Apr

6

CanaAs a very serious collector of art, I see people buy art for the purpose of investment all the time. I'm asked to give my opinion on the worth of a particular piece of art a few times a month. When the public sees headlines touting record price for Van Gogh, Renoir or Matisse, they rush out to buy art for investment. Some major companies have also put the shareholders at "art market risk" by owning large collections of art for investment purposes. The cottage industry of consultants that has sprung up dealing with the art investment field is full of swindlers, thieves, liars and cheats. The consultants, dealers, and auction houses are the ones who profit, not the average collector. Even some reputable dealers have been known to sell fakes, such as works by Dali, which are 99% fake (except for his signature). While it is possible to make some money in the art market, it is very improbable for the collector to profit. A collector should stick to buying art he loves, has beauty, wants to display forever, and is willing to bequeath to a relative or museum upon death. The art hanging on our walls and in our collections is owned by history, and we are merely the caretakers of the art. Incidently, despite the spin by Sotheby's and others, the mid-range market for good Impressionist art is rather soft. There are also some good prices to be found in the Old Masters. I used to tell my lovely wife that the price of good mid-range art fluctuates inversely with the number of margin calls on the Street.

Sam Marx remarks:

PollockI believe a lot of modern art is a fraud. Jackson Pollock's splatter paintings — how can anyone take them seriously? Yet they are sold for millions of dollars. A painting (not a Pollock) hung in the Museum of Modern Art in NYC for a number of years before it was discovered to be upside down.

Marion Dreyfus critiques:

Your grasp of modern art is not strong; if you know the continuum of the field's development, you would not say that. It marks a yahoo sensibility, alas. There are fraudulent practitioners, but Pollock is not one. Suffice to say there are less well researched and annotated and revered artists around to pick on. In general, if you are going to pick on frauds and fakes, better to pick on a very current artist whose chops are not yet firmly implanted in the historical record and universally accepted.

Just as there are 'collectors' without an ounce of sophitication in what they are amassing, there are quick-buck artists eager to make use of the investing/collecting sensibility when they adjudge the market to be a bunch of gullible wallets circling for a kill.

And though it sounds foolish, because much of modern art is nonrepresentational, if the artist is not present while the museum hangs the piece, it is forgivable if the canvas is not the way the artist intended: The average viewer could not tell which side was intended to be down, which up, so one ought not hold the museum guilty for such an understandable error.

Sam Marx retorts:

What makes Pollock’s work worth millions? One critic called Pollock's work colorful "wallpaper designs." I don't believe Pollock precisely measured the hole he created in the bottom of the paint can and a slight change in the hole size in the can of paint that he was dripping from would've resulted in a very different painting. If you don't have a precise control over what you're doing, I have doubts about it as a masterpiece.

Michael Bonderer assays:

RothkoSam, easy boy! Kindly try to put Pollock specifically, and the Abstract Expressionists of the budding NY School Artists more generally, in the context of post Hiroshima/Nagasaki, post WW II ethos and emerging Cold War ethos of the late 40s and early 50s, to understand their aesthetic and important place in global art and their brilliance. Particularly interesting would be for you to trace Pollock's pre-Abstract Exprisionist work to see how he as an artist developed and emerged as a leading Abstract Expressionist. As the atom's understanding came to mass consciousness, you will see bio-morphic imagery present in many artists' work, including Pollock's. This gave rise to the 'explosive canvas' of Pollock and others and the magnificient 'color-field' work of Rothko, as they all came to grips and a better understanding of where we as a society were going on a certain level from 1945 to the present. Collecting and investing in art is an aesthetic and a lifestyle, and to do it well you really have to immerse yourself, e.g., Paris in the 20s and 30s, NYC in the late 40s, 50s and 60s, LA and SF Bay area in the 50s and 60s and 70s and the LA Chicano art of the 70s and 80s and now Shanghai today with its phenomenal present day contemporary pieces and artists. Sam, I kindly direct you to the Art Tab on Costco's web site!

Lon Evans adds:

Should this be 1910, Sam, you’d be offering to pass on any available Van Gogh.

Adam Robinson offers:

Cana Alas, what's not strong is modern art's grasp on what moves the human heart.

If anyone wants to take up the affirmative position that modern art resonates with the human soul and psyche anywhere near as much as does any Old Master painting, I'll take up the negative banner onto the debate field with gleeful alacrity.

As a rule of thumb, in any field of human production, whether art or literature or essay writing or science, I lay it down as axiomatic that the time and consideration that ought to be accorded to the appreciation and evaluation of human products is proportional to the time and consideration that went into their creation.

Some might argue that talent or brainpower ought to figure in to the calculus of merit, also, so for those who like to quantify things, let's say,

PT x BP/T = k x CAT (production time of creation times the creator's brain power/talent equals some positive constant times the claim on an audience's time)

Show me a piece of art — or an idea even — that took two years of a human being's life to conjure and produce, and another that took two days, and the assuming the talent of the creator's to be the same, I'll give the later maybe 1% as much of my time weighing and appreciating as I will the former.

Michael Bonderer explains:

Tang ZhigangAnd therein lies the adventure and challenge. To effectively emmerse oneself into the Shanghai art and media cognoscenti and find the Shanghai Pollock and Rothko and Diebenkorn. Scour the streets and allys and lofts for the work-product of the Tiananmen-inspired dissidents and new-found 21st Century Shanghai sensabilities. Maybe even find the Costco art-mill progenitor and take him out for tea and latte and pick his brain. He may be nothing more then a knuckle dragger, but then again, he may point you to a street that is having a new showing Friday night.

Jeff Watson responds:

There are some prefectly dreadful works from the Old Masters out there. Just go to the Prado or Louvre, and you'll see plenty of examples. While I'm not a fan of most modern art, I do like some of it, and have one piece in my collection. Good art is good art, in any genre, be it music, literature, or theater, and the heart will respond to to what's good. Some have pre-existing opinions on the merits of a certain genre, and it could cause them to miss out on something beautiful. Pre-existing opinions have cost me a lot of money in the market over the years, and this has taught me to sample everything, and keep an open mind.

Steve Leslie ponders:

Why is it that a painting of a nude is considered artform when a photograph can be considered pornography? As an addendum, do I need Freudian therapy if I am a fan of Robert Mapplethorpe?

Why would someone spend millions for a stolen work of art yet know in advance that he may never reveal it for public viewing?

Along the lines of burglary, How can billions of dollars worth of artwork be stolen every year and vanish for decades?

What happened to all the artwork that the Germans plundered from France, Italy, Denmark and other places during World War II and has not been seen since?

Where does someone draw the line between art and garbage? Along those lines what, defines Dali as a genius and not mildly psychotic?

Was Andy Warhol an accomplished artist because he drew for Campbell’s soup labels or in spite of it?

Who else thinks that Frank Frazetta is genius personified?

Are dogs playing poker classified as modern art, especially with the Phoenix-like rise in popularity of the game?

Do velvet Elvis paintings increase in value?

Alston Mabry postscribes:

I enjoy using artwork as wallpaper on my computers. Two very good sources are Mark Harden's Artchive and WebMuseum. It is crucial to get a good scan, that has decent color saturation and sharpness. For example, Hopper's Cape Cod Afternoon from WebMuseum, in which the colors are very rich, and you can actually see the grain of the canvas.

Mar

6

Moby DickIn Herman Melville's Moby Dick there is a fine chapter about the monkey rope. Many of us are on a monkey rope with others where their fruitfulness and indeed life force are intimately tied with another both going up or down together. I wonder what markets or components are tied on a monkey rope together these days. The bond insurers and the banks comes to mind. The bonds and the stocks always. The dollar and the grains. What else comes to mind?

Jim Sogi:

EU, Japan, US at varying times.

I would often jerk poor Queequeg from between the whale and the ship-where he would occasionally fall, from the incessant rolling and swaying of both.

Monkey ropes from todays news: The drop in crude futures dragged gold along with it just as the precious metal approached a record near $1,000 an ounce. Dollar also turned higher against the yen late in the day as U.S. stocks trimmed losses.

Matthew Alexander:

Gold and oil.

Lon Evans:

Gold is, and historically has been, a hedge against the perfect irrationality of the human genome. Oil, relative to history, is but an infant in the same game. At no time in recorded history has a commodity been susceptible to the geometrical acceleration of an intelligence necessitated by the very same genome.

John Tierney:

We all share, and live or die in the market, by the same components: fear and greed. We all possess an abundance of both and the really fortunate make it back on deck alive and whole. But Melville's real point here is not how skillfully we joust with Fate and, if fortunate, prevail. No, the message is what we can expect as a reward; certainly not a fine cognac, but a dismal flagon of ginger. Surviving the monkey rope is its own reward, indeed a great conquest just in balancing two such powerful forces.

Should we expect more? And if we get more will we not risk it all again tomorrow? For what?

Andrea Ravano:

Stocks, and currencies such as Aud and Nzd.

Denis Vako:

It would appear that roughly speaking it is Commodities vs Financials, and East vs West.

Sam Marx:

Fuel Oil Prices and Airline Stocks

Pitt Maner III:

Oil Prices vs. Drill Rig Count, Oil Service Companies

Economic Slow Down, Stress — Cold and Flu, Defensive Stocks, Funeral Service Companies

Consumer Spending as a case of Melville's Bartleby — "I would prefer not to".

Alan Millhone:

Ahab knew the value of Gold and so did his crew: on board ship while chasing the great whale, Ahab took a Gold coin and nailed it to the mast for all to see.

Phil McDonnell:

Some more coterminal monkey ropes. Things lashed to the Dow Jones Transports include: bonds, notes, oil, the yen and VIX. The aforementioned all are lashed in a negative sense. Surprisingly oil services are lashed positively along with most world stock markets and financial services.

Tied to the S&P we have oil services but not particularly oil itself. Naturally most stocks are tied together with the S&P - no surprise there. But one finds that US paper of substantial duration, VIX and the yen are negatively linked.

Riz Din:

Commodities prices and currencies. I'd previously looked to the commodity prices to get a better handle on the likes of CAD, NOK, AUD and NZD. However, according to a recent paper by Ken Rogoff summarized in the WSJ, I may have been looking in the wrong direction, and it is currencies that provide predictive insight on the commodities, not the other way around.

Feb

23

ChairWhat must not be gainsaid is that the rise of 22 points in S&P futures from 3:30pm to 4:00pm on February 22 from 1334 to 1356 was the greatest rise in history. The rise of 24 points from 3:00pm to 4:00pm from 1332 to 1356 was the second greatest in history, failing by only a point to match the Société Générale rally on 01/17. It was beautiful the way the market set up exactly the same way it did the Friday before all the money was made by frontrunning and running stops associated with the $7 billion loss. Also beautiful was the way the move from 1327 to 1357 (low to high) on Friday basically recapitulated in half an hour the entire range of the last two weeks. That's what a classical symphony is supposed to do at the end of the piece, recapitulate all the themes, bring them together and close with a bang. Also of note was the sentinel function of the bonds in the entire mass, staying down nicely even while the market at the two week lows. It was all guaranteed to happen.

J.P. Highland adds:

Natural gas also had a nice day, settling above $9 for the first since February 2006. It's been quite a run since December 2007 when it was trading below $7. Nearby months are selling at discount, but open interest is decreasing.

Jeff Watson noticed:

While the S&P rallied today at the close, there was also great volatility in the wheat market. The nearby months in Minneapolis did a mongoose/cobra dance today, and the mongoose won.  There aren't any shorts in Minneapolis wheat who are making money right now. 

Kim Zussman studies:

In relation to the joyful pop near Friday's close, I was wondering how to design an experiment in which subjects obsess about short-term gratification in a system with long-term utility.

(ES on Friday from open to 1130 PST was -18, and from 1130-cl was +25.25. Over recent 100 days, when op-1130 < -10, 1130-cl average= -1.5, T=-0.7)

During recent 100 days , lucky longs celebrated some or all of the following:

KZ1

Yet during the entire period, the net change was -217.

The mean O-C was a dull -2, but certainly there was much along the way to self-flagellate or congratulate over, depending on the spin of the wheel:KZ2

Lon Evans queries:

In regards to "It was all guaranteed to happen": Why so?

Note that the AmBac information was released towards the end of a Friday's afternoon session, replete with low volume and high volatility. Note, as well, that the news was released as the S&P was tumbling dangerously close to the dreaded 1320 level. Take also into account that no (pesky) details were included in the given information. Finally, acknowledge that the Bush administration is actively involved in the bail-out considerations (which suggest but another timely release of disinformation from a cabal that would rather climb a greased pole to tell the lie, than stand on the ground to tell the truth).

Without the mentioned announcement, was Friday's reversal "guaranteed?"

Let's consider another scenario. Friday closes at 1324, after bouncing off 1320. We awake on Monday to Asia's having sold off heavily in a tidal wave of red. Spitzer, again, rattles his saber in demanding that the rating agencies come clean with timely and honest evaluations of the monolines' status. And a credible evaluation of accelerating inflation hits the wires.

Given the above scenario, would a Monday's close below 1320 have been a reasonable possibility?

Where is the science in your predictive model? It seems to me that all you've done is demand that a arbitrary result validate a biased opinion. Other than betting upon an "inevitable" inevitable, I don't understand that your system of analysis is any more logical than that of a friend who utilizes tarot cards to guide his investment strategy.

No one can argue that Friday was very profitable for the quick-witted daytrader (full disclosure: I was among the less acute, managing to cover my short with only a couple handle loss, and just as my limit was so close I could smell it). But having cut my teeth on a day-trading floor during the dot-com boom/bust, I'm as aware as any what an accumulation of the quick-witted can impel given the intraday scenario, particularly a Friday scenario.

Will the calvary route the savages, succor the wagon train, and unite the dashing captain with the demure beauty? Only the details will tell. Should this boil down to a Federal bail-out, I'll cover my puts and look to go long. Should it be but a bickering viper's nest of plutocrats and the over-privileged, I sit tight. Either way, there is little science involved in my decision. I'm only interested in what target the guy with biggest stick swings at.

Sushil Kedia observes:

On Thursday, the Indian futures index CNX Nifty produced exactly the same pattern. Meandering lower the whole day and going up in a straight line in the last 30 minutes to finish at the high of the day.

Shorts got squeezed for sure as the futures discount of 30 points got compressed to just about 5 points. Chartists gruntled with joy oh a hammer and the Index jumped from the 5080 area to 5200.

However, the next morning the market opens with a large down gap at 5130 explained primarily by the overnight move in the US, stays throughout the day at the downgap as the resistance for the day dipping in between by a percent from the open some 20 times. The market saw the move on Friday as a dead /dyeing man's heart beat really going nowhere.

One wonders if there is a global trading pump that is on microcosmic level driving the same algorithm in every market?

The rare downgap opening after the move such as on Thursday in India could well be explained with the higher significance of the larger market called US the night after. However, if Asia did still trade lower on Monday would that call for the traders in the US to be ready for a lower market on Monday there despite the move of Friday?
 

Feb

20

MistakesAfter the monoline debacle, it seemed to me several clear patterns of failure had occurred.

The cash cow, muni insurance, led to complacency in product development for insuring CDOs.

The wonderful sales success entrenched management, leading to escalation of commitment, rather than raising questions about underpricing.

Risk management became management by numbers only. The rating agencies had a moral hazard and now are accused of heel dragging blindness.

(However, the accountants, auditors and regulators, have now stepped in and now have the opposite moral hazard… to inflate their worth by aggravating and exaggerating the downside).

This may seem a bit long winded and hindsight contrived; yet a similar story could be given for the instigator of the CDO problems and the sub-prime mortgages.

But these modeling problems have not been limited to the sub-prime originators. It has been my experience within the insurance industry that many of the failures follow a similar pattern. Bad modeling seems to follow this course over and over. Many of these cases do not lead to the scale of problems in the financial markets we see now, but on a company basis they often have been as devastating.

Like computer programmers and their anti-patterns, modelers often fall into habits that at first seem beneficial, but in the end are bad habits. Wikipedia has a list of failure pattern traps, including the ones I mentioned here.

I am a runner. To me, losing a race has always been much more motivational and educational than winning one. Losing exposed the weaknesses in my training and habits. Success easily becomes complacency. Losing brings the hunger back.

Lon Evans critiques:

As an avid runner (some 35 years in that game and counting), we are kindred spirits in at least one instance.

I'll mention that you have been a bit slow on the uptake concerning the entire subprime mess, though you're not alone. DailySpec, to my knowledge, has few, if any, posts that attempt to "test" what the financials are now properly suffering. With so much brain power in accumulation, one would assume that at least a handful of posts would be delving into what is shaping up to be a global tsunami. It is interesting to view as a correlation the denial evidenced by the VicBots and that of the cretins who got us into this wretched mess.

Your attempt to decouple the various manifestations of the current malaise is in error. Subprime, CDOs, SIVs, monolines, et al, are simply an indication of the stupidity (duplicity?) of entrusting those incapable of honoring their responsibilities. All that currently ails us is a result of selling houses, and then "creatively" declaring "risk free" investments, which could only fail given their ultimate collateral.

In closing, I don't share your optimistic evaluation of "failure." I imagine the man, who willfully (through ignorance or intent) severs a hand. After cleaning up the resulting mess, he then exclaims, "Well, I now know never to do that again." There will be costs, in bringing this saga to a close, far steeper than you're imagining.

Russ Sears responds:

You have me beat with running experience. I have been racing for only 27 years. Note I said racing, not running. However, as a racer since college, I have found many people that talk a good game. Everybody wants to be associated with taking personal responsiblity, but few really want to put in the mileage. Many are fakes. If I had a dollar for everybody who has claimed to run close to my times! When I qualifed for the US Olympic trials, I was told by the head offical more people tried to fake their qualifications than actually qualified.

If you are so avid, why is your name not appearing in any of the websites that give race results? Surely you have done a fun run or charity run or two in the last 10 years? For an avid runner since the early 1970s, you would know that being an avid fitness runner without any racing was unheard of back then. What made you change?

It is clear to anyone that subprime, CDOs, and monolines issues are closely related. You have not told me anything everyone doesn’t already know. But you expect to make money off it?

Supposing I take your word for your grand analysis, tell me how you came up with the underlying assumptions, rather than how grand they are.

However, your assumption that I have been slow on the whole subprime mess is wrong. The monolines, Alt-a have been on my “avoidance” list since 2005 (when I took my current job which required me to have an opinion) and subprimes always were. However I did miss the SIV connection, so my risk management was not flawless this past year.

Lon Evans retorts:

You might find yourself a bit back on your heels when more fully apprised of my experiences and associations in my 35 years as an "avid" runner. I'm as amenable to good conversation as I am to fighting the good fight. 

Jan

14

Consider that:

1. Sharp market downturns from highs are more often false positives than signs of impending meltdown.

2. Timing matters in making a market or economic prediction. If you miss a relief rally you miss the biggest gains. A relief rally is a stock rally from the foresight that fear, often of a recession, is abating.

3. Recessions do not always yield large, long term stock meltdowns. Big and long; pre- and post- recession meltdowns are not a given, just because that's what happened last recession. A paradoxical corollary: If most people think it will happen, it won't, it is already anticipated.

4. Wealth, if measured by real assets and growth of real assets (including human capital), makes the USA a very hard long term bet to beat.

5. Conspiracy and market manipulations are two-way streets. Just as stock market cheerleaders may have ulterior motives, so do the prophets of doom. Except, alarmists and media have a symbotic relationship. And journalists don't have worry about geting sued for causing you to worry too much. "Smart money" has a way of becoming "dumb money" when everybody is following the same guru and strategy. What are those strategies and who are the gurus?

6. The Fed's increasing money and Fed's decrease money may cause credit cycles but the Fed's diverting the normal flow destroys wealth. In a credit crisis few real assets are destroyed; only values are reassessed. Money, eventually, will flow to what is valued, not just what is safest, if the government does not divert that flow.

7. When you hear politicians talk of "change" the first thing you should ask is whether they are talking about downsizing or increasing government's power.

8. These topics will not be highlighted by the media.

Lon Evans asks:

Toe TagAre you possibly one of those who reassured the herd that the NASDAQ meltdown of 2001 was merely a “correction,” and that smart money would hold for the rebound? My opinion differs. This market is nowhere near its bottom.

I’m personally holding 1460-strike S&P 500 puts. I plan to ride them all the way down to 1200. With all the fraud and chicanery relative to the sub-prime mess, this is not the moment for optimism.

Russell Sears replies:

I did fine in 2001, but it may have been beginner's luck as this was my first year of running an S&P options portfolio, professionally. 2002 was not as good but OK.

I would agree that the market will get hit on those days where market senses “chicanery relative to the sub-prime mess” but we may disagree on how much of it is “fraud” and how much of it is uncertainty of the outcome, at least on the part of the banks. And note, the title was for all of 2008, not the next quarter.

Congrats on the 1460 puts. You sound like you did better than I in 2007. But I no longer run an options portfolio — perhaps this kept me out of too much trouble.

John White writes:

1 - Define sharp. -9.5% from 10/9/07 to 1/14/08 took three times longer than -9.4% from 7/19/07 to 8/15/07. Sharp upturns in a bear market are more often false positives than the start of the next bull market.

2 - Timing does matter, but how much depends on your investment horizon. Timing strategies differ significantly with investment objectives, e.g. retirement funding vs. meeting quarterly numbers on the trading desk at Golden Slacks vs. putting food on the table for your family every night. If you miss a bear market you miss most of the losses. A bear market is a re-pricing of equities from the foresight that growth in corporate profits will slow/go negative in the near term.

3 - Recessions never yield large long-term stock meltdowns, depending of course on your definition of large and long-term. Depressions do and I sincerely hope we never have enough depressions to develop a statistically significant correlation. One was plenty enough. A question for your corollary: Most people think the market will return an average annual compound growth rate of around 10% over the next 20 years. Does that mean it won’t happen?

4 - And? What’s your investment/trading horizon? Q1, 2008, 2028?

5 - Exactly why I’m responding with the “other side of the coin.” And anyone who listens to journalists for advice on trading or investing has already lost regardless of the bear or bull.

6 - Agreed with the added comment that the government often does divert the flow, the anticipation of the diversion can be profitable, and being oblivious to the diversion can be destructive.

7 - When you hear politicians talk, the first thing you should ask yourself is, “Are they a soggy #### sandwich, or just a #### sandwich?”

8 - The mainstream media are often a contrary indicator. By the time it is reported on the front page of non-financial publications, or parroted by talking heads on non-financial news shows, everyone always knows and a reversal is often around the corner.

Personally I think the S&P will have a greater return in ‘08 than it did in ‘07, but I thought I’d play devil’s advocate.

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