What is Dr Copper telling us right now?
no positions
Wednesday, September 28, 2011
Doctor Copper
Copper is often referred to as 'Dr Copper,' because it is said that the metal has a PhD in economic activity. The metal has so many uses that copper prices are thought to be a valid forecaster of economic strength.
What is Dr Copper telling us right now?
no positions
What is Dr Copper telling us right now?
no positions
Monday, September 26, 2011
New EU Bailout Scheme
The idea de jour in the EU crisis is to have governments borrow money from the ECB to buy assets (such as Greek bonds) from struggling banks. The vehicle for doing this is the EFSF (European Financial Stabilization Facility), which is a special purpose vehicle (SPV) established in 2010 and backed by EU country guarantees. The EFSF provides assistance to eurozone states in financial difficulty. The EFSF would essentially borrow using their country's assets as collateral.
The size of the borrowings necessary? Perhaps $1-2 trillion...
If this sounds like a version of TARP, then you'd be somewhat correct since the focus would be buying 'troubled assets.' In the case of TARP, however, government funds bought troubled assets from private sector banks. Under the latest EU plan, government money would be levered up with ECB money (more government money) to buy bonds from the same governments on the hook for the EFSF and ECB money to begin with.
How long before Mr Ponzi enters this discussion?
The only way such a program could be marginally effective is if Germany and France absorb an outsized share of the risk--well beyond what they have currently committed to contribute.
Which brings us back to the conclusion we've been reaching for months (here, here). Should Germany decide not to participate, then it all crumbles, cookie.
For today, anyway, markets were willing to look at the glass half full side of the story, with domestic markets up a couple of percent or so on the prospect of a $trillion EU bail out.
position in SPX
The size of the borrowings necessary? Perhaps $1-2 trillion...
If this sounds like a version of TARP, then you'd be somewhat correct since the focus would be buying 'troubled assets.' In the case of TARP, however, government funds bought troubled assets from private sector banks. Under the latest EU plan, government money would be levered up with ECB money (more government money) to buy bonds from the same governments on the hook for the EFSF and ECB money to begin with.
How long before Mr Ponzi enters this discussion?
The only way such a program could be marginally effective is if Germany and France absorb an outsized share of the risk--well beyond what they have currently committed to contribute.
Which brings us back to the conclusion we've been reaching for months (here, here). Should Germany decide not to participate, then it all crumbles, cookie.
For today, anyway, markets were willing to look at the glass half full side of the story, with domestic markets up a couple of percent or so on the prospect of a $trillion EU bail out.
position in SPX
Sunday, September 25, 2011
Long Bond Yields at All Time Lows
Below is monthly chart of the yield on a ten year Treasury note over the past 20 years. Earlier this month 10 yr yields dropped below 2% for the first time ever.
After the Fed announced Operation Twist this past wk, yields broke lower yet again. They now reside at about 1.8%.
The Fed is trying to buoy economic activity thru borrowing--particularly w.r.t. housing. But anyone with a pulse recognizes that interest rates, which have been at generational lows for months, do not constitute a binding constraint on economic activity here. Economies around the world are already choking on debt and have little appetite for more. The Fed is thus pushing on a string.
Two groups are especially hurt by Fed policy here. Retired people and other savers are having trouble making ends meet as it is becoming impossible to make ends meet by making 1-2% off modest principal. Savings are being gutted by Fed policy. Moreover, low returns on savings are nudging more people into risky assets such as dividend-paying stocks.
Keep in mind that, over time, savings are the driver of higher standard of living as resources set aside are invested in productivity-enhancing technologies.
Pension funds are also significantly impacted by long bond rates. Pensions funds are built on bond portfolios, and these portfolios are returning less and less. Lower bond yields increase pension fund assumptions about future liabilities, thereby creating funding gaps. To close these gaps, pension fund managers can take more risk increasing their allocation towards stocks, or, in the case of corporate pension funds, have the corporate parents write checks out of retained earnings to fund the shortfall. Those checks in turn reduce earnings...
By discouraging saving and encouraging risk taking, current Fed policy serves as a major drag on standard of living.
position in SPX
After the Fed announced Operation Twist this past wk, yields broke lower yet again. They now reside at about 1.8%.
The Fed is trying to buoy economic activity thru borrowing--particularly w.r.t. housing. But anyone with a pulse recognizes that interest rates, which have been at generational lows for months, do not constitute a binding constraint on economic activity here. Economies around the world are already choking on debt and have little appetite for more. The Fed is thus pushing on a string.
Two groups are especially hurt by Fed policy here. Retired people and other savers are having trouble making ends meet as it is becoming impossible to make ends meet by making 1-2% off modest principal. Savings are being gutted by Fed policy. Moreover, low returns on savings are nudging more people into risky assets such as dividend-paying stocks.
Keep in mind that, over time, savings are the driver of higher standard of living as resources set aside are invested in productivity-enhancing technologies.
Pension funds are also significantly impacted by long bond rates. Pensions funds are built on bond portfolios, and these portfolios are returning less and less. Lower bond yields increase pension fund assumptions about future liabilities, thereby creating funding gaps. To close these gaps, pension fund managers can take more risk increasing their allocation towards stocks, or, in the case of corporate pension funds, have the corporate parents write checks out of retained earnings to fund the shortfall. Those checks in turn reduce earnings...
By discouraging saving and encouraging risk taking, current Fed policy serves as a major drag on standard of living.
position in SPX
Friday, September 23, 2011
Precious Metals Slammed
Precious metals getting smelted today with gold down almost $90 and silver off by nearly 15% (!). Obviously my small venture into SLV yesterday wasn't the best of timing...
Support for GLD looks to correspond to the multi-year uptrend line which corresponds to 152ish.
SLV looks to have support right around here at 30, although it doesn't feel very strong. Stronger support may reside below at 25-26ish.
Have taken 'placeholder' positions in both metals and will be a better buyer lower.
positions in GLD, SLV
Support for GLD looks to correspond to the multi-year uptrend line which corresponds to 152ish.
SLV looks to have support right around here at 30, although it doesn't feel very strong. Stronger support may reside below at 25-26ish.
Have taken 'placeholder' positions in both metals and will be a better buyer lower.
positions in GLD, SLV
Thursday, September 22, 2011
SPX 1120
Domestic equities gapped about 3% lower after dismal overseas response to yesterday's FOMC announcement (plus continued deterioration in Europe).
They 'felt' lower in early morning trading as well. Early afternoon saw the SPX toying w/ the Aug closing low of 1120. This was the battleground for the remainder of the day.
I covered 20% of my short position during the probes of 1120. I intended to cover more if sell stops were tagged and sucked the index lower but that didn't happen.
I also bought a little SLV as silver was tagged for nearly 10%.
Stochastics suggest that the SPX is not all that oversold--unlike previous visits to 1120. Thus, there may be more downside 'energy' for piercing support. Classic technical analysis says the more times support is tested the weaker it gets. And today's back and forth around 1120 likely chewed through a few layers of latent demand.
Futes are up a few after hours, but would think that we see a probe lower in the near future.
position in SPX, SLV
They 'felt' lower in early morning trading as well. Early afternoon saw the SPX toying w/ the Aug closing low of 1120. This was the battleground for the remainder of the day.
I covered 20% of my short position during the probes of 1120. I intended to cover more if sell stops were tagged and sucked the index lower but that didn't happen.
I also bought a little SLV as silver was tagged for nearly 10%.
Stochastics suggest that the SPX is not all that oversold--unlike previous visits to 1120. Thus, there may be more downside 'energy' for piercing support. Classic technical analysis says the more times support is tested the weaker it gets. And today's back and forth around 1120 likely chewed through a few layers of latent demand.
Futes are up a few after hours, but would think that we see a probe lower in the near future.
position in SPX, SLV
Wednesday, September 21, 2011
FOMC Selloff
Looks like the FOMC statement did not contain enough goodies for the addicts, and markets subsequently drained. SPX was down about 3%, with things really letting go in the last half hour.
While we're still some distance from the August lows in the SPX, other 'tells' hint that a date with those lows may be coming.
The Trannies, for example, were splattered for more than 5% today and are now within spitting distances of their recent lows.
Will be interesting to see how overnight markets, particularly Europe, greet the FOMC decision.
position in SPX
While we're still some distance from the August lows in the SPX, other 'tells' hint that a date with those lows may be coming.
The Trannies, for example, were splattered for more than 5% today and are now within spitting distances of their recent lows.
Will be interesting to see how overnight markets, particularly Europe, greet the FOMC decision.
position in SPX
Tuesday, September 20, 2011
Fully Hedged
As a result of today's MSFT sale, I am pretty much flat risky assets on a net basis. Long positions in Cisco (CSCO) and ag commodities (RJA) are offset by a short position in SPX (SH).
A fully hedged position feels good ahead of the Fed's special two day soiree which is setting up as a binary event.
If the Fed injects another round of drugs and markets trip higher, then I hope to unload some of my CSCO exposure. If the Fed takes the narcotics away and markets head into withdrawal, then I might trim my short book. Either way, chances are that my risk will be pretty manageable.
My sense is that the Fed may in fact do nothing--with the justification that it is already propping up Euro banks. Why nothing from a central bank that loves to meddle? It is becoming politically less palatable to engage in interventionary behavior. Plus, the marginal bang for each interventionary buck is approaching the zero bound.
If the Fed does indeed stand pat, then domestic markets will likely fall thru the floor.
position in CSCO, RJA, SH
A fully hedged position feels good ahead of the Fed's special two day soiree which is setting up as a binary event.
If the Fed injects another round of drugs and markets trip higher, then I hope to unload some of my CSCO exposure. If the Fed takes the narcotics away and markets head into withdrawal, then I might trim my short book. Either way, chances are that my risk will be pretty manageable.
My sense is that the Fed may in fact do nothing--with the justification that it is already propping up Euro banks. Why nothing from a central bank that loves to meddle? It is becoming politically less palatable to engage in interventionary behavior. Plus, the marginal bang for each interventionary buck is approaching the zero bound.
If the Fed does indeed stand pat, then domestic markets will likely fall thru the floor.
position in CSCO, RJA, SH
Sold MSFT Position
Unloaded my Microsoft (MSFT) position into this morning's lift. This position was built ahead of the signing of the debt deal. MSFT was trading well in a drekky tape and the thesis was that any relief rally would find MSFT leading the way higher.
Instead, the debt deal was met with a nasty sell off, and renewed probs in the EU opened the trap doors. MSFT went down the drain w/ the tape. Important lesson: a stock can trade great...until it doesn't...
After lugging this position thru the morass of the past two months, I feel fortunate to have salvaged a profitable shekel or two on the trade.
MSFT is now back up to where is was before the collapse. Can it go higher? Fer shure, dude. But resistance looms directly above, and to me there's more downside than upside in the name.
Although I became bullish on MSFT on a valuation basis early in the year, I have revised my view given the darkening macro context. That context has me thinking that MSFT is no great value here, since a slower economy may drag cash flows significantly lower.
MSFT's current enterprise value is about $190 billion. My interest will be rekindled if EV reaches gets down to the $120-130 zone, or 1/3 off the current price.
no positions
Instead, the debt deal was met with a nasty sell off, and renewed probs in the EU opened the trap doors. MSFT went down the drain w/ the tape. Important lesson: a stock can trade great...until it doesn't...
After lugging this position thru the morass of the past two months, I feel fortunate to have salvaged a profitable shekel or two on the trade.
MSFT is now back up to where is was before the collapse. Can it go higher? Fer shure, dude. But resistance looms directly above, and to me there's more downside than upside in the name.
Although I became bullish on MSFT on a valuation basis early in the year, I have revised my view given the darkening macro context. That context has me thinking that MSFT is no great value here, since a slower economy may drag cash flows significantly lower.
MSFT's current enterprise value is about $190 billion. My interest will be rekindled if EV reaches gets down to the $120-130 zone, or 1/3 off the current price.
no positions
Monday, September 19, 2011
Venezuela Siezes Gold Mining Companies
Venzuela is nationalizing its gold industry. This is one of the big risks with owning natural resource companies in general and precious metals miners in particular.
Political risk looms large in this sector.
On the other hand, the physical commodity itself does not carry political risk--at least of the kind that amounts to expropriation of producer property.
position in gold
Political risk looms large in this sector.
On the other hand, the physical commodity itself does not carry political risk--at least of the kind that amounts to expropriation of producer property.
position in gold
Thumbs Down Vote in Germany
Over the weekend,German Chancellor Angela Merkel's party was defeated in a Berlin state election. The defeat casts doubt on continued German support of EU bailouts.
Germany is the 'have' while nearly all of the the other EU countries are 'have nots.' The multi-trillion dollar question is whether the haves are willing to bail out those who have acted imprudently.
These election results suggest that the answer to that question is 'no.'
Markets are off sigificantly this am.
position in SPX
Germany is the 'have' while nearly all of the the other EU countries are 'have nots.' The multi-trillion dollar question is whether the haves are willing to bail out those who have acted imprudently.
These election results suggest that the answer to that question is 'no.'
Markets are off sigificantly this am.
position in SPX
Thursday, September 15, 2011
EU Bank Bailout
This morning, a 'syndicate' of central banks stepped in to promise loans to European banks that are having trouble staying solvent. The announcement sent markets higher world wide. Euro bank stocks ripped 8-10% on the news.
The situation is similar to late 2008 when the Fed opened the uber cheap credit window to crippled US banks. Ironically, today is the third anniversary of the Lehman collapse.
Initiation of yet another bail out has stock buyers giddy today as morale hazard takes control. However, when market participants pause to consider just how dire the situation must be to motivate coordinated central bank intervention, perhaps their mood will change.
position in SPX
The situation is similar to late 2008 when the Fed opened the uber cheap credit window to crippled US banks. Ironically, today is the third anniversary of the Lehman collapse.
Initiation of yet another bail out has stock buyers giddy today as morale hazard takes control. However, when market participants pause to consider just how dire the situation must be to motivate coordinated central bank intervention, perhaps their mood will change.
position in SPX
Wednesday, September 14, 2011
Cisco's Strength
Cisco (CSCO) has been trading with relative strength of late. Traders seem to be perking up to this. A couple opined that perhaps CSCO is about to break its year long downtrend.
Chartgazing suggests that we're still a buck away from such an event. The downtrend line and the 50 day moving average are tracking almost exactly right now.
Am currently carrying a pretty sizable CSCO position. In past posts I have laid out the fundamental and valuation thesis that has made me bullish. The last couple of months, however, have brought me visions of 2008, where even stocks of good value are likely to be sold if we encounter a broad deleveraging event. I assign the chances of this scenario as pretty good over the next few months.
As such, I plan to lighten my CSCO position into strength. Should CSCO approach that $17.50ish area, I'll be making significant sales.
position in CSCO
Chartgazing suggests that we're still a buck away from such an event. The downtrend line and the 50 day moving average are tracking almost exactly right now.
Am currently carrying a pretty sizable CSCO position. In past posts I have laid out the fundamental and valuation thesis that has made me bullish. The last couple of months, however, have brought me visions of 2008, where even stocks of good value are likely to be sold if we encounter a broad deleveraging event. I assign the chances of this scenario as pretty good over the next few months.
As such, I plan to lighten my CSCO position into strength. Should CSCO approach that $17.50ish area, I'll be making significant sales.
position in CSCO
From Private to Public Debt
Note the step change higher in country-level debt in 2008. That's the effect of socializing losses during the credit collapse. The chart shows that this was not just a US thing. It was a global phenomenon.
Note also that the US debt:GDP puts us in some shady company.
Note also that the US debt:GDP puts us in some shady company.
In 2008, private debt problems were handed to the countries. Now, as countries around the world begin choking on this debt, who can they hand their problems to?
Friday, September 9, 2011
Greek Default Pending?
Domestic stocks down almost 3% today on chatter that Greece may default as early as this weekend. Germany is said to be readying plans to help banks if Greece does in fact default.
Euro banks stocks were pounded for another 7% plus today with SocGen of France down 11%.
For the SPX, the August double bottom of 1120 is coming into clearer view...
You can bet that many market participants will be monitoring news flow out of Europe this wkend.
position in SPX
Euro banks stocks were pounded for another 7% plus today with SocGen of France down 11%.
For the SPX, the August double bottom of 1120 is coming into clearer view...
You can bet that many market participants will be monitoring news flow out of Europe this wkend.
position in SPX
How Weak Currency Initiatives Could Hammer Gold
Fil Zucchi shares an interesting thesis that actions by central banks to weaken currencies could put downward pressure on the price of gold. This is counterintuitive because interventions to weaken a currency are typically viewed as bullish for gold.
Because there is building political pressure against weakening a currency via money printing, Fil posits that central banks might sell some of their gold reserves, and use the proceeds to buy foreign currencies (forex). Price of forex would rise, and domestic currency would weaken as per the objective.
I hadn't given this scenario much thought but I do think Fil has an interesting angle. Domestically, the Tea Party movement and other social awakenings seem to be sensitizing the public about the dangers of money printing by the Fed and other central banks. By selling gold to weaken the currency, central banks can achieve their goal in a politically expedient manner--i.e., they cannot be accused of pure money printing to manipulate currency cross rates.
Should such actions occur, it would almost certainly drive the price of gold lower. How much lower and for how long would be anybody's guess. What we do know is that central banks could not engage in this operation indefinitely as they would run out of gold to sell at some point.
Fil notes that, while the selling of gold by central banks would be bearish for gold price in the near term, it would likely set up a very bullish scenario for gold at some point. Once central banks deplete their gold, then the only way to continue currency debasement (which is the heart and soul of central banking) would be to crank up the printing presses full force. At that point, 'big inflation' would be en force; gold would be situated for a moonshot increase.
It would also constitute a sort of poetic justice, since gold will have left government hands and landed in the hands of the people--where it naturally belongs.
Like Fil, I'm currently out of 'paper' gold and silver, having sold the last of my trading position in SLV last week before ensuing price weakness (better lucky than smart). I do maintain exposure via my physical metals position--a position that I do not plan to sell.
Meanwhile, I'm going to watch gold price from the sidelines for a while, and look for evidence that Fil's thesis may be playing out.
position in gold, silver, USD
Because there is building political pressure against weakening a currency via money printing, Fil posits that central banks might sell some of their gold reserves, and use the proceeds to buy foreign currencies (forex). Price of forex would rise, and domestic currency would weaken as per the objective.
I hadn't given this scenario much thought but I do think Fil has an interesting angle. Domestically, the Tea Party movement and other social awakenings seem to be sensitizing the public about the dangers of money printing by the Fed and other central banks. By selling gold to weaken the currency, central banks can achieve their goal in a politically expedient manner--i.e., they cannot be accused of pure money printing to manipulate currency cross rates.
Should such actions occur, it would almost certainly drive the price of gold lower. How much lower and for how long would be anybody's guess. What we do know is that central banks could not engage in this operation indefinitely as they would run out of gold to sell at some point.
Fil notes that, while the selling of gold by central banks would be bearish for gold price in the near term, it would likely set up a very bullish scenario for gold at some point. Once central banks deplete their gold, then the only way to continue currency debasement (which is the heart and soul of central banking) would be to crank up the printing presses full force. At that point, 'big inflation' would be en force; gold would be situated for a moonshot increase.
It would also constitute a sort of poetic justice, since gold will have left government hands and landed in the hands of the people--where it naturally belongs.
Like Fil, I'm currently out of 'paper' gold and silver, having sold the last of my trading position in SLV last week before ensuing price weakness (better lucky than smart). I do maintain exposure via my physical metals position--a position that I do not plan to sell.
Meanwhile, I'm going to watch gold price from the sidelines for a while, and look for evidence that Fil's thesis may be playing out.
position in gold, silver, USD
Thursday, September 8, 2011
Long Bond Yields and the Fed
The chart below displays yields on the 10 year T-note over the past 200+ years.
If we were to calculate the standard deviation of interest rates for the first half of the series, and then do the same for the second half, which standard deviation would be higher?
Answer: the second half by a mile. Long bond rates have been significantly more volatile during the past 100 years than during the previous 100.
A key difference between the two periods is the presence of the Federal Reserve. The Fed came into being in 1913, and has been getting progressively more intrusive in markets since then.
Ironically, a primary justification for the Fed was that a central bank was needed to stabilize economies and markets that purportedly were too volatile in their free unregulated states.
The interest rate data above suggest just the opposite. The Fed's presence increases, rather than decreases, volatility in credit markets which, because of credit's centrality to economic activity, spills instability into the entire economic and financial system.
Stated differently, credit markets unhampered by central bank regulation are likely to be more stable, rather than less, stable. How can that not be a boon for economic activity?
no positions
If we were to calculate the standard deviation of interest rates for the first half of the series, and then do the same for the second half, which standard deviation would be higher?
Answer: the second half by a mile. Long bond rates have been significantly more volatile during the past 100 years than during the previous 100.
A key difference between the two periods is the presence of the Federal Reserve. The Fed came into being in 1913, and has been getting progressively more intrusive in markets since then.
Ironically, a primary justification for the Fed was that a central bank was needed to stabilize economies and markets that purportedly were too volatile in their free unregulated states.
The interest rate data above suggest just the opposite. The Fed's presence increases, rather than decreases, volatility in credit markets which, because of credit's centrality to economic activity, spills instability into the entire economic and financial system.
Stated differently, credit markets unhampered by central bank regulation are likely to be more stable, rather than less, stable. How can that not be a boon for economic activity?
no positions
Wednesday, September 7, 2011
Nice Missive
The last 5-6 paragraphs of John Hussman's weekly missive are 'must read' material. Then they are 're-read' material.
Until policy making returns to market driven themes such as private savings and investment, and rejects themes grounded in Fed money printing and government stimulus, we have 'an economy built on speculation and paper, stacked into a flimsy house of cards.'
Very nicely put.
position in SPX
Until policy making returns to market driven themes such as private savings and investment, and rejects themes grounded in Fed money printing and government stimulus, we have 'an economy built on speculation and paper, stacked into a flimsy house of cards.'
Very nicely put.
position in SPX
Monday, September 5, 2011
Down Day in Europe
Markets not trading on Labor Day, but futes are 2% in the red in the early going, with some big US banks like Bank of America (BAC) off 5% in European trading.
In fact, it was pretty much a bloodbath across Europe today, with indexes on average down 4%. Some European banks were down about 2x that as hopes waned (again) of a EU sponsored bailout of Greece et al.
The all important DAX was clubbed for 5%. More importantly, perhaps, is that it gapped lower from August lows and never looked back. Past support is now resistance...
A date between US indexes and their August lows seems increasingly likely.
On the SPX, that equates to 1120ish.
position in SPX
In fact, it was pretty much a bloodbath across Europe today, with indexes on average down 4%. Some European banks were down about 2x that as hopes waned (again) of a EU sponsored bailout of Greece et al.
The all important DAX was clubbed for 5%. More importantly, perhaps, is that it gapped lower from August lows and never looked back. Past support is now resistance...
A date between US indexes and their August lows seems increasingly likely.
On the SPX, that equates to 1120ish.
position in SPX
Friday, September 2, 2011
Widening Euro Credit Spreads (Again)
On the back of failing talks between Greece and EU/IMF officials (and maybe even today's weak US job report), credit spreads are blowing out again in Europe. Greek CDS spreads are once again at records, and Italian and French bonds are also getting hammered.
While it is easy to get distracted by talk of QE3 and the potential for new stimulus packages here in the US, I continue to view Europe as ground zero for synchronized global market probs.
Still adding short side hedge in order to manage risk.
position in SPX
While it is easy to get distracted by talk of QE3 and the potential for new stimulus packages here in the US, I continue to view Europe as ground zero for synchronized global market probs.
Still adding short side hedge in order to manage risk.
position in SPX
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