Zero Hedge is to CNBC as Evangelicals are to Pornographers

There's a familiar joke about a guy who walks into a doctor's office complaining about shoulder pain. The fellow with the shoulder pain awkwardly wraps his arm around his neck, and says to the doctor, "hey doctor, it hurts when I go like this." To which the doctor replies, "ok, stop going like this, then."



I feel the same about folks who constantly kvetch about the poor quality of CNBC, of whom Zero Hedge is the worst culprit. If it's so bad, stop watching it. Move on with your life. I mean, really. Change the channel to Spike and waste a day or two watching Unbeatable Banzuke. Or better yet, turn the TV off and go for a walk. No one is forcing you to watch CNBC. Every comment you make about CNBC proves that you are watching its programming, which, for CNBC, means that the programming is a success. The ratings don't distinguish between those who love the show and those screaming at the TV.

Yesterday, Zero Hedge posted an article about how much CNBC's ratings were down year over year by 37%. Really? Were the weather channel's ratings down 80% a year after Katrina hit? Zero Hedge is capable of insightful reporting and detailed analysis, but this is Zero Hedge at its sophomoric best. CNBC's influence may indeed be declining or going through the roof, but this stat is irrelevant.

Zero Hedge's obsession would all be slightly more understandable if CNBC were the only financial news network, but it's not. Most basic cable networks provide Fox Business News and Bloomberg, as well. And the true indictment of those networks is the complete lack of vitriol from the blogosphere, because nobody's watching them long enough to get annoyed by them.

No, I'm not a shill for CNBC. I probably watch fifty hours of the station a year. I think Mark Haines and Erin Burnett are pleasant. I like Mark Faber. Since Ratigan and Macke left, nothing on after 9 am mountain time is watchable. So I don't watch it. Simple as that.

On racism and teaching moments

A couple of years ago, I almost went to jail for jaywalking. But that's not really true, I nearly went to jail because I was a smart ass to a police officer. My friend and I were late to a concert, and we crossed a busy street by weaving through traffic. I was trying to wave a car ahead of me so we could cross, but the car didn't stop. So I looked at the driver and gave her a "wtf" look before jogging across the street. It was a ghost car. Before I knew it, I was up against the wall being frisked. The cop was furious, and I'm fairly sure the initial plan was to take us to jail. But then we got very apologetic and deferential, and the cops let us go with just a citation.

I'm a 31-year-old white lawyer. And talking smack with cops is a great way to go to jail. I fully acknowledge that there is a long history, including the present, where blacks receive additional inappropriate scrutiny solely because of race. But that's not why I'm writing this. The Gates story is so big for the same reason the Duke lacrosse story was so big. It's the perfect, juicy mix of wealth, affluence, and race where we can use it to talk in broad strokes about anything and everything. I get that. We want to make it a teaching moment. The President invited the two for a beer. And when the President invites you out for a beer, it's not like you can say no.

Gates is a public figure, but Crowley is not. But now he will be famous, whether he likes it or not. And I suspect that it kinda sucks being famous if you're not rich. While Obama and others may wish to make this a teaching moment, we're turning Crowley into a Steve Bartman-like caricature. It's going to be exceedingly difficult for him to go back to his life after this fades from the public view.

Obama's decision to invite the two for a beer might be the best move for his reputation, but it's decidedly unfair for the participants involved, particularly Crowley. I have no idea what happened in Gates's house and I don't particularly care. My only strong belief is that the in civil society, the punishment should have some degree of proportionality with the crime. If Gates would like to sue for a violation of his civil liberties, he is entitled to do that. If state or federal officials would like to look into alleged impropriety, they should. But forcing people to try their case, without facts, in a public debate, with the President serving as a mediator, strikes me as cruel. But now the damage is done, and in two weeks, though Gates's and Obama's lives will be very similar to what they were before, Crowley's will be irreversibly transformed. He's been shamed, publicly, by the President. And you can't take that back. He's going to find it difficult, bordering on impossible, to do his job. This will be the first thing they write about him in his obituary. And it will affect everything he does between now and then.

You don't get worthwhile lessons when you teach about subjects where you have no unique insight or knowledge. And since We don't know what happened in that house, I just don't see what purpose it can serve as a "teaching moment." Ultimately, there's only one person for whom this should be a teaching moment, and that's Mr. Obama.

Are California's IOUs Unconstitutional?

In case you haven't heard, California can't pay its bills, so it's gone about issuing IOUs, or "Warrants" to Creditors it can't afford to pay just yet (if ever). They'd like us to believe that they're just as good as money. But if they're just as good as money, that may be problematic.

According to Article I, Section 10 of the Constitution:

"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

The two phrases of concern are "coin Money" and emit "Bills of Credit." Now, the definition of money is complex and subject to great wonkiness to those of far greater pedigree than I. But, to move this post along, the main definitions according to economists (as understood by me) are "a store of value" and "a medium of exchange."

Well, the California legislature certainly wants the former to apply to its IOUs, and its recipients are hoping for the latter. Check and check.

What do courts think? I haven't found any recent cases on the subject, but I found some old ones. According to a series of cases from the 19th century, the standard appears to be whether, "the paper [is] issued by a state, upon its faith, designed to circulate as money, and to be received and used as such in the ordinary business of life." Darrington v. Bank of Alabama, 54 U.S. 13 (1851).

I would argue that California's IOUs don't violate this standard . . . yet. While there's some folks on eBay looking to arb these bad boys, you probably can't use them to buy Wheaties or a new stereo at your local Walmart, in California or anywhere else. So, they're not yet, "used as such in the ordinary business of life." But if California continued to issue them, and they became more widespread, or even developed their own exchange rate, I think you could make a solid argument that they were unconstitutional.

In sum, if this is a one-time, stop-gap measure, I think anyone looking to take their case to the Supremes would be disappointed by the result. But the longer it goes on, and the more they're used by the Californians as a convenient substitute for actual cash, the closer these IOUs would come to a Constitutional crossroads.

On Chaucer and Twitter

Too frequently, media analysis of Twitter reverts to an intense criticism of what it is not. As a former member of "the media" (I used to work at the Chicago Sun-Times, as well as a few other online sites, allmusicguide, RollingStone online, Salon.com), I have some opinions myself. But because my job no longer depends on advertising content (now an attorney), I might have some different conclusions on the subject.

I love books. Musty books. Hardcover books you have to hold on the spine so they don't fall apart. I like to go into old libraries, hide in dank basements, and read dated books on dated subjects. Just now, I'm reading Men and Rubber, a book from the late 20s, which I highly recommend. I probably average two a week, and I have since I was in high school. And I love Twitter, too. And before they became largely irrelevant and lost nearly all of their talent, I loved magazines and newspapers.

To appreciate any of these media, and to develop yourself as a 21st century Human, you get nowhere focusing on what they are not. However, you can develop a significant edge by using all of them to your advantage. Reading Wyckoff and LeFevre will give you the background and sage wisdom on trading and investing, but reading tweets from Hamzei, Kass, and Adam Warner will give you a glimpse of what the masters are doing in real time. Reading Halberstam on your front porch might be the best way to get a full portrait of Michael Jordan, but Deadspin can give you a much needed break from a stressful work day. And its zeitgeist fits as much with this time as Halberstam did with his. None of these is mutually exclusive.

If you take any single tweet from an unknown source as gospel, you're a fool. But no less of a fool as someone who believes everything she reads in print as sacrosanct. Today, as in prior generations, the onus is on each of us to determine which sources to rely upon and to what extent. Just as the onus is on the information source to create a viable means of publication. That we should have more sources of information is not a curse, but a tremendous advantage. If you spend your life twittering, and you never read a book, it won't be twitter's fault that you're shallow. It will be your own.

Twitter is a news source. Raw as sashimi, but news nonetheless. What you make of it is up to you.

Demographics and Debt

Paul Krugman recently published an article called stay the course, which urges politicians to keep priming the stimulus, despite all the green shoots that are coming out of our eyeballs. He argues that if we do not continue to stimulate, that we run the risk of repeating the errors of 1937 in the US and 1997 in Japan. In both instances, governments took for granted that their respective economies had recovered, changed their focus from stimulus to fiscal responsibility. This shift, we now believe, led to each falling back into recession, giving up prior gains. For a fantastic in-depth analysis of this point, please read The Holy Grail of Macroeconomics by Richard Koo.


In a sense, I agree with Krugman. This economy needs constant government stimulus to replace slack private demand, or else we'll see 10-20% unemployment indefinitely. Where Krugman and I differ (or not, I've never heard him speak to this point) is in my belief that, for the foreseeable future, the US economy will always need government stimulus to replace private demand. Without the federal government pumping an extra trillion-plus into the economy per annum, the days of peak credit and peak earnings cannot and will not come back.

Chart Courtesy of CrossingWallStreet.com


The strongest data point to support this I know is in the total number of people employed as a percentage of the total population. This is in a fairly severe long-term secular downtrend.






What's more, it's hard to see this improving. In Japan, Europe, and the US, this trend will likely continue for another decade or two. For one, the working age population is only growing slightly. Meanwhile, debt as a percent of GDP is exploding.

Krugman is quick to point out that stable, industrialized nations such as the US have had higher debt as a percentage of GDP before. But that was at the end of World War II, when the demographics of this nation were very different. At the end of World War II, we had the baby boom, and the growing population help to pay off that debt. Now, we are developing a comparable debt burden being placed on an increasingly small percent of the working population.

It is possible that tremendous jumps in technology and productivity will enable us to escape this pickle. But even in a best-case scenario, I suspect this will remain a serious headwind for these economic juggernauts in the foreseeable future. There are no easy outs in this one. Either dump a larger percentage of debt onto an ever-shrinking working population, or suffer a decrease in demand, which will lead to even smaller working population, and most likely, a debt burden just as severe as the stimulative approach because of the reduced top line.

Does this mean that the Dow is going to 2,000? Or 20,000? It doesn't imply or preclude either. What it means to me is that Siegel's 7% annualized S&P growth over the past 150 years was dependent upon working population growth that was significantly above what it is today. My best guesstimates make me think that the first half of this century could see growth reduced in proportion to the size of the working population. There's too many variables (at least for me) to calculate what that might amount to with any precision. But it's scary knowing that it's there.

Trading in Multiple Time Frames

One of the things I try to do in my trading is to function on multiple time horizons. As a trader with a minuscule portfolio, I feel (rightly or wrongly) that I'm at a major disadvantage when compared to bigger, more connected trading firms when it comes to short-term trading. Goldman Sachs can move the market. I cannot.



So what I try to do is to trade on multiple time horizons. I constantly move in and out of short and long positions in leveraged ETFs, underlying etfs and options. I frequently employ a counter-trend strategy, that anticipates market reactions based on the distance a given underlying ETF might be from a given trend line. If IWM is 30% below its X-day WDMA, I would likely go long. Similarly, if it's well above its WDMA, I'll tend to short. The vehicle I use depends on time horizon and distance from the trend line.

This strategy has worked pretty well, and I've averaged about 30% annualized returns since I started with it. My worst months recent memory were October 2008 (not alone on that one) and this April. But March was great for me, and last November was spectacular as well.

But I also employ some straight-up turtle-like trend following techniques as well to counterbalance the effects of my anti-trend positions.

One might ask, if you think you know where the market is going, why not always put your resources there? Because I never know for certain where the market will go, and I think it's essential to have some aspects of your portfolio that keep you from drowning if you're wrong.

Disciplined Investing

Another low volume rally on bad news today, and this means that the last two weeks have seen me giving up about half my gains for the year, which is a bit of a bummer. I could make arguments that this is a BS rally or that markets are irrational, but if you're a trader/investor, irrationality is something you're attempting to exploit. That's the point.

Most of my trading is reactionary based on pre-determined rules. If the market does X, I buy Y. If Y does Z, I either sell or hold based on a pre-determined set of rules. This system had me losing money from S&P 760 to 666, but then allowed me to make a lot of money (by my standards, at least) on the first few stages of the rally up until about S&P 800. Since then, I've grown bearish, and been smacked upside the head for my troubles.

I don't use tight stops on many of my trades. Instead, I use other forms of risk management, such as a paired trade. For example, I went long Chinalco (ACH) at around 11. This stock has gone as high as 21, and has hovered in the high teens generally. Since then, I've added a short Baidu (BIDU) at 180 to hedge the downside risk. This has kind of exploded against me, as BIDU is around 225. Now, I think most investment professionals would have sold by now. I remain bearish on BIDU and long-term bullish on Chinalco. Gun to head, I think BIDU falls below 100 by January 2011, and that Chinalco will fall below 10. But I don't know for certain what either will do. So I'm comfortable owning Chinalco, which has a Price-to-Sales ratio of 1, while shorting BIDU, which has a price-to-sales ratio of over 15, even though the trade is going against me bit right now.

Could this decision cost me all my gains in Chinalco? It most certainly could. But a more likely scenario is that this rally peters out, BIDU hits a brick wall, I sell BIDU way lower, use it to buy more Chinalco and eventually the big bad Chinese aluminum company rakes it in big time. This is a happy scenario for me, but I think it is likely enough. And if I'm wrong, I'll probably only give back the gains I already made.

Sounds like a decent risk/reward to me. In a world where I'm not using stops (at least on this trade -- I use them on others all the time), this is just one example where disciplined trading can be different from setting tight stops.

Now, if my entire P&L for the year starts to run away from me, then I will re-evaluate and get smaller. But we're not there yet...