Martin Kronicle

The Economic Times asked Jim Rogers recently about the recent strength of the USD and if it was here to stay.

I think the USD has been rallying in the short term because it is the evil of two lessers. The EUR and GBP are in line to get hammered, but for now, the USD is in an uptrend. The strength in the USD is most likely buoying the equity markets.

He also likes to say that he is the world’s worst market timer. However, Rogers made a bullish call on the USD in December.

In an early 2009 podcast interview, Rogers said that there would be social unrest in a podcast interview.

From The Economic Times:

ET: The recent strength in the dollar is it here to stay?

Jim Rogers: It’s here to stay for a while because of the serious problems in Europe many people were using the dollars carry trade and now reversing and borrowing at low interest rates and investing elsewhere and now having to take that money back and we burst the carry trade and that makes the dollar go higher for a while. I own the dollar for that reason and I own the Japanese yen for that reason. Both could be temporary beneficiaries of what is happening in Europe.

US Banks can borrow from the Fed below 0.25% and buy 2-year Treasury Notes without any reserve requirement. They can lever this investment 100 to 1 (maybe higher) if they want and it’s a riskless trade. If rates go higher, the banks just hold the Notes until they mature.

They also don’t need an underwriting department for this, so they can lay off personnel. Since this is so lucrative, and riskless, and can be done with lower overhead, you can see why banks will be reluctant to lend money to small business owners.

Depositors are the ones fueling this trade by leaving their funds on deposit at the banks. But they’re effectively taxed at a rate of 100% since they are not getting any yield on their money.

The new SEC Short Selling rule will kick into effect when a stock has fallen 10% or more in one day. Studies have shown that putting restrictions on short selling actually causes more volatility, but I don’t think politicians worry about that as much as they need to look like they’re doing something.

From The Economist: (bold is mine)

Despite being a compromise, the new rule is controversial within the SEC. Two of the five commissioners voted against it. One of the dissenters, Kathleen Casey, complained that the move was guided “less by empirical analysis and more by public relations” and that “we should resist the urge to act merely to say we have acted.”

Some will see this as a reference to the huge political pressure the commission has faced to crack down on short-sellers, while others will see it as a dig at Mary Schapiro, the commission’s newish chairman. Ms Schapiro has spent her first year in the job trying to rush through a bunch of new initiatives to counter criticism that the SEC lacks spine.

The NYT’s Floyd Norris reported Mary Schapiro as saying “the rule would force short-sellers to stand in the back of the line, unable to sell shares until all actual owners who wanted to sell had been able to do so.”

Now that has to be the most stupid thing she could have said. Why the preferential treatment? That takes the spirit of competition right out of the market. Short selling is as American as buying long. Furthermore, short selling is more of a trade than an investment.

This rule, as it’s written, only strengthens and substantiates the institutional, long-only mindset that must have been lobbied for by the mutual fund industry. This is not a good thing.

Even if the SEC had evidence that there was manipulative short selling (they already have handled naked shorting) and long-only investors invest for the long-term, why would it be necessary to annul short selling on an intraday basis?

#1. Don’t go home short gamma.

Funny Wall St. Journal article article by James Altucher, too bad VN didn’t follow his pupil’s lessons – specifically #8 below.

Victor Niederhoffer blew up a few times by being short gamma. He mustn’t have tested that ethos despite how smart he is, and I’m not being sarcastic.

I have nothing against Victor Niederhoffer personally, but his book The Education of a Speculator has to be the second-worst book I’ve read after Liar’s Poker.

Popular? – Yes, both are.

Classics? – Not in my paradigm.

The upside to all of this is that I did incorporate a new rule to my book-buying system: never buy a hardcover without having read a good portion of it first at the bookstore (now a free chapter on the Kindle). So for that, I have to thank Victor Niederhoffer.

The best book to understand the Greeks (such as Gamma) would be Tony Saliba’s Option Spread Trading Strategies: Trading Up, Down, and Sideways Markets.

Listen to my Tony Saliba pocast interview.

From the WSJ article (I don’t pay for news fyi):

8.) Always Protect the Downside.

This is learned by negative example. As Nassim Taleb has pointed out ad nauseum, Black Swans occur. (See the Malcolm Gladwell article on Taleb to see Taleb’s thoughts on Victor.) No matter how much you test, there will be a “this time is different” moment that will force your bank account into oblivion. I trade a strategy based on selling puts and calls at levels where my software thinks its statistically unlikely the market hits those levels before the next options expirations day. But I also use some of the premium I earned from selling those puts and calls to buy slightly further out puts and calls as insurance the market doesn’t run away from me. No matter how confident the software is, always protect.

I live in Los Angeles, so naturally I’ve been reading a lot about California and it’s own economic crisis. We are in a very similar situation to what the US is in.

Like the US as a whole, we have a large economy, a horrible state senate and assembly, an incompetent leader, taxes out the wazoo, and we happen to be in the forefront of immigration and health care issues. Worst of all, Los Angeles and the state at large, are not business friendly in the least.

I’ve been reading about the potential collapse in Greece too, and have blogged about that recently in a post called Greece and California Death Match, which was a bit of a play on words.

Greece has no Treasury of its own. California issues IOUs. S&P downgraded California’s credit rating from AA to AA- which means that the issuance of new debt – debt that we need – will cost more and add to user fees and taxes, depending on the type of debt issued.

Jamie Dimon recently commented on Greece and California in Barron’s and I thought his words were more in line with mine about what would happen with California’s debt service.