Next week’s Term Auction Facility (”TAF”) is an experiment.    It’s untested and it’s being used for a situation that has not been experienced before.  The problem with experiments is that sometimes they blow up the first time around.   Just look at Edison and some of his explosions.  In fact, it’s hard to find too many great scientists that got it right without a few failures first.  The TAF experiment may work, but if it doesn’t - I expect the market will have a major explosion.   Keep your fingers crossed!

Watching this CDO/SIV/CP fiasco is kinda like seeing a mom stocking the cookie jars. Usually we think about someone getting their hand caught in the proverbial cookie jar, but that’s not what I am talking about. That will come later or maybe they won’t get caught at all. All these writedowns are tough to take, but they are better than the alternative. And it makes it clear to me that few, if any, of the market participants really care whether these products get traded right now - at least not at these prices.

To me, all this talk about trying to “free up the system” and “solving the liquidity crisis” is a bunch of crap. If these guys wanted to sell the stuff or really had no other choice, a market would evolve. Why? If you sell something now, you cannot benefit from it later. Just ask E-Trade. When, and if, the portfolio they sold to Citadel for 27 cents on the dollar gets collected at rates higher than that or if the economy and credit markets improve enough to sell the portfolio to someone else, Citadel will benefit, not E-Trade. Kudos to Ken.

On the other hand, all these bank assets getting written down have the potential for reversals at later dates. So, as long as no one is forced into making a sales transaction, the writedown route is much better. Instead, banks are doing whatever they can to avoid trading these assets and all consequences are far superior. If they didn’t have to deal with regulations on bank capital, there would be minimal issues with writing down far more than they have. When Citi got $7.5 billion from Abu Dhabi, they did what they had to do, at any cost, to avoid “freeing up the system.” In my view, Abu Dhabi didn’t invest in Citi - it invested in the future reversal of Citi’s writedowns. The same goes for any of these other transactions that help avoid “freeing up the system.” And the Fed is enabling that by providing liquidity through any means necessary to these banks so they can avoid having to actually sell anything.

Meanwhile, it’s time to stock the cookie jars with billions of c000,000,000kie$$$$$$. Because when it’s all over and the banks that didn’t sell can reach into the cookie jar and pull out the reversals, they will be able to create some pretty nice looking earnings. Then it will be up to investors to figure out how much came from our current mess. By then, much of this will be forgotten and they may not get caught with their hand in the cookie jar.

One of my favorite CNBC moments of the year happened today. Of course, I looked on the CNBC.com website to see the clip (click here) but the part I loved was edited out as you would expect. Hopefully it will find its way onto YouTube for those of you that missed it or for those of you that saw it but just want to watch it over and over again to get a good laugh. At the end of Charlie Gasparino being as interruptive as usual to Dennis and Herb, Bill Griffeth showed some real balls right in front of the camera and went off about having enough of Gasparino and telling his producers to cut his microphone. For a second I thought he might have been joking but those were some genuine comments. Good for you Bill! It’s encouraging to watch someone with character on that channel.

If you don’t like getting whipsawed by market reactions to the Fed, don’t participate in it. Ridiculous assumption - right? I can understand that most investors believe it is impossible to avoid and that is true - as long as you let it. Our market has been conditioned by the media and the focus on short term trading to pay attention to everything involving Bernanke and his crew. Economic reports have one focus - to determine what they mean for likely Fed action. With each release we have speculation leading up to the report and traders placing bets that fit with their position. Then we have the reaction to the report and unwinding of the previous speculation or adding to the position or taking profits. Next up they analyze the effects on Fed Funds Futures which as I keep saying are useless and dangerous measures of this absurdity. Of course, if you must speculate about the Fed then Fed Funds Futures seem like an indispensable part of the puzzle. I know the media keeps reporting on it and making it seem like it’s important and it is. It is critical to the continuation of their focus on trading and speculation. It’s great for volatility. It’s great for program trades. It’s great for exciting tv. But this is not great for investing.

Just look at the past few weeks since the Fed stopped the slide and gave us a rally. Was that investing? How many positions were put on after Thanksgiving that came off real quickly yesterday afternoon? And then again this morning with the “unprecedented” coordination between Central Banks - was that an investable moment? How long did it last? This market is not about investing, it’s about speculation on the Fed intervention and with any speculative endeavour, you have to deal with massive volatility at some point. The first Fed Funds cut took almost two months before it gave up all the gains. The Halloween cut took one day. Yesterday took a few seconds before the cascade began. And it is painful and it will continue as long as you participate. I know this short term market focus is tough to shake. It’s easy to be drawn in and participate. Who can miss out on the promise of the big rally? There seems to be a perception that you aren’t a serious investor if you don’t play along. Once you place that first bet based on the Fed you are hooked. Traders who got in before 2:15 yesterday, probably felt they had to get out at 2:30, if not short the decline. Then this morning they probably felt they had to cover at the open and maybe even buy the rally. This is ridiculous and if you don’t like it, refuse to participate.

I spend very little time doing technical analysis on index charts. However, if you are a bear and like that kind of thing, you’re probably looking at a Death Cross on the S&P 500 that is not too far off (a few weeks) if current trends persist. And you might even be looking at that occurring simultaneous with an intermediate-term Head and Shoulders pattern. And while you are at it, why not pull up a 10-year chart of the S&P and you’ll be able to convince yourself that a Double Top is forming with the 2000 peak. All those things seem plausible but you must avoid convincing yourself of doomsday chart patterns that have not been formed - YET. I am not suggesting to ignore the risks, but try not to turn your awareness of a potential problem into a certainty. These patterns have a habit of looking likely one week and then totally opposite the next. Please trade the charts you have - not the ones you want to have. Keep yourself aware of the risk, be ready to act. I went to a bullish bias this week, albeit a slim one, but I did so recognizing the dangers that are out there. It’s important to challenge your assumptions and trade with optimism and fear at the same time.

The FOMC disappoints the markets, a sell-off ensues and what did HEDGEfolios do with signals this week? 376 new UPs vs. 25 new DOWNs and a bullish bias from the HEDGEfolios Timing indicator and confirmed by the move to 51% bullish. I know that may seem a bit disappointing for anyone that is obsessed with the Fed’s rate decisions, but it really shouldn’t be too surprising for anyone that has been paying attention to what I believe. For those of you that missed it the gazillion times I have said it….I DO NOT MAKE DECISIONS BASED UPON FED SPECULATION. I have no opinion whether the Fed Funds cut was enough, whether the Discount Rate should have been cut to match Fed Funds or whether the statement was good or bad. I’ll let economists, media hypesters and pundits speculate about that and start their bitching for the next cut. For weeks, I have been hesitating to react to the rapid increases in stocks which I felt were solely responding to what investors and people like Cramer were insisting the Fed should do or must do. Prior to that, I have made it clear that I do not feel that interest rate cuts are going to solve the credit crisis or the economic risks. So I know it may seem surprising that I missed the reaction to the cut or that I didn’t hold my permabear turf a bit longer. If I was anticipating a reaction in order to make the decisions to HEDGEfolios, I guess I’d feel frustrated or something like that but since I wasn’t gaming the Fed, it’s impossible to say I was wrong about them. However, I have been through things like this too many times to react in a panicky way about the last 2 hours of trading on one day, whether it was a massive down move or the many massive up moves I have also missed. I am comfortable with the changes I made and being 51% bullish. If things really break down over the next week, I’ll adjust accordingly and if I need to, I’ll reverse bad decisions from this week. Otherwise, I’ll just say that I was impressed by last week’s market action and the improving technicals on the broad base of stocks I cover. Hopefully, investors will get back to investing and not speculating about the Fed, but I doubt it.

This market is not climbing a wall of worry, it’s climbing a wall of ignorance.  Why worry about $10 billion in writedowns at UBS?  Ignore it.  Why worry about Columbia’s pseudo money market fund breaking the buck yesterday?  Ignore it.  Why worry about MBIA needing a billion to shore up its capital and avoid a downgrade to its credit rating?  Ignore it.   Forget about Freddie Mac preserving its capital by restricting its purchases of delinquent loans. Ignore it.  Why worry about Washington Mutual ?  Ignore it.  Inflation, slowing GDP, slowing corporate profits, housing crisis, etc.?  Ignore it.   Do what you want, but just don’t tell me about this market climbing a wall of worry.  This market started to climb two weeks ago when it stopped worrying and started ignoring.

There’s a big debate about how the Fed signals its intentions to the market. CNBC’s stupid Greenspan briefcase indicator was one useless example on FOMC decision days. But between meetings we typically hear about the signaling from Fedspeak or other Fed actions like liquidity injections. The biggest one is the statement that accompanies the decision on rates and this afternoon we’ll be treated to the parsing and spin of their words. However, I think this debate is useless. After all, who is signaling these days? Do you really think the Fed is telling the market what it will do? Increasingly, it seems to me the market tells the Fed what to do and Bernanke does it. When the Fed signaled in August that all was well, we got a surprise discount rate cut a few days later. Why? The market told them to do it. Remember when Poole signaled that they were hawkish and the market signaled it did not like that. Who won? Remember when the last FOMC statement signaled they were hesitant to cut this month? Remember when “less important” Fed members indicated they were on hold? The market signaled that was unacceptable and after all, stocks were down too much. What happened? The “more important” Don Kohn signaled he got the signal. Chairman Bernanke quickly followed that up with a confirming signal that he and Kohn got the signal from the market signal.  Sorry, but I don’t care what the Fed signals to the market.  I care what the market tells the Fed to do.

From time to time, someone makes the effort to email me with a question/complaint/request as to why I do not allow readers to submit comments on HEDGEfolios. I know there is a general theory that you need to create a community of users to have a successful blog. You decide if HEDGEfolios is a successful blog.

But in the end, I need to have a few other things to be successful. The first one is time. The fundamental and technical database portion of this site is my priority and it requires a lot of focus. I just do not have the time to deal with reading comments or replying to the stuff that I write. Sorry for that but my blog was never intended to be an interactive dialog with readers - it was meant as a place for me to share my thoughts. If you like them, good. If you don’t, good. If it causes you to think, good. If you have (or want to create) your own blog and comment there about my blog and then turn on your comments, that might be a good solution. For the record, in my life I have left one comment on another person’s blog and that was only because I did not have their email. Otherwise, expect …NO COMMENT.

Sometimes (as a way around the no comment on the blog) people email me and I do not respond. I get emails like “you suck” - NO COMMENT. I get emails like “you are always so negative” - NO COMMENT. I get emails asking me to talk about stuff I don’t find interesting or relevant - NO COMMENT. Sometimes I get a short email which contains an intriguing thought or observation and I may reply to those. But mostly, I don’t spend much time communicating with readers. Note that if a reader also happens to be a subscriber to the database, then I respond.

Secondarily, the scumbags that love to soak up our time by sending spam to emails also love to attack blogs through comment spam (see Barry’s blog today). I have no desire to deal with that. So if you really want me to allow comments, you’d first have to create a world without the threat of viruses and spam. Good luck with that.

And lastly, I need to be in control of what happens on this site. If I open the comments and someone says something wrong or offensive, I would feel responsible for what happens here. I just don’t have the time or desire to control a series of messages. In general, I do not attempt to control things that are not under my control.

Now that I have hopefully resolved this issue with enough of my time, from now on expect “NO COMMENT.”

I have great admiration for quants - the funds, the analysts, the traders - all of them. I don’t aspire to be one - I just appreciate their advanced mathematical and programming abilities. All that data … complex statistical analysis of almost every variable you can imagine that might influence stocks or any other investable asset class… multifactor models … algorithms … automated trading. So cool! Amazing stuff! Obviously, I love math and have done quite a bit through my graduate finance degree and as an adjunct prof. HEDGEfolios incorporates a reasonable amount of formulas and modeling but nothing ultra-sophisticated compared to these guys.

Jim Simons at Renaissance has influenced investing in ways that few others have through his pioneering quant work. And while I’d enjoy meeting with him some day (maybe on a return visit to East Setauket where I lived 15 years ago), I’d be more interested to discuss his initiatives to enhance public school math skills through increased teacher compensation (click here for info on mathforamerica.org). I’ve often held that the greatest scholarship you can give to a student, is a great teacher, so Jim and I have that in common at least. Anyway… I wouldn’t be too interested in the math they do at Renaissance. Same thing with AQR or any of the other quant shops. Like I said, I have great admiration for them, but it’s not my thing.

I’ve spent most of the last 8 years in a path opposite to theirs. They pursue complexity and formulas that only PhD’s would understand. I pursue simplicity - a concept that has become deemphasized in the sophisticated trading environment that exists in all financial markets today. I get the impression that “simple” is now perceived as “lazy, slow, inefficient, ineffective” and a bunch of other unimpressive adjectives. Just take a moment and think of your own perception of a “simple” investor or trader. Now how do you think this simple trader would do in a head-to-head competition with a quant? I’d understand if you think that the quant would crush the simpleton …and I wouldn’t be offended. It’s part of the conditioning that has affected the way we think. We learn about primitive humans discovering how to harness heat energy and all the mathematical evolution and great minds along the centuries like Einstein that have lead us to nuclear and hopefully, yet undiscovered forms of energy. In almost all applications including investing, we pursue incremental complexity…it’s human nature and it is revered as it should be.

But take another moment to clear your mind because I am heading in a very indefinite direction here. What if there is something else? What if the race forward has caused us to suffer the consequences of calculating the incalculable? What have we missed? Is that next more complex model any better than what we used a month ago, a year ago, 10 years……or all the way back to when markets were infantile…simplistic? Has all that progress made it impossible to make money with simplicity?

Have you read many of my articles here? Does your perception of my commentary match with your perception of a simpleton? Maybe so, but I don’t pursue simplicity by doing nothing. Instead of making a complex thing like investing more complex, I find it more intriguing to make complex things simple. I have spent years trying to improve my performance by filtering out the difficult stuff and focusing on core factors that I believe are at the root of investment theory - the basics that were used in the beginning. I find more value in the beginning than the end. I use no complex formulas. Maybe I have no formulas. Maybe I have really simple ones. Like the quants - I keep my work to myself.

Consider that there is one of me - I have no assistants or analysts - no one. Renaissance has hundreds of math geniuses. Right now I cover 3542 stocks and 286 ETFs and that is about average for the past 3 years that HEDGEfolios has been on the web. No blackbox formulas here. During that time, I have completed over 36,000 signals on these securities with consistent returns that have outperformed the S&P 500. Consider the performance posts I put up each month (click here for most recent). Look at the volatility of HEDGEfolios versus the index. Consider the long/short hedge funds and their volatility and losses during the past 4 months of a very difficult market. At HEDGEfolios, I am only using equities traded in the United States - no complex derivatives, not much international diversification, no leverage…just the basics. I am not changing positions to exploit 15 minutes worth of trading - I only modify the database once each week. Complex finance theory says what I do is not possible. Maybe the last 3 years and about 40,000 data points is luck. Then again, maybe there is something to be said for simplicity.