Peter Atwater notes the bifurcated nature of the US banking system. Large firms deemed too big to fail have benefitted from govt largesse in the form of bailouts, favorable accounting regs, and uber low interest rates.
Small banks have not been privy to the same special treatment and remain in rough shape following the credit collapse.
Sadly, many of these small firms made prudent decisions ahead of the crisis and were poised to reap a huge windfall when the big firms failed.
It seems that big banks who took too much risk were rewarded, while little banks that were prudent were penalized.
Monday, February 28, 2011
Sunday, February 27, 2011
Buffett's Annual Letter
Each spring, Berkshire Hathaway (BRK.A, BRK.B) chairman and CEO Warren Buffett pens a letter to shareholders. It's been said that reading his archived letters provides more value that obtaining an MBA.
Not sure about that, but I do know that reading Buffett's annual letters always offers some insight--even if I don't always agree with Mr Buffett's point of view.
The most recent 2010 letter, along with previous years' archived letters, can be found here.
no positions
Not sure about that, but I do know that reading Buffett's annual letters always offers some insight--even if I don't always agree with Mr Buffett's point of view.
The most recent 2010 letter, along with previous years' archived letters, can be found here.
no positions
Friday, February 25, 2011
Downtrend in Treasuries
Treasuries have been getting hammered since the Fed commenced QE2 last fall. However, long bonds have been catching a bid over the past week as people reduce equity risk (at least temporarily).
From a technical standpoint, price of Barclay's 20+ Year Treasury ETF (TLT) appears to have cleared the multi-month downtrend (as well as the 50 day moving average). Should prices continue higher, it appears that near term resistance resides a couple of points above--in the 94-95 range.
position in TLT
From a technical standpoint, price of Barclay's 20+ Year Treasury ETF (TLT) appears to have cleared the multi-month downtrend (as well as the 50 day moving average). Should prices continue higher, it appears that near term resistance resides a couple of points above--in the 94-95 range.
position in TLT
Correlation Between Asset Classes
Another picture of the increasing correlation among asset classes. As correlation increases, diversification and risk management become more challenging...
Thursday, February 24, 2011
Chinese Internet Control
Related to our class discussion concerning control of the Internet by China, there are reports that the Chinese government has been blocking Twitter, LinkedIn on fear that these sites could be used as anti-government protest sites.
Nice example of political/country risk...
Nice example of political/country risk...
Wednesday, February 23, 2011
Head and Shoulders Pattern
On the back of our discussion yesterday on copper, I noticed this chart of Southern Copper Corp (SCCO).
The stock seems to be tracing out a textbook head and shoulders pattern (bearish implications). Should SCCO break below support at 40ish, then technically it has 'room' lower to 32ish.
Interesting that various copper miners (see also FCX0 and refiners are trading 'heavy' relative to the underlying commodity.
position in copper
The stock seems to be tracing out a textbook head and shoulders pattern (bearish implications). Should SCCO break below support at 40ish, then technically it has 'room' lower to 32ish.
Interesting that various copper miners (see also FCX0 and refiners are trading 'heavy' relative to the underlying commodity.
position in copper
Sunday, February 20, 2011
Market Cap and Enterprise Value
Last week we discussed the concepts of market capitalization and enterprise value, and how they can be used in valuation methods.
Here's some more on the subject using a pre meltdown example of General Motors (GM) as an example.
no positions
Here's some more on the subject using a pre meltdown example of General Motors (GM) as an example.
no positions
Friday, February 18, 2011
Silver Break Out
Silver broke out yesterday and today displayed pretty follow thru on nice volume.
Former technical resistance now becomes support. Any pullback toward the $30 breakout level is likely to be bought by traders.
position in silver
Former technical resistance now becomes support. Any pullback toward the $30 breakout level is likely to be bought by traders.
position in silver
Thursday, February 17, 2011
Kyle Bass Letter
Kyle Bass is a managing partner at Hayman Capital Management and one of my favorite reads. I found his recent letter to investors very interesting. He hits on some of the more central macro issues around the world.
His final section 'Does Debt Matter?' provides a nice overall view and how he is positioning accordingly.
His final section 'Does Debt Matter?' provides a nice overall view and how he is positioning accordingly.
Wednesday, February 16, 2011
Bearish Macro Analysis Example
Money manager Doug Kass serves up his macro analysis. He appears to be weighting the macro factor highly in terms of its impact on stocks.
You may not agree with it, but 'see it' in the interest of understanding both sides of the trade...
You may not agree with it, but 'see it' in the interest of understanding both sides of the trade...
Single Best ETF?
Is there one best exchange trade fund (ETF) for young investors to own? Here are some thoughts from a few people who think that the answer is 'yes.'
Of course, there are those who think the answer is 'no.' People have different risk profiles and investment goals, for example, that would preclude any vehicle that is appropriate for all investors.
Food for though either way...
Of course, there are those who think the answer is 'no.' People have different risk profiles and investment goals, for example, that would preclude any vehicle that is appropriate for all investors.
Food for though either way...
Tuesday, February 15, 2011
Is Inflation Priced In?
David Rosenberg of Gluskin Sheff thinks that inflation expectations may be pretty well priced in by the markets. He offers some interesting evidence to support his thesis.
As we have noted in class, when consensus builds on a subject that has helped to trend markets, then a trend reversal may be pending...
As we have noted in class, when consensus builds on a subject that has helped to trend markets, then a trend reversal may be pending...
Monday, February 14, 2011
US Consumer Credit Breakdown
Wondering about the composition of consumer debt in the US? The below graph shows a breakdown. Mortgage debt is by far and away the largest.
Many observers like the fact that credit card debt has been ticking higher (squint and you may actually see it!)--which suggest more spending on the horizon.
The other side of the trade is that more consumer credit is the last thing we need given the degree of leverage in the system...
Many observers like the fact that credit card debt has been ticking higher (squint and you may actually see it!)--which suggest more spending on the horizon.
The other side of the trade is that more consumer credit is the last thing we need given the degree of leverage in the system...
Friday, February 11, 2011
Withdrawing Monetary Stimulus
Can the Fed reverse monetary policy fast enough should signs of significant inflation appear? In a recent 60 Minutes interview, Fed chairman Ben Bernanke said that he was '100%' confident of the Fed's ability to withdraw stimulus.
But inflationary signals are already surfacing, and some commentators doubt the Fed's responsiveness based on historical track record.
One thing working against the Fed is the considerable time lag between policy changes and outcomes. In other words, once policymakers recognize the need to reverse course and take corrective action--it may be many months before that corrective action takes effect.
One question market participants must ponder is: Given the size of the stimulus injected into the financial system, how likely is it that central bankers can withdraw the stimulus in time?
But inflationary signals are already surfacing, and some commentators doubt the Fed's responsiveness based on historical track record.
One thing working against the Fed is the considerable time lag between policy changes and outcomes. In other words, once policymakers recognize the need to reverse course and take corrective action--it may be many months before that corrective action takes effect.
One question market participants must ponder is: Given the size of the stimulus injected into the financial system, how likely is it that central bankers can withdraw the stimulus in time?
Thursday, February 10, 2011
Debt Picture
Earlier this week we noted that the Federal Reserve has become the largest holder of US Treasury debt. Here's a picture:
Again, pls make sure you ponder the potential ramifications of a government deeply in debt that is printing money to buy its own debt.
position in Treasuries
Again, pls make sure you ponder the potential ramifications of a government deeply in debt that is printing money to buy its own debt.
position in Treasuries
SPX vs Baltic Dry Index
Speaking of divergences, take a look at this one. A previously strong relationship between the SPX and the Baltic Dry has come apart since late last year.
About the same time the Fed embarked on QE2...
position in SPX
About the same time the Fed embarked on QE2...
position in SPX
Wednesday, February 9, 2011
Dow Theory
One theory that many market participants subscribe to is known as 'Dow Theory.' In its general form, Dow Theory posits that trends in the Dow Jones Industrial Average (DJIA) are healthiest or most valid when they are paralleled by similar behavior in the Dow Jones Transportation Index (TRAN).
The rationale is that strong financial markets are grounded in strong economies, and strong economies require lots of transportation activity to move goods between sellers and buyers.
Currently, the DJIA remains in a very strong uptrend:
Recently, however, the TRAN has not been following along:
Instead, the TRAN has broken thru its uptrend line and is currently showing a wedge (a.k.a. flag or pennant) pattern that is likely to resolve soon.
This constitutes another divergence worthy of half an eye's attention...
The rationale is that strong financial markets are grounded in strong economies, and strong economies require lots of transportation activity to move goods between sellers and buyers.
Currently, the DJIA remains in a very strong uptrend:
Recently, however, the TRAN has not been following along:
Instead, the TRAN has broken thru its uptrend line and is currently showing a wedge (a.k.a. flag or pennant) pattern that is likely to resolve soon.
This constitutes another divergence worthy of half an eye's attention...
Monday, February 7, 2011
Volatility Indexes and Sentiment
The Volatility Index (VIX, VXO) estimates the 'implied volatility' baked into S&P option prices. When market participants sense big pending movements in stock prices, they pay more for options, which sends implied vols higher.
Volatility indexes provide useful gauges of investor sentiment. When markets move higher, investors are often less willing to hedge their long positions with put options (when you buy a put against a long stock position, you are essentially buying insurance to protect your position against a price decline) or to speculate in puts outright. Less demand for options causes implied vols to fall.
Declining vols are commonly associated with conditions of 'complacency' in markets, as investors are less willing to pay for insurance to protect their long positions.
Typically, when market prices decline, investors suddenly wake up to the need for downside protection (or to speculate on lower prices by buying puts outright). The lower prices go, the more investors are willing to pay up for put options, which in turn drives implied vols higher. As such, rising vols commonly reflect 'fear' in markets.
Take a look at the two charts below. First is a chart of the S&P 500 (SPX) over the past five years.
Second is a chart of the VXO over the same time period.
Note the inverse relationship between the SPX and the VXO--particularly during periods where the SPX declined. The VXO hit its zenith during the waterfall decline in stocks in late 2008, early 2009--indicative of major fear in the markets. Note also that this fear was reactive--implied vols didn't spike until after prices began cascading lower.
Since the March 2009 stock market lows, the VXO has been generally grinding lower while the SPX has been grinding higher (interrupted by last spring's 'flash crash' phase). The VXO currently stands at multi-year lows--indicative of significant complacency.
Please note that the VXO is not an effective forecasting tool. For example, just because implied vols are relatively low today does not necessarily mean that a market decline is eminent.
Instead, volitility indices are better regarded as coincident indicators--more reflective of current levels of collective sentiment rather than of future sentiment or its consequences.
Nonetheless, smart market participants keep an eye on volatility indexes in order to gauge sentiment in the here and now.
position in S&P
Volatility indexes provide useful gauges of investor sentiment. When markets move higher, investors are often less willing to hedge their long positions with put options (when you buy a put against a long stock position, you are essentially buying insurance to protect your position against a price decline) or to speculate in puts outright. Less demand for options causes implied vols to fall.
Declining vols are commonly associated with conditions of 'complacency' in markets, as investors are less willing to pay for insurance to protect their long positions.
Typically, when market prices decline, investors suddenly wake up to the need for downside protection (or to speculate on lower prices by buying puts outright). The lower prices go, the more investors are willing to pay up for put options, which in turn drives implied vols higher. As such, rising vols commonly reflect 'fear' in markets.
Take a look at the two charts below. First is a chart of the S&P 500 (SPX) over the past five years.
Note the inverse relationship between the SPX and the VXO--particularly during periods where the SPX declined. The VXO hit its zenith during the waterfall decline in stocks in late 2008, early 2009--indicative of major fear in the markets. Note also that this fear was reactive--implied vols didn't spike until after prices began cascading lower.
Since the March 2009 stock market lows, the VXO has been generally grinding lower while the SPX has been grinding higher (interrupted by last spring's 'flash crash' phase). The VXO currently stands at multi-year lows--indicative of significant complacency.
Please note that the VXO is not an effective forecasting tool. For example, just because implied vols are relatively low today does not necessarily mean that a market decline is eminent.
Instead, volitility indices are better regarded as coincident indicators--more reflective of current levels of collective sentiment rather than of future sentiment or its consequences.
Nonetheless, smart market participants keep an eye on volatility indexes in order to gauge sentiment in the here and now.
position in S&P
New Top Holder of Treasuries
By the end of 2010 China held nearly $1 trillion in US Treasuries--making it the #1 holder of Treasury securities. Suddenly, in early 2011, China has relinquished its title to another entity. Japan? Brazil? Saudi Arabia?
Nope. The Federal Reserve.
The Fed now owns over $1 trillion in Treasuries. Since it began its QE2 program back in October, the Fed has been buying on average $5-10 billion per day via it Permanent Open Market Operations (POMO) program.
Make sure you understand the process at work here. The US Treasury sells Treasury debt. Banks buys the Treasuries using funds borrowed from the Fed. The Fed buys the Treasuries from the banks with money printed out of thin air.
Also make sure you ponder the consequences of this program in lieu of our current market context.
position in TLT
Nope. The Federal Reserve.
The Fed now owns over $1 trillion in Treasuries. Since it began its QE2 program back in October, the Fed has been buying on average $5-10 billion per day via it Permanent Open Market Operations (POMO) program.
Make sure you understand the process at work here. The US Treasury sells Treasury debt. Banks buys the Treasuries using funds borrowed from the Fed. The Fed buys the Treasuries from the banks with money printed out of thin air.
Also make sure you ponder the consequences of this program in lieu of our current market context.
position in TLT
Sunday, February 6, 2011
Time Horizon and Treasury Yield
The 10 year T-note yields (TNX) that we examined a couple weeks back broke above near term resistance last Friday. This break out suggests to many technicians that interest rates may be headed higher. On 10 yr Treasuries, resistance now resides above--perhaps at about 4%.
As noted in class, it often pays to review price action using different time horizons. The chart below shows the TNX using weekly data over the past 6 yrs. Note that a downtrend remains in place, although current yields are right at resistance as reflected by the downtrend line.
The final chart below shows ~ 20 years of monthly TNX data. The picture here suggests that the secular downtrend in 10 yr yields is firmly in place. Technically, this secular trend won't be broken unless/until 10 yr yields rise to nearly 4.5%--almost 100 basis points higher than current levels.
Nice demonstration of how the technical picture can change depending on the time horizon...
In the here and now, investors need to grapple with what rising long bond yields mean. Strengthening economy? Inflation? Increased borrowing costs? Changes to Fed policy?
Judging by recent stock market action, the 'dominant logic' seems to be that the rising interest rate picture is bullish for equities. Perhaps it is. But make sure you see the bearish picture as well, as there are surely two sides to this trade.
position in Treasuries
As noted in class, it often pays to review price action using different time horizons. The chart below shows the TNX using weekly data over the past 6 yrs. Note that a downtrend remains in place, although current yields are right at resistance as reflected by the downtrend line.
The final chart below shows ~ 20 years of monthly TNX data. The picture here suggests that the secular downtrend in 10 yr yields is firmly in place. Technically, this secular trend won't be broken unless/until 10 yr yields rise to nearly 4.5%--almost 100 basis points higher than current levels.
Nice demonstration of how the technical picture can change depending on the time horizon...
In the here and now, investors need to grapple with what rising long bond yields mean. Strengthening economy? Inflation? Increased borrowing costs? Changes to Fed policy?
Judging by recent stock market action, the 'dominant logic' seems to be that the rising interest rate picture is bullish for equities. Perhaps it is. But make sure you see the bearish picture as well, as there are surely two sides to this trade.
position in Treasuries
Thursday, February 3, 2011
Defining Profit
As observed here, there are many possible meanings for 'profit.' The same can be said for 'earnings.'
Imprecise meanings increase potential for misinterpretation. Be careful when processing information about profits and earnings. You and the information provider may not be on the same page...
Imprecise meanings increase potential for misinterpretation. Be careful when processing information about profits and earnings. You and the information provider may not be on the same page...
Wednesday, February 2, 2011
A Primary Macro Issue
Richard Russell writes Dow Theory Letters, the longest running investment newsletter service in existence (he's been at it since the 1950s). I've subscribed to his service in the past and it has helped shape my thought process.
Snippets from RR's nightly missive occasionally appear in the public domain. This one provides a nice example of a 'macro' market issue. In fact, it may be the primary 'macro' issue facing the US (and the world, for that matter): government spending and debt.
Russell suggests that debt levels have risen past the point of no return, and that there is little political will to reverse course. He sees two possible endgames to this situation. One is for the US to default on its debt. Big debt default is akin to deflation. To many, including Russell, this seems unlikely. However, sovereign debt defaults, even among 'leading countries,' have marked world history. Investors, in my view, should not dismiss this scenario entirely because of the potential market consequences should it come to pass.
The other likely scenario suggested by Russell is for the US to debase the currency (i.e., print money) and to pay back debts in depreciated dollars. This, of course, is inflationary. Indeed, one could argue that this strategy is already underway via various Federal Reserve monetary policies. RR thinks that this scenario is far more likely because it is more palatable to politicians and to the public.
You may not agree with RR's thought process. But in the interest of 'seeing all sides of the trade,' prudent risk managers should be factoring such macro scenarios into their spectrums of possibility.
position in TLT
Snippets from RR's nightly missive occasionally appear in the public domain. This one provides a nice example of a 'macro' market issue. In fact, it may be the primary 'macro' issue facing the US (and the world, for that matter): government spending and debt.
Russell suggests that debt levels have risen past the point of no return, and that there is little political will to reverse course. He sees two possible endgames to this situation. One is for the US to default on its debt. Big debt default is akin to deflation. To many, including Russell, this seems unlikely. However, sovereign debt defaults, even among 'leading countries,' have marked world history. Investors, in my view, should not dismiss this scenario entirely because of the potential market consequences should it come to pass.
The other likely scenario suggested by Russell is for the US to debase the currency (i.e., print money) and to pay back debts in depreciated dollars. This, of course, is inflationary. Indeed, one could argue that this strategy is already underway via various Federal Reserve monetary policies. RR thinks that this scenario is far more likely because it is more palatable to politicians and to the public.
You may not agree with RR's thought process. But in the interest of 'seeing all sides of the trade,' prudent risk managers should be factoring such macro scenarios into their spectrums of possibility.
position in TLT
Tuesday, February 1, 2011
Career Risk, Herd Behavior, and Bubbles
Reprint of a recent missive by smart cookie Jeremy Grantham entitled 'Pavlov's Bulls.' Grantham proposes that markets are not efficient in part because of career risk.
Career risk is potential for losing one's job as a money manager--which Grantham proposes is more likely to occur when you perform worse than other money managers. Career risk causes managers to follow the behavior of other money managers in herd-like fashion. Herding leads to excursions away from fair market value in the form of persistent uptrends and downtrends.
Grantham thinks that this mindless herding, when combined with access to easy money/credit, helps explain why financial market bubbles occur. Grantham has obviously studied historical market bubbles extensively, and he shares some of the findings from his studies.
Interesting thought food...
Career risk is potential for losing one's job as a money manager--which Grantham proposes is more likely to occur when you perform worse than other money managers. Career risk causes managers to follow the behavior of other money managers in herd-like fashion. Herding leads to excursions away from fair market value in the form of persistent uptrends and downtrends.
Grantham thinks that this mindless herding, when combined with access to easy money/credit, helps explain why financial market bubbles occur. Grantham has obviously studied historical market bubbles extensively, and he shares some of the findings from his studies.
Interesting thought food...
Subscribe to:
Posts (Atom)