Oct

10

caneOver the years, I've enjoyed and preferred the company of working people. The people I'm referring to are fishermen, lawn guys, lifeguards, surfers, and other blue collar types. These people live without credit, loans, real estate, bank accounts, or any other financial instrument, save for their eventual social security benefits. In the past couple of days, I've had five people come over to my house wanting to buy common stock. Without exception, they weren't able to open accounts at brokers, and want to buy good stocks because they heard that stocks are cheap, and they believe in America. They all came over, cash in hand, asking if I would get down the trades for them. They wanted me to buy the stocks and sign over the certificates to them. I wonder what kind of indicator this is, as I've never seen anything like it.

The Fifth Amendment allows me to decline to answer whether I accommodated their requests.

Stefan Jovanovich adds:

Canes come in all shapes and sizes and styles. My paternal grandmother, who remained illiterate in her native tongue of Polish as well as in English for her entire life (probably because of undiagnosed dyslexia), took grandfather's stash of double eagles saved from digging ditches and bought a 3-story rooming house in Denver after the 1919-20 crash for 12 cents on the dollar. Even in the Depression it generated enough free cash flow for her to send all 3 children to the University of Colorado. The money from the sale of the property after her death sent 1 grandchild to the same school in the 1980s, which may signify more about the relative value and price of education in the 1930s versus the 1980s than anything else.

Vinh Tu responds:

Suppose one is operating on the premise that a recovery will occur, but one has no idea how long it will take, or how low the market will go before recovering. What is the optimal trading strategy? I think it should be some kind of optimal Kelly fraction. If one maintains a constant fraction of cash and equity, as stocks approach zero, one's number of shares approaches infinity, which is nice once they recover. If the stocks actually REACH zero, then hopefully one has also stocked some canned food, ammo, etc and learning the art of shoemaking.

So what is the optimal ratio of cash and stocks? What assumptions do we need?


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10 Comments so far

  1. Rocky Humbert on October 11, 2008 7:10 am

    A 68-year old relative of mine with a Yale PhD in economics decided to buy stocks for the first time in his life this week. His logic is that the government is socializing risk and privitizing profit to an extent never seen heretofore. Simply put, he wants to be on the right side of this trend. He's buying the bank ETF and S&P500 ETF. Yale PhDs don't have a monopoly on perception and insight. It's one of the things that the liberal elitist cannot grasp and/or accept.

  2. the boy on October 11, 2008 9:14 am

    I have also had many people showing me how much stock they have bought in the past two trading days. The question is, if everyone is taking out the canes, how could this possibly be the correct time?

  3. Barry Gitarts on October 11, 2008 10:35 am

    If everybody is taking out the canes, why are prices going lower?

  4. Jaden Zoemus on October 11, 2008 2:00 pm

    Dr Niederhoffer and Ms Kenner, I hope you are navigating through this storm safely. If you have the time, I hope you can share some thoughts to help us understand what to be expected over the next few weeks. It seems like the bond market has put a cage around the elephants of the stock market. Is it safe to assume that the bond market is the key to a stock market rebound? You have mentioned the importance of the bond market in relation to the stock market. So I was wonder will it take the bond market to unleash the elephants or will the elephants be able to smash through the gates that hold it captive. Your knowledge would be appreciated.

  5. J. Hughes on October 11, 2008 2:05 pm

    Having been on a trading desk during the crash of 87, I was considering the other day what events percipitated those fateful few days in October 21 years ago. I recalled, the ESM failure, under the weight of another fixed income scheme, reverse repo's, which are relatively benign in todays market. But I could not recall any bank failures. Yes, there was Continental Illinois , but that was a different kind of failure.

    I as I was joggging, I was attempting to find a connection, to the recent events… we have had so many dealers fail, that would've been unthinkable back in the day. I know that part of the contributing factor back in 87, was the mantra on my desk and many others, "the next one who answers the phone is fired" as we sat there, watching all the blinking dealer and customer direct lines, there was no chance of the outside lines getting answered. I wonder how many server connections were just simply pulled in the past 10 days. I know that my trading platform at my dealer was down frequently, and that I received a missive in my email apologizing and instructions on how to receive better customer service when we phone in. Good luck with that one.

    Buying stocks by the main stream, yeah, it could be and will be a good short term tradeable bounce here, but will they have the ability to benefit? Or could they just sit on the cash, and continue to invest it in themselves, something that they can exercise a degree of control over… as opposed to casting their fate in the hands of the financial magicians who only choose to answer the phone, or not pull the server plug when it benefits them.

  6. George Parkanyi on October 11, 2008 2:09 pm

    Sounds like a good indicator to me. People who understand thrift wanting to buy stocks at these prices? Hmmm.

    “they heard stocks are cheap”. Now there’s an understatement. I love it.

    Cheers,
    George

  7. HC on October 11, 2008 2:24 pm

    I bought stocks for the first time this week after having been out of the market all year. My thinking went as follows:

    -While it is most certainly a Depression on Wall St., it is not neccessarly a Depression on Main St. If it is merely a recession- even a deep recession- I think blue chip companies with little debt who have not been making money off rising prices will do fine.
    -Our economy and financial system is predicated on some degree of inflation resulting fom growth. Over time prices generally rise and equities have been a good hedge (depending on the entry multiple). If we are in fact in a multi-year deflation then all assets are a poor investment. But it will take more time to determine if this will be the scenerio.
    -People get used to patterns- generally rising prices and a generally rising equity maket over time. With this context in mind, it is hard to refrain from taking stock from clearly desperate sellers.
    -I am getting 3% in a bank while getting paid 6%+ in dividends (assuming no Depression)
    -Unlike like many institutions who are forced sellers, many I have 30+ years until retirement and can afford to wait for value to be recognized. Many institutions are selling assets at levels they acknowledge significantly undervalue the anticipated long-term cash flows.
    -Strong hands (those who have cash and a LT investment horizon) are needed to take this stock off the weak hands (who are forced to sell by regulation or due to redemptions).

  8. Evan McKeown on October 11, 2008 3:26 pm

    I for one echo Jaden's note for some insight from Dr Niederhoffer and Ms Kenner. Everything does seem different this time. Historic VIX, massive de-leveraging, global panic. Who would have thought that one would consider purchasing a safe to place one's cash because their is no confidence in a regional or national bank? As long as we have the de-leveraging process going on won't we continue to see selling into any rally? Will this selling continue through year end because of tax loss reasons? Is there anyway to determine the risk/reward ratio at this level? Are there any technical indicators that the chair would suggest being useful such as a positive divergence of the MACD or a move above the 20, 50 or even 200 day moving average before daring to step back in these shark infest waters?

  9. Marguerite Chandler on October 11, 2008 4:25 pm

    The Bankers get their Nannie-State. Where is mine? Who’s gonna buy up all the junk now? Is that why Wall St. supported W. Bush? Who’s going to use the term “free market” now, with a straight face?

    Reminds me of the Bush vs. Gore decision: Judges who made their entire career drumming on about “state’s right” renege on their weak pose, when it is convenient.

    “Free market” can take a vacation until further notice: i.e. when it becomes convenient again for those whose purpose it serves?

    Schadenfreude, anyone? Not really. Me and my generation failed. I was unable to positively influence events, nor prevent the suffering of my friends and loved ones. If *I knew all the banks were insolvent months ago, how can others pretend ignorance? If *I knew that the derivatives markets was a ponzie scheme and that the real estate market was a speculative bubble, how can others, more sophisticated, who spend hours in the field of finance and business, pretend surprise? Are people blinded by greed?

    “It’s strange what desire will make foolish people do”
    http://www.youtube.com/watch?v=OkKuaJxXIIA

    Now this post of mine is a *definite “cane?”

    And I apologize, Victor, for the insult to your friend at the last meeting I attended - my co-researcher and myself, if I remember correctly, called him a “liar.” He may not be one. Just ignorant and misinformed? The fighter in you came out and even though it was against *me, I admire someone who stands by his (or her) friend. I am sorry for offending you. Not *everyone who panders to their audience is wrong.

    All the best to you and I hope you and yours are well.

  10. David Whitesel on October 18, 2008 8:13 am

    Stefan's comment that, "My paternal grandmother, who remained illiterate in her native tongue of Polish as well as in English for her entire life (probably because of undiagnosed dyslexia)," your paternal grandmother was an animist, therefore she was hardwired to understanding identity transparency… the tipoff was her dyslexia.

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