Mixed Metaphors

by JDH on June 13, 2009

I knew enough to realize that the alligators were in the swamp and that it was time to circle the wagons.

-Rush Limbaugh

Is there anything more fun than a mixed metaphor? Who doesn’t want to circle the wagons around alligators in a swamp? On Wednesday morning I did my usual Wednesday morning elliptical machine workout, and I watched the Squawk Box crew on CNBC make fun of someone, I can’t remember who, mix the “walk in the park” and “piece of cake” metaphors to create “a walk in the cake.” Yup, that’s messy, and that’s mixing your metaphors.

If you want to amuse yourself this week, keep track of how many mixed metaphors you hear or read. Good sources for mixed metaphors are:

Good luck finding them; it will keep you amused during these dismal economic times. (Post your favourites over on the Buy High Sell Higher Forum; maybe I can write a book about it someday).

The reason for a mixed metaphor, I assume, is because the speaker is mixed up. We try to make sense of two incongruous concepts, and it backfires.

Last week I discussed My Conundrum; how can I reconcile the fact that the S&P 500 is actually up for the year, and yet we have record unemployment, massive levels of personal, corporate and government debt, and a financial system that remains in crisis? For me, there are only two possible explanations:

One explanation is that the recession has ended, and we are now on our way to recovery. The stock market is a leading indicator, so the “smart money” is buying in advance of the upturn that will eventually be obvious to everyone.

The other explanation is that in every depression, in every bear market, there are short term rallies, and that’s what’s happening now. The smart money is driving up prices so that they can liquidate their dogs in advance of the inevitable correction that often happens in the summer.

I have been wrestling with these two competing views for quite some time. Back on April 9 I wrote a long dissertation on cognitive dissonance, which is that uncomfortable feeling caused by attempting to believe and follow two contradictory ideas or cognitions at the same time: the market has rallied huge in the last two months, but over the last two years we are still in a bear market. So which is it: up or down? (You know my thoughts).

Here’s another area where we appear to be out of sync: Here in Canada public companies are moving towards International Financial Reporting Standards (IFRS), as is the rest of the world. The impact: financial statements and disclosure documents will be much longer and more complex. Is this a positive development? In the wake of the Enron scandal and the collapse of our banking system it can be argued that more disclosure and regulation is a necessary development.

But ask yourself this: you own many stocks, so you get many annual and quarterly reports in the mail each year. Do you read them? Cover to cover? Do you read all of the notes to the financial statements? Personally, I have a university degree, an accounting designation, and a bunch of other letters after my name to signify my expertise in all things financial, and I don’t read them. By the time an annual report is issued the information is so outdated that it is virtually worthless.

The conundrum, the cognitive dissonance, the mixed metaphor, comes from the fact that we are piling on the IFRS regulations and increased reporting in a 140 character Twitter world. Do we want more, or do we want our information in quick, immediate, 140 character bursts of information?

I don’t know, but I can only assume that we are entering a period of intense dislocation and change. The forces of more regulation are smashing up against the forces of the 140 character sound bite. The forces of unrestrained free market capitalism are crashing into the power of governments to run a deficit of $2 trillion in a single year to “fix” the economy. We are in the middle of a hurricane, financially and socially speaking.

And being in the middle of a hurricane is not a fun place to be. You may get carried up, or you may get crashed down.

Which is why I have made the decision to remain on the sidelines. On June 4 I covered all of my optionable gold and silver stocks. In the medium term I am a strong believer in gold and silver, so I don’t want to sell everything. But I also know that the summer is a historically poor time for gold and silver stocks, and I fully expect the general stock market to melt down over the next two months as well. So, I covered my bets by selling June calls against the stocks I own.

For example, on June 4 I sold June 21 calls against K.TO – Kinross Gold Corp. I took in a premium of $1.30. If Kinross closes above $21 on June 19 (the third Friday of the month), I will be required to sell my shares for $21, which is roughly what they were trading for on June 4 when I covered. If the shares are worth less than $21 the options expire worthless, and I keep the $1.30, which helps mitigate my loss.

Since June 4 Kinross has fallen over 7%, and closed on Friday at $19.68; if there is no upswing this week, I pocket the premium, and I still own the stock. If it recovers to $22 I sell the stock for $21, but I keep the $1.30, so in effect I sold the stock for $22.30, so I’m still happy. I only “lose” if the stock is over $22.30 on Friday, in which case it was a mistake to cover, since I gave up some profits.

Some may argue that if I was expecting weakness I should have sold the stock outright, and/or purchased some puts. That’s true, but I don’t know for sure that the stock will go down, and it would be silly to be betting against gold in a potentially hyper inflationary environment. Expecting a slight correction over a two week period is a relatively safe bet; going short is an entirely different matter.

I’ll report next week on how it all worked out, but as long as we remain stuck “between a rock and a hard place” I will stay on the sidelines, cover my bets, and hold cash. You can make your own decisions, and of course post your own thoughts and mixed metaphors over on the Buy High Sell Higher Forum. See you next week.