How to make 300% off Washington’s lies.
That’s the conceit of my wife’s current favorite TV show.
I’m sure you’ve seen it, or at least heard about it, as it is supposedly one of the most popular shows on cable right now. It features an ill-tempered, opiate-addicted doctor who, without ever actually seeing or touching a patient, can cure them of whatever rare disease ails them.
The reason he gives for never speaking to patients? “It’s pointless: They all lie.” Instead, he combs through the facts with a jaundiced eye (sometimes figuratively and sometimes literally) to uncover the truth.
My wife says (with a bit of a naughty sparkle in her eye) that he reminds her of someone she knows.
"I wish I could just get back to where I was!"
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Reliable as Sin
I don’t like to think that I am actually that much of a curmudgeon. I will concede, however, that historically, economically and financially speaking, lies and liars are probably closer to the norm than not.
And thank the Lord (or, perhaps more appropriately, that bad old fallen angel) for them, because the proliferation of lies, half-truths and obfuscations can offer the skeptical investor some of his finest trading opportunities.
Here’s an example: Back in 1982, 16-year-old Barry Minkow of Reseda, Calif., started a carpet cleaning biz out of his parent’s garage. Now these were optimistic, go-go times... the beginning of the Reagan Revolution that would see the Dow Jones Industrial Average rise from sub-1,000 levels to unthinkably unimaginable heights.
A $100 Million Con Doesn’t Seem Like Much These Days
Pretty early in the game, Minkow decided on one thing for certain: A small-town Cali kid stood next-to-no chance at grabbing a piece of this hot, steaming pie armed with nothing more than the truth and a rented carpet steamer.
He needed more than a mere couple hundred bucks a week. He needed Wall-Street-style capital. And he went after it in ways that any modern Wall Street exec can understand (and even admire): He borrowed. He lied. He stole. He burglarized. He even forged.
But he was charming about it all, and so was lauded as a paragon of virtue by such discerning, well-informed folks as the Los Angeles Times, The Wall Street Journal, and Oprah Winfrey. Eventually, he did what any accomplished scoundrel does: He went public. And by the time the whole house of cards collapsed, Wall Street had showered some $110 million (a great deal of money in those halcyon days) on the 21-year old “Biz-Whiz.”
Back in the Game
F. Scott Fitzgerald has stated categorically, “There are no second acts in American lives.” The charming liar at the center of this tale has, well, “put the lie” to that homily, as it were.
Mr. Minkow has been out of jail for some time now, and is in fact really doing quite well these days. His latest endeavor, The Fraud Discovery Institute, claims to have grossed $1.2 million in 2008. His system depends on that one thing he knows so well: “Everybody lies.”
His firm searches through thousands of executive resumes posted on corporate filings. He cross checks various biographical or educational claims such as “born with a silver spoon in mouth” or “master’s degree from Ivy Walled U.,” and when he finds that these claims come up a tad short of the truth, he shorts the bejeezus out of the company’s stock, and then pitches a very public fit about the fraud.
Careful Now…
Please understand that I am not suggesting that you invest any of your hard-earned money with Barry. As James Ratley of the Association of Certified Fraud Examiners puts it: “As far as being reformed, that’s something only Barry knows.”
However, a quick perusal of various daily newspapers seems to indicate (at least to Barry and me), that Wall Street and Washington have a virtually unending supply of prevaricators, smoke blowers and truth stretchers. And each one offers you an honest way to make some coin off their fibs.
Again, I have an example for you snatched straight out the headlines: Yesterday, all the cheerleaders and talking heads were touting a fabulous “3.4% Increase in Durable Goods!”
Now Wall Street just loves news like that, and rewarded Washington by pushing up shares almost 3%.
“Lies, Damn Lies and Statistics”
“Fabulous” is a great way to put it. While it wasn’t an out-and-out lie, it was another one of Washington’s grand exercises in obscuring facts with statistics.
Let’s start with that grand top line 3.4% gain. I am holding the actual report from Census, and there it is in the very first paragraph, so it must be true, right?
As a freestanding number, yes. But when you skim all the way to the very last paragraph, you arrive at a bit of awful contextualization. Seems that to arrive at a gain that strong, they had to downgrade January’s already dismal performance by another 1.42%, increasing the loss that month to a truly mind-boggling -7.3%.
Now we are still left with a bit of a net rise, just a touch over 1% (provided they don’t “revise it” away next month). And this is indeed a good thing, because we haven’t seen durable goods orders rise in over six months.
Randy Wikowski’s secret to $204,400 in 34 days
Randy had spent years saving every nickel and dime he could earn from his manufacturing job just outside of Boston.
So, when he heard about “energy incentives,” he was skeptical. But when he saw the potential payouts… and how little money he could get in with, Randy gave it a shot.
Just over a month later, he had an incredible opportunity… the chance to cash a check for $204,400.
Finding the Catch…
And it seems like the more you prowl through the details (much in the same fashion that Barry Minkow sifts through resumes), the more you find the horrid clues as to where we really stand.
For example, Washington has pledged to fund the recovery in part by cutting back defense spending. However, if you exclude the 35% increase in February Defense shipments, that 4.3% gain drops down to a mere 1.7%.
As my wife points out, I am a touch of an antisocial curmudgeon who is never happier than when sorting through long lists of supposed facts looking for red herrings. If you too like this sort of thing, here is the link to the census department’s latest stats: http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf.
And Finding the Profit…
For those of you who actually have lives, I will cut to the chase: Over the next few months, we may very well hammer out a bottom. This may even be the beginning of the end. But it is not yet the new beginning Wall Street is looking for.
The “Grand Turnaround” will require at least one more test of support, forming a classic double bottom. Then we will see confirming signals from various statistical indicative systems, like my own Multiple Moving Average/Money Flow Cross Reference.
I promised you a way to profit off this smoke, and here it is: Buy short-term puts and long-term calls on major market players such as Ford (F:NYSE) and General Electric (GE: NYSE).
The puts will allow you to survive the herd’s inevitable disappointment on each episode of false spring. For example, one such set of puts WaveStrength Options Weekly readers are holding gained some 12% yesterday when their underlying shares dropped 4% as the market began to decipher how it was rooked (again).
Gains like that allow you to tolerate losses in the long-term calls that are your bridge to the revival that is, indeed, lurking out there just over the horizon. Market disappointment will also drop the entry for these calls. This is a good thing, because in the end, they stand to make as much as 300% gains when the genuine revival (finally) arrives.
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