What's sinking the dollar?

Things do tend to go to hell all at once, so maybe it should be no surprise that the dollar tanked as the subprime mess was getting rapidly worse and stock markets were whipsawing, mostly downward.

The dollar's fate is especially worrisome because of its historic role as the world's reserve currency and its obvious importance to the world's largest economy. In today's interconnected global markets the dollar's movements are part cause, part effect -- but on net it's hard to see the dollar getting much stronger anytime soon.

The forces behind the dollar's weakening have been building for years but didn't have much effect until recently.

Most fundamentally, we Americans have been living beyond our means, buying more from the rest of the world than the world buys from us (that's the trade deficit); to do that, we have to give foreigners claims on our assets in the form of government bonds and corporate bonds, or sometimes the assets themselves.

A country as rich as America can do that for a long time, but eventually the world ends up holding more dollars than there is dollar-denominated stuff they want to buy, so they start offloading dollars. They also worry that any country with loads of debt -- even the U.S. -- may be tempted to inflate its currency, and that fear reduces its value.

Since the U.S. has been running huge trade deficits the past several years -- about $700 billion this year -- the stage has long been set for the dollar to drop. What shoved it over the edge was the subprime mess and worries about a U.S. economic downturn. If the economy looks to be slowing down, investors bail out of U.S. assets and turn to investments that must be bought with other currencies. When the Fed tries to perk up the economy by cutting interest rates, as it has done twice recently, it makes the dollar even less attractive because investors can get better rates in other currencies, such as the euro.

What makes investors really nervous is that the trend could become self-reinforcing. A Chinese government official sparked a particularly sharp selloff of the dollar when he said his government would be moving its reserves out of weak currencies and into strong ones -- goodbye, dollar; hello, euro. Since China holds more than $1 trillion, its actions could move markets, pushing the dollar down further, prompting dollar holders to shift out of it further, and so on.

Even if we avoid that scenario, more dollar weakness is probably ahead, at least relative to China's yuan and other currencies of developing nations. As Alan Greenspan points out, when their living standards are rising faster than ours, their currencies will probably appreciate vs. ours. Remember, he says, that the Japanese yen was once 300 to the dollar and eventually strengthened to below 100 (it's now around 113). The trend continues: In just the past year the dollar has weakened 13% vs. the Indian rupee and 11% vs. the Colombian peso, for example.

By the way, Warren Buffett told us all this would happen. In mid 2002, for the first time in his life, he began buying foreign currencies, thus betting against the dollar. He explained his reasons most extensively in a Fortune article he wrote (Nov. 10, 2003). The main factor he cited, the trade deficit, is much worse now. For a year or two after the article, his bet seemed to be a loser. But now, as usual, he looks prescient. To top of page

Boo-yah this: 'Lazy Portfolios' beat 'Mad Money'

Why waste 15 hours a week and lose a $72,000 'opportunity cost?
By Paul B. Farrell

This column, originally published Nov. 6, has been updated with a link to Jim Cramer's response.

ARROYO GRANDE, Calif. -- Last week I finally listened to the "Mad Money" show for a full hour. When channel surfing in the past I'd move on after 30 seconds. It's about as educational as Saturday morning cartoons. What I heard was a manic distraction for addicted personalities. But there I was, alone in the car on a five-hour trip back home. So I made a conscious decision to listen to the entire show, first time (and last!). "Oh god, what torture," I screamed aloud somewhere near Gilroy, the garlic capital of the world: "This is crazy-making, what a waste of time!"

Of course that was the voice of passive investors coming out from deep within my soul, speaking for the 90 million American investors who don't have the time to waste watching this inane "entertainment" program that's brainwashing innocent minds, repeating the dot-com drumbeat of the late 1990s. Seriously, most folks have real jobs that take up most of their time, real families, real outside interests, real lives to live.

Fortunately many Americans have figured out that active trading is a dead-end street. Remember University of California-Davis finance Profs. Terry Odean and Brad Barber and their famous study of 66,400 accounts at a major Wall Street brokerage? They concluded that transaction costs, fees and taxes ate much of the pretax returns: "The more you trade the less you earn." Active traders actually made a third less than passive buy-and-holders. And it's still true.

OK, assuming you're one of America's 2 million to 5 million fairly active traders, calm down. I know you're dismissing what I said. But stick with me for a minute. Take a deep breath before you fire off a nasty email. Quash those emotions and let's look at this another way.

Figure your 'opportunity cost' of trading
You already know that the Odean and Barber research tells us that traders are running the race with a huge handicap. So, let's quantify traders' "opportunity cost," the "economic cost of an opportunity foregone" when they spend time playing by "Mad Money" rules (or any other trading game). In short, what's your time worth if you watch "Mad Money" daily and do the "homework" Cramer recommends?

Jim Cramer's a brilliant trader. I interviewed him in the late 1990s when he was a hedge fund manager. He didn't like my criticism of the Mutual Fund Derby Race on TheStreet.com, of which he was one of the founders. Said I was "over the top." That was at a time when a competing dart-throwing chimpanzee's index called Monkeydex was beating America's top funds.

The fact is, what was "over the top" was TheStreet's manic racetrack imagery that encouraged passive investors to start trading funds, only to rue the day a couple years later when the market tanked and lost $8 trillion in a three-year bear/recession. That was bad media. And last week's "Mad Money" program is the same kind of subtle brainwashing that's misleading passive investors unconsciously into high-risk trading.

Work the numbers. Cramer's emphatic: "Do your homework, the right homework." That can mean many things, depending on your approach to stock research. But one thing's certain, Cramer says: "Doing homework could take as much as an hour per week per position."

But when he says that to investors, "they look at me as if I am some kind of old-fashioned teacher who is asking for way too much in this busy world in which we live. That's just plain wrong."

Good advice. But the one hour daily "Mad Money" show is such a manic wisecracking racetrack mentality with funny costumes, bizarre sound effects and boo-yah cheers that it totally undercuts the subtlety of doing passive "homework." It's more like a hard-sell infomercial to get you to buy a trading system "guaranteed to make you a successful trader."

Except "Mad Money" is drawing people into a new 2007 Derby Race, targeting traders with the minds of kids chasing instant gratification. Read Jim Cramer's response.
'Mad Money's' wasted 'opportunity cost' Here's the hard facts folks: How to quantify the economic "opportunity cost" of the "Mad Money" game. Cramer's right, you must do serious analysis of your "positions." OK, so for five hours a week he overwhelms your mind with tons of opportunities. Let's say that somehow, when the smoke clears, you have 10 "positions."

Now let's do the math in this simple economic equation: If you're following Prof. Cramer's rules and doing your "homework" you're watching "Mad Money" five hours a week and doing another 10 hours of "homework" on your "positions." That's potentially 60 hours of your valuable time each month, on top of your full-time job. Assuming you're a professional or business executive, let's say your time's worth $100 per hour, probably more.

So, bottom line: Your economic "opportunity lost" for 60 hours is at least $6,000 a month or $72,000 a year, playing by "Mad Money" rules. Get it folks? Your time is valuable. If you're worth a minimum of $100 an hour and you spend 60 hours a week on any activity, you darn well better be earning at least $72,000 a year. And to make that kind of money at, say, 15% a year you'd need more than $400,000 capital at risk.
My guess is that most of the "Mad Money" audience takes the easy route: They just go emotionally gaga over some of Cramer's manic stock picking and buy some, without doing the necessary hours of "homework."

'Lazy portfolios' outperform 'Mad Money'
The vast majority of American investors, probably 95%, will likely never waste their valuable time playing "Mad Money's" new Racing Derby, watching and doing all the necessary homework. The odds aren't very good anyway: the unofficial tracking site CramerProject.com says Cramer's chance of making a wrong call is about 42%. That means that nearly half the time you may be misled.

How about portfolio performance? CramerProject.com says the 30-day average return on the Cramer Index was 14.90% on Nov. 2, though undoubtedly much less on an after-tax basis. The Web site tracks a "Jim Cramer index" of more than 1,600 stocks. You can find data on Cramer's individual stock picks on TheStreet.com, a staggering 3,000 from the prior three months -- about 50 a day. But to get a peek at some of his portfolio data you have to subscribe to his service for $400 a year. Now suppose you're a full-time teacher, cop, attorney or entrepreneur running your own business. You don't have an extra 60 hours a month. Or maybe you're already a nervous active trader whose family wants more quality time, and isn't making that $72,000 breakeven ROI for your valuable time.

So, compare the "lazy portfolios:" They require almost no time, so you can continue making money on your job plus add some nice passive money from your customized lazy portfolio, without wasting the "opportunity cost" on trading. See how the lazy portfolios stacked up in the third quarter.

True, only five of our eight lazy portfolios return more than the 14.9% from "Mad Money's" active trading. But that is giving Cramer a tremendous benefit of the doubt, since the lazy portfolio returns are computed as an annual gain and the "Cramer index" is a 30-day moving average. On Sept. 17, for example, that average was closer to 9%.

Even with that edge, the lazy portfolios stack up well. The Aronson Family Portfolio's one-year return of 23.5% is beating "Mad Money's" number by a wide margin. And the lazy fees, taxes and transaction costs are less than with active trading, if you reflect on the Odean-Barber research.

And even more embarrassing, the passive three-fund "Second Grader's Starter Portfolio" is also beating the CramerProject Index, 19.5% to 14.9%. And that kid's a full-time student, so he doesn't have time to watch "Mad Money." Plus he's doing some real "homework" and it looks like he's already learned a valuable lesson that goes over the heads of the "Mad Money" crowd: "The more you trade the less you earn!" Boo-yah! End of Story

Buffett's Estate Tax Ear-Bender

More new taxes? That's the surprising mantra of America's second richest man: Warren Buffet. On Wednesday, the billionaire investor and philanthropist urged the Senate Finance Committee to keep the controversial estate tax. Buffett, whose net worth is over $57 billion, has heavily crusaded for more taxes on the rich. While many of his peers may disagree, Buffett staunchly believes that the current tax system favors the elite and overburdens the middle class. Perhaps in a sign of how near-and-dear the tax issue is to Buffett, the head of Berkshire Hathaway addressed the committee without a prepared speech (according to one of his personal assistants). Speaking off the cuff, he said a repeal of the estate tax would unjustly benefit America’s wealthiest.

The estate tax has been a hot-button issue on Capitol Hill this year. Under a 2001 law, the estate tax will be gradually reduced until 2010, when it is suspended for on year. Then in 2011, the tax returns in full force, and estates worth over $1 million could face a 55% tax. While some Republicans have pushed for the tax’s full repeal, many Democrats want the tax to stay in place. It is unclear where Republicans and Democrats will find common ground, but many expect the sides to reach a compromise before 2011.

According to Buffett, the estate tax is important, because it bridges the gap between the poor and rich. “A meaningful estate tax is needed to prevent our democracy from becoming a dynastic plutocracy,'' he said. He said low taxes on the rich (many of the richest Americans are taxed at the lower dividends and capital gains rate) have given them an unfair advantage over the middle class, which fork over a greater percentage of their income to the government.

In a recent interview with Tom Brokaw of NBC, Buffett produced a document that showed he had about $49.6 million in taxable income, 18% of which was paid to the government. For comparison, he said the average federal tax rate for a Berkshire employee was nearly double that–33%.

Proposing a more-direct redistribution of wealth, Buffett said the approximate $24 billion in proceeds from the estate tax, should be redirected to the poor. One way to do it, he argues, would be to give $1,000 tax credit to 23 million low-income households.

Buffett’s focus on U.S. economic disparity may seem like a modern dilemma, but his arguments echo the words of Theordore Roosevelt, the 26th president of the United States. In 1906, the president Roosevelt told Congress: "The man of great wealth owes a peculiar obligation to the state, because he derives special advantage from the mere existence of government,” he said. And the man of great wealth “should assume his full and proper share of the burden of taxation.”

While Buffett’s tax position, seems like an unlikely perch for a man that has aggressively accumulated wealth, he has been a longtime proponent of wealth redistribution. He doesn’t just talk the talk, he also pays up—big. In 2006, Buffett pledged to give 85% of the value in his Berkshire Hathaway stock to charitable organizations. The lion share of that—about $30 billion over 20 years— will go to the Bill and Melinda Gates Foundation. For all of 2006, Buffett gave away $4 billion, or 7% of his wealth.

But Buffett is not a lonely black swan in the Forbes 400 circle. Fellow philanthropist, Bill Gates has said that he is committed to his late father’s pro-tax policy. In addition, George Soros, the chairman of Soros Fund Management, has also lobbied Congress to keep the tax on the books.

3 Myths About the Turbulent Market

The past few months haven't been short of hair-raising moments in the stock market. From panic to jubilation, and then back to panic, it's hard to tell what's been going on. A credit crunch, a housing crash, a weak dollar, lower interest rates -- it's a lot to take in.

Regardless of whatever problem pops up, there are several investing myths that resurface during turbulent market periods. Here's just a few of them to think about.

Myth No. 1: You can time the market.
Take it easy, Nostradamus. The stock market can be about as twitchy as a shivering Chihuahua. This year alone, we've had several days when the Dow went up or down more than 300 or 400 points in the blink of an eye. Short-term stock movements are determined by buy and sell orders, and people buy and sell for all sorts of reasons -- not all of them rational.

Whether it's a wealthy CEO selling a large block of shares to pay for a new yacht, a hedge-fund manager looking to jump in and out for a quick trade, or a complete novice crossing his or her fingers and hoping for the best, there is no reason to assume you can predict what people will decide to do in the future.

You also have to take into consideration the out-of-the-blue events that make market timing nearly impossible. Suppose you thought Citigroup was due for a quick rebound after it fell from $48 to $42 per share in mid-October. You gather some fancy candlestick charting program that churns out pretty numbers and tells you Citigroup is bound for success. Fantastic! Back up the truck!

Well, not so fast. Before you know it, Citigroup comes out with staggering writedowns and the ouster of its CEO, leaving investors no less than 20% worse off in the matter of a few days. Ouch.

Once in a while you'll get lucky, but don't kid yourself. You can't time the market. Save the fortune-telling for the good folks at the other end of those 1-900 numbers.

Myth No. 2: Fallen stocks must rise again.
What goes down by no means has to come back up. Many of the homebuilding stocks, such a Beazer Homes, D.R. Horton, and Pulte Homes, have taken gut-wrenching hits in the past year, but that doesn't necessarily mean they are cheap. The past several years were a boon to the homebuilding industry, and it could be many, many years before we see construction return to those levels -- if ever.

When you're looking for a cheap stock, it's important not to fixate on how much a stock has fallen from its high. True, bargains are often found in stocks that have taken a beating, but the amount a stock has gone down doesn't dictate whether it's cheap or not. Baidu has gone down some 20% in the past week, yet it still trades at a triple-digit price-to-earnings ratio.

Myth No. 3: Volatility hurts you.
This is one of the biggest myths in all of stock market lore. The majority of investors will be net buyers of stocks over the coming years or decades. Since most of us plan on being investors for the long haul, you should welcome volatility as your friend.

If you're investing in a retirement account that you don't plan to withdraw from for, say, 20 years, but you plan to contribute frequently to it, the best thing in the world that could happen to you is to have a massive stock market crash that lets you purchase investments at bargain prices. Yet many investors panic and head for the hills at the first sign of trouble, even if they know the trouble will be only temporary.

Yes, we're having a credit crunch right now. Sure, housing is ugly at the moment. But does that mean you should dump everything and put your cash under your mattress? Not even close. When the market becomes turbulent, as it has in the past few months, and your favorite companies go on sale, consider yourself lucky. Look past the short-term noise and think about what the goal of successful investing is -- to make money over time.

There are plenty of myths out there. Everyone in the stock market wants to make quick and easy money, but in reality, that's not how the world works. Develop a sound investing plan, stick to your guns, and don't be tempted by greed or fear as the market gyrates to and fro.

Our 'Voluntary' Tax Code

The Wall Street Journal, November 14, 2007

By Donald L. Luskin
Should we stop worrying and learn to love the "mother of all tax reform plans" put forward by House Ways and Means Committee Chairman Charles Rangel of New York?
The bill would raise taxes by $3.5 trillion over the coming decade, according to Louisiana Republican Rep. James McCrery, a committee colleague of Mr. Rangel's, making it the largest tax increase in history. There has been so much concern that such a tax increase would hurt financial incentives that drive economic growth that House Speaker Nancy Pelosi distanced herself from Mr. Rangel's plan almost as soon as he announced it.
But fear not. As Mr. Rangel wrote on this page two weeks ago, his bill would "restore a sense of equity and fairness that is critical to the success of our voluntary tax system." That's right, he called our tax system "voluntary." That means we don't have to worry about the incentive effects, since we won't actually have to pay any of that $3.5 trillion -- unless we want to.
So when April 15 comes around, I encourage you to be like Herman Melville's Bartleby and say: "I prefer not to." But wait. By April 15 you'll already have paid, since taxes are involuntarily withheld from your paycheck. Nothing can be done about that, even if you don't volunteer to file a tax return. And if you don't file a return, you'll find yourself involuntarily in jail.
You'll then have to yield to the opinion that Mr. Rangel wasn't being entirely straightforward in writing that our tax system is voluntary. But then, he wasn't being entirely straightforward in writing that his bill, which would further raise taxes on the "rich" who already pay the great majority of federal taxes, has anything to do with equity and fairness.
Perhaps from Mr. Rangel's perspective, our tax system is indeed voluntary. After all, he chooses who pays taxes, how much they pay and how their money gets spent. If he wants to raise our taxes to support a $2 million earmark to create a Charles B. Rangel Center for Public Service at the City College of New York, he can volunteer to do that -- but the rest of us have no such choice.
To be fair, our tax system is indeed voluntary in certain respects. For example, wealthy liberals like Warren Buffett, who call publicly for higher taxes on the rich in the name of fairness, can volunteer to pay more themselves any time they wish to do so. All Mr. Buffett has to do is send a check to Department G -- that's G for "gift" -- at the Bureau of the Public Debt in Parkersburg, W.Va.
Why not try an experiment in which the tax system is made truly voluntary? Already 42 states (as well as the District of Columbia and Puerto Rico) raise revenues with lotteries, through which citizens voluntarily paid $57 billion last year. It's a long and noble tradition. Before the birth of Christ, the Han Dynasty ran lotteries to raise the revenues used to build the Great Wall of China.
Government could be entirely financed by voluntary taxation. Yes, the government would have to be small enough to make do, and citizens would have to be sufficiently public-minded about it. But all 13 original American colonies ran lotteries, and playing them was considered a civic duty. Proceeds from lotteries established Harvard, Yale, Columbia, Dartmouth, Princeton, and William and Mary -- and paid for the cannons that defeated England in the Revolutionary War.
But today, Mr. Rangel might find that the volunteerism in today's tax system is a dangerous thing. His bill would raise the tax rate on capital gains income, but the cap-gains tax is voluntary to the extent that one doesn't have to pay it until one chooses to sell an appreciated asset. That fact is not lost on Mr. Buffett, who believes the rich should pay more taxes, but who has never volunteered to sell even one share of his vast holdings in Berkshire Hathaway -- and thus has never volunteered to pay any cap-gains taxes.
What if every investor did that? It's nice to imagine a nation of long-term investors just like Mr. Buffett. But if stockholders never sold any of their investments, the economy, incomes and job creation would slow to a crawl because a growing economy depends on capital moving freely and continuously to its perceived highest and best use.
Mr. Rangel should also bear in mind that taxes on labor income are voluntary in the sense that one can choose not to pay them by choosing not to earn any labor income -- that is, by not working. All the rich need to do in order to make true Mr. Rangel's characterization of our tax system is to retire to their yachts, rather than continue to contribute to the economy by running hedge funds or doing private equity deals.
When that happens, Mr. Rangel will get a lesson in supply-side economics he'll never forget. Some say that the Laffer Curve is wrong, and that tax cuts don't result in higher tax revenues. But when America's most productive workers stop working -- even a little bit -- in reaction to the incentive effects of the "mother of all tax reform plans," they'll see that the Laffer Curve was right after all, and that it can cut both ways. Involuntary tax hikes result in voluntarily lower tax revenues.
Mr. Luskin is chief investment officer of Trend Macrolytics LLC.

China bubble to burst, Greenspan predicts

Former U.S. Federal Reserve Chairman Alan Greenspan warned Wednesday that there's going to be a "dramatic contraction" in Chinese equities and that the current surge on the Chinese stock market is unsustainable, according to media reports. In recent weeks, a number of financial firms, including Goldman Sachs, as well as Governor Zhou Xiaochuan of the People's Bank of China have expressed concern about the possibility of a bubble forming in the Chinese stock market. The Shanghai Composite Index, which tracks shares listed on the larger of China's two stock exchanges, has gained 56% year-to-date.

Is there anyone who doesn't think the Chinese markets are bubblicious?
The bigger questions are whether or not Chinese policymakers have lost control of the economy.

OK, that was written last May...for anyone owning anything in China they have seen remarkable appreciation.

Yesterday, Buffett continued on as was reported by Bloomberg News:

Former Federal Reserve Chairman Alan Greenspan said China's stock market is a speculative bubble that will burst.Asked if China was in a state of "irrational exuberance," a phrase Greenspan made famous in 1996, he said, "I think so," speaking to a conference of insurance executives in Boston on Tuesday."When you don't expect it, it breaks," Greenspan said of the bubble.

His comments reprise remarks from May, when Greenspan said he was concerned Chinese equities might undergo a "dramatic contraction" after its main stock index at the time had jumped more than 90 percent since the start of the year.Greenspan's latest words of concern come at a time when investors are increasing bets on Chinese equities. Tuesday, PetroChina Co. and Alibaba.com Ltd. sold stock valued at more than $10 billion.

PetroChina, the world's second-largest company by market value, raised $8.9 billion in the biggest stock sale this year.Alibaba, the operator of China's largest trading Web site for companies, sold $1.5 billion of shares in the second-biggest initial public offering of an Internet company, after Google Inc., said two people with knowledge of the matter.China's benchmark CSI 300 index has surged 170 percent this year as the country's households invest more of their $2.3 trillion of savings in equities. The rally has given China more of the world's 10 largest companies than the U.S. for the first time and prompted billionaire investor Warren Buffett to warn that prices have risen too fast.China's stock market value is $3.7 trillion, compared with $18.7 trillion for the U.S."It's easy to be carried away in the stock market when things are going very well," Buffett said Oct. 24. "We at Berkshire never buy stocks when we see prices soaring."Greenspan on Tuesday also predicted a "long-term erosion" of the dollar in part because of the U.S. current-account deficit. The U.S. currency's decline is accelerating, he said.For three years, Greenspan has said the dollar will weaken when international investors tire of financing the U.S. current-account gap, the broadest measure of trade."We are likely to see a long-term erosion of the dollar," said Greenspan, 81, who retired from the central bank in January 2006 after 18 years as chairman and last month published a memoir titled "The Age of Turbulence."

How a Fed rate cut raises oil prices

Expect even higher crude prices if the central bank cuts interest rates Wednesday.

If you think oil price are high now, wait till Wednesday.That's when the Federal Reserve is set to announce its decision on interest rates. Most say a cut is coming. If the Fed cuts rates, it will probably push oil prices higher.

There are a couple of reasons lower interest rates usually cause higher oil prices. The first is lower interest rates are designed to spur economic growth by making money for investment cheaper to borrow. Stronger economic growth usually entails using more energy, so traders bid up oil prices on the expectation of higher demand.

Second, lower interest rates usually cause the dollar to fall, as they make dollar-denominated investments like Treasurys less attractive for foreign investors.

Oil, like many other commodities, is priced in dollars worldwide. If the dollar falls, oil producing nations, like those in OPEC, need a higher price per barrel to maintain a the same level of revenue. While oil producing countries don't set the price of oil in the market, they do have control over production and are less likely to increase it when faced with the declining dollar. Also, foreign consumers have less incentive to reduce demand if oil is, relatively, getting cheaper for them.

The real question is this: Is a rate cut already priced into the cost of a barrel and, if not, how much higher is crude expected to go?

"Some has been priced in, but we could see more," said Mike Stelmaki, energy analyst. "I think a couple of bucks is possible."

That would push crude prices, already at record nominal levels, to somewhere near $95 a barrel. That's just shy of the all-time inflation adjusted level of between $93 and $101 a barrel (depending on which calculation is used) set in early 1980s during the Iran-Iraq war.

Mike didn't say how much higher oil could go, but also suggested a rate cut hasn't been fully priced in.

"The temptation is to say it must be priced in, but it could still go higher," he said.

He also noted that a deeper rate cut from the Fed, like half a percentage point, would cause prices to jump further.

According to futures listed on the Chicago Board of Trade, investors say there's an 86 percent chance the Fed will cut its federal funds rate by a quarter percentage point to 4.5 percent. The funds rate is an overnight bank lending rate that influences how much interest business pay for capital loans and consumers pay for things like auto, credit card and home equity lines of credit.

Investors say there is a 14 percent chance the Fed will cut rates by half a percentage point, according to futures on CBOT.

The falling dollar is a fairly prominent reason oil prices are moving higher, as "fundamentally, there really haven't been that many things to cause this price rise."

But others say the dollar's role has been exaggerated.

We didn't expect to see much of a price jump if the Fed cuts rates, and attribute oil's recent record run to rising worldwide demand running up against limited supplies.

Buffett: Expect more subprime pain

Billionaire investor sees problems in the subprime market affecting consumers for up to 2 years, but expresses confidence in U.S. economy.

American billionaire investor Warren Buffett said Thursday that problems in the U.S. subprime mortgage market will likely weigh on consumers for up to two years, but that the U.S. economy will weather the storm.

The subprime problem "is having an impact," Buffett said on his first visit to South Korea. "It will have more of an impact."

Billionaire investor Warren Buffett

Rising default rates among U.S. mortgage holders with poor credit histories have rattled globalcredit, stock and currency markets since August and raised concerns about a possiblerecessionin the U.S. economy, a major export market for Asian companies.

"In the next 6 months, one year, two years the problems in the mortgage market can cause a lot of problems with consumers and hurt buying power in the United States," he said at a press conference after arriving earlier in the day from China on his private jet.

However, the U.S. economy has often had to face various difficulties and the present was no exception, Buffett said.

"Overall the economy will make progress," he said.

Buffett came to Daegu, located about 180 miles southwest of Seoul, to inspect Iscar Korea, a subsidiary of Iscar, the Israeli industrial tool manufacturer that his company, Berkshire Hathaway Inc., purchased last year for $4 billion, its first overseas acquisition.

Buffett also expressed pessimism on the U.S. dollar.

"We still are negative on the dollar relative to most major currencies," he said.

The dollar has fallen against the euro, British pound, Japanese yen, Indian rupee and many other Asian and European currencies this year. The euro, for example, has gained 8 percent against the dollar this year.

Roller Coaster Rides

Roller Coasters take you way up high and then drop down dramatically...up and down and up and down. Then at the end of the ride...you are right back where you started. Hmmmm.

Apparently, no one wants to be short or not long enough headed into another rate cut even amid the bad news out there. After selling off this morning and following a feeble rebound effort, a rumor that the Fed is going to do an emergency rate cut sent the shorts running.

There have been some wild moves over the past week and its been difficult to explain it. Pure manipulation? Perhaps. But no matter what it is, it makes for a difficult time unless you're renting stocks for just a few seconds. We know as we watched the tape reverse course this afternoon. Something strange is going on other than just mere speculation on the Fed's next move. No matter what you think of the economy, the next week or so is going to be an interesting time for the markets and we're not just talking about the continuation of earnings season. Make sure you have your seat belts fastened.

1987 Crash Revisited

Rob Fraim puts out his own amusing comments each day via email. On the 17th anniversary of the 1987 stock market crash, he put out his recollections from that day, and we are republishing them today, the 20th anniversary of Black Monday.

Here is Rob's version of 1987 Crash Revisited. If nothing else please take a look at the charts below.

October 19 – the day that each year gives old-timers in this business a renewed facial tic and post-trauma flashbacks.

“What?” you say. “You mean you were actually there, Grandpa? You remember the Crash of ’87?”

Yes, I was, and yes I do. Confirming rumors that I am, in fact, older than dirt I note that I was in this business in 1987 – and had been for a few years prior (I started in 1983.)

I was having dinner last week with a friend who runs a hedge fund (another graybeard, although he looks younger than me) and we ended up talking about 1987. He had a great story about the whole thing (which I’ll let him tell you about someday if you ever get to have dinner with him.)

So I thought I would take a moment to reflect on my own Crash Experience – and perhaps some of you will share your October 19, 1987 story (provided you’re not a whippersnapper who would be relating what was on freakin’ Sesame Street that day! I really hate you guys. You’re svelte and unwrinkled and smart and energetic and I’m just liable to whup you if you’re not careful.) Maybe we’ll even get a recounting of the aforementioned dinner tale from last week. So if you feel like it, drop me a note with your recollections. If I get enough to make it worthwhile, perhaps I’ll compile them for sharing.)

“What I Did During the War (or What Felt Like One Anway)” or…

“Dr. Strange-Broker or How I Learned to Stop Worrying and Love the Bear” by Rob Fraim

I was 29 years old, 4 years in the business, with two young children. I thought I had investing figured out, didn’t really, and was working for the old Dean Witter (now Morgan Stanley.) The market had been mostly good during my relatively brief time in the business and I had survived the crucial new-guy starvation years and had built up a fairly good book.

So good in fact that I listened to my manager – an advocate it turns out of the “if-you-get-the-brokers-to-really-get-themselves-in-hock-they’ll-be-
forced-to-produce-more-just-to-pay-their-bills” school of thought. (He was also the genius who kept telling us to forget about analyzing stocks ourselves. “Look, we pay those analysts in New York a lot of money to do that. Do you think you know more than those guys? Your job is to sell.” He is no longer in the business, by the way. Last I heard he had left his wife and family and was involved in a relationship with a New Age guru type who had helped him to discover his true “orientation.” He’s raising llamas with this guy and chanting or something. But I digress.”

“You need a new house” he said. “That “piece of#%@ little house of yours isn’t enough. You need to aim higher. Think bigger.” Actually a new house seemed like a pretty good idea, and the kids were getting bigger, and business was good, and hey…what’s a little extra mortgage to a hot-shot like me?

I pasted a picture of a big house on the door of my little office (thanks to the suggestion of my motivational coach in the big office) and embarked on the quest to get me some o’ that.

Before too long I was closing on a house that was twice the size of the old one and came complete with a mortgage that was only 3 times as large. Coolio!

We closed on the house on October 1, 1987.

Oh sure, the market had been a little funky. After peaking in the summer, the market had gone through a pretty good decline – from about 2700 to 2300 or so. In percentage terms, not an insignificant sell-off. But of course it was just: summertime doldrums, a little readjustment, things a little ahead of themselves, no problem, secular bull market, great buying opportunity, hey just look -- now we’re getting a second chance at bargain prices.

And don’t forget: “We’re paying those guys in New York a lot of money.”

On Friday October 16, three of us brokers decided to play hooky and “have meetings scheduled” that afternoon. It was one gorgeous fall day. (By the way, for those of you in other locales – particularly you concrete jungle folks – I heartily recommend my neck of the woods in mid-October. The lower Shenandoah Valley of Virginia – smack in the middle of the Blue Ridge Mountains – is a great place to be when the air turns crisp and the trees put on their autumn show. Drop in sometime. I’ll buy you a beer.)

Making the turn after the 9th hole we stopped in the clubhouse to use the pay phone and call the office (pre-cell phone days you youngsters) and my buddy came back looking a little stunned. “Down 90,” he said. Of course these days 90 points doesn’t mean that much. But down 90 from 2300 was a drop. “It’s over” he went on. “The party’s over.”

The weekend was a little tense, since we knew that Monday would open weak. An understatement as it turned out. The combination of a Treasury Secretary with a big mouth and what was called “portfolio insurance” (which somehow involved the commandeering of the free market system by that crazed computer from “2001 – A Space Odyssey” ) came together in an incredibly imperfect storm.

At some point during the day a strange, battlefield-giddiness sort of took over and we just…all….laughed. It was so surreal that all you could do was just laugh. Mortar shell…giggle…another bomb…chuckle. As the day went on, clients were trying to make moves – a lot of panic selling of course, along with more buying interest than you might imagine. There was one small problem though – the systems just crashed. Market orders, limit orders, stop orders – all in, but no reports.

“Are we filled?”
“Don’t know.”
“Should we re-enter the order?”
“Don’t know – it could have failed and you need to re-enter, or you could be duping a trade.”
“When will we get reports?”
“Any minute now.”

As it turned out it was days later in some cases – and a nonsensical mix of nothing dones, good trades, and fills that were two points or five points away from where you figured they should be. As the day went on and we approached down 500 we were really trying to do some buying. But there was no way to know what, when, if, and at what price trades were filling.

In a strange little wrinkle, I figured out something about the Dean Witter system that day. Back then there was an odd-lot order execution system at Dean Witter. If you put in an order for less than 100 shares close to the limit where it was trading, the system would automatically fill it (internally, not actually on the exchange) and then almost simultaneously fill it on the exchange so that the system was flat on the position. By chance, one of the orders that I put in during the period where executions weren’t being reported was for 70 shares of something or another. Boom. Instant fill. So the next order for 400 shares or whatever it was – went in as 99-99-99-and-3. Boom, boom, boom, boom. I became king of the odd lots for about a day until they wised up and shut the auto-fill system down.

On Monday night, the manager made an evening shift mandatory.

“Call your clients. Tell them what’s going on and what to do.”
“Uhhh….what is going on and what should they do?”
“

…..I don’t know. Tell ‘em to buy or sell something.”

His other fabulous idea was to call lots of people that weren’t clients of the firm and act like we had told everybody to get out before the crash and then talk them into transferring their accounts. Oh he was prince of a guy all right. I hope he and Serge and the llamas are happy.

That was October 19, 1987. I went home late and stared at all of my new walls. I had a lot more of them than just a few weeks earlier. And the first (tripled) mortgage payment was due on November the 1st.

In the days after the October 19 crash things did stabilize a bit – even rallying some. Corporations stepped in with real buybacks (not the maybe-someday ones we see so often now.) The Fed flooded the system with liquidity and somebody unplugged the hell-spawned computers. The trading systems got back to working and we commenced to explaining why market orders (and limits, and stops) never filled – and more importantly we had the opportunity in the cooler non-panic moments to actually make recommendations and help people figure out how to proceed. “And of course you bought everything in sight since it was the buying opportunity of a lifetime, right Grandpa Rob?” Well, yeah, we did some good buying to be sure. But hand-over-fist-with-reckless-abandon-because-we-knew-for-sure? Well, I wish we had been that smart. But by the time the systems came back in full function we had rallied a couple of hundred and it was awfully hard to find anyone who wasn’t warning of the Impending Great Other Shoe. So yes, we bought, and bought strong, but not as much as hindsight would dictate.

And what most people forget is that the market made its low, not on October 19, but a couple of months later in December. It’s always simple looking backwards, but tougher at the time (as it was in the 1989 United Airlines-related mini-crash, the Persian Gulf war, the 1994 baby bear, the Long-Term Capital mess, the Russian crisis, post-9/11, etc. Or today for that matter.

At the risk of being called a Pollyanna or a head-in-the-sand type, here’s an interesting little exercise. (And you folks know me, and you know my reasonably cautious market stance at present. I have a long bias and am fairly constructive on the market, but my present “play some defense” mode is well documented. And I’m old and feeble and decrepit, so I’m not a reckless sort anymore.)

But take a look at this chart. Pick out 1987 -- The Great Crash of our generation. And then 1989 (or 1994 or…)

Oh…you needed some dates (and a microscope) to help you find them?

Kind of interesting to look at things from a longer-term perspective sometimes huh?

Anyway kids, that was a day in the life of Young Rob, semi-new broker in 1987.

How about you? Care to share your Crash Day story? (Use the comments below to post . . .)

I’ve gotta run now. Business is pretty good. And I have a meeting with my real estate agent about this house I’ve got my eye on.

The smart guys in New York say it’s all good. And never forget: we pay them a lot of money.

by Rob Fraim

Rob is a broker and consultant with Mid-Atlantic Securities, Inc. -- serving the investment needs of institutions and high-net worth individual clients nationwide. A 21-year veteran in the investment industry, he lives and works in Roanoke, VA.