Of course, other PIIGS (Portugal, Ireland, Italy, Greece, Spain) should soon be observed approaching the EU with hat in hand.
I'm adding to my short position around these levels as indexes approach resistance.
position in SPX
Wednesday, June 29, 2011
Greece Bailout
Greece is now set to receive a new tranche of bailout funds. More money being passed to a broke country in order to stave off default... Stocks have been lifting on the news.
Of course, other PIIGS (Portugal, Ireland, Italy, Greece, Spain) should soon be observed approaching the EU with hat in hand.
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I'm adding to my short position around these levels as indexes approach resistance.
position in SPX
Of course, other PIIGS (Portugal, Ireland, Italy, Greece, Spain) should soon be observed approaching the EU with hat in hand.
I'm adding to my short position around these levels as indexes approach resistance.
position in SPX
Questioning the Usefulness of GDP Measures
Most of us have come to accept the validity of GDP as a given. This article questions the usefulness of national output measures.
Arguments against GDP are not new. As the author notes, Mises was on the case years ago. GDP is hardly a measure of 'economic health' as many believe. One need only look at the components of GDP to understand why:
GDP = C + I + G + (X - M)
C = private consumption
I = gross private investment
G = government spending
X = exports
M = imports
As measured, GDP is largely a measure of consumption. In the spirit of 'what gets measured gets managed,' policymakers will likely intervene in markets in order to goose the numbers in their favor.
Interestingly enough, as noted by the author, GDP measurement didn't come about until the 1930s, when New Deal bureaucrats sought a measurement on which they could focus the public's attention on the need for planning to maintain national economic health.
A better argument can be made that long term economic health depends on savings and capital accumulation. Focus on a consumption oriented measure of national output like the one above is more likely to result in capital consumption in order to 'make the number.'
The decline in savings and rise of debt suggest that this is precisely what is going on.
Arguments against GDP are not new. As the author notes, Mises was on the case years ago. GDP is hardly a measure of 'economic health' as many believe. One need only look at the components of GDP to understand why:
GDP = C + I + G + (X - M)
C = private consumption
I = gross private investment
G = government spending
X = exports
M = imports
As measured, GDP is largely a measure of consumption. In the spirit of 'what gets measured gets managed,' policymakers will likely intervene in markets in order to goose the numbers in their favor.
Interestingly enough, as noted by the author, GDP measurement didn't come about until the 1930s, when New Deal bureaucrats sought a measurement on which they could focus the public's attention on the need for planning to maintain national economic health.
A better argument can be made that long term economic health depends on savings and capital accumulation. Focus on a consumption oriented measure of national output like the one above is more likely to result in capital consumption in order to 'make the number.'
The decline in savings and rise of debt suggest that this is precisely what is going on.
Friday, June 24, 2011
The Correlation of Contagion
Interesting discussion by Conor Sen on the set-up for a EU-based contagion now vs the housing/credit market contagion we experienced in 2008.
An important difference, he notes, is that in 2008 there was leverage across the board. Debt was piled high on consumer, corporate, and government balance sheets. He suggest that since then, corporate balance sheets have improved dramatically making them more capable of withstanding a credit event.
He does not discuss the changes in consumer and government balance sheets. Consumer balanced sheets have improved marginally as individuals begin to save and pay down debt. But governments have levered up as risk has shifted from private to public hands over the past few years. Systemic leverage has gone up.
The similarities between then and now include the persistent run-up in risk spreads despite interventionary efforts to put down problems. For example, sovereign yields of Greek, Spanish, and Italian sovereign bonds have been rising over the past year or so in the face of ECB interventions. Similar to 2008, Conor notes, stock markets have been basically chugging higher, basically ignoring problems in the credit markets.
The other similarity is interlinked and leveraged exposure to smoldering credit problems. Some institutions are long sovereign debt while others are short sovereign credit default swaps in a complex, levered manner that is difficult to figure out. The exposure reaches the US, including risk to cash assets. Approximately 40% of domestic prime money market funds are parked in unsecured European bank debt.
You would think domestic institutions would have sold off their Euro exposure by now in order to manage risk. Well, it so happens that in 2008-2009 we changed the accounting rules so that institutions could mark distressed securities as 'held to maturity' rather than having to market them to market in the 'assets for sale' category. Marking them to market would have meant lower values. When you're highly leveraged as banks are, lower values to balance sheet assets drive you toward insolvency. By designating securities as 'held to maturity,' institutions only need to recognize losses if cash flow issues drive them to sell.
It was this fun with numbers, extend-and-pretend approach that helped stave off a more severe decline two years ago. Consequences of that manipulation may now be coming home to roost, however.
Should an institution elect to sell 'held to maturity' securities before they mature, the accounting rules require that other assets in the 'held to maturity' category must be moved back to the 'held for sale' bucket, meaning that they must be marked to market once again.
Because marking them to market would require significant write-downs and threaten solvency, Conor suggests that institutions are 'not going to sell sovereign debt until they can't.' (nicely put) The important consequence of this is that banks seeking to reduce risk will instead sell correlated assets. This means that they might sell anything from corporate bonds to stocks in order to avoid a margin call or outright failure.
This is what a 'contagion' is about. Investors selling anything that isn't nailed down in order to stay solvent. Contagions cannot occur without leverage, or debt. The more debt that's in the system, the higher the chance that a deleveraging contagion will occur at some point.
As we noted above, while debt has been shifted around, the overall systemic leverage is high. The potential for contagion, thus, is also high.
position in SPX
Wednesday, June 22, 2011
Fudging the CPI Numbers
As part of the federal budget talks, there is a proposal on the table to alter the way that the consumer price index (CPI) is calculated. Essentially, the proposed method would try to take into account the fact that consumers often trade down (e.g., go from steak to hamburger) when prices rise.
If passed, the alteration would make the 'headline' inflation number smaller.
Why is this on the table as part of the budget debate? Because a smaller inflation number would lower federal payouts (such as social security) that include cost of living adjustments. Viola! An instant $200 billion in budget savings.
This would not be the first time that the CPI has been dumbed down. There have been multiple changes to the methodology over the past couple of decades. The weird (criminal?) thing is that when the goverment changes the method, they do not go back and alter the historical series. Those looking at historical CPI data are not comparing apples to apples (the same is true for unemployment, GDP, and other measures). If we were measuring the CPI the same way as in 1980, the headline inflation number would be nearly triple the currently reported level.
How such a practice is viewed as legitimate and is tolerated is beyond me. If I had tried to manage measurement systems like this during my industry days, then I would surely have been fired.
Make sure you understand the dynamic here. The federal government is printing money, which undermines the value of the dollar. Government officials are then supressing the metric that is supposed to reflect the dollar's value, effectively under-reporting reporting the inflationary consequences of their activities.
If passed, the alteration would make the 'headline' inflation number smaller.
Why is this on the table as part of the budget debate? Because a smaller inflation number would lower federal payouts (such as social security) that include cost of living adjustments. Viola! An instant $200 billion in budget savings.
This would not be the first time that the CPI has been dumbed down. There have been multiple changes to the methodology over the past couple of decades. The weird (criminal?) thing is that when the goverment changes the method, they do not go back and alter the historical series. Those looking at historical CPI data are not comparing apples to apples (the same is true for unemployment, GDP, and other measures). If we were measuring the CPI the same way as in 1980, the headline inflation number would be nearly triple the currently reported level.
How such a practice is viewed as legitimate and is tolerated is beyond me. If I had tried to manage measurement systems like this during my industry days, then I would surely have been fired.
Make sure you understand the dynamic here. The federal government is printing money, which undermines the value of the dollar. Government officials are then supressing the metric that is supposed to reflect the dollar's value, effectively under-reporting reporting the inflationary consequences of their activities.
Tuesday, June 21, 2011
US Money Market Exposure in Europe
Learned via Bill Fleckenstein today that Jim Grant, in his most recent newsletter, has observed that US money market funds have substantial fractions of their assets invested in European bank debt. Many money fund managers have been extending themselves abroad in search of yield, given the Fed's suppression of short rates to essentially zero.
The five largest domestic money market funds (three at Fidelity, one at Vanguard, one at Blackrock) with about $400 billion under management have about 45% of their assets in Euro bank paper.
If a credit crisis commences in Europe on the back of sovereign debt probs, then the spectre is raised that collapsing Euro bank paper could pressure net asset values of US money market funds to the point where they could 'break the buck' (fall below the $1 unit value). This occured to a small degree two years ago here in the US.
The implication is that US investors should make sure that they understand the nature of their cash holdings. Some funds may be FDIC insured. Current insurance amount, which was raised during the recent credit crisis, is $250,000 per depositor per insured bank.
For cash holdings that exceed the insurance limit or that are not covered, then the strategy should be locating the safest principal preserving vehicle possible. For those who are capable, this might mean parking cash in 1 to 3 month T-bills. They yield next to nothing but likely reflect the surest bet on preservation of principal.
Some believe that the US government would intervene should US money market funds begin to feel stress. Based on history, that may be a good bet. It is also one of the reasons why moral hazard is so high among bank depositors. As a class, depositors are largely clueless of the issues discussed here since they figure that the government has their back.
The five largest domestic money market funds (three at Fidelity, one at Vanguard, one at Blackrock) with about $400 billion under management have about 45% of their assets in Euro bank paper.
If a credit crisis commences in Europe on the back of sovereign debt probs, then the spectre is raised that collapsing Euro bank paper could pressure net asset values of US money market funds to the point where they could 'break the buck' (fall below the $1 unit value). This occured to a small degree two years ago here in the US.
The implication is that US investors should make sure that they understand the nature of their cash holdings. Some funds may be FDIC insured. Current insurance amount, which was raised during the recent credit crisis, is $250,000 per depositor per insured bank.
For cash holdings that exceed the insurance limit or that are not covered, then the strategy should be locating the safest principal preserving vehicle possible. For those who are capable, this might mean parking cash in 1 to 3 month T-bills. They yield next to nothing but likely reflect the surest bet on preservation of principal.
Some believe that the US government would intervene should US money market funds begin to feel stress. Based on history, that may be a good bet. It is also one of the reasons why moral hazard is so high among bank depositors. As a class, depositors are largely clueless of the issues discussed here since they figure that the government has their back.
Thursday, June 16, 2011
Election Cycle Analog
In the summer of 2007, stock markets showed early warning signs that something was going on in the credit markets. Led by the banks, we had a few big down days in July/Aug.
I happened to be in NYC at the time and recall that, while there was some palpable concern among traders, many viewed the bearish action as a minor, necessary correction to relieve overbought conditions in what had been a strong multi-year uptrend. A stroll thru Midtown certainly did not suggest that luxurious lifestyles had taken much of a hit yet. Excess was still visible everywhere.
One rationale offered by the bulls was that it was the year before an election year, and that the Bush/GOP political machine would pull out all stops to keep markets from falling. After the summer swoon, markets indeed reversed higher. In fact, the S&P 500 (SPX) notched a marginal all time high in early fall.
After that, however, things came unglued. For most of the following 18 months, stocks cratered alongside the credit markets, lopping more than 50% off the value of the SPX.
It is safe to say that maneuvers employed by politicians to keep things 'contained' (and they used that word alot) were not very effective.
So here we are four years later. Markets softened back in March and then ralled to marginal highs for the move off the early 2009 lows. Prices have given back more than 7%. From a macro standpoint, we have the end of QE2, data suggesting a softening domestic economy, a sovereign debt crisis in Europe, and stress cracks in the Chinese machine. As a whole, this constitutes a big stinking mass of bear fodder that could/should propel markets much lower.
Yet, similar to four years ago, many have been trotting out the year-before-the-election-year rationale once again. Obama can see his poll numbers sliding w/ the weaking economic picture, the thinking goes. He and his political machine will therefore pull out all stops to keep things afloat into next year's election.
I have no doubt that many political stops will be pulled--some perhaps more extreme than we've seen already (and that's saying something). Whether those stops will 'stop' the bleeding is another question entirely, as our analog four years ago suggests.
Can't shake the sense that all the king's horses and all the king's men will once again prove ineffective in parrying the corrective forces of markets seeking balance.
position in SPX
I happened to be in NYC at the time and recall that, while there was some palpable concern among traders, many viewed the bearish action as a minor, necessary correction to relieve overbought conditions in what had been a strong multi-year uptrend. A stroll thru Midtown certainly did not suggest that luxurious lifestyles had taken much of a hit yet. Excess was still visible everywhere.
One rationale offered by the bulls was that it was the year before an election year, and that the Bush/GOP political machine would pull out all stops to keep markets from falling. After the summer swoon, markets indeed reversed higher. In fact, the S&P 500 (SPX) notched a marginal all time high in early fall.
After that, however, things came unglued. For most of the following 18 months, stocks cratered alongside the credit markets, lopping more than 50% off the value of the SPX.
It is safe to say that maneuvers employed by politicians to keep things 'contained' (and they used that word alot) were not very effective.
So here we are four years later. Markets softened back in March and then ralled to marginal highs for the move off the early 2009 lows. Prices have given back more than 7%. From a macro standpoint, we have the end of QE2, data suggesting a softening domestic economy, a sovereign debt crisis in Europe, and stress cracks in the Chinese machine. As a whole, this constitutes a big stinking mass of bear fodder that could/should propel markets much lower.
Yet, similar to four years ago, many have been trotting out the year-before-the-election-year rationale once again. Obama can see his poll numbers sliding w/ the weaking economic picture, the thinking goes. He and his political machine will therefore pull out all stops to keep things afloat into next year's election.
I have no doubt that many political stops will be pulled--some perhaps more extreme than we've seen already (and that's saying something). Whether those stops will 'stop' the bleeding is another question entirely, as our analog four years ago suggests.
Can't shake the sense that all the king's horses and all the king's men will once again prove ineffective in parrying the corrective forces of markets seeking balance.
position in SPX
Wednesday, June 15, 2011
The Default Option
When you have borrowed more than your income will allow you to comfortably pay back, you face three choices. One is to borrow even more, assuming that creditors are stilling willing to lend to you. A secone choice is to lower your standard of living so that you can allocate more of your income to debt service. The third choice is to default on your loan.
In the first case, you are merely kicking the can down the road while facing larger payback obligations. In the second case, your standard of living falls. In the third case, the creditor's standard of living falls. In all cases, there is likely to be a drag on economic progress. In fact, collective standard of living will probably fall.
These choices now confront much of the world. Greece is a microcosm of the situation. The people of Greece have borrowed extensively to elevate their standard of living far beyond that which income from productive effort would permit. The Greeks want to borrow even more to sustain their condition. Unfortunately, the bond market no longer believes that the Greek condition is indeed sustainable and has effectively shut the country off from further credit.
To frame it in terms that we in the US might currently relate to, Greece would like to 'raise its debt ceiling.' Unfortunately, lenders refuse to offer any more loans.
As such, the first choice elaborated above is unavailable to Greece.
The Greeks do not appear to want to lower their living standards, as demonstrated once again yesterday by yesterday's riots. The second choice therefore seems unlikely either.
Quite appropriately, by default (!) this leaves the third choice: default.
no positions
In the first case, you are merely kicking the can down the road while facing larger payback obligations. In the second case, your standard of living falls. In the third case, the creditor's standard of living falls. In all cases, there is likely to be a drag on economic progress. In fact, collective standard of living will probably fall.
These choices now confront much of the world. Greece is a microcosm of the situation. The people of Greece have borrowed extensively to elevate their standard of living far beyond that which income from productive effort would permit. The Greeks want to borrow even more to sustain their condition. Unfortunately, the bond market no longer believes that the Greek condition is indeed sustainable and has effectively shut the country off from further credit.
To frame it in terms that we in the US might currently relate to, Greece would like to 'raise its debt ceiling.' Unfortunately, lenders refuse to offer any more loans.
As such, the first choice elaborated above is unavailable to Greece.
The Greeks do not appear to want to lower their living standards, as demonstrated once again yesterday by yesterday's riots. The second choice therefore seems unlikely either.
Quite appropriately, by default (!) this leaves the third choice: default.
no positions
Tuesday, June 14, 2011
The Sentiment Cycle
Anyone looking at a chart of stock prices can see that markets move in ebb-and-flow cycle patterns. In fractal-like fashion, cyclical patterns reveals themselves across various time frames--from granular minute-to-minute action to secular decade-long swings.
The nascent field of socionomics equates cycles with changes in 'social mood'--alternating periods of collective optimism and pessimism that cause investors to run with the pack (a.k.a. 'herd behavior').
Here is an interesting diagram that reflects various emotional states as a market cycle progresses. Note that extreme optimism is associated high risk. This is because euphoria has driven investors to bid up prices. At some point, extreme optimism reverses as do prices.
This model suggests that best value is obtained at lows in the sentimental cycle. Extreme pessimism drives investors to sell and to stay away from assets marked way down.
I personally find it useful to overlay these concepts on my fundamental analyses. For example, a question that I've been asking myself over the past couple of weeks is where on the diagram is general stock market sentiment currently?
We entered a bullish uptrend off the March 2009 lows. Since then, markets have been rising on increasing optimism. This has been a strong bull run, with major indexes like the S&P 500 (SPX) up nearly 100% off the lows. Now, however, the uptrend is more than 24 months old and general market valuations are extremely rich. Technically, we're approaching a level (SPX 1250) which, if decisively pierced, would reflect a trend change.
From where I sit, collective sentiment may have topped out at 'Euphoria' at the end of April (approx SPX 1370). Investors are currently at 'Anxiety' after a 7% decline from the highs. If correct, then we have more work to do on the downside. Stages of fear, panic, capitulation (e.g., 'forced selling') lie somewhere ahead. I have been trying to position accordlingly.
I'm not totally pessimistic, however, as some individual names have been beaten down to the point where the negative sentiment coupled with interesting fundamentals suggests value. Cisco Systems (CSCO) is one of those names.
Over the past few months, CSCO has reversed nearly all of its gains off the 2009 lows as recent quarters have fallen short of expectations. Sentiment in this name is horrid, and portfolio managers have been busy unwinding positions in CSCO as prices go down.
Our diagram, of course, suggests that extremely negative sentiment is likely to wring risk out of a security. Pessimism encourages selling over buying. All else equal, the lower the price of a security, the better the value.
I happen to believe that CSCO's competitive advantage is still intact and durable. Using similar reasoning to my entry into this name, I now think I can buy a large multinational company with a durable franchise, strong balance sheet, and $9 billion in free cash flow, that I conservatively value at $90 billion, for a market price of about $60 billion.
The risk, of course, is that the fundamentals of the company have been permanently impaired, and markets are in the process of revaluing the franchise.
Could be, but the current disparity (market says it's worth $60 billion; I think it's worth $90 billion), gives me a decent margin for error in my assessment.
position in CSCO, SPX
The nascent field of socionomics equates cycles with changes in 'social mood'--alternating periods of collective optimism and pessimism that cause investors to run with the pack (a.k.a. 'herd behavior').
Here is an interesting diagram that reflects various emotional states as a market cycle progresses. Note that extreme optimism is associated high risk. This is because euphoria has driven investors to bid up prices. At some point, extreme optimism reverses as do prices.
This model suggests that best value is obtained at lows in the sentimental cycle. Extreme pessimism drives investors to sell and to stay away from assets marked way down.
I personally find it useful to overlay these concepts on my fundamental analyses. For example, a question that I've been asking myself over the past couple of weeks is where on the diagram is general stock market sentiment currently?
We entered a bullish uptrend off the March 2009 lows. Since then, markets have been rising on increasing optimism. This has been a strong bull run, with major indexes like the S&P 500 (SPX) up nearly 100% off the lows. Now, however, the uptrend is more than 24 months old and general market valuations are extremely rich. Technically, we're approaching a level (SPX 1250) which, if decisively pierced, would reflect a trend change.
From where I sit, collective sentiment may have topped out at 'Euphoria' at the end of April (approx SPX 1370). Investors are currently at 'Anxiety' after a 7% decline from the highs. If correct, then we have more work to do on the downside. Stages of fear, panic, capitulation (e.g., 'forced selling') lie somewhere ahead. I have been trying to position accordlingly.
I'm not totally pessimistic, however, as some individual names have been beaten down to the point where the negative sentiment coupled with interesting fundamentals suggests value. Cisco Systems (CSCO) is one of those names.
Over the past few months, CSCO has reversed nearly all of its gains off the 2009 lows as recent quarters have fallen short of expectations. Sentiment in this name is horrid, and portfolio managers have been busy unwinding positions in CSCO as prices go down.
Our diagram, of course, suggests that extremely negative sentiment is likely to wring risk out of a security. Pessimism encourages selling over buying. All else equal, the lower the price of a security, the better the value.
I happen to believe that CSCO's competitive advantage is still intact and durable. Using similar reasoning to my entry into this name, I now think I can buy a large multinational company with a durable franchise, strong balance sheet, and $9 billion in free cash flow, that I conservatively value at $90 billion, for a market price of about $60 billion.
The risk, of course, is that the fundamentals of the company have been permanently impaired, and markets are in the process of revaluing the franchise.
Could be, but the current disparity (market says it's worth $60 billion; I think it's worth $90 billion), gives me a decent margin for error in my assessment.
position in CSCO, SPX
Monday, June 13, 2011
EU Credit Defaults and US Banks
John Mauldin shares analysis suggesting that, while Euro banks stand to lose big time in the event of sovereign debt defaults in the EU, US financial institutions are likely to fare just as poorly. This is because US institutions have been primary sellers of credit default swaps on EU sovereign debt.
Of the approximate $1.2 trillion in sovereign debt issued by Greece, Ireland, and Portugal, US institutions have indirect exposure via CDS of about $120 billion.
Hopefully you can connect the dots. Big EU bond 'restructurings' (a.k.a. defaults). CDS owners files claims w/ US insurers. US insurers lack capital to cover claims. FDIC steps in. US citizens fund another bailout--this one arguably on foreign soil.
position in SPX
Of the approximate $1.2 trillion in sovereign debt issued by Greece, Ireland, and Portugal, US institutions have indirect exposure via CDS of about $120 billion.
Hopefully you can connect the dots. Big EU bond 'restructurings' (a.k.a. defaults). CDS owners files claims w/ US insurers. US insurers lack capital to cover claims. FDIC steps in. US citizens fund another bailout--this one arguably on foreign soil.
position in SPX
Thursday, June 9, 2011
Jim Rogers Checking In
The alway interesting Jim Rogers has been making the rounds recently, here at WSJ and here w/ a raspy Maria. JR has little doubt that the US is headed for crisis much larger than the 2008 edition. His time window for arrival seems to be between 'this fall' and 'the next 5 years.'
He's offsetting his longs in commodities, Chinese stocks, and select currencies (including the USD for a trade) with shorts in emergining markets and US tech.
When speaking w/ Maria, JR also revealed that he's short 'one major American financial company.' When pressed for more details, he admitted that 'it's the bank that hasn't gone down as much as the others.'
Any guesses on which bank he's short? I have mine...
position in commodities, SPX
He's offsetting his longs in commodities, Chinese stocks, and select currencies (including the USD for a trade) with shorts in emergining markets and US tech.
When speaking w/ Maria, JR also revealed that he's short 'one major American financial company.' When pressed for more details, he admitted that 'it's the bank that hasn't gone down as much as the others.'
Any guesses on which bank he's short? I have mine...
position in commodities, SPX
Wednesday, June 8, 2011
Total US Debt Level
The below chart, taken from this article, shows total US debt among select countries. Total debt is broken down into categories of government, non-financial business, households, and financial institutions.
In 2009, total US debt amounted to nearly 3x GDP. Since then, government debt has probably gone up relative to other categories as we increasingly socialize risk.
According to the author, the pink line at 260% represents the all time record for debt repayment, accomplished by England between 1815 and 1900. Can't substantiate the source, but the notion that there is a level of debt that constitutes a point of no return is certainly consistent with the recent work of Reinhart of Rogoff (2009).
The author observes that these debt numbers do not include entitlement liabilities (e.g., Medicare, Social Security). Were these liabilities factored in, then total liabilities to GDP shoots to 6-7x or higher.
References
Reinhart, C.M. & Rogoff, K.W. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
In 2009, total US debt amounted to nearly 3x GDP. Since then, government debt has probably gone up relative to other categories as we increasingly socialize risk.
According to the author, the pink line at 260% represents the all time record for debt repayment, accomplished by England between 1815 and 1900. Can't substantiate the source, but the notion that there is a level of debt that constitutes a point of no return is certainly consistent with the recent work of Reinhart of Rogoff (2009).
The author observes that these debt numbers do not include entitlement liabilities (e.g., Medicare, Social Security). Were these liabilities factored in, then total liabilities to GDP shoots to 6-7x or higher.
References
Reinhart, C.M. & Rogoff, K.W. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
The Fed's Leverage
Since 2007, assets on the Federal Reserve's balance sheet have expanded from $850 billion to $2.8 trillion. At the end of April, the Fed reported assets of $2.695 trillion against capital of $53 billion.
That's a 50:1 leverage ratio. Bears Stearns and Lehman were leveraged about 30x before they imploded.
At 50x leverage, prices need only go against you by 2% before equity is wiped out.
Of course, the Fed does not have to worry about insolvency risk. That risk has been transferred to us.
no positions
That's a 50:1 leverage ratio. Bears Stearns and Lehman were leveraged about 30x before they imploded.
At 50x leverage, prices need only go against you by 2% before equity is wiped out.
Of course, the Fed does not have to worry about insolvency risk. That risk has been transferred to us.
no positions
Monday, June 6, 2011
SPX 1250
A few days back we wondered whether the major indexes might not have a date with the uptrend line off the Spring 2009 lows. For the S&P 500 (SPX), that uptrend line marks at about 1250 currently.
Since then, markets have continued to trade heavy, putting that 1250 level all the more in play.
Shorter term technical analysis provides more suggestive evidence. Multi-month horizontal support highlighted by the lows last March and the 200 day moving average intersect at ~1250.
While many short term indicators suggest an oversold tape, 1250 may be pulling on prices like a magnet.
position in SPX
Since then, markets have continued to trade heavy, putting that 1250 level all the more in play.
Shorter term technical analysis provides more suggestive evidence. Multi-month horizontal support highlighted by the lows last March and the 200 day moving average intersect at ~1250.
While many short term indicators suggest an oversold tape, 1250 may be pulling on prices like a magnet.
position in SPX
Local Farmers Market
For the past couple of years, my neighborhood has sponsored a farmers market on Sundays. This year, the weekly market will be set up in the town square.
Markets are often explained in terms of sellers and buyers. For instance, markets are often defined as places where sellers and buyers come together.
In the farmers market case, the sellers are customarily considered to be the farmers with their produce. The buyers are viewed as the neighborhood folks heading to the square with cash (broadly defined) in hand.
Generally, then, sellers are typically seen as those who bring goods and service to the market; buyers are those who bring the money.
But what exactly is money? It's often defined as a medium of exchange. But corn or apples are also mediums of exchange.
At its essence, money in the form of paper or coins is meant to represent a portion of income from productive effort. One dollar might represent 4 ears of corn from a farmers' production, or a fraction of a customer service representative's phone conversation assisting a client. It is the fungibility of paper or coins money that makes it a desirable proxy for income in social situations.
Typically, then, a farmer is seen as 'selling' 4 ears of corn to the customer service rep, who 'buys' them with a dollar bill. Just as accurately, however, the CSR can be seen as 'selling' the fraction of a service call to the farmer, who 'buys' the call with 4 ears of corn.
Precisely who the seller is and who the buyer seems a subjective matter.
More accurately, then, markets are places of trade or exchange. In market exchanges, people trade portions of their income or (when the paper or coin money used in trade is created by fiat) claims on other people's income.
Viewed thru this lens, sellers and buyers do not populate markets. Traders do.
Markets are often explained in terms of sellers and buyers. For instance, markets are often defined as places where sellers and buyers come together.
In the farmers market case, the sellers are customarily considered to be the farmers with their produce. The buyers are viewed as the neighborhood folks heading to the square with cash (broadly defined) in hand.
Generally, then, sellers are typically seen as those who bring goods and service to the market; buyers are those who bring the money.
But what exactly is money? It's often defined as a medium of exchange. But corn or apples are also mediums of exchange.
At its essence, money in the form of paper or coins is meant to represent a portion of income from productive effort. One dollar might represent 4 ears of corn from a farmers' production, or a fraction of a customer service representative's phone conversation assisting a client. It is the fungibility of paper or coins money that makes it a desirable proxy for income in social situations.
Typically, then, a farmer is seen as 'selling' 4 ears of corn to the customer service rep, who 'buys' them with a dollar bill. Just as accurately, however, the CSR can be seen as 'selling' the fraction of a service call to the farmer, who 'buys' the call with 4 ears of corn.
Precisely who the seller is and who the buyer seems a subjective matter.
More accurately, then, markets are places of trade or exchange. In market exchanges, people trade portions of their income or (when the paper or coin money used in trade is created by fiat) claims on other people's income.
Viewed thru this lens, sellers and buyers do not populate markets. Traders do.
Sunday, June 5, 2011
Follow-up Charts
Last week, durring a summer session of MGT 305, an impromptu extra credit assignment on the definition and causes of market bubbles morphed into an interesting class discussion of our current economic and fiscal situation.
The following charts serve as follow-up to a couple of discussion threads. Notes that all charts show about 20 years of monthly data.
position in oil, gold
The following charts serve as follow-up to a couple of discussion threads. Notes that all charts show about 20 years of monthly data.
position in oil, gold
Saturday, June 4, 2011
Getting Defensive
The last couple of weeks has found me selling strength in pursuit of a more defensive posture. Current asset allocation is:
stocks 18%
fixed income 4%
alternative assets 18%
cash 60%
Alternative assets are composed of 8% commodities and 10% short equity. Because my fixed income is in short duration insured instruments (i.e., 'risk free'), then I estimate my net risk or net market exposure at about 16% (18% stocks + 8% commodities - 10% short equity).
Am increasingly watching the Greece/EU situation with a certain sense of deja vu toward 2007. Massive debt, intertwined banks, and unknown but likely large derivatives exposure. While some markets have been flashing warning signals (e.g., 10 yr Treasury yields, swiss franc), most markets have been trading in a benign state of denial.
From where I sit, probability of a deflationary downdraft is increasing, and the time horizon is dead ahead.
As such, I would like to reduce my net market exposure even more. I might do this by selling strength should stock/equity markets rally further, or by increasing my short position.
stocks 18%
fixed income 4%
alternative assets 18%
cash 60%
Alternative assets are composed of 8% commodities and 10% short equity. Because my fixed income is in short duration insured instruments (i.e., 'risk free'), then I estimate my net risk or net market exposure at about 16% (18% stocks + 8% commodities - 10% short equity).
Am increasingly watching the Greece/EU situation with a certain sense of deja vu toward 2007. Massive debt, intertwined banks, and unknown but likely large derivatives exposure. While some markets have been flashing warning signals (e.g., 10 yr Treasury yields, swiss franc), most markets have been trading in a benign state of denial.
From where I sit, probability of a deflationary downdraft is increasing, and the time horizon is dead ahead.
As such, I would like to reduce my net market exposure even more. I might do this by selling strength should stock/equity markets rally further, or by increasing my short position.
Friday, June 3, 2011
Weak Jobs Number
Big miss in the jobs number this am. And it should be noted that the 54,000 number includes 206,000 estimated jobs created using the 'birth/death' model of the BLS.
Over the past 3 years, government has borrowed and spent $trillions, and printed and spent $trillions more largely in the name of 'creating jobs.' Yet, anemic employment persists despite the federal government's best efforts to paint the data pretty.
Will markets view this job report thru a glass half full or glass half empty lens? The bullish argument is that weak jobs data will require more government intervention (can you say 'QE3'?).
The bearish argument is that a weak employment situation persists in the face of $trillions of government intervention, suggesting that perhaps prolonged economic weakness is unavoidable.
Over the past 3 years, government has borrowed and spent $trillions, and printed and spent $trillions more largely in the name of 'creating jobs.' Yet, anemic employment persists despite the federal government's best efforts to paint the data pretty.
Will markets view this job report thru a glass half full or glass half empty lens? The bullish argument is that weak jobs data will require more government intervention (can you say 'QE3'?).
The bearish argument is that a weak employment situation persists in the face of $trillions of government intervention, suggesting that perhaps prolonged economic weakness is unavoidable.
Wednesday, June 1, 2011
Nasty Head Fake
Yesterday's nice move higher appears to have been a nasty head fake, as domestic equity markets were weak out of the gate today. They steadily ground lower and finished on the lows. The Dow was down about 280, which is the largest single day point drop in some time.
Am starting to wonder whether the major indexes might not have a date with their respective uptrend lines stretching from the Spring 2009 lows.
For the S&P, that would correspond to about SPX 1250 which is also where the 200 day moving average currently resides.
What in the fundamental or macro environment might drive weakness from here? There are many possibilities, cookie. But given how heavy the banks are trading (the BKX was down over 4% today), it 'feels' like markets may be worried about contagion from the ongoing Greece/Spain/etc EU saga.
Over the past couple of weeks, I've been selling strength to get more liquid. Cash level is now at 60%. Wouldn't mind more, as the market action is increasingly taking on a deflationary feel.
position in SH
Am starting to wonder whether the major indexes might not have a date with their respective uptrend lines stretching from the Spring 2009 lows.
For the S&P, that would correspond to about SPX 1250 which is also where the 200 day moving average currently resides.
What in the fundamental or macro environment might drive weakness from here? There are many possibilities, cookie. But given how heavy the banks are trading (the BKX was down over 4% today), it 'feels' like markets may be worried about contagion from the ongoing Greece/Spain/etc EU saga.
Over the past couple of weeks, I've been selling strength to get more liquid. Cash level is now at 60%. Wouldn't mind more, as the market action is increasingly taking on a deflationary feel.
position in SH
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