Kimball Corson
10/30/2009, Neiafu, Vava'u, Tonga

As small as it is, the town, as such, thins out fast.

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Kimball Corson
10/30/2009, Neiafu, Vava'u, Tonga

A cross, a cistern and a dog house, implying there is a dog.

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Kimball Corson
10/30/2009, Neiafu, Vava'u, Tonga

He didn't have a hook and line, he said. I later fixed that.

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Kimball Corson
10/30/2009, Neiafu, Vava'u, Tonga

It is nice and quiet when no one is there. The bothersome noise of doctrine attaches much more to people than it does to the church per se.

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Kimball Corson
10/30/2009, Neiafu, Vava'u, Tonga

The place to buy produce, flowers and plants.

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Kimball Corson
10/30/2009, Neiafu, Vava'u, Tonga

Checking out a small fish they caught.

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Kimball Corson
10/30/2009, Neiafu, Vava'u, Tonga

Women of social status, probably nobles. There are three classes here. Royal, nobles and commoners.

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Kimball Corson
10/30/2009, Neiafu, Vava'u, Tonga

She gains weight when she doesn't want to go.

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Kimball Corson
10/30/2009, Neiafu, Vava'u, Tonga

The day's catch just came in.

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Kimball Corson
10/30/2009, Neiafu, Vava'u, Tonga

Girls always give me their best expressions. Lucky old dog that I am.

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Kimball Corson
10/27/2009, Neiafu, Vava'u, Tonga

Steps into the more blue.

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Kimball Corson
10/27/2009, Neiafu, Vava'u, Tonga

And over a church, at that.

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Kimball Corson
10/27/2009, Neiafu, Vava'u, Tonga

It's about to get mowed over.

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Kimball Corson
10/27/2009, Neiafu, Vava'u, Tonga

Not a whole hull of a lot.
_______

How Trend Trading Compromises the Stock Market

There are three basic approaches to stock market "investing:" fundamentals analysis, charting theories and raw trend trading. Obviously, some market participants mix two or more of these approaches to some degree. By fundamentals analysis, I basically mean a Value Line or Graham & Dodd approach to buying and selling. The other two approaches depend on one or another type of trend analysis. Raw trend trading is simply jumping in and out of the market to ride up long and down trends short, with little real consideration given to the fundamentals of the stocks selected. How is it so little attention need be paid to stock selection, according to investment criteria, in order to successfully trade the market trends? That is the core question. Obviously, a disconnect has clearly arisen between company performance and stock market price performance. Why?

I argue that all forms of trend analysis and trading - anything but classic investment criteria buying and selling - compromises the stock market as a market per se. What do I mean, you say? By compromising the market, I mean the following:

1. Market prices less accurately reflect true company performance;
2. Market prices move less independently of each other;
3. Herd behavior and band wagon effects become more dominant;
4. The market becomes more volatile and less stable;
5. The market is more amenable to manipulation by major players;
6. The market is more open to trading abuses;
7. The market disconnects from reality and has internal life of its own;
8. The market is more inclined to react to irrelevant information;
9. The market also overreacts to external information;
10. The market has a shorter term memory;
11. The market seeks new information to overreact to; and
12. The market is more disposed to bubble up and to crash.

In short, the market does a less good job by far of accurately reflecting companies' current actual and expected performance and of distinguishing between companies in the market and having their stock prices move more independently of each other in the shorter term. These are major failings for a market.

None of this should come as a surprise. The more buying and selling in the stock market is based on factors other than underlying actual and expected company performance based on fundamentals, the less well market prices will reflect that performance and those fundamentals. The reverse is true as well. The more actual company performance becomes irrelevant to buy and selling stocks, the more the stock market takes on the characteristics (1) through (12) above and the less effective the market becomes as a market for the stock of those companies. These may not be popular notions, but that does not alter the truth of them.

The real difficulty is that, given these results from trend trading and given the market's consequentially developed failings, it is still not unreasonable to engage in trend trading. More do it all the time, in one time frame and manner or another. That is because, for everyone, the market is about making money, not about the health of the market per se. But the situation does become a vicious circle and the problems (1) through (12) above are exacerbated the more trend trading occurs. The market is further compromised. Trading manipulations and abuses become more prevalent.

As a practical matter, I believe that little can be done about this problem, but it is very much worth noting and keeping an eye on because it does have a strong bearing on what you should be able to expect from your investments, especially in the shorter term, if you investment using classical investment criteria.

Rejected for publication. Very unpopular notions? Too controversial? Who knows? Its just economic analysis. The more buying and selling in the stock market is based on factors other than underlying company actual and expected performance, the less well market prices will reflect that performance. Surprise! Obvious, at that level, but not at others. One of my more insightful articles, too.

Flash Bulletin: The article was published, albeit late and out of order. Perhaps there was a struggle among the editors or perhaps an assigned editor was simply on vacation. Whatever, it made it.

Posted and published on seekingalpha.com

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Kimball Corson
10/27/2009, Neiafu, Vava'u, Tonga

It is just turtles all the way down, young man.
____

The following three comments were posted to Paul Krugman's blog under his article Stimulating Thoughts: Third Quarter Edition in which he argues for ever bigger stimulus programs. My comments:

I. In fact, consumer spending could clearly be better because in truth it tumbled 1.5% in September, as vehicle sales plunged, following a 1.4% gain in August (previously 1.3%). The saving rate rose to 3.3% as consumers returned to saving after buying cars to get clunker monies in August. Real spending dropped 0.6%.

Like too many government programs, including the stimulus program, the effects are too transient and the programs are too expensive. Too little bang per buck and too little impact on the real economy.

The answer is not therefore, as you suggest, to then just make the (stimulus) programs bigger.

___ Kimball Corson

II. The Chicago Fed´s National Activity Index indeed rose for the last quarter, but it is interesting that many of the non-averaged components have been falling for the last two months after a July peak. The Chicago Fed summarized the data:

"Thirty-two of the 85 individual indicators made positive contributions to the index in September, while 53 made negative contributions. Thirty-nine indicators improved from August to September, while 46 indicators deteriorated."

The bad news in this data is that much monthly data has been falling for the last 2 months. If this trend continues, next month this index will likely fall. This would be significant evidence that the recovery is now stalling, after the effects of the government's bump-up programs have passed.

We must face and address our structural problems of the trade deficit, the maldistribution of income, the dysfunctional banking sector and the decline of employment in the manufacturing sector if we want GDP to grow on a solid footing. Until we do this our prospects are poor.

The problem is none of the Keynesian policy makers even recognized these problems or take them seriously enough or believe they really matter. We are barking up the wrong tree, as I keep saying.

___ Kimball Corson

III. What we should be doing is addressing our structural problems of the trade deficit, the maldistribution of income, the dysfunctional banking sector and the decline of employment in the manufacturing sector and we could do that as follows:

The Trade Deficit: adopt an auctioned quota certificate system allowed by the WTO for persistent deficit countries and develop tax employment incentives for the more labor intensive companies in the US engaged in export. Put a surtax on gasoline and use the money to press for the development and use of smaller vehicles that use less or no gas. Provide tax incentives for their purchase. Put a luxury tax on gas guzzlers. We need a big and serious push here, politics be damned.

The Maldistribution of Income: use the tax system and a negative income tax if necessary to quickly redistribute income and raise the marginal propensity to consume. Now, those earning over $85,000 a year get half of all income and dump too much of it into secondary financial markets to create bubbles and messes.

The Dysfunctional Banking System: Run the money center banks through one or another type of FDIC insolvency proceeding to correct incentives, repair debt damage and pass financial reform with less opposition from those banks, while at the same time getting better supervision over them in the interim. We need to get serious here.

Employment in the Manufacturing Sector: We need to subsidize and support employment in this sector and companies with higher labor to capital ratios engaged in exporting a high percentage of what they make. All kinds of programs should be considered to do this.

We need to focus in on our problems and adopt some real fixes if we want to see more sustainable real economic improvements, not just throw more money at the priming pump of aggregate demand and getting temporary increases in aggregate demand that do not last.

We are on the wrong track.

___ Kimball Corson

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