sentiment remains very negative at the moment, making it hard to bet on a downward market (S&P500 1163), more upside risk than downside risk at the moment. However, the long-term outlook is still very bearish as long as most people are denying the risk of a disaster.

Free Markets are the Usual Suspects in Economic Turmoil

In dire times people are looking for scape goats. One of the most common scape goats is the free market. So is the free market really the problem? Let us look at what countries do in these troubled times.

  • First, they blame other countries for unrighteously compete with their domestic industries, setting up tariffs for foreign trade, thus engaging in trade wars, instead of letting competition rule.
  • Second, they increase regulations on businesses, blaming trading robots, short-sellers and other participants, and trying to interfere with these tools of the free market.
  • Thirdly, the state out-crowds sound private companies by engaging in their own businesses with the unlimited resources of the public. This is just one of many things the state do to ruin private businesses. Out-crowding is also done by manipulating the interest rate so it either becomes too high or too low, and thus ruining the private businesses’ ways of doing business at market rates.

So there you have some of the reasons why bad gets worse. With all these things happening at once in already fragile economies, there is no wonder that the economy usually hits a depression or crash before things get better.

Also note that all these signs are signs of socialism, taking us further away from the principles of free markets. A free market is a market without rules governed by the state, but instead by rules made by the market’s own participants.

Mortgage Rate Spread

falling house prices mortgage loansThe spread on interest rates between mortgage loans and central banks’ loans to other banks are increasing. While banks pay less for long-term loans, the private households who want a loan to buy a house need to pay a higher premium each day.

This implicitly means that house-buyers have to pay an increased risk premium to their bank and that real-estate investment are getting worse each day, not taking future depreciation of house value into account.

I do not see that this phenomenon is widely recognized and that more pressure on real estate is to come.

Survival of the Weakest

money printing press inflationIt seems that most countries want their currency weaker. At least in bad times such as the present. Both strong countries such as Switzerland, and countries with serious problems such as the USA.

In times of trouble debt is building up. In the US it seems that debt is building up no matter it is the best of times or the worst of times. When debt has reached a level in which it cannot be repaid, then there is one option left, to inflate the amount of that country’s currency and thus devalue the value of its debt.

The downside is that you lose confidence next time you need to borrow. Also note that this trick is worthless if all other countries do the same, which is what we will see happen in the future. Then the value of money just will evaporate all around the globe.

So stay tuned for a nice inflationary cycle to come within the next few years, in times when many countries will try to have the weakest currency. But then again, why not? The intrinsic value of today’s money is nil.


q-ratio q-valueThe Q-ratio is one of the methods to estimate the fair value of the stock market. It is defined as the total price of the stock market divided by the replacement cost of all its companies.

To put it more simply, the Q-ratio shows how much do we have to pay to buy the stock market compared to how much it would cost to build it up from scratch.

The Q-ratio is a fairly simple concept, but timely to calculate; fortunately, the US Federal Reserve provides the data on a quarterly basis.

To compare how much the companies cost with how much it would cost to rebuild them seems like a clever and objective way to measure the fair value the stock market. And looking back at “Q:s” history it has been of great value for investors using it.

The basic logic behind the Q-ratio is that if the “Q” is above 1.0, then the market is valuing the present stocks more than it costs to reproduce them; making them overvalued. If it is below 1.0, then it cost less to invest in stocks than it cost to reproduce them, thus making it more profitable to invest in the stock market than creating new companies.

On contrast to the P/E-ratio, the Q-ratio, is independent from the interest yield for comparison analysis. This makes the “Q” an easy and objective way to measure markets.

One of the drawbacks with the Q-ratio is that you have to trust the FED releasing the correct data, unless you wanna calculate the replacement cost of every stock by yourself.

Most people would intuitively think that the value of Q would be around 1 or a bit above in long-run. But its long-term value is close to 0,7. This is probably due to the fact that most firms assets are generally booked too high.

It is a shame that most amateurs in the market does not prefer to use the Q-ratio instead of P/E-ratios or dividend yields, both of which need to be compared to interest rates and other measures to be understood in their context.

Today the Q-ratio is a bit above 1 making the stock market overvalued by 40-50%.

I hope you enjoyed this article! Feel free to leave a comment.


Chart below shown for a historical view and is not recently updated

q-ratio historical chart

Chart from:

Fixed or Adjustable Mortgage Rate

Two questions regarding mortgage (home) loans.
Why are most people having adjustable mortgage rates on their home loans?
Is it better to have adjustable or fixed rate?

There are mainly two reasons why people choose adjustable mortgage rate:

  1. Because, an adjustable rate is mainly lower, since you have to pay an insurance premium for knowing your rate beforehand and will not end up with negative (or positive) surprises. You have secured your price of living at a certain rate. Secondly;
  2. since rates have steadily gone down for the last fifteen year or so, the bet to secure at a higher rate have been a losing bet. And since most home buyers memory have only seen interests going down and house prices going up, this is what they will define as a normal state of things.

The typical home buyer do now have the knowledge or understanding that interest rates have been much higher historically and most were not thinking of rates when rates were 15%, just back in the 90’s.

Another misconception is that they will be able to change to a fixed rate later on if rates go up. No such luck. If rates are going up, they will not be able to fix their rate at todays low level. They must then fix it at a higher level or continue speculating that rates will remain low, thus ruining the whole idea about keeping the cost of living low and decrease risk. What all this basically means is that when choosing an adjustable rate you are speculating with your home as security that rates will go down or remain neutral.

When choosing a time-period, do not choose 2 or 3 years, since then you are only insured from spiking interest rates for that period. Choose a period for as long as you need to make payments for the house, thus knowing your cost of living for that period instead of running the risk of ugly surprises. The government will not bail you out. They only do that to the really big and stupid risk-takers that have million-dollar-bonuses every year.

When choosing a fixed mortgage rate today, you get the lowest fixed rates in the history of mankind, and pay the smallest premium ever compared to the adjustable rate. So instead of taking the risk to double the cost of your living, fixing your rate seems like a pretty good deal of you ask me.

Below a chart comparing the long 30-year-old rate (blue) and the short prime rate (orange).

adjustable fixed mortgage rate home loan

Reproduced with the permission of

stock market manipulation

Manipulation Lowering Stock Prices

stock market manipulationI never understood all the fuss about so-called downward manipulation of a company’s stock price. I so often hear or read about people complaining about that their stock is manipulated to be artificially lower than it should be. Even if it was true, that would be a good thing!

As all other things in life, the lower you buy, the better you are off. The advantages of buying a stock lower means, you get more of the company for the same money, a bigger share of future earnings, a higher dividend each year, and a better risk-reward ratio in distance for an up versus down swing.

A low stock price is only bad in one of the two scenarios. If a company needs to issue new stocks. Then they will have to sell out more of the company diluting the current ownership base. And it is obviously bad if current shareholders need to sell stocks at the time of the manipulation.

So please tell me if you know any stocks that are manipulated to be cheaper so I can buy them. I suggest you do the same next time you hear about manipulated stocks.

Click here for a general paper on Stock Market Manipulation.

Gold Sentiment among Portfolio Analysts

In this short article I will follow up on the ways to look at gold sentiment to judge whether it is a good time to buy or sell gold (or sit on your hands). This time we see how portfolio analysts look at gold to see if they are too enthusiastic or too negative.

According to Hulbert at MarketWatch, “that huge two-day drop in late August did scare a lot of erstwhile bulls into becoming almost stubbornly bearish — which, from a contrarian point of view, is bullish. As a result, even though gold bullion is now back within shouting distance of its August highs, gold market sentiment remains remarkable subdued.”

They write that the average recommended gold market exposure among a subset of the shortest-term gold market timers currently stands at 40.3%. While it stood at a much higher 67% in late July.

So even though gold has climbed $300 and 18% since July portfolio managers are more negative (or less positive) now. Since the typical pattern is for gold timers to become more bullish as the market rises, and vice versa, this development is bullish from a contrarian point of view.

gold sentiment bullish chart


Ceiling on Swiss Franc

Today the Swiss National Bank announced that they will no longer tolerate a Euro under 1.20, thus putting a ceiling on the franc.

The bank said that: “The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development [and] the SNB is therefore aiming for a substantial and sustained weakening of the Swiss franc”.

The bank also said that to prevail this goal they may buy Euro in “in unlimited quantities” to suppress the Swiss Franc.

The trade we recommended last week is better shown in a chart:

us dollar swiss franc trade chart

Gold Sentiment

There are many ways to measure market sentiment for gold. One way to do it is by checking Google Trends to see how many have searched for the term “buy gold”. That way you get a very broad definition of the positive sentiment in gold

From the chart below we see that we just have had a top in sentiment in gold in the beginning of August. Last time before that was in October 2008. The price of gold took a deep three-week dive right after the October top before the strong trend continued.

What seems to be a bit stretched in the picture though, is that the news references just made a huge spike in august. More notable than the spike in October 2008. This spike, however, totally died out for the last days which could make gold bulls relax a bit.

I am not very found of doing quantitative research with so few observations (the peeks), but this is one of many tools about how to look at quantitative-, technical-, or sentiment analysis.


gold positive sentiment trend

Related Articles:
Should I Buy Gold?
Platinum and Silver vs. Gold

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