The Tasgall Group

You may have heard that Intercontinental Exchange (ICE) is making a $9.6 billion bid for the Chicago Board of Trade (CBOT). One of the more interesting factors is that the ICE “only” has a market-cap of $8.8 billion, which makes the acquisition price a very curious event.

How can ICE do that? They’re making the offering with new stock, which means they’d issue new stock worth over 100% of their current market cap. Most people can’t do things like that, but basically the management at ICE have managed to secure the equivalent of a line of credit with their investment banks. They’ve talked to the brokers that would help them issue the new stock, and convinced them to help them sell such a large chunk of shares. (In a deal like this, the investment bankers will make a ton of money in fees, so I doubt it took much convincing.)

So, the yield curve inverted back at the beginning of August 2006… a full 8 months ago. As we talked about a few times, the typical response to an inverted yield curve is a recession in 6 to 12 months…

Well folks, we’re smack dab in the middle of that timeframe now… and several of the yield spreads worth watching are closing in on the zero line.? Some would say the uptrend in the yield curve is the real harbinger of ill fates, rather than the inversion itself.

Anyone want to take a bet on whether or not we’re heading into a recession?

I find myself reading a few good blogs consistently, one of which is The Big Picture. Here are two of the recent highlights:

Small Cap vs. Large Cap

Today, the market cap weighting is once again hiding something significant from investors: This time, its the fact that the stock market isn’t particularly cheap. The relative cheap prices of the OEX100 (S&P100) is hiding the relative prices of the rest of the index…

How different? “According to Ford Equity Research, the average P/E ratio among the 50 largest-cap companies is now 19” — thats about 30% of what it was for the grouo in March 2000. On the other hand, the 50 smallest companies P/E ratio is now 30.7 — 50% higher than it was in 2000.

The Market as a Forecasting Tool

Mr. Market is at times a Rorschach test, a blank slate upon which participants project their hopes and fears. He reveals the personality characteristics and emotional functioning of investors by their interpretations of the noise he generates. Remember this the next time you are tempted to create a grand theory of what happens next based only upon a few of his recent squiggles…

Just found this annecdotal quote from Mish’s blog (not sure if it is true, but it could be):

Earlier this year I received a note saying the Core Bond Fund in my 401k was changing to a new bond fund this year. They nicely transferred the old holdings to the new fund without any cause for action on my part.

…The new fund is almost 37% invested in mortgage securities. The old was only a tad over 1%.

Imagine my surprise when the value of the [new] fund had dropped almost 13% from Friday to today! [3/2/2007 -3/5/2007]

(more…)

I find it amusing when the USPS announces their “forever stamp” and the implicit statement that makes regarding inflation…

The post office is basically admitting that their services and their costs will always continue to rise, a sign of perpetual inflation.? While the forever stamp makes sense as a business case (it can’t be cheap to make those 1c and 2c stamps all the time), it is another example of the increasing costs of government service, and the pricing distortions caused by monetary inflation.

Here’s a rather peering look into the mechanics in ARM and Option Arm loans that is an interesting read…? There are many different possible reasons for rates (and payments) to reset or recast…

The short version — it’s so complicated that it takes around 10 paragraphs just to cover a hypothetical loan.

Any wonder why the average homebuyer might not understand what they’ve gotten themselves into?? Especially when some smooth talking salesman tells them that their payments won’t go above $X per month for the first year… and after that you can simply refinance if the payments adjust too high?

I’m amused sometimes when I stumble on things like this…

Bill Cara pointed to an interview that Jim Cramer recently did on “professional juicing”, or basically manipulating markets to help your positions… Here it is from You Tube: (more…)

I’m always annoyed when I see something like this (from yesterday’s Yahoo Market Overview):

9:40 am …a sense that a bottom has finally formed following a week of aggressive selling pressure gives stocks a sizable boost right out of the gate.

The big lie is that after only 10 minutes of trading the author of this tidbit claims to see market behavior that is significant enough to cancel out the entire last week‘s worth of selling.? (Technically two weeks of selling, but the largest down moves were last week.)

What is happening? The author is mixing multiple time frames to try and draw comparable conclusions. Anyone can do it by accident, including me, but those tasked with commenting on the markets for the financial press seem to do it with alarming frequency.

Remember that we can observe the same phenomenon on many different time frames… We can see a bounce from a low on a daily time frame, monthly, yearly, etc. When trying to understand if a week long selling spree is over, we really need to see several days, if not a week, of strength.

One of the many important concepts of trading is to be aware of your time frame. It’s easy to be distracted by the action of the last 5 minutes (the prices keep changing after all!), but if you invest over longer time frames (months and years) then a one day bounce (or dip) is not usually significant.

What would be significant?

• Bullish Significance – Several days of buying on good volume, with a general upward trend. A series of higher lows when the market does have a down day or series of down days.
• Bearish Significance – Failure of the NDX‘s ability to climb above 1750 (a very short term target) and lower volume on up days like today.? A series of lower lows and lower highs…

Paraphrased from Technically Speaking…? (you can tell which side he’s on based on the wording he uses…)

The Bear Case is simple:

• Mean reversion to growth norms
• P/E Multiple norms
• Dividend norms (1.8% on the SP500)
• Extremely low mutual fund cash
• Rising interest rates with a questionable dollar, under constant pressure from the printing press.

The Bull Case is equally simple:

• “WooHoo”
• “This time it’s different
• “The trend is your friend”
• “I can get out any time”
• “Debt doesn’t matter”
• The US consumer will never give up
• The Bernanke Put
• Victor Sperandeo’s “follow the false train of hope to the end of the line, and jump off just before the end.”

I think this sums things up fairly concisely… though I would probably add a few more strong profits stories to the bullish side, and some additional inflation stories to the bearish side…

The Kirk Report has a good post on the 48 Laws of Power…? and how the laws might apply to traders.? While many might be questionable, some are quite good, such as:

9. Win through your actions, never through argument. (Don’t waste time convincing others on message boards how good or bad a stock is and/or telling people how smart you were because of good calls you’ve made in the past. Instead, trade the stock and make your profit. Talk will never pay your bills. Show others by demonstration, not by time wasting chatter.)