Santa Claus came to town!

Santa Claus is coming to town. The last trading week of the year is typically bullish and this anomaly is called “The Santa Claus Rally”. The momentum is usually strong heading into year end and Asset Managers bid up the market. On very light volume, stocks creep higher.

Traders will not stand in the way of this move and they lift their offers. It is almost as if stocks defy gravity and they float higher. This environment serves a purpose. When investors open their fourth quarter statements, they are pleasantly surprised. They have confidence and they plow retirement money into equities at the beginning of the year. Hedge funds also benefit. When new high water marks are reached, bonuses expand.

On occasion, traders use this strength to unwind long positions. That selling can catch on and profit-taking sets in. A decline in the last week of trading signals trouble ahead. I don’t see any signs of that happening this year.

As January goes, so goes the year. This indicator has a 91% accuracy rate in the last 60 years. The third-year of a presidential term is also bullish and it appears that both parties are willing to compromise.
If not for massive debt levels, the market would be off to the races. Earnings, interest rates, economic activity, quantitative easing and taxation are all “market friendly”. Unfortunately, the foundation is cracked and this castle is ready to crumble.

When a heroin addict wakes up, it’s a good day. It means that they haven’t killed themselves and they get busy lining up their next fix. After they shoot up, life is grand again. They live day-to-day and they don’t worry about tomorrow. Kicking the addiction would be very painful and they promise to stop – tomorrow.
Americans are addicted to credit. Over 70% of our economy is based on consumption. As a country, we produce very little (manufacturing is 20% of our economy) and we rely heavily on imports. We used to finance our own habit, but now foreigners hold more than half of our debt. We elect enablers and politicians make this lifestyle possible.

Right now, we are “high” and life is grand. In the absence of a credit default, the market will continue to push higher. In the early stages of a credit crisis, the EU will pull out all of the stops to keep it from spreading. The ECB/IMF/Fed will be scrambling to “hook us up” and their actions will be “unprecedented”. You might remember that phrase from the spring of 2009 when the Fed through the kitchen sink at the credit crisis. We will see declines and snap back rallies. Eventually, the bottom will fall out and that’s when it gets scary.

I don’t know when this flashpoint will be reached.

I’ve been long in the money calls in commodity stocks (FCX) and heavy equipment manufacturers (CAT) into year end. Those positions are up very nicely. I still like the stocks, but I don’t want to be greedy. I am taking profits this week with the goal of being in cash by the end of the week. I will start 2011 with a clean slate and I suggest you do the same.

Is the writing on the wall?

It is widely known that empires who hold the global reserve currency are also normally net foreign creditors and net lenders. The British Empire declined—and the pound lost its status as the main global reserve currency—when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running a huge budget deficit and an even more huge trade deficit. We are currently relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The question is to where do they turn for a new global reserve, and when they do find somewhere else to go what will that mean for the US dollar? 

Investing is an Art not a Science

Here's a dirty little secret of Wall Street: Risk management isn't a science. Who exactly is this a secret to? To the professionals practicing it, and the innocent people who believe them. Wall Street blew itself up a couple of years ago with excessive risk and irresponsible leverage because practitioners and their “quants” either didn’t know or didn’t care about this secret. And Main Street paid the price, and part of the tab.

As the dust still settles from the subprime mortgage crisis, maybe most of us now accept that risk management isn’t a science. But we’re no better off today than we were two years ago just because Wall Street somehow totally revamped its models. Things are stable and growing again because Washington provided a “get out of jail free” card, and some pocket money, to Wall Street.

So, why does it matter that “risk management isn’t a science”? Because those who act like it is can get in lots of trouble with their capital … and yours. And we had lots of warnings before 2007 that this was true. The best example was 1998’s blowup of quantitative hedge fund Long Term Capital Management (LTCM for short).

Myron Scholes, a Nobel Prize-winning financial theorist, was a partner in LTCM. Along with his equally quantitative partners, he made sizable leveraged bets on interest rates in the late 1990s that got creamed when Russia defaulted on some debt and devalued the ruble, sending shockwaves through global markets.

The Federal Reserve decided to bail out Long Term Capital Management to the tune of about $3.5 billion because it believed that not paying LTCM’s derivatives obligations would create “big” losses for too many Wall Street firms. How ironic that the phrase “too big to fail” may have originated with this now-tiny fund collapse. Roger Lowenstein’s 2000 book on LTCM, When Genius Failed, chronicles the missteps in strategy and risk management that brought the fund to its knees.  Moral hazard is a dangerous business. Perhaps because the Fed bailed out LTMC this led others to believing the Fed would do the same for them, but thats a different subject for a different day.

Now before anyone thinks I am completely discrediting volatility as a risk management and trading tool, let me clarify where it is useful and powerful. In options trading, you need a baseline for comparing the perceived risk of positions. It works for options because you are dealing with two elements where the variability of inputs is strictly limited.

First, you are valuing options and their risk on one security. Second, you are doing so to a specific forward date, usually less than one year. Mortgage-backed securities were infinitely more complex than this. By reducing the complexity of your risk analysis, you quickly make volatility a more useful measure.

But option traders don’t pretend they are doing science here. They know it’s still all about probability and that conditions change constantly. They go beyond recognizing that today’s implied volatility number is still only a 68% chance "guesstimate" at what is likely to happen. And they know that this is not a poker game with finite outcomes. When a company or market event elevates the risk measurement (implied volatility) by a factor of two in one day, they take it in stride -- because they never promised themselves or others with massive bets that it couldn’t happen.

There’s hope for Wall Street to learn to use financial modeling and quantitative strategies for good, as long as we learn from our mistakes and don’t let ourselves become seduced by the latest equation from a math whiz promising great returns with low risk. Probably the best teachers here will not be the universities, but the firms that survived the crisis with better, more robust models that took all the money from the illusionists and fools. 

Asset Bubbles Presentation

     The recent world wide recession has focused attention on the role of asset price bubbles and what, if anything, policymakers should do to stem their effect on the global economic landscape.  The boom in home prices around the world from 2000 to 2006 is our most recent bubble bursting episode. House prices rose far more than the underlying fundamental drivers of home prices such as family income and rents. The bursting of the bubble then lead to a sharp rise in international foreclosures and massive declines in the values of mortgage backed securities which then lead to a broader sell off in most every asset class as investors rushed to safety. The collapse in prices led to the weakening, and in some cases, the collapse of major financial institutions around the world. All of this has led to one of the most serious recessions in the entire post World War II period. 


Here are my slides for my presentation Asset Bubbles

The Methodist Church

Every Friday I get a special email from the General Board of Church & Society. In it I get to read about all the left leaning activities of my church.

Some wonder why I stay at my church knowing that my tithes and offerings go toward such things as gays in the military, pro-choice movements, and pro-amnesty to name just a few. 

In this past weeks Word from Winkler it opens with “Declining membership in our denomination concerns me and many other United Methodists. I know of no one who likes to see our churches shrinking. The panic about this decades-long decline has become a major, perhaps the central, concern in our denomination today.”

I wonder why? 

Some of the top reasons I have heard for why church membership is down.

• Churches are more about entertainment than the Bible.
• Churches are focused on expanding the building instead of teaching about and following God.
• Churches teach things which some believe to be false.
• The music is too loud.
• Churches don't want me, they just want my money.

The third reason, Churches teach things which some believe to be false, is what concerns me most. The Methodist church has become an institution that models itself more after a business or political entity. The church should be counter-culture; instead it's suffering from worldly influences. When the pastor's job depends on him not offending the board, sermons get watered down and they focus more about preaching salvation to the choir than about pressing on to serious discipleship. The great commandment, Matthew 28:19 Therefore go and make disciples of all nations, baptizing them in the name of the Father and of the Son and of the Holy Spirit. That's what the church should be primarily focused on.

Instead my church is worried about ratifying the START treaty. (A treaty I oppose because it would place severe restrictions on our missile defense system and the treaty's verification measures are inadequate to say the least.) But this is not the issue to focus on in this blog, declining numbers at the Methodist church are. 

If 40% of the population is conservative. I do not feel the church should be preaching about liberal policies. Instead I think they should spend more time on teaching people to give their lives to Jesus. Or how about teaching them to love their neighbor? (Their actual neighbor that lives across the street.) Or even the following, how about discussing that there is whole world dying and going to hell and the US church does not seem to care?

Evangelical churches are bursting at the seams. Why? Because the Gospel works. We don’t need to be fed progressive messages. The Methodist church, like many other churches, is a sinking ship. I continue to go to my church in hopes that I can tell people where the lifeboats are.

I want a revival. I pray for it. I’m active in my church in hopes that it will come. Why don’t you join me? I’ll be going this Sunday and would love to save you a seat.

Looking to diversify your investments? Try a micro-loan on for size

I came across an interesting item the other day. How about a way that you can earn interest and help the world be a better place?

“A billion people around the world work hard every day to lift themselves out of poverty. They don’t want your charity. They want your investment. Invest today, earn a return, and provide them with a livelihood.” – Microplace.com homepage.

Sounds pretty good, right? Microplace is owned by Ebay, and is an SEC-registered broker of microfinance securities to individual investors. Loans are classified by level of poverty, financial return, length of investment, and geographical location.

Here is the loan listing page. They seem to participate in a variety of countries on 4 continents, from Armenia to Bolivia to Cambodia.  These notes are not a mutual fund, and is not FDIC or SIPC insured. These are unsecured debt obligations, with partial backing of “philanthropic guarantors”. Basically, wealthy individuals and/or groups promise to repay parts of this loan if there are enough defaults. The details are a bit vague, but there seems to be a networked agreement across multiple guarantors. However, risks definitely remain.

The actual interest charged to local microfinance institutions (MFIs) are stated to be from 8-10%. The rates paid by actual individuals are not stated, but can be as high as 30%. But these are often short-term loans to people with no collateral and few alternatives. The historical repayment rate is listed to be 96%.  In some of these countries interest rates are as high as 120% so it’s nice to be able to offer loans at reasonable rates to people who are just like you and me, except they were not as fortunate to have been born in America. So why not invest a little? It will possibly do your investment balance and more importantly your soul good.

BARACK OBAMA'S children's book, "Of Thee I Sing: A Letter to My Daughters", will be published on Tuesday 16th.

 It will be similar in form to George W. Bush's recent work, "Decision Points". Mr Bush's book covers 14 decisions made by him during his presidency. Mr Obama's book is an ode to 13 great Americans. If this trend continues, future presidents will have to publish a book consisting of a single bullet point.

Practice Teaching Slides

QE2: The last straw or the best move?

Many years from now when we look back at history, I think this chapter of fed policy may be seen as one of the greatest blunders or greatest move made by a central banker.  


Lets start with the dollar. 

The quantitative easing that has already taken place has had a real effect on the dollar. Many believe that with this second round of QE we will have a major currency crisis by next spring. 


Even if QE2 works I believe we have seen the end to the dollar being the worlds reserve currency, and unless the Fed has everything go in its favor the dollar may very well be doomed to follow every other fiat currency in history into the hyper inflation and total devaluation category. 


I'm suggesting to everyone that will listen to hedge their assets. Some are suggesting abandoning the dollar betting that the central bank is going to destroy it and its purchasing power. Many believe its no longer safe to hold cash. I'm a believer that diversification is the only free lunch. 


I would bet that most financial advisers would say buy stocks, but soaring inflation will destroy profit margins and the market will struggle more and more as it becomes more difficult to predict future value of dollar denominated assets. The only bright spot will be in commodities. As the dollar loses value more and more countries and firms will be moving away from their dollars and will use them to buy our commodities. As the fed weakens the dollar the better the fundamentals will become for precious metals and other commodities.  Gold itself is now entering the parabolic phase of the bull market. 


I really do doubt if we'll see sub $1300 gold for at least 20 years. All we can hope for is for the fed to pull off a miracle and accomplish a "soft landing." We need the dollar to lose value in an orderly fashion. The only way out of our current debt is through the devaluation of the dollar. A soft landing will bring this about over the next few years. If on the other hand it does not stay orderly things may become very difficult for the average American very quickly. You should expect assets to rise and the purchasing power of your money to decline. Expect everything to become more expensive. Its long been said that at least 10% of your assets should be in precious metals, its is quite possible that one will wish it had been more. 

Are you being smart with your investments?

It is time to learn about options. Most people do not know much about options. Its the last frontier of investing. Options are very powerful investment vehicles. They offer a way to get higher leverage from your money in the stock market or to protect you from downside risk. If your broker does not use them you are being cheated. 

Here are the top reasons I think you should be using them in this market more than ever before.

• The calls in your options portfolio will allow you to achieve big leveraged gains if the market catches most investors by surprise and rallies through year-end.
• The puts in your options portfolio will protect you against "flash crashes" and other disruptive market events and even allow you to profit in these situations.
• You can still benefit from the unlimited profit potential of option buying yet limit your loss from any trade to 20-30%.
• You can profit from market volatility regardless of the direction of the price movement.
• You can profit from buying calls on stocks that outperform, and at the same time buying puts on stocks that underperform their industry peers.
• You can achieve huge leveraged gains by buying options during expiration week, when premiums are extremely low. And now, with the new Weekly Options, there is an expiration week every week.
• You can profit from the strong tendency of the market to trade in well-defined ranges most of the time with a carefully selected option premium selling program.
• You can profit from the huge volatility around events like quarterly earnings reports
• You can profit by buying call options on stocks that are in long-term uptrends, at much lower dollar risk than buying the stock.

Helicopter Ben at it again? Deflation vs Inflation pick your poison

On Friday, Fed Chairman Ben Bernanke will speak at the Federal Reserve Bank of Boston Conference "Monetary Policy Objectives and Tools in a Low-Inflation Environment".

Jon Hilsenrath at the WSJ has a preview: Fed Chief Gets Set to Apply Lessons of Japan's History

Mr. Bernanke is preparing for a potentially important policy speech Friday, when he could detail his thinking on the Fed's next steps ... The conference is a reprise of a 1999 conference at which Mr. Bernanke and other academics took Japanese officials to task for failing to get their economy moving.

Here is the 1999 paper that Hilsenrath mentions: From Ben Bernanke (1999): Japanese Monetary Policy: A Case of Self-Induced Paralysis?

There is quite a bit about deflation and monetary policy in his 1999 paper, including arguing for a higher inflation target of 3% to 4%. Bernanke even made some "helicopter drop" comments before his well known speech in 2002: Deflation: Making Sure "It" Doesn't Happen Here

It is my belief that we can have quite a lot of stimulus to fight off deflation before we have to worry about inflation. As you see in the above aggregate supply graph, at some point after a considerable amount of stimulation you do get inflation and possibly hyperinflation.

Some great questions to answer in the future are:
Are we avoiding inflation expectations today because we are backwards looking at 20 years of little to no inflation?
Can we handle the medicine it will take to get rid of inflation?

Why VOTE Republican?

I have heard from many people that they are scared to vote Republican because they worry about a return to the Bush years and more "Crony Capitalism". Lets be honest we are not voting for a president, we are voting for members of Congress at the national level and voting for governors, state representatives, and senators at the state level. The last time the Republicans controlled Congress Clinton was in office. Remember those years? A booming economy, low interest rates, a strong dollar, and a balanced budget. Sounds good right? That is why it is important for everyone to vote Republican this November.

Do you stand for a fair and level playing field for all businesses? For Lower taxes, so that businesses can reinvest their profits and create more jobs? VOTE REPUBLICAN.

Do you stand for an end to intrusive government regulations? For the preservation of our free market system? VOTE REPUBLICAN.

Are you for a smaller, more efficient government? Are you for a government that follows the constitution? VOTE REPUBLICAN.

Are you for a government that honors families, traditional marriage, life, and the private and faith-based organizations that form the core of our American values? Then you must VOTE REPUBLICAN!

Give the Grand Old Party one last chance to save America as we know it.

Competition, it is said, doesn't build character. It reveals it.

As posted on my campaign blog:

I never really took the time to write a concession speech or give one for that matter, that’s what you do when you run a “big” campaign, but I believe that to be a successful politician, or anything else for that matter it is very beneficial to study the pitfalls and mistakes that lead to losing than to focus on just the ways to win.

With that being said, I have a few thank-yous I need to get out of the way. 

I’d like to thank God first of all, for giving me the desire and the courage to get involved. Knowing that what you do is not for your own glory, but for His sure does make knocking on doors much easier. I was able to share the gospel a couple of times over the course of a few months. I knocked on over 2500 doors and you never know what a smile and a friendly word might do for the person opening up their home to you. 

I also appreciate all the support I was given from my friends, family, fellow church members, and the neighbors I met out on the campaign trail. I received 673 votes and without your assistance I might have only received my vote alone! I especially thank my wife she was not on board in the beginning, but made many phone calls and helped with many of the other aspects of the campaign before it was over.

So what did I learn? 

1. Make sure Momma is on board. Make sure your wife is on board before you pick up your petition. My family is number 1 to me and I assumed that my wife would be in full support of my campaign, but I was wrong. In the future, I will make very sure that my wife approves my decisions before I make them. Your family is highly effected when you decide to run for office, make sure they are on board before you make even your first move.

2. Choose your opponent wisely. You have to be careful about choosing who you run against. I assumed that a 20 year incumbent would not be interested in putting up much of a fight given the current anti-incumbent atmosphere. But was I wrong! She knocked on doors and even decided to buy signs, as I had heard her say that she did not have to buy signs anymore. She saw the challenge and made changes to her election plan. I admire Mrs. Ealy and when I called her to congratulate her  I really meant that I was willing to help her in anyway because I care for our community more than I do my own pride. Unfortunately she has yet to ever return my phone call. 

3. Press the issues. Robert Arnold did a great job of this. His mail outs cut deep, and he had Truman Jones and his staff reeling the entire election. I never really pushed that hard. Yes I told people about her voting record on property taxes, but I never really made the real push by sending out a mailing detailing the differences between her and I. I thought that since it was a neighborhood race I should not go “dirty” and instead just talk about my platform and not about the incumbent.

4. Get more volunteers. Because I am active in many local political groups I have a slew of friends with tons of political knowledge and expertise. My problem was that much of their abilities were spread out across many campaigns. Of course the republicans swept the ticket and that makes me happy, but we did not place enough true conservatives on the county commission as we had planned. It takes money and people to win elections. I was able to raise the money because I have the best network of friends on the planet, and I have experience as a stock broker and the key to that business is asking for the check to close the deal. Next time, I’ll first make sure first that my wife is on board, and then I will find some people that will focus on my race alone.

5. Carry pepper spray. Really, when knocking on lots of doors, you have to beware of dogs and other dangers. I was bitten twice, once by a pit bull on my forearm, and once by a very little over aggressive dog on the ankle. I was also stung by a wasp and sprained my foot because I stepped in hole I didn't see. There are prices to pay when running for office, but even these were not as great as missing my family. You spend a lot of time away from your family during a race and its a struggle on the it as well on yourself. 

6. A little about me. I have lived in Murfreesboro for less than 3 years, and yet I received 673 votes. My opponent received 1325 and has lived here for over 40. You do the math, I laugh and tell people I have time on my side and there is something to that. 
I’ve learned that politics is mostly a popularity contest. Most people do not care your stance on many issues, they vote for who they know. In time more people will know and recognize my name and hopefully they will vote for me. I care about this community, it is my home. It is where I have decided to raise my family and I will continue to be involved and press for my conservative values to be represented by our elected officials and therefore in the laws of our county and of our state. I know that the people of Rutherford County share the same opinion I have on most issues, so I doubt this will be the last time they see my name on the ballot.

I've heard it said that, “Experience is the worst teacher. It gives the test before it gives the lesson.” And there is a lot of truth in it. Now I have experience, and hopefully if you ever decide to run and you'll have read this you will avoid some of the pitfalls I made. We must remember its not whether we lose, but how we lose and how we might change because of it.  What is important is what we take away from the loss that we never had before, to apply to our future endeavors. Losing, when done right, is winning.

A Little About Me

Born in Horse Cave, Kentucky, I know the value of hard work. My father, an air force veteran worked on heating and cooling units and my mother worked at the local factory. My parents worked jobs so I could have a career. I can’t say thank you enough to them. My dad worked two jobs for as long as I could remember so that my brother and I would have all the things he did not. My mom managed to keep the home fires burning during the day and work at nights. Whenever I accomplish anything, it’s on their shoulders I am standing. I am convinced that if they had not worked so hard, I might not have become who I am today.

In high school I played football and tennis. My father told me that I had all my life to work and only a few years to do these sorts of things. So as long as I was doing extracurricular activities he made sure I had a car to drive and gas in the tank.  Because I only had to work in the “off season” better known as summer break I was able to enjoy high school for all it was worth.  I lettered in football, tennis, and the academic team, and graduated in the top third of his class. Even at a young age I was eager to be involved in politics, so it came as no surprise to my former classmates when I decided to run for County Commissioner earlier this year.

College was a short drive down to Bowling Green, KY.  (Home of the Hill Toppers)  I joined a fraternity and was very active in lots of other clubs and groups on campus including starting the Economics Club and serving multiple terms as a member of student government and as a residence hall president.  I really enjoyed college; so much that I stayed there for over 5 years! I finally graduated in December of 2000. I am the first of my family to graduate from college, which provided its own set of challenges. (I’m sure to discuss further in future postings)

While an economics degree was not easy to attain, it did not make for a smooth transition from college to the real world. Luckily, I had worked my way through college and was able to find a sales job at Dell. I did not like being tied to a cubicle for 60 hours a week, although the money was really great, I desired more. I had always wanted to be a stock broker and a childhood friend, Jason Claycomb, opened the door of opportunity to me.(Who I highly suggest as a financial planner if you ever need one and I am not available)  Of course this was now 2002 and the US was in a recession, talking about great timing, it was very difficult to build a book of business. I was probably too young for the job, but I worked hard to learn the craft. I read many books studied far more than I ever had in college and learned how to be a financial planner.  Over the next half decade I would take advantage of being young and single. I moved companies and chased down greater and greater opportunities. 

Then I met someone that would change my life forever. I met the love of my life, Christy, a few years after my move to Fort Wayne where I was working for Wells Fargo Investments. It’s almost a story book tale.  I was a groomsman, in a fraternity brother’s wedding, and Christy was a brides made. I was awestruck from the very beginning. I was always looking for a reason to move back to the south, and Christy gave me the just reason I was looking for.

I continued to work as a financial asset manager until I completed my MBA at MTSU in 2008. While earning an MBA I fell in love with Murfreesboro. It was so much like Bowling Green, KY I instantly felt at home.  Of course in 2008 the market was falling apart and it was very difficult to make money in the financial services business, so I started In Your City Inc., an idea I created as a project for one of my classes, where I helps small to medium size businesses build websites and improve their presence on the internet.

Married for five years, Christy and I are now the parents of two lovely girls, Carly and Collette. Carly attends preschool at Providence Christian Academy and the youngest Fancher, Collette, is now over a year old. We are members of the First United Methodist Church here in Murfreesboro. I am a regular usher at the contemporary service and I encourage you to pay us a visit if you do not have a church. I promise to take great care of you. 

Currently, I am very active in regional politics. Although I was unsuccessful in my first election, I am still trying to help many other good conservative candidates win. Sometimes I think God lets us fall down so we will learn valuable lessons that we might have not learned if we had been successful. My loss taught me a lot. (Another topic I plan on talking about in the near future) I am also very active in the local Campaign for Liberty Chapter, as well as both the Rutherford County Republicans and the Young Republicans where I am currently the Chairman.  I am not sure what the future holds for me. I just take it day by day. I try to help where and when I can and I just trust in God’s providence that he has me right where he wants me, and with his help I’ll do what he wants me to do.