Market Review: The Wall of Worry

Last week, your Baltimore editor was in Manhattan, touring some of the city’s more fashionable locations, including the gym at Chelsea Pier.

If you want to define quality, this gym is it. It has everything…beach volleyball, a driving range, bowling lanes, a putting green, and a boxing gym with a dozen different varieties of punch bag. Apparently, a former champion is in charge of the boxing facility there. And the swimming pool was stunning too, managed by an NCAA swimming champion. A clever architect had designed the pool so it looked like it was part of the same body of water as the Hudson River. This was a place for beautiful people.

We’d been invited to come climbing by another newsletter writer, Paul Mampilly. And even though we’d never seen a climbing wall before, we knew the wall at Chelsea Piers was a good one. It was well kitted out…loads of jug handles, buttons and odd-shaped pieces of rock are screwed to the walls, colored and labeled to mark out different routes of varying difficulty. One part of the wall was vertical, another part was leaning forward for advanced climbers, and for those who fancied crawling on the gym’s ceiling upside down, there was a large overhang.

They even lent us a harness and a pair of shoes for free. And the best part, because we got there an hour before opening time and the guy in charge was amenable – the wall normally opens at 5 p.m. on Thursdays – there was no one else using the wall.

"It was all financed with tax-exempt bonds," said our host as we strolled around the Pier 60. "There was nothing here before. Just old docks. So a well-known developer bought the whole thing, using money borrowed from the state, and renovated the place. Now look at all this. It’s worth millions. And the taxpayers were the only ones who took any risk."

This was the first time your weekend editor had ever been climbing. Fortunately, a colleague back in Baltimore had given us three key pieces of advice before we left… "Keep your hips close to the rock face, use your legs for power and arms for balance, and if you want to take a rest, just extend your arms and hang, still keeping hips to the wall.

"Trust your feet," shouted our climbing partner from below, during the third and final ascent. "Lift your right foot up to the next green foothold and then push yourself up."

In order to lift our right foot, we’d have to rest our entire body weight on a tiny blue-painted pebble sticking out of the wall, forty feet above the ground…

Paul Mampilly is a former Wall Street analyst and portfolio manager. He’s got an MBA and a CFA. He’s worked for several large investment banks and he’s covered nearly every market sector. We chatted with him about finance…first on a shady bench in Battery Park and then at the base of the cliff face in between climbs.

"I couldn’t stand the working environment in the large Wall Street firms," he said. "There was always so much conflict. And they tried to control us all…they wanted everyone to be the same and think the same. So I had to leave. It just wasn’t for me."

"We’re all different, and we express our ideas differently," he continues. "The mainstream approach to market analysis is just as bad. That people will always seek to maximize wealth is simply not true. Efficient market theory is what they taught me in my undergraduate and graduate studies, yet there’s just so much it can’t answer for."

So Paul struck out on his own and set up a website, where he publishes his analysis. Capuchinomics, says his website, uses "human emotion as the primary factor in analyzing the fluctuations of markets and securities."

"I began to wonder why a company in the biotech industry with 25% earnings growth and 80% profit margins is more valuable and/or more volatile than a company with the same characteristics in the furniture business.  Biotech companies…are highly valued while a furniture maker with equivalent characteristics is valued at a fraction of that price."

"If efficient markets price stocks without distinction, these two companies accounting for some small non-arbitrageable differences (nationality, tax rates, etc.) should have similar values.

"The answers then must lie beyond value and in the human psyche, in its desire to perceive more value one enterprise over the other based on experiential, emotional and subjective qualitative factors."

Hence the capuchin monkeys. Capuchinomics is based on behavioral finance. Mampilly monitors dozens of different sources to get an idea of the sentiment in a market…and if he thinks it’s out of whack, he arbitrages sentiment with reality. He’s found it’s an excellent way to trade.

Take Goldman’s prediction for an oil ‘super-spike,’ in behavioral economics terms, he says, it was the perfect confirmation for a short-term top in the oil market. These signals may seem anecdotal, incidental even, but they’re not. They’re a powerful expression of market sentiment.

"What about the stock market?" we asked next. "And the dollar?"

"Frankly, sentiment suggests you should buy the market. It’s very negative at the moment." Mampilly has been bullish on the dollar too, as it climbs that ‘wall of worry’… "A rising dollar is one of the greatest threats to the economy…it’ll reverse everything that’s happened in the last three years…"

A wall of worry indeed, but the marriage between left big toe and the small blue pebble held, and we grabbed the top of the wall.

Now it was time to come back down again. "Just let go of the wall, and rappel down," Paul shouted. "Just walk down the wall like a commando."

But we couldn’t let go. Like the price of your favorite stock, we just clung to the top of the wall and ignored the instructions…


Tom Dyson,
The Daily Reckoning

May 15, 2005 — Baltimore, Maryland

P.S. Dan Denning’s book, ‘The Bull Hunter’ has just hit #3 on the Barnes & Noble bestseller list and is stirring up a literary-storm with readers.

— Daily Reckoning Book Of The Week —

The Bull Hunter: Tracking Today’s Hottest Investments

By Dan Denning

Investors who limit themselves to U.S.-based stocks and bonds routinely miss out on global opportunities – because right now, somewhere on earth, a bull market in a little-publicized region is providing savvy insiders with double- and triple-digit returns. In The Bull Hunter, global investing authority Dan Denning shows ground-floor investors how to zero in on such regions so they can snag safe, outsized profit opportunities in countries, industries, and sectors where huge bull markets are just taking off.

The Bull Hunter

THIS WEEK in THE DAILY RECKONING: Want the real scoop on China? This week’s essays were all about China… Two of them were written by analysts who literally just stepped off the plane from Beijing, and the third comes courtesy of our resident commodity expert, Justice Litle, editor of Outstanding Investments…

By Bill Bonner
"Did you ever wonder how America came to be the world’s superpower? Bill Bonner explores the self-deception, and the mad and preposterous ideas that led America to her first awkward steps as an empire…"

By Justice Litle
"There are two ways to think about China: you can take the optimistic standpoint, and view it as a rapidly growing country filled with opportunity…or you can see it as a ticking time-bomb, just waiting to destroy itself…"

By Karim Rahemtulla
"After visiting China, Karim is still puzzled by the Chinese government and economic systems…and can’t help but wonder: is China is pulling off an economic miracle, or just the wool over the world’s collective eyes…"

THE MYSTERY OF MR. WU  05/10/2005
By Greg Grillot
"Recently, Greg Grillot took a trip to the Far East…and between exploring terracotta warrior tombs in Xi’an, and drinking the healing "Sea Horse with Reptiles Liquor," he pondered the enigma that is the Chinese banking system…"

THE BUBBLE BLUES  05/09/2005
By The Mogambo Guru
"Bubbles – from debt to real estate – have taken the country by storm. What will happen when they burst? The Mogambo Guru predicts that the average American’s sense of blissful ignorance will be replaced by misery and heartache…"

FLOTSAM AND JETSAM: Here’s an extract from Dan Denning’s brand new book, ‘The Bull Hunter.’ This is an exclusive…you won’t find this material anywhere else…

By Dan Denning

In the fall of 2002 I gave a speech that was not well received by the audience. The speech warned against the coming fall in the dollar. It also warned about the dangers of deficit spending. The strongest warnings, however, were that a long, sustained war on terrorism was a threat to your financial freedom and, eventually, your liberty.

There were a few people who listened, though, and liked it. One of them came up to me afterward. She and her husband were living a comfortable life in northern California. He was a programmer in Silicon Valley. She sold real estate. She was worried about the issues I brought up.

Two years later, I wrote to readers of my investment newsletter, Strategic Investment, that I was about to spend three months in Asia doing investment research for what would become the book you’re reading right now. Dozens of them wrote back, inviting me to their homes and businesses in Japan, China, India, Australia, and Thailand.

I took many of them up on their generous offers. It gave me valuable insight on each country from people who were actually living and investing in the places I wanted to write about. One of the e-mails proved fortuitous:

Dear Dan,

You may not remember me. But several years ago I heard you speak at the Agora Wealth Symposium in San Francisco. I just wanted to let you know that since then, my husband and I have moved to Thailand! We took your dollar warning seriously and we also wanted a change in our quality of life. We now run a mountain bike rental bicycle shop on the island of Koh Samui in the Gulf of Siam. When we’re not running our business, we’re managing our investments reading Strategic Investment and the Daily Reckoning. We’d love to see you when you’re in Thailand and show off our little slice of paradise and tell you what we think of investing in this country.

How could I turn down an offer like that? I am an avid mountain biker. What’s more, I’d get a chance to talk with real readers about how they were personally dealing with the investment challenges I wrote about every day.

Not everyone will choose to move to Thailand as a hedge against the falling dollar, though some have. Many others have set up bank accounts or established second homes outside the United States.

These are large, quality-of-life decisions that I think it’s healthy to at least consider.

You already have at your disposal a broad arsenal of remarkably diverse investment weapons to deal with the world’s many threats and its many more opportunities. The risk of a crashing dollar merits the consideration of what others would call radical alternatives. But there are many less radical choices you can make to achieve similar results.

It’s possible, of course, that I’m wrong about many of my big picture predictions. Although my track record over the last four years has been pretty good, you are either wrong or right about the collapse of a currency. There is not a lot of middle ground. But as a bull hunter, you must remember that your goal is to find the big trends and then find the best tools for investing in them.

The trend may be up or it may be down. It may be in commodities or currencies. It may be in U.S. tech stocks or Australian mining stocks. But the unique advantage of using ETFs is that you can invest in all these trends quickly and easily, wherever they might be and whichever direction they might be going. There is no trick to it. But you have to think as a bull hunter, not as a "buy and hold" investor.

It’s a small change in thinking. But it’s the kind of change that allows you to do more. It allows you to invest in different sectors, different asset classes, and even different countries all over the globe. As Robert Heinlein says, "Specialization is for insects."

You do not want to invest like an insect these days, as a specialist. It will doom you to certain poor performance, if not outright extinction. And with the existence of so many new ways to make money from so many different markets, there’s no good reason not to at least consider some ETF strategies in action.

[Ed. Note: Denning goes on to outline specific strategies for trading the macro trends he sees dominating markets over the next few years. Until recently, this type of macro strategy was only open to hedge fund managers and guys like George Soros, but with the release of ‘The Bull Hunter,’ it’s now available to everyone.

The Daily Reckoning