Thursday, March 31, 2011

Fed Bailout Records Released

Quick news bite in the midst of the RISE conference (which is very cool so far). Under court order, the Federal Reserve released loan records of those banks who tapped the discount window during the credit meltdown. The Fed extended $3.3 trillion (yep) to financial institutions during the crisis.

Those in support of bailout activities argue that releasing such a list will make it harder for the Fed to serve as lender of last resort because banks may be less reluctant to seek emergency loans knowing that their identities will be known. I wouldn't count on it...

Those who believe in transparency of government agencies, of course, believe that such information is owed the public.

position in SPX

Wednesday, March 30, 2011

Strong Trannies

On the verge of breaking down two weeks ago, the Trannies have lifted all the way back to previous highs.


Should the Trannies decisively break thru resistence here, the bulls will collect some Dow Theory love.

position in SPX

Tuesday, March 29, 2011

End of QE2?

The Fed's QE2 program is slated to end in a couple of months. In the past week, various Fed officials have been discussing the program's end--perhaps to 'prepare' the market for the termination of Fed money printing.

One big question is whether the Fed will have the fortitude to end the stimulus program. After all, Fed chairman Ben Bernanke has gone on record that QE2 has helped firm the US economic recovery and lift stock prices (although he denies any culpability with respect to the increse in commodity prices).

Many market participants are wondering whether stock prices can stay elevated without such 'help' by the Fed.

Last week I heard an interesting theory that the Fed will in fact do a QE3 program. But it won't be able to find broad support for it until QE2 ends and stock prices (and perhaps economic activity) come down. If markets tank (as what occured after QE1 and before QE2), then it will become clear to others that another QE program will be necessary to keep economies and markets afloat.

In some other domain, this line of thinking would be considered preposterous. But given the bizaare situations that we've witnessed over the past couple of years, I would not dismiss such a scenario.

Again, the proposed scenario is: QE2 ends --> stock markets decline --> the Fed gets the justification for QE3

Life (or at least life in financial markets) is sometimes stranger than fiction.

position in SH 

Monday, March 28, 2011

EU Debt Problem Revisited

The sovereign debt crisis in the European Union has been taking a back seat to problems in Japan and the Middle East. While attention has been elsewhere, however, sovereign credit spreads in Portugal, Spain, and elsewhere have continued to widen.

Today Ireland said it wants senior bond holders of Irish banks take a hit as part of any debt restructuring plan. Seems reasonable. After all, in an unhampered market, these bondholders would take a hit, up to and including total loss of their investment if Irish banks went bankrupt.

But other EU countries oppose the idea, claiming that smacking bondholders in Ireland might cause a contagion of debt selling in other countries by skittish investors.

Europe faces an intractable problem with 'domino effect' potential. While other issues around the world currently seem more urgent, investors ignore the increasingly volatile situation in the EU at their own peril.

position in SPX

Sunday, March 27, 2011

Monetizing the Debt

Two years ago, politicians and media were quick to recognize the ponzi scheme run by Bernie Madoff at the expense of his investors.

Today, however, a much larger Ponzi scheme is being run by the US government at the expense of US citizens. The US Treasury sells bonds to banks. The banks then turn around and sells those bonds to the Federal Reserve. The Fed buys those bonds w/ freshly printed dollars.

This is sometimes referred to as 'monetizing the debt.' But it is a Ponzi scheme, pure and simple. And this scheme is built with an inflationary engine.

btw, nice work for those banks that serve as middlemen, as they are privy to free money for brokering the pyramid.

You may or may not agree with this policy. But as investors, you need to make sure you understand the financial and economic implications.

no positions

Wednesday, March 23, 2011

Core Positions

The 'core position' concept may be worth considering as we begin building the Haile Fund portfolio. Core positions provide strong exposure to asset classes or sectors being pursued by the investor. Usually, core positions are 'low maintenance' in that they do not require constant review and oversight. As such, time horizons associated with core positions are usually long term in nature.

When putting a portfolio together, I personally like to look for core positions early in the process. This is because core positions can serve to anchor my portolio in the asset classes that I am interested in. Once the portfolio is solidly anchored, then I can pursue other, more specialized (or speculative) positions that help tailor the overall asset class composition toward more specific views.

As an example, I would view the Rogers International Commodity Index fund (RJI) discussed yesterday as a potential core position in commodities because it provides broad, market weighted exposure to the sector. Once I have positioned a broad fund like RJI in my portfolio, then I can look for other, more specialized commodity investments, such as DBA (ags), JJC (copper), or GLD (gold), that better express my preferences toward specific commodities.

In equities, core positions are often reflected by large cap stocks that dominate attractive industries. Due to its size and influence in the tech sector, Apple (AAPL) can be considered a core equity position.

One problem I often encounter with acquiring core positions is that they are often overpriced (from where I sit, anyway). Two strategies that I use to cope with this problem are a) sit on my hands and patiently wait for the security to be put 'on sale' by the market (this happens more often that you might think), or b) take a small position now at the current price with plans to add more shares if/when price goes lower.

Recently, I have employed strategy b) to begin building core equity positions in my personal portolio (I have not owned stocks for quite some time). I have initiated small 'starter' positions in a few large cap tech and healthcare names such as Microsoft (MSFT) and Johnson & Johnson (JNJ). My work suggests that these names offer decent--but not great--value here. These starter positions give me initial exposure, while leaving the door open for using lower price to my advantage to build more meaningful core positions down the road.

Should stocks rip higher from here and never look back, at least I have some core exposure that will allow me to participate.

Anyway, you might find the core position concept useful as you search the investment landscape for ideas.

positions in GLD, JNJ, MSFT, RJI

Weak Economic Indicators

Some measures suggest that current economic recovery is on weak footing. I found the petroleum data particularly interesting.

position in oil

Tuesday, March 22, 2011

Jim Rogers Video Clips

During class we discussed Jim Rogers. I pulled a few snippets from youtube in case you want to get a sense of the guy and how he thinks.

Bloomberg interview on commodities--oil, gold, silver, ags, and offsetting that w/ short exposure. He's also long the US dollar for a trade.

My friend Jeff Macke interviews JR on the Fed and other matters.

Part 1 and Part 2 of CNBC interview Japan disaster and investment.

Last week, Kudlow interviews interesting panel including JR.

There are plenty more if you have interest...

position in commodities

Stock Markets vs Futures Markets

Interesting comparison of stock markets vs futures markets. One thing that seems pretty clear is that advent of commodity ETFs has altered the structure of commodity futures markets.

Monday, March 21, 2011

Dollar Weakness

It's getting close to fish-or-cut-bait time for the US dollar index (USD). The USD has been in a decade long downtrend. (offline, compare the 10 yr USD chart to a chart of gold over the same time period)


On the back of QE2, the USD is once again probing the lows for the move. Near term support resides right around here at about 75ish. Below that rests the 2008 lows at 71-72.

If that support gives way, then it'll be a brave new world...

position in gold

SPX 1300

Interesting battle shaping up here at SPX 1300. The S&P 500 has rallied over 30 handles in three days.


It is now hitting its head against resistance at 1300, which also corresponds to the 50 day MA.

I added some short exposure in here given the tight defined risk parameters. Should the SPX decisively chew thru resistance here and motor higher, then I'll humbly stop this trade out.

position in SPX

Sunday, March 20, 2011

FDIC Rate Page

Need to know current rates on CDs? The Federal Deposit Insurance Corporation (FDIC) reports weekly national averages for rates on money markets, CDs, and other deposit products.

As you can see, yields on deposit products remain low.

position in CDs

Thursday, March 17, 2011

Price to Earnings Ratios

The price to earnings ratio (P/E) is the most common valuation metric applied to stocks. The higher the P/E, the more expensive the stock.

P/E has many shortcomings. The 'E' represents net income as determined by accounting convention. Accounting earnings can be subject to considerable manipulation and often do not reflect the true cash earning power of an enterprise.

Another drawback is that the 'E' typically reflects a 12 month performance window. Company performance is sure to change over time, so basing valuation on a one year time frame can be short cited.

Moreover, Wall Street is notorious for using earnings estimated by analysts for the next 12 months when generating P/Es. Research suggests that analysts are overly optimistic when forecasting the future, meaning that the so called 'forward' P/Es provide an illusion of value that often disappears when P/Es are based on 'trailing' (i.e., trailing 12 month or TTM) performance.

Finally, P/Es often appear most attractive when business cycles have peaked. Cyclical expansions increase earnings. Higher earnings drive P/Es lower, and those lower P/Es can entice investors into thinking that they are buying stocks on the cheap just before cycles turn down. This missive from my friend Vitaliy suggests that we may be facing just such a situation currently.

That said, P/E can still be a useful valuation metric--particularly when employing aggregate P/E measures to assess overall market value. John Hussman is a sharp valuation guy who employs this approach. An example of his work can be found here.

After reading it, answer these questions: Where do we stand currently with respect to overall market P/E compared to history? What is the historical relationship between P/E and future stock returns? What does John Hussman forecast for 10 year market returns given current aggregate market P/E?

position in SPX

Wednesday, March 16, 2011

Yen Carry Trade

Last nite the Bank of Japan (BOJ) continued to pour 'liquidity' into Japanese financial markets. Total money printing over the past three days has been nearly $700 billion worth of yen. That amount exceeds the objective of the Fed's QE2 program.

At first glance, one would expect the yen to be hammered by this massive wave of money printing. However, the yen is actually higher over the past couple of days.


How can this be? Over the past few years people have been borrowing yen from the BOJ at ultra cheap rates and using the proceeds to speculate in stocks, bonds, and other risky projects. This called a carry trade--borrowing at cheap rates and investing in a project with a higher rate of return. The idea is to make money on the spread between the cost of 'carrying' the cheap loan and the return on the risky project.

The risk to carry trades is that either a) borrowing costs rise or b) returns on risky projects decline. When either occurs, carry traders sell their risky projects and seek to buy back currency in order to pay back their loans and reduce leverage.

Right now, investors want out of risky projects that were funded with borrowed yen. They are effectively short the yen, and to cover their short position they need to buy yen, which is putting upward pressure on price due to higher demand.

Once the urge to close out carry trades sets in, herd mentalities of risk aversion can make this behavior persistent.

It should also be mentioned that carry trades funded by US dollars have increased dramatically over the past couple of years as investors have been exploiting ultra cheap rates offered by the Federal Reserve.

no positions

Tuesday, March 15, 2011

Japan's Stock Market Crash

Want to see what a crash looks like? Take a look at the Nikkei (NIKK) in two days.


The NIKK is off 17% since Monday. At one point last nite, NIKK futures were about 25% percent lower.

Domestic markets bounced after opening about 3% lower this morning. Final tally found the S&P 500 down about 1.5%.

Bulls will likely drink this news pretty, and a rally to relieve some pressure may be due. But there may be unfinished business, perhaps a lot of it, to the downside.

In any event, risk management seems the order of the day...

position in SPX

Monday, March 14, 2011

SPX 1225ish

Should the downward move in the S&P 500 (SPX) continue, what does chartgazing suggest about significant support below?


Pulling the time horizon back to a 3-4 year frame, important support appears to rest around SPX 1225 (about 60 pts below current levels). This level reflects the intersection of a horizontal and trendline support dating back to the Spring 2009 lows.

If/when we get there, SPX 1225 may constitute a meaningful battleground between bulls and bears.

position in SPX

Japan Earthquake Effects

Death tolls from last Friday's catastrophic earthquake in northern Japan have now topped 10,000--a number that is almost certain to rise significantly higher. The country is now working to stave off additional disasters at a couple of nuclear power plants that have experienced reactor damage.


Last night the Nikkei sold off more than 6%. The Bank of Japan (BOJ) injected  $200+ billlion billion of 'liquidity' into the financial system in the form of short term money market credit, and asset (bond and ETF) purchases.

In the midst of the BOJ's money printing, the yen actually rallied last nite. As explained here, one reason for this is that there is an immediate need for cash in Japan. People who have have purchases risky assets with yen borrowed at uber cheap BOJ rates (a.k.a. 'the yen carry trade) are now looking buy those yen back to shed risk and whether the economic storm.

Stateside, there has been some fear that Japan might start unwinding its huge stash of US Treasury debt in order to raise more cash. Thus far, the aggressive BOJ monetary actions appears to have stemmed any predilection to liquidate US bonds.

This is a dynamic situation that requires careful watching.

position in TLT

Baltic Dry Index Less Relevant?

Previously we highlighted the Baltic Dry Index (BDI) as a popular indicator of global trade intensity. This missive suggests that the BDI is losing its relevance as an effective indicator.

Not sure I totally buy the argument. For example, the author suggests that changes in the BDI do not correlate well with returns of major cargo carriers. But the author never demonstrates a strong relationship between the BDI and carriers even before the supposed period when the BDI's effectiveness started to wane.

In any event, it's good to keep in mind that some believe that the BDI is becoming a less relevant measure of global trade.

no positions

Sunday, March 13, 2011

SPX Trendline Challenge

It has been said that it's better to draw trend lines with a dull crayon rather than with a sharp pencil, lest one is prone to jump to conclusions about pattern changes.


Such is the current technical state of the S&P 500 (SPX). The uptrend since last March is being challenged. Not decisive enough to confidently conclude that the trend is broken.

But certainly close enough for bulls to be looking over their shoulders.

position in SPX

Thursday, March 10, 2011

EU Debt Spreads

Markets have been largely looking past the increasingly ugly debt situation in Europe. Sovereign spreads continue to widen. Yesterday, Spain got a debt downgrade from Moody's.

Reminiscent of 2007 before the mortgage dominos starting falling...

position in TLT

Tuesday, March 8, 2011

Dollar Index

Since markets began sniffing out QE2 last summer, the US dollar has been declining. The dollar index (USD) has lost about 20% of its value since last June.


The USD is now sitting on support marked by a gentle sloping multi-year uptrend. A bounce around these levels would not be surprising.

position in TLT

Monday, March 7, 2011

Head and Shoulders Patterns

Am seeing more head-and-shoulders patterns (representative one below) than I've seen in a while.


When this pattern becomes apparent across many stocks/sectors, it's often a sign that the tape is changing its tone.

position in SPX

Wednesday, March 2, 2011

Tobin's q

Generally speaking, Tobin's q is the market value of an asset divided by the replacement value of an asset. While the devil can be in the details of accurately determining both the numerator and denominator, hopefully you can see that the higher the value of Tobin's q, the more expensive an asset is.

As such, Tobin's q represents one approach to securities valuation. Tobin's q for the broad stock market appears below.


What do current levels of Tobin's q suggest about the general value of stocks here--cheap, fair value, or expensive?

position in SPX

Trading Crude Oil

FYI, sold a chunk of crude exposure into this morning's spike higher.


Could oil move higher from here? If unrest continues to heat up in the Middle East, the answer is most definitely yes. On the other hand, if peace suddenly breaks out, then crude will likely take a sizeable hit.

If oil does march higher from here, I have some 'secondary' exposure in the form of DBE and RJI that I have 'tagged' w/ longer horizon intentions.

Meanwhile, seemed prudent to reel in a portion of this trade after a gappy 10% move in crude.

position in DBE, RJI

Tuesday, March 1, 2011

Trannies Update

Last month we discussed the importance of the Dow Jones Transportation Index ($TRAN) to what is known as 'Dow Theory.'


Today, the 'Trannies' are trading down. On a weekly chart, the pattern suggests a topping pattern to the index.

Support resides below in the 4800-4900 zone.

position in SPX

Bank Index

The Bank Index (BKX) has retreated back down to near term support at 52ish.


Given the leveraged, financially centric nature of our economic system, the banks often provide a useful 'tell' on general market direction.

The BKX has already broken thru its 50 day moving average. Should the index break decisively thru support, some market participants may regard this as a sign that the tenor of the tape is changing.

position in SPX