Investment Philosophy, The Mystery Buyer, Trouble Brewing for Munis, NYS Going Broke, SAC Capital Under the Gun

Every morning my father and I begin the trading session with a review of our investment strategy. We point out pros and cons and attempt to poke holes in theory. We perform this ritual every day, without fail, for the simple reason that when investing in the stock market those who stand still get steam rolled.

Success can have the nasty side effect of creating arrogance and arrogance has no place in the realm of portfolio management. Our hardest (but perhaps most important) job is to spot flaws in our own thinking and react without passion or prejudice.

At the same time, having the courage of one's convictions is the yin to the yang of this self flagellation. You must build an investment strategy over time and have the patience to wait and not be tired of waiting. If you can keep your head when all about you are losing theirs...then "Yours is the Earth and everything that's in it,/And - which is more - you'll be" a successful portfolio manager, my son! Little did Kipling know he was describing auspicious stock market investing.

"IF" you have had enough of philosophy let's get down to business. I have been writing about the rather disturbing trend of low volume rallies and high volume sell-offs in the equity markets. On Oct. 28th I highlighted this negative trend. In this morning's meeting Gary directed my attention to the following story that offers amazing insight into this volume conundrum. As you will see, market manipulation is clearly present. Don't be alarmed by that weird sensation you will feel when you finish reading; it's just your skin crawling, the sensation fades...

WHO IS THE MYSTERY BUYER? By The Pragmatic Capitalist

I don’t know if any characteristic of this massive 6 month rally has been more apparent than the huge futures run-ups we’ve seen at random points during the trading day. Without news, the S&P 500 futures get gunned on huge volume and surge higher. I’ve seen it at least every other day for 6 months. It tends to occur on low volume days such as the one we’re currently experiencing. As you can see in the chart below, the futures are getting gunned on massive volume without any coinciding volume in SPY. This means an institution is jamming the futures higher knowing that they can drive the market higher on no volume. Effectively, they can take out every asking price with a large enough order and immediately create a 0.25% bump in the market in no time. If you’ve been wondering why we’ve seen huge surges on low volume days and conviction high volume selling on down days this explains much of it.

To View Charts discussed above CLICK HERE

So, who is the mystery buyer? We think the answer lies on the 9th floor at 33 Liberty Street.

...The key takeaway from the knowledge revealed above is not to become angry. Fighting against the machine is futile. Instead, the key is to understand the house of cards we are living in and react appropriately when the wind begins to blow.

So far, the weather seems fair with only a slight breeze. However, we hear thunder rumbling in the distance and the winds can pickup quickly. The following are a few stories that show up on our radar and give us pause...

Famed short seller says dump munis - Barron's
James Chanos, the famed short seller who was among the first to foresee the collapse of Enron, recently sounded the alarm on the municipal-bond market -- in the hallowed halls of the New York Historical Society, no less. The "cracking of state and local municipalities is coming," he predicted at a recent meeting attended by Barron's staffer Susan Witty, adding that he wouldn't touch munis. In a subsequent telephone interview with this columnist, Chanos said, "State and local municipal finance are a mess and going to get worse." It's not just the recession, which has reduced tax receipts. Rather, he says the poor economy "is masking real problems in municipal cost structures." The big problem, he says, is "the platinum-plated health-care and retirement benefits" given to state and local workers. "It's all coming home to roost" as boomers start to retire. California faces a $60 billion deficit, and the politicians there believe that in "a worst-case scenario, the federal government will bail them out," says Chanos. "If the feds do bail them out, as I believe they will," the state's bonds will likely lose their federal tax exemption, he adds.

Paterson: NYS Will Be Broke Before Christmas Delivers Scary News To Legislature, Says Only Way To Fix Problem Is To Have Immediate Cuts To Education, Hospitals

...He said if the Legislature doesn't cut the budget now the state could run out of money by next month. "We're going to run out of cash in four and a half weeks. We are going to run out of money. Unless we do something about it, (it will) threaten generations," Paterson said.

...On Oct. 26th I mentioned three developments that could become a problem for the equity markets. Development Three was about hedge fund unwinds that could possibly add instability to the markets as they did in Q4 2008. At the moment, this development is just a rumble, but as the probe widens and further mistrust of the hedge fund industry mounts trouble could ensue...

Hedge-fund giant surfaces in trading probe - WSJ
WSJ reports the widening investigation of insider trading on Wall Street is expected to examine transactions at Steven A. Cohen's SAC Capital Advisors, one of America's largest and most successful hedge funds, according to people familiar with the matter....