Aug

3

J T

"In the coming depression, pawn shops will be a profitable business". A Daily Speculations reader.

Finney had a better ending in 'The Body Snatchers' book than the movies. The dynamic duo of Bennell and Driscoll torch the pods that they find. This is important and I believe that Finney purposefully wrote it that way because it came at a time of hopelessness and desperation where everything seemed like it would be over and the world would come to an end. Guess what, the aliens in the fictitious book that survived the fire died off according to Finney and the world was saved thanks to backbone, effort and not rolling over and saying "well, we are going down".

Just as the torching does take place in depressions, look at the returns the markets brought forward from '34 - '36. Anyone that has burnt a field down due to overgrowth of weeds and thicket knows the beautiful greenery that comes the following spring. Finney I feel knew this and therefore provided an appropriate ending. A ending where life prospers and advances. Fittingly this week the Olympic motto is "Citius, Altius, Fortius" aka "Faster, Higher, Stronger".

I'm a little old fashioned, but to think that one can predict with certainty depressions or heck even recessions for that matter seems a little self centered? Am I wrong in thinking or feeling this?

Kevin Depew replies:

K DThe stock market bottomed in 1934. But the economy and the stock market are not the same thing, perhaps that is the disconnect. There are far more people with exposure to economic conditions than to stock market returns. I have not been able to figure out how stock market speculators can win by following the economy, or how those who are more dependent on the economy for survival can win by paying attention to the stock market.

Jeff Watson adds:

With economic slowdowns and recessions being part of the natural order of the economic cycle, I look at them as just another season, much like the solar or lunar cycle. There are many trading opportunities during slowdowns, and somewhere in the world, there's always a bull market. To quote Chance the Gardener in "Being There", "In the spring, there will be growth…." Metaphorically speaking, Chance, (who had no clue about anything) hit the nail on the head. The question remains, when will the spring time appear? The astute speculator who can identify the change of spring time will prosper.

Janice Dorn reveals:

Dr DornI am the Daily Speculations reader who stated "In the coming Depression, pawn shops will be a profitable business." Human history seems logical in afterthought, but a mystery in forethought" — William Strauss and Neil Howe from their book The Fourth Turning. I believe we have left fall and and are now entering winter. With all due respect to the general optimisim of this site and my high regard for Vic and Laurel, what has been going on since 2001 has been ordained by history. It is our responsibility to ourselves and those we love to protect ourselves and survive through what is coming. After the purge, there will be a new awakening, but many us alive today will not see it. If we are not prepared to go into deep survival mode, we will not make it through the coming crisis. Even if the fourth turning — winter — does not occur within the next two years, the lessons of the third turning will serve us well and strengthen and preserve what we have.

Dr. Dorn is the author of Personal Responsibility: The Power of You, Gorman, 2008 


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9 Comments so far

  1. George Parkanyi on August 3, 2008 10:20 pm

    So if a recession is officially two quarters in a row of negative growth, does anyone know the official definition of a depression? Eight quarters in a row? Or do we just not talk about it? Cheers, George

  2. George Parkanyi on August 3, 2008 11:16 pm

    Can money management alone beat the odds?

    A few weeks ago I went to our local casino to play a little craps. (Yes, I know it’s gambling, but I just play small stakes for the fun of it. I just enjoy the game.) I lost my stop-loss of $300.

    I went back again last night, and won $500 after a maximum drawdown of only about $40. It got me to thinking. Could the difference partly have been money management? On thinking about what I did wrong the first night, I reflected that I was playing too many numbers at once (aggressively) pretty much all the time, and there never really was a hot roll over that period and I just got ground down. Last night I decided to start very conservatively (minimum bets and single odds) - especially when it was my money; press only when it was the house’s. I got lucky right away by letting a $10 bet (table minimum) and its payoffs ride a couple of times, so I picked it up a little bit, but still not too aggressively. After about an hour I was up $150 and took a break. When I came back I stayed conservative and won and lost a bit, giving back maybe $50. Eventually the hot roll came - by luck it happened to be me. As I was hitting numbers amidst the cheering and starting to win, I played more aggressively using the house’s money. I estimate I made $400 on just that one hot roll. At the end of it I cashed in and called it a night.

    Craps, especially when you back a pass-line bet (slight house advantage) with odds bets (which pay true odds - no house advantage), can reduce the house advantage overall well below 1%. If you play conservatively, your “equity” tends to drift back and forth across your break-even point. If you made the money management decision to only press when you drifted positive a certain amount and then either back off if the foray fails, or press harder if you start winning, could you consistently make money? Or are the odds simply the odds, and you will lose no matter what because longevity of play favours the casino? In a book on craps I read a long time ago, the author told the story of an average-guy professional gambler in Las Vegas who supposedly made a living at it. He played very small stakes, took small losses, harvested bigger wins when he had them though never went for the kill (to stay under the casino’s radar), and made enough to buy a modest house and feed himself and his kid. Whether that was true or not, who knows, but if he did, it’s certainly interesting.

    In the markets, with research and experience, you can shift the odds in your favour, but the trading lesson from craps here might be to stay conservative until you are in a position to take on more risk/reward using the market’s money, not your own.

    Cheers,
    George

  3. Prudence Gently on August 4, 2008 1:58 am

    So the stock market is not too tied to the economy. Why then do speculators view a drop in the stock market as a period of doom and gloom? Aren’t we all traders now? A solid short position followed by a drop in the market can make everything sunny and bright! And the economy need not even pay attention!

  4. Prudence Gently on August 4, 2008 2:10 am

    George, you are not thinking the craps money management thing through. When the house has a slight advantage, it is the law of large numbers that will get you eventually. Your best bet at a game like craps is to bet the entire farm on one turn. On one turn, your odds are about 50-50. In the long run, the inexactness of that “about” makes all the difference, and your odds will tend toward 0%.

    Talk about money management always raises red flags with me. Money management is the easy part of trading. The hard part is getting good odds.

  5. Craig Bowles on August 4, 2008 7:45 am

    Kevin’s right that economic implications often don’t appear to coincide with market movements but reward potential vs risk changes depending where we are in the cycle. Stocks do best when the lagging economic index and the leading inflation index shows negative growth rates, while Fed Funds is loose vs the combination of CPI and coincident index growth rates. Gold is a mid-cycle vehicle when the lagging index and leading inflation index show positive growth rates with a loose Fed. Bonds are late cycle when the economic indexes are inverted, leading inflation index has negative growth rates and Fed is tight. Currently, we have an inverted economy but positive leading inflation index growth rates and loose Fed. Gold can have a late cycle move but gets hit hard when the lagging index begins to correct as is happening now. The only time economics says short stocks is when the economy is inverted with positive leading inflation index growth rates but you also want a tight Fed. Often economics suggest doing nothing but following these signals averages over 20% over the last 50+ years. The biggest market moves come when supported by economics. Also, extended recessions come when inflation peaks are later than the normal 3 month lag. It currently looks like inflation hits another high in July, so that’s 8 months into the recession defined by the coincident index. We’ve never seen that before, even in the 1970s.

  6. steve leslie on August 4, 2008 7:54 am

    First of all pawn shops are profitable businesses in any economic climate. They are an unregulated industry that charges usurious rates of interest and buys assets for pennies on the dollar. They then resell the asset at an atromomical mark up. In Florida, even if a pawn shop purchases a stolen item, the original owner faces long odds of recovering the asset. Pawn shops provide liquidity to the retail market and are a legal way to exploit the public.

    During World War II with the war still very much in doubt, the stock market began to turn positive in 1942. For whatever reason the market was looking to the future. In 1992 with the banking industry in crisis and in the midst of a recession the market began to turn. In 1982 with Paul Volker vigorously working to break the back of inflation the market was laying a foundation for the great market run of 18 years. Even in early 2003 with a war in Afghanistan,, in Iraq and the war on terrorism in full mode, the market was turning positive.

    The old cliche is a recession is when your neighbor loses his job, a depression when you lose yours. Perhaps a more modernized version is a recession is when your neighbors house faces foreclosure, a depression when your house faces the same fate.

    Steve L.

  7. George Parkanyi on August 4, 2008 9:37 am

    Hi Prudence,

    Deep down I know you are right on the problem of overcoming a certain negative expectation. My greater point was being conservative until you already had some cushion — say, bet the farm on one roll after only with the profits, or part of the profits (the house's money). In the long run that won't work either, but in trading it might, if you know your market well enough to have some kind of edge.

    Besides that, I don't have to think it through. I play craps for fun. My trading system is based solely on the one certainty that prices fluctuate. Besides knowing that my component securities will be around for a while (intially researched), I don't need to know anything more than current price.

    Cheers, George

  8. Barry Gitarts on August 4, 2008 10:48 am

    Despite the uphill battles they have to fight, the pawn shops continue to turn a good profit even in times where many companies are showing a slowing in earnings growth. To be fair, I don’t know if this smallcap pawn shop is representative of the industry.

    Ezcorp profits rise 60 percent (http://austin.bizjournals.com/austin/stories/2008/07/21/daily49.html?ana=yfcpc)

    “The forced shutdown of operations in Florida and a $600,000 lawsuit settlement in Texas didn’t keep Ezcorp Inc. from a big second quarter earnings spike.

    The Austin-based operator of pawn shops and payday lending stores earned $10.8 million, or 25 cents a share, in the second quarter, up 60 percent from the same quarter a year ago.

    Ezcorp (Nasdaq: EZPW) logged revenue of $108 million, up 24 percent from the year-earlier period.

    Shares of Ezcorp were trading at about $17.58 Friday afternoon, up 2 percent from Thursday’s close.

    “Overall, our third quarter was a great quarter for Ezcorp and was our twenty-fourth consecutive quarter of year-over-year earnings growth,” President and CEO Joe Rotunda says. “Particularly gratifying is that these results are after a two cents per share impact from two non-recurring charges.”

    In June Ezcorp was forced to close 11 of its EzMoney stores in Florida following a judge’s ruling that the stores were violating that state’s usury laws.

    Also in June, Ezcorp settled a lawsuit brought by the Texas Attorney General’s office over allegations that the company had failed to protect customers’ information. The company challenged the claim that it had illegally disposed of customer records that included personal information like bank accounts and driver’s license numbers. But Rotunda said the company decided to settle for $600,000 rather than pursue costly litigation.”

  9. Brian Kuebler on August 5, 2008 8:54 am

    Predictions? What predictions? If the front end of the canoe goes over the waterfall, does it take a Nostradamus to predict the back end will follow it?

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