zerohedge – Page 18295

A Penny-Stock Trader’s Diary “Our Brains Are Hard-Wired To Get Us Into Investing Trouble”

Originally posted at The Idiot Tax blog,

I'd been watching the stock for at least a month. A small time oil & gas company in Africa. It managed to secure a huge land position for a company of its size. Looked very promising, well funded for some time. Management previously had success putting together a similar land position with another company before it was swallowed early. But, still highly speculative.This one wouldn't be dropping a drill on dirt until late 2014. Maybe 2015.

Being a stingy bugger and without a catalyst in the market, I kept sniffing around for a while before I finally slid my buy order in at 18.5 cents – this dude wasn't going to pay the current market price of 20 cents! Maybe even 18.5 was too much. When it dropped to 19.5, I began to believe my order would get filled, but then when it hit 19 cents my mind started to desert me.

"I could get this for 18 cents."

Volume. There wasn't a great deal of it. In fact it was being pushed down on mild trades. Someone needed a new flatscreen or wanted to get their kid Optimus Prime for Christmas. There was no prospect that enough shares would be dumped and I'd get my fill at 18 cents. The holding was tight and the sell side was thin. Regardless, I hit the amend button and my order dropped down the queue to 18 cents.

I assume you know where this story is going. You're probably wondering why I'm telling it when it inevitably makes me look like an idiot. So why tell? I've read countless explanations of investor psychology in a general sense, but rarely does anyone put their name to a calamity, or at least their nom de plume.

Everyone can recognise these paragraphs by Heidi Lefer and Ildiko Mohacsy, in Journal of the American Academy of Psychoanalysis and Dynamic Psychiatry, but there's little personality to it and no experience.

Economic bubbles and crashes have occurred regularly through history-from Holland's 17th century tulip mania, to America's 19th century railway mania, to the 1990s high-tech obsession. Though most investors regard themselves as investing rationally, few do. Instead they react collectively, buying high and selling low in crowds. Being subject to the illusion of control, they follow regressive behavior patterns and irrational, wishful thinking. They are victimized by their own emotions of hope, fear, and uncertainty.

When people feel doubt and panic, they regress to an earlier stage either individually or en masse. Under stress, they revert to affect (Mohacsy & Silver, 1980). Such mobbing has an obvious psychological counterpart in the market. Here, crowds are governed by wishful thinking. "Investors are coached to believe that a stock is a better buy when the price rises, that it's 'safer' to join the crowd in betting the price up and 'riskier' to buy a stock declining in price" (Vick, 1999, p. 7). Investors also join a crowd to minimize regret. If something goes wrong, they know others behaved the same way.

We recognise it when exuberance makes charts go vertically up or when stone cold fear pushes them ruthlessly down, but our ego inevitably makes us shy away admitting that we take part in any function of it – "that's those other sheep". We're merely unemotional observers, until we aren't. Is anyone going to admit they were buying in the final moments before the last bitcoin crash?

It was inevitable that a few short days after Wall Street lovingly embraced Bitcoin as their own, with analysts from Bank of America, Citigroup and others, not to mention the clueless momentum-chasing, peanut gallery vocally flip-flopping on the "currency" after hating it at $200 only to love it at $1200 that Bitcoin… would promptly crash. And crash it did: overnight, following previously reported news that China's Baidu would follow the PBOC in halting acceptance of Bitcoin payment, Bitcoin tumbled from a recent high of $1155 to an almost electronically destined "half-off" touching $576 hours ago, exactly 50% lower, on very heave volume, before a dead cat bounce levitated the currency back to the $800 range, where it may or may not stay much longer, especially if all those who jumped on the bandwagon at over $1000 on "get rich quick" hopes and dreams, only to see massive losses in their P&Ls decide they have had enough.

There will be a strange irony, in that anyone you talk to with a bitcoin experience will have left the building at $1100 – "it was looking bubbly, so I took a profit." Hmmm. The drip that bought at $1155 will be cloaked in anonymity, unless $2200 is later smoked.

Back to me, and the price my mind had agreed pay – 18.5 cents was hit. But where was I? Yeah, I'd cooly (or so I told myself ) shifted another gear down and was expecting to get my happy ending at 17.5 cents. As the share price firmed again, juddering between 19.5 and 20 cents I meekly snuck back to 18.5. At 20 I snuck up to 19, as I wondered whether it might go to 20.5. Of course it did, before coming back to 19.5, at which point I had enough steel to leave my order at 19.

In the midst of this circus, late on a Friday, the buy side appeared to firm considerably and immediately it looked a better buy again – "buy now and I'm with the crowd." After a fortnight of courting and several times being left with my frank in my hand, maybe it was time to make the move and just get my fill at 19.5. But, but, but, this was Friday afternoon and anything could happen over the weekend. Rating agency downgrades, terrorist attack, tsunami, nuclear disaster, alien invasion, apocalypse. And I'd still have to settle on Wednesday!

And something did happen. First it was a market announcement after the close on Friday that their seismic program had shown positive results. Damn, I assumed this was going to cost me another half cent! Then on Monday – TRADING HALT.

11 minutes before open on Monday morning. I spent most of Monday cursing my stupidity while muttering F-U under my breath. On Wednesday morning the announcement came out – an unsolicited equity placement at an 18% premium to the previous close. A significantly rare and positive event. And on open, the share begins trading at 23.5 cents.

Where's my order? Oh I'd moved it to 22 cents now. Sigh. Yeah it was happening all over again. Though a few price bumps up to 24 and 24.5 cents during the day had me edgy. Now the urge is to get ahead of the game because this is surely going higher.

What didn't help throughout this brain mincing was my constant contact with a share trading forum. Those great analogies that describe a share price ready for take off (see, I just used one then!) were flying into my eyes like poison darts. Common sense is blinded and it further makes me think I gotta get in!

Toot! Toot! Buckle up your seatbelts! The floor is in! A couple of cents will be meaningless soon!

Then there's also talk of the big boys buying, holidays (not just theme parks, your own private island), early retirement and Ferraris. Sitting on the sidelines and kicking yourself while reading this is a little unnerving, but a slap to the face and you quickly regain perspective. The real issue becomes the now moving share price. Even if you block out the chat room noise, with every half cent it's somehow a better investment – or speculation as it were. Yet last week every half cent movement downward made it waft like sun-baking salmon. Someone's selling, something must be wrong. Drag that order down so you won't overpay!

After again playing tag and miss with the price for most of the day, a gap opened up at 22.5 towards closing time. That was the entry point. No more mental gymnastics trying to second guess the next movement – if I got hit, I got hit. I placed my order. It sat near the top of the queue and with one foul swoop at 3:51pm I became a shareholder. A few minutes later the price went back to 23 cents and that's where it closed for the day. After two weeks of games, and being led around by my nose, it was a very painless exercise. Yet I had little control until I pinched my brain in those final moments. There was some satisfaction that I paid less than the premium placement that instigated the jump in price, but I still paid 21% more than if I'd just left my initial order 18.5 cents.

Again, from Heidi Lefer and Ildiko Mohacsy, in Journal of the American Academy of Psychoanalysis and Dynamic Psychiatry – I'm guilty as charged.

Our brains are hard-wired to get us into investing trouble; humans are pattern-seeking animals . . . .Our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row . . . the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat . . . dopamine is released . . . .Thus, if a stock goes up a few times in a row, you can reflexively expect it to keep going up . . . .Brain chemistry changes as the stock rises, giving . . . a "natural high." You effectively become addicted to your own predictions.

At last close the share price sat at 31.5 cents. I'm in, I'm ahead and I'm finally calm. But I still can't believe how ridiculous my mental gymnastics became. I've got no clue how many trades I've completed over the years, but any time I'm buying a new company this farce reappears.

The share forums have gone wild over the company. Just by reading them the brain could start firing with thoughts of short changing your future family tree by not taking a position. I felt similar insanity that day I realised I'd be paying 21% more than I'd initially intended.

It's gone up consistently for weeks. It will keep going up, surely? No, I don't think that any longer, but that's the mental game any potential new entrant is faced with. Now, as a shareholder, I'm less concerned if it goes up or not. I just don't have to worry about being left behind if it does.

My terror now? The prospect of fighting my uncontrollable and irrational mind when it comes time to sell. Another two weeks to get an extra three cents, before eventually chasing the price two cents down?

If I can ruthlessly control my saving and spending, surely the same control can be applied to investing (or speculating).

Sooner or later I'll find out.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NYDIPIq2Dz0/story01.htm Tyler Durden

Spanish Debt-To-GDP Surges To New Record High

The last 2 years have seen the clearest indication of the health of Spain deteriorate at its fastest rate on record. In spite of constant reassurances from Rajoy et al. that recovery is here, as we noted here, it’s not just unemployment that is dogging Spain; and now – having risen at a stunning 25.8 percentage points in the last 2 years, as Reuters reports, Spain’s debt-to-GDP has hit 93.4% – the highest level in more than a century. Of course, we should not worry… Spain has reassured investors that sees the debt-to-GDP ratio peaking at 101% in 2015 and 2016, then it’s plain-sailing to nirvana.. (and do not contradict them!)

Chart: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/yb_8r0ysahc/story01.htm Tyler Durden

Faber, Rogers, Dent, Maloney, & Stockman – What Do They Say Is Coming In 2014?

Submitted by Michael Snyder of The Economic Collapse blog,

Some of the most respected prognosticators in the financial world are warning that what is coming in 2014 and beyond is going to shake America to the core. Many of the quotes that you are about to read are from individuals that actually predicted the subprime mortgage meltdown and the financial crisis of 2008 ahead of time. So they have a track record of being right. Does that guarantee that they will be right about what is coming in 2014? Of course not. In fact, as you will see below, not all of them agree about exactly what is coming next. But without a doubt, all of their forecasts are quite ominous. The following are quotes from Harry Dent, Marc Faber, Gerald Celente, Mike Maloney, Jim Rogers and nine other respected economic experts about what they believe is coming in 2014 and beyond…

–Harry Dent, author of The Great Depression Ahead: "Our best long-term and intermediate cycles suggest another slowdown and stock crash accelerating between very early 2014 and early 2015, and possibly lasting well into 2015 or even 2016. The worst economic trends due to demographics will hit between 2014 and 2019. The U.S. economy is likely to suffer a minor or major crash by early 2015 and another between late 2017 and late 2019 or early 2020 at the latest."

–Marc Faber, editor and publisher of the Gloom, Boom & Doom Report: "You have to say that we are again in a massive financial bubble in bonds, in equities, in [other] asset prices that have gone up dramatically."

–Gerald Celente: "Any self-respecting adult that hears McConnell, Reid, Boehner, Ryan, one after another, and buys this baloney… they deserve what they get.

And as for the international scene… the whole thing is collapsing.

That’s our forecast.

We are saying that by the second quarter of 2014, we expect the bottom to fall out… or something to divert our attention as it falls out."

–Mike Maloney, host of Hidden Secrets of Money: "I think the crash of 2008 was just a speed bump on the way to the main event… the consequences are gonna be horrific… the rest of the decade will bring us the greatest financial calamity in history."

–Jim Rogers: "You saw what happened in 2008-2009, which was worse than the previous economic setback because the debt was so much higher. Well now the debt is staggeringly much higher, and so the next economic problem, whenever it happens and whatever causes it, is going to be worse than in the past, because we have these unbelievable levels of debt, and unbelievable levels of money printing all over the world. Be worried and get prepared. Now it [a collapse] may not happen until 2016 or something, I have no idea when it’s going to happen, but when it comes, be careful."

–Lindsey Williams: "There is going to be a global currency reset."

–CLSA's Russell Napier: "We are on the eve of a deflationary shock which will likely reduce equity valuations from very high to very low levels."

–Oaktree Capital's Howard Marks: "Certainly risk tolerance has been increasing of late; high returns on risky assets have encouraged more of the same; and the markets are becoming more heated. The bottom line varies from sector to sector, but I have no doubt that markets are riskier than at any other time since the depths of the crisis in late 2008 (for credit) or early 2009 (for equities), and they are becoming more so."

–Financial editor Jeff Berwick: "If they allow interest rates to rise, it will effectively make the U.S. government bankrupt and insolvent, and it would make the U.S. government collapse. . . . They are preparing for a major societal collapse. It is obvious and it will happen, and it will be very scary and very dangerous."

–Michael Pento, founder of Pento Portfolio Strategies: "Disappointingly, it is much more probable that the government has brought us out of the Great Recession, only to set us up for the Greater Depression, which lies just on the other side of interest rate normalization."

–Boston University Economics Professor Laurence Kotlikoff: "Eventually somebody recognizes this and starts dumping the bonds, and interest rates go up, and inflation takes off, and were off to the races."

–Mexican Billionaire Hugo Salinas Price: "I think we are going to see a series of bankruptcies. I think the rise in interest rates is the fatal sign which is going to ignite a derivatives crisis. This is going to bring down the derivatives system (and the financial system).

There are (over) one quadrillion dollars of derivatives and most of them are related to interest rates. The spiking of interest rates in the United States may set that off. What is going to happen in the world is eventually we are going to come to a moment where there is going to be massive bankruptcies around the globe."

–Robert Shiller, one of the winners of the 2013 Nobel prize for economics: "I'm not sounding the alarm yet. But in many countries the stock price l
evels are high, and in many real estate markets prices have risen sharply…that could end badly."

–David Stockman, former Director of the Office of Management and Budget under President Ronald Reagan: "We have a massive bubble everywhere, from Japan, to China, Europe, to the UK. As a result of this, I think world financial markets are extremely dangerous, unstable, and subject to serious trouble and dislocation in the future."

And certainly there are already signs that the U.S. economy is slowing down as we head into the final weeks of 2013. For example, on Thursday we learned that the number of initial claims for unemployment benefits increased by 68,000 last week to a disturbingly high total of 368,000. That was the largest increase that we have seen in more than a year.

In addition, as I wrote about the other day, rail traffic is way down right now. In fact, for the week ending November 30th, U.S. rail traffic was down 16.3 percent from the same week one year earlier. That is a very important indicator that economic activity is getting slower.

And we continue to get more evidence that the middle class is being steadily eroded and that poverty in America is rapidly growing. For example, a survey that was just released found that requests for food assistance and the level of homelessness have both risen significantly in major U.S. cities over the past year…

A survey of 25 American cities, including many of the nation's largest, showed yearly increases in food aid and homelessness.

The cities, located throughout 18 states, saw requests for emergency food aid rise by an average of seven percent compared with the previous period a year earlier, according to the US Conference of Mayors study, published Wednesday.

All but four cities reported an increase in demand for assistance between the period of September 2012 through August 2013.

Unfortunately, if the economic experts quoted above are correct, this is just the beginning of our problems.

The next wave of the economic collapse is rapidly approaching, and things are going to get much worse than this.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/FMJrr3rrcZQ/story01.htm Tyler Durden

Faber, Rogers, Dent, Maloney, & Stockman – What Do They Say Is Coming In 2014?

Submitted by Michael Snyder of The Economic Collapse blog,

–Gerald Celente: "Any self-respecting adult that hears McConnell, Reid, Boehner, Ryan, one after another, and buys this baloney… they deserve what they get.

And as for the international scene… the whole thing is collapsing.

That’s our forecast.

We are saying that by the second quarter of 2014, we expect the bottom to fall out… or something to divert our attention as it falls out."

–Lindsey Williams: "There is going to be a global currency reset."

–CLSA's Russell Napier: "We are on the eve of a deflationary shock which will likely reduce equity valuations from very high to very low levels."

–Robert Shiller, one of the winners of the 2013 Nobel prize for economics: "I'm not sounding the alarm yet. But in many countries the stock price levels are high, and in many real estate markets prices have risen sharply…that could end badly."

A survey of 25 American cities, including many of the nation's largest, showed yearly increases in food aid and homelessness.

The cities, located throughout 18 states, saw requests for emergency food aid rise by an average of seven percent compared with the previous period a year earlier, according to the US Conference of Mayors study, published Wednesday.

All but four cities reported an increase in demand for assistance between the period of September 2012 through August 2013.

Unfortunately, if the economic experts quoted above are correct, this is just the beginning of our problems.

The next wave of the economic collapse is rapidly approaching, and things are going to get much worse than this.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/FMJrr3rrcZQ/story01.htm Tyler Durden

Gold's Intrinsic Value Vs the US Dollar

Many investors argue that Gold has no intrinsic value. I disagree with this assessment as it does not consider the nature of the financial system.

Let’s compare Gold to the US Dollar.

Every asset in the financial system trades based on relative value. Ultimately, this value is denominated in US Dollars because the Dollar is the reserve currency of the world.

However, even the US Dollar itself trades based on relative value. Remember the Dollar is merely a sheet of linen and cotton that is printed by the Fed and is backed by the full faith and credit of the Unites States.

In this sense, the Dollar’s value is derived from the confidence investors that the US will honor its debts.

A second item to consider is the fact that the Dollar’s value today also derived from the Fed’s money printing. Indeed, a Dollar today, is worth only 5% of a Dollar’s value from the early 20^th century because the Fed has debased the currency.

As a result of this the world has adjusted to this change in relative “value” resulting in a Dollar buying less today than it did 100 years ago.

In this sense, Gold’s value is derived from investors’ faith in the Financial System (ultimately backstopped by the Dollar) and the Fed’s actions.

Gold also moves based on investors’ confidence in the system. If investors’ are afraid that the system is under duress (meaning that they have little confidence in the Dollar-based financial system) then they perceive Gold has having a higher value.

Similarly, if the Fed prints Dollars by the billions, Gold is perceived as having a higher value relative to the Dollar.

Thus, Gold does not have any less intrinsic value than the US Dollar does. In that regard we can price it relative to the Fed’s actions and to the fear of systemic risk to get an assessment of its true value.

As noted a moment ago, every asset in the financial system trades relative to investors’ confidence in that system. With the US Dollar as the reserve currency of the world, that confidence is ultimately based on the idea the US will pay you if it owes you money.

If you remove this confidence, then the entire system collapses as the reserve currency is no longer perceived has having value.

The problem with this setup however is that the US, like almost every other country in the world (I’m including China which is sporting a Debt to GDP ratio north of 200% if you account for its Shadow Banking liabilities), has made promises that it cannot possibly keep.

The US “officially” owes nearly $17 trillion in debt. However, if you include unfunded liabilities this amount surges to at least over $80 trillion and likely north of $100 trillion.

These are promises the US has made. And the US Dollar’s value is based on the belief that the US will honor these promises.

The US is not isolated in this regard. Indeed, the problem of unfunded liabilities exists throughout the world.

In the case of Europe, the situation is so bad that the average EU country would need to have an amount equal to over 400% of its GDP sitting in the bank, earning interest at the government’s borrowing rate, in order to fund its unfunded liabilities.

The same goes for Japan and even China where the shadow banking system has liabilities north of 200% of China’s GDP.

These are promises that cannot be kept. And when these promises are broken confidence in the system will be broken. This will inevitably lead to a period of currency collapse. After this, ultimately there will be a need to restore confidence in the system.

The only way to do this will be by backing currencies with Gold again (or a basket of items that includes Gold).

Given the limited amount of Gold in the world, (a little over 171,000 tons) and the enormous amount of US Dollars in the world, this would require a revaluation of Gold to north of $10,000. Dylan Grice formerly of Societe General lays this out beautifully in the below chart.

I cannot possibly predict when all of this would happen. All I can state with 100% certainty is that ALL fiat currencies throughout history have failed.

This failure has been based on a loss of confidence. And the only way to restore confidence is to limit the ability of Central Banks to print money.

This will inevitably lead to some form of a Gold backed currency. Gold has been used as currency for over 5,000 years. It will be considered currency again in the future. When it does, the price of Gold will be much higher (remember, Gold has risen over 34 fold in the last 40 years).

For a FREE Special Report on how to beat the market both during bull market and bear market runs, visit us at:

http://phoenixcapitalmarketing.com/special-reports.html

Best Regards

Phoenix Capital Research

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Gold’s Intrinsic Value Vs the US Dollar