Fundamentalism Can’t be all Bad

FundamentalismIn recent years, “fundamentalism” has gotten a bad rap.

Remember the old days? Back when we had TV dials, rotary phones and believed in the fundamentals in every aspect of our lives.

Eh, not so much anymore.

Maybe it’s the perception that fundamentalism is associated with terrorist bombings or perhaps related to abortion clinic shootings, but whatever, fundamentals are not what they used to be. Neither are the funadamentaists.

Fundamentalists, those that purportedly live a life style based on fundamental principles, are very egalitarian, though. Not only do they come in all colors, religions, nationalities and walks of life, but they hate all (other) colors, religions, nationalities and walks of life. To me, that exemplifies a blanket lack of bias.

It used to be that fundamentals were simply the basic building blocks upon which more complex behaviors, decisions and actions were based.

How can I put this?

Eh, not so much anymore.

It’s almost as if they took the “fun” out of fundamental and instead focused on the “mental.”

I have to credit Dennis Kneale for inspiring today’s theme. Before your mind runs away with you, he did so, not because of the “mental” part.

I can’t say with any certainty that I’ve ever gotten any tangible added value from following Dennis Kneale on Twitter or watching his segments on FOX Business or FOX News, but I’ve definitely received the intangible value of thinking, when I’d ordinarily be drooling.

So, while I may not be grateful, those around me probably will pick up my slack and thank Dennis Kneale for removing the topic of fairness in our tax system from our dinner table.

Enough about Dennis Kneale. Read his tweets and watch his segments.

Rhetorical question: What’s so fundamentally changed that a 4% move in Intel’s stock price following release of earnings move doesn’t propel the rest of the market upward?

Unnecessary answer to the rhetorical question? Fundamentals are irrelevant.

Now the fundamentalists pictured above would know just how to light a fire under the market, but that’s a pretty ugly allegory so I’ll avoid drawing it to spare sensitivities.

Clearly, the focus on fundamentals in the stock markets has gone the way of the Yeti, except that fundamentals once did actually exist, although there’s not much of an archeological record of them having survived into this decade.

I did some carbon dating of some old brokerage house statements from the 90’s and there clearly was an over-riding theme of investing on fundamentals.

There was a time when every stock market and investing primer started with concepts like Price – Earnings ratios. Trading volume, new highs and lows. Even such arcane concepts as profits.

These days?

Eh, not so much anymore.

I’m not really certain what’s focused on these days, besides the closing level of the Finnish stock market. This afternoon, I noticed the new top banner on CNBC, at about 2 PM that now gives the closing prices of the many European markets.

I don’t even think that information is fundamental to Finland.

Now, I probably shouldn’t be the one to harp on and bemoan the loss of fundamentals.

After Wednesday’s bell, Riverbed Technolgy reported earnings.

I don’t know what they were, but in the after hours Riverbed went up about 9%.

I’ve owned Riverbed numerous times over the past 3 years and have made lots of money just selling options on those shares.

Lots of money.

In yesteday’s blog “Put a Condom on your Portfolio” I mentioned that sometimes the protection is worth more than the assets. Riverbed is one such example, thankfully.

Occasionally, I’ve also made some capital gains on the shares as they were assigned. That may end up being the case this Friday, as about 30% of those shares may be assigned at $25.

The fact is that I don’t even know what Riverbed Technology does or makes.

That would be pretty fundamental.

But I do know that its price moves alot in both directions. I also know that the premium people are willing to pay to leverage their investment through the purchase of options is fairly rich.

I don’t need to know any more. As long as there’s no white powder obscuring the flashing geen numbers on my screen, I’m good. And truth be known, even if there was a faint hint of said powder, I’m still good.

A big topic of discussion today was on the unsettling effect of ETF’s on the markets and commodities, especially the leveraged ETF’s.

One of my past favorites, which I don’t currently own, is the ProShares VIX Short-Term Futures.

To put it simply, this vehicle represents purchasing a derivative of a derivative, which itself is based on the implied volatility of the markets over 30 days.

Then you can compound it a bit more by selling call options, as I did.

Once you get to that point, it’s actually hard to even remember what it is that you want to occur.

The Volatility Index, or VIX tends to go up when the market goes down. Now once you start selling calls on that, you’re actually hoping that….

Never mind. It’s bad enough that I go through that mental exercise with the ProShares UltraShort Silver ETF.

I don’t exactly know what I want to happen, all I know is that whatever has been happening has been good for me.

Why would you want to regulate that? I like being happy. Before you know it, people other than Ron Paul will be clamoring to regulate sex and drugs.

That may explain why only a single Senator showed up for the ETF hearings scheduled on Wednesday.

No, not because it was “Sex and Drugs Hump Day” on The Hill.

Well, it may also be related to the fact that the other committee members thought that this was just another episode of “To Catch a Predator”.

Say what you will about their sincerity and interests in protecting the investing public, but at least our elected officials are capable of learning from their past mistakes. That, and big posters with a bright red “X” over the face of Chris Hansen are plastered everywhere in the Senate corridors.

I still giggle at the close of each committee session when the disclaimer comes on C-SPAN informing the viewers that “no Pages were abused in the hearings of this committee.”

There was some talk about requiring the same kind of documents as are necessary to open margin accounts or trade options.

But as long as the leveraged ETF’s stay in the 3x range, why do so? Since investing is really a zero sum game, where are the profits of the 1% going to come from if the uninformed and incapable hordes are prevented from losing their way?

I certainly understand why it’s necessary for margin accounts. People do stupid things when they invest money that’s not really their own and it’s amazing how quickly equity erodes. I learned that from Bernie Madoff.

Not directly.

Leverage? You want to talk leverage. Just look at the November 2011 premiums for in the money and near the money options. There’s a 40 to 1 ratio.

2 to 1 and 3 to 1 for ETF’s?

So, I don’t really have a problem with uninformed people purchasing ETF’s. I’m informed, or at least have the potential to be so, and I still don’t know what I’m always purchasing, but I do know enough to change course if things aren’t going according to plan.

Sometimes the fact that an investment opportunity just looks good is good enough as far as full disclosure goes.

But what does rankle me a bit is the behind the scenes rebalancing that takes place, particularly in the leveraged ETF’s that in the long run result in an outcome completely counter-intuitive to rational thought processes.

When you have to explain to someone why their leveraged short Oil ETF fell in value, even while the price of oil did just the opposite over the same haul, there’s a fundamental problem.

Although having the right to make a fool of yourself is fundamental, being made a fool of, is not.


Full Disclaimer: Some Pages (and two illegal immigrant interns) were harmed in the writing of this blog. Details may be found on a future episode of DateLine.

Spoiler Alert: Kneale’s alibi is filled with holes.



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