Tuesday, June 30, 2009

The End of the Quarter....Finally!!

A day that could not get here fast enough for me, the end of the quarter. It will be interesting if this alone is a catalyst to end some of the wackiness we are seeing.

Very interesting day today. Volume picked up, a few attempted and semi failed runs by programs after 2:00. Haven't seen that in awhile. A BIG reversal in commodities. Oil after being up got slammed down. Copper slaughtered. Corn obliterated. Concerning corn, the crop report came out and increased the planted acreage of corn by 2.5 million acres. Wheat also slammed. All this with the dollar only up slightly. Very interesting.

Not everything was bearish though. Appeared credit did okay today.

Tomorrow will be very interesting. Also, Thursday will be interesting with the nonfarm payrolls numbers and jobless claims numbers both coming out. Usually on a short week like this week they would push off the nonfarm payroll numbers until the following Friday. The fact they are not have some speculating that it could be a worse number than anticipated. Report the number when no one is around so it is forgotten sort of thing. The next three trading days (which includes next Monday) I think will tell you alot about the month of July.

Ron Paul Gaining Momentum with Fed Audit Bill

Ron Paul made it to the front page of foxnews.com. He is starting to gain some major momentum after 26 years to audit the FED. Barney Frank is holding up the process.

All of a sudden, Congress is paying close attention to Ron Paul.

The feisty congressman from Texas, whose insurgent "Ron Paul Revolution" presidential campaign rankled Republican leaders last year, now has the GOP House leadership on his side -- backing a measure that generated paltry support when he first introduced it 26 years ago.

Paul, as of Tuesday, has won 245 co-sponsors to a bill that would require a full-fledged audit of the Federal Reserve by the end of 2010.


The bill would call for the comptroller general in the Government Accountability Office to audit the Fed and report those findings to Congress. The GAO's ability to conduct such audits now is severely restricted.

A slew of top Republicans are backing the bill, as are many Democrats.


"The Federal Reserve Transparency Act would remove all of these restrictions, and allow GAO to get real answers from the Federal Reserve to protect American taxpayers," Boehner wrote.

Unfortunately for Paul, the bill appears to be idling in the House Financial Services Committee, which is chaired by Barney Frank, D-Mass. The bill has been sitting there, gathering co-sponsors, since Paul introduced it in late February.

"You've kind of got to rely on the Democratic leadership (to move the bill along)," a Boehner aide said. "I haven't heard a lot of support from Chairman Frank."

Guaranty Bank - Texas 4th Largest Bank Set to Fail

The crises moves south. According to the Houston Business Journal Guaranty Bank is on its last breath of life. I read the 8k filed yesterday. It would be very unusual for the FDIC to help the bank like it is proposing.

The only way Guaranty Bank will survive is with assistance from the Federal Deposit Insurance Corp. and significant capital from private investors, the bank said in a regulatory filing Monday.

Guaranty’s parent company, Guaranty Financial Group Inc., stated that it is in discussions with the FDIC and its primary regulator, the Office of Thrift Supervision, for a plan in which the FDIC would absorb part of the bank’s losses while private investors provided a “significant equity capital infusion.”

Guaranty is the fourth-largest independent banking institution based in Texas. It has 162 offices in Texas and California and $11.6 billion in deposits, according to the latest data available.

Monday, June 29, 2009

Another Day

I get tired or reporting this because it is becoming almost normal despite how abnormal it really is. 1.3 million futures contracts traded today. Remember on jam job Thursday 1.35 million traded by 11:15 a.m. In the cash market we had 1.065 billion shares trade. Like watching paint dry. No one is interested at buying at these levels but to sell doesn't make much sense either since any downward pressure will be jammed higher. So another day and another drift higher.

WOW - A Major U.S. Media Publication Reporting on a Dying Weed

Amazingly the WSJ is actually reporting on the dying greenery in the U.K. Now grant it, the news story is on page A8 of the WSJ, may have been cleared to be published because the story is not about the United States, and ends with multiple qualifies but it is more fair and balanced than normal. It's a start.

A suggestion that the U.K. economy was making a speedy recovery has fizzled, with recent numbers showing that banks still aren't helping businesses invest, and consumers still aren't spending enough to spur faster growth.

Data including retail sales, house prices and manufacturing orders had suggested that the recession-plagued U.K. might be moving faster in the right direction. The numbers helped trigger rallies earlier this month in stocks, bonds and sterling.

More recent figures, however, were a reminder of the recession's reality.

How many times have I talked about the inventory bounce

But Chief Executive Simon Topman says that rather than heralding an upturn, the increase reflects a nationwide phenomenon: Businesses are restocking after running down their inventories during the last lean year.

Other companies agree such restocking was a factor behind a 4.3% increase in imports in April. "This is a spike -- this is not the new business that will turn things around," Mr. Topman says.

and some bright points at the end...of course unfortunately you may just need to give it time.

Still, many economists and businesspeople agree the worst is behind Britain. As it wades out of recession, the U.K. can comfort itself with the knowledge that during the last downturn, in the mid-1990s, unemployment and interest rates were around or above 10% -- compared with current unemployment of 7.3% and interest rates of 0.5%.

California - The Clock Keeps Ticking

California looming debt crises continues to draw closer. I was having dinner with someone this weekend and told them I had no doubt that the first deadline would not be the implosion. They would find someway to patch it up to buy time. Sure enough, it seems they have bought another 30 to 90 days.

From McClatchy

California state controller John Chiang warned Wednesday that if legislators and Gov. Arnold Schwarzenegger fail to come up with a budget-balancing package in the next week, he would begin paying California's bills with IOUs on July 2.

"The state's $2.8 billion cash shortage in July grows to $6.5 billion in September, and after that we see a double-digit freefall."

I am not exactly sure how these IOUs will work but it sounds like they are just expanding accounts payable. This is a common game with companies right before they declare bankruptcy. They can buy several months by letting the days outstanding of accounts payable increase as they pray for a miracle.

As the LA Times points out, this isn't the first time California did this. Last time, they got their miracle.

But even that seems familiar. California has issued IOUs before, back in the early 1990s. Then it got its budget, the economy improved, and everyone wanted to lend the state money.

The editorialist points out why this time it is different.

We survived that, so what's the big deal?

The familiarity is an illusion. The state has had enough cash to pay its bills since July 2007 only because it borrowed from various supposedly off-limits special funds. Now that money too is almost gone. IOUs, coupled with anticipated monthly tax revenues, might preserve the state through September, but only with permanently decimated access to the credit market. After that, default.

My guess is there will be some agreement with the various branches of California government. That also will only be a short term patch. It could give confidence to those poor hapless individuals who are taking those IOUs as forms of payment. America is a land of creativity and in the last year we have to be the most creative species on earth in ways to delay certain things that are inevitable.

Thanks goes to Jarred for the links.

The Week Ahead

For a holiday week this week is chalk full of important economic news and dates. We have home price indexes, pmi, ADP employment numbers, ISM index, auto sales, nonfarm payrolls, the end of the month, wnd of the quarter, and for some firms end of the fiscal year. The market jam last Thursday leaves me agnostic on my feelings on the market in the short term. Should be interesting.

Speaking of Thursday, after thinking about it I have devised a theory. The way Thursday developed, I believe that it was some major macro fund / pension fund that had a large cash pile that didn't want to report they had been holding so much cash this past quarter. It wasn't just an equity market jam job. It was commodities, bonds, stocks, every asset class got jammed higher. This makes me think they just wanted to put alot of cash to work so the books they report show low cash numbers. Several blogs have highlighted very unusual futures activity the night before. My guess is somebody found out this fund was going to go to work on Thursday massively changing its allocation and jumped ahead. It is very unusual for all asset classes to go up. This would explain such a move.

Friday, June 26, 2009

A Waco Tribune-Herald Special

Not sure how in the world the Waco Tribune-Herald got such an interesting interview but Tim Woods managed to do just that with Alice Schroeder, author of Snowball - a biography on Warren Buffett. This was the first book Warren Buffett ever agreed to do an interview for. I have read it and highly endorse it. From the Waco Tribune:

On the personal side:

There are many aspects to his personality. It’s almost like he’s several different people.

There’s that grandfatherly wise man you see on TV. There is this tough, icy businessman that I called “the great white shark” in The Snowball. You would not want to be on the other side of a deal with him, trying to negotiate with him. Then, there’s this little kid that needs taking care of and that manages to pull everybody in to protect him. Everybody in his world is his protector.

Then, he has a very showoff side that’s like P.T. Barnum and he likes to dress up like Elvis and sing and play the ukelele and put on shows and he’s a great theatrical personality. And then he’s very sensitive to criticism and there’s a part of him that’s also childlike and vulnerable, but in a different way, in that he cannot tolerate anything that would make him feel unworthy. That’s because his mother abused him and his sister emotionally for years and told them that they were literally worthless and didn’t deserve to exist.

As Warren put it, by the time he was 3 years old he was broken and couldn’t be put back together. That might have something to do with his reaction to the book. He’s sensitive in a way that is very hard to describe.

on the investing side:

So, the book details the battles that he had to get control of some of the companies that he ended up buying. And his friends and how he went through these long, strategic battles that were really very funny, but also very intense.

So, you can learn a lot from them, but they’re also really revealing. He was not somebody sitting in a room investing. He was conducting wars, and that’s something that people don’t know.


All of these books that say you can get rich by investing like Warren Buffett, it’s a bunch of baloney. You can’t do it. He’s not only brilliant, but he works like a demon from morning until night and he’s been doing that for 70 years. So, when you see him and you’re around him, you realize the futility of trying to replicate his achievement. It can’t be done.

Bank Earnings Season - Just Around the Corner

Starting in a couple of weeks, banks start reporting 2nd quarter earnings. I believe JP Morgan starts it off July 16th. If you remember, this massive rally was started with Citigroup and Bank of America pre announcing they would make money last quarter. This lit a fire in financials and as a result the rest of the market. Of course, much of the earnings, i.e. Wells Fargo, were massive accounting games. Underreserving for losses and messing with mark to market accounting. This quarter sets up an interesting dynamic. So far the banks have kept their mouths shut. No chatter on what earnings will look like. That is until today, when UBS said they will have a loss the 2nd quarter and be back to the water trough needing to raise capital. From the UK Times

UBS, Switzerland’s biggest bank, has announced that it has undertaken a SwFr3.8 billion (£2.1 billion) capital raising as it warned investors it would make a net loss in the second quarter.


UBS is due to announce its second-quarter results on August 4.

Now UBS was one of the few banks to actually report a loss in Q1. This Q2 loss would be less than Q1. UBS has been sort of an outlier so not totally sure you can extrapolate anything from this pre announcement for the rest of the big banks.

You had a massive refi boom in the first half of the 2nd quarter that would be very profitable for U.S. banks but this was shut off about three weeks ago with the big spike in mortgage rates. Also, the big banks were able to take alot of the benefit from the reduction of mark to market accounting in Q1. The smaller banks would not have been able to do this because the software and lack of man power to change their accounting on such short notice for the most part would not have been there.

I have a feeling the bank earnings number may not be that bad which I think would be the last set of good earning numbers for several quarters. The question is how far the market will look out. Banks have had a massive run. There may be enough question marks that Q2 earnings doesn't act as the catalyst to send the banks higher.

Thursday, June 25, 2009

Interesting Speculations

I had been debating on whether to post a column from marketwatch talking about a coming blow up in the next 120 to 180 days. It was ominous and sounded sensationalist. I was not familiar with the Harry Scultz Letter and didn't think it had enough credibility. Well Market Ticker had a much more plausabile explination.

Let me be clear. I am not endorsing this view. I have no idea. I still think it is sensationalist. It is now at least plausible. The H1N1 thing I shrugged off as ridiculous in the short term. The danger starts during the flu season. Late fall into winter. Already according to government health officials there are 20,000 more cases than there were just two weeks ago.

Thanks goes to Ron for bringing my attention to both.

First from marketwatch:

The top-performing letter that predicted the Crash of 2008 now predicts a confiscatory Franklin D. Roosevelt-style "bank holiday." But it's surprisingly sanguine about stocks -- in the (very) short term.


In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."

Now from The Market Ticker:

Bah. I'll tell you what I think they're preparing for:

CDC is now estimating that the novel H1N1 virus will be “Category 2” in severity. They are closely watching the situation in the Southern Hemisphere for validation of this estimate.

A category 2 pandemic has the following characteristics:

Case fatality ratio of 0.1 percent to less than 0.5 percent.
Between 90,000 and 450,000 deaths in the U.S. (compared with estimated 36,000 deaths during a typical influenza season).
Excess death rate of between 30 to less than 150 per 100,000 people.
Illness rate of between 20 and 40 percent.
Similar to 1957 pandemic.


If this flu bug turns into that sort of event nations will go on "lockdown" almost immediately in a last-ditch defensive attempt to control contagion. It will help but not fix it (there is no fix) but in that situation having local currency will be critical to be able to have basic needs delivered to you - like for instance food!

Complete Total Jam Job

I don't get upset at the market very often, it is what it is, but personally (not in my fund) I was trading a few futures contracts that had me a little more vocal at my computer screens than usual.

This is totally absurd. We have 1.35 million futures contracts that have traded. Yesterday this time I think was about 500k. Compare that to the cash market where you have 420 million shares traded. This time yesterday was over 500 million. So the cash market is dead, deader than a doornail. the futures market is going beserk getting jammed ruthlessly higher.

Today we had a horrific jobless number. Remember this was one of the first green shoots supposedly telling us that "all was well." Not only did we not break the 600k number to the downside, last weeks number was revised up and this weeks number was back to mid May levels at over 620k. Now in the whacky world of markets the fact that it was bad could be construed as good for the markets. It is the only thought that I could come up with that even comes close to explaining rationally what is going on in the markets today. (a futile exercises I know) The thinking goes like this. The Fed statement was bearish yesterday because it showed the Fed was content doing nothing and talked about inflation which means the magic elixir of liquidity juice may be coming to a halt. The fact that you have bad jobs number means that wouldn't be the case. The Fed will hold longer to keep money sloshing in the system. The problem was the number seemed so bad that it should trump such logic.

On top of that, you have Bernanke getting positioned to get pushed out by Congress, if not now in January, to open a spot for Summers. That can't be good for the markets.

Regardless jam jam jam job up up and away. We broke the trendline. I got out of my futures contract at a nice loss. Thank-you invisible hand, whoever is deciding to continually jam this market higher.

Wednesday, June 24, 2009

Unwrapping Today's Event

A very interesting day in the markets. Sort of a head scratcher. First, let me give my caveat that I really don't know. Not a terribly strong opinion on where the market is headed unlike last week where I was selling stocks that I had been waiting to sell. In general I thought today was pretty bearish. The market seemed to be offered every excuse to go up and all we got was a big post Fed reversal. Even with this reversal, the NASDAQ finished up 1.5% and the S&P 500 managed an up move of .65%. The Dow was down but that was mostly because of Boeing.

As I flagged earlier, I didn't believe the breakout this morning. There was no volume and it was obvious that it was just computer buy programs. Also the dollar started inching up after being down early this morning. Volume picked up after the Fed announcement but even with this pick up the markets still finished slower than yesterday and on Monday. This is net bearish as the weak bounce, after the big sell off on Monday, cannot attract more buying interest. Yet, I was really disappointed with the sell off after the Fed announcement. It drifted down but I thought there was a good chance for a true sell off to materialize and pick up speed at the end of the day. It never really happened.

If your bearish, the Fed statement took out tail risk of a massive move up. The Fed played it safe and took no major risks in doubling down their efforts to keep yields down. The fact that the 10 year yield went up after the announcement was very interesting. As bearish as I am, I am still very nervous about all the liquidity in the system. I am a fundamental guy and fundamentally I want to bet big against the market but many bearish funds have gotten their head handed to them the last three months because they don't understand how the government can flood the economy with liquidity and create valuations that do not make any sense. Unfortunately, because of the way you have to manage your risk, being bearish is much more technical in nature than being bullish. Being bullish, a drop of 50% means you can buy more. Bearing bearish, a doubling of the stock means you can't short more. In fact you may be forced to cover even if you know your right.

To sum up, I thought today was bearish but not as much as I was hoping for. One thing is for sure. The market cares more about the trend line (this was around 910 to 911) coming down from the 950 highs then it cares about other technical levels like 903. As a result, if we hit 910 tomorrow my guess is we will be going higher because that means we will have broken that trend line. A push tomorrow, say up less than 5 in the S&P, I would also read as bearish.

Across the Pond

Europe and Great Britain continue to shock me at their overall resilience. The Pound shows continued strength against the dollar and the European markets also continue to show strength. A couple of interesting article. This one from The Guardian talking about the OECD uping their world economic forecast for 2010 (we will see if that optimism comes to past).

But the OECD had less good news for the UK, revising down its growth estimate this year to -4.3%, the biggest one-year fall in output since 1945 and lower than Alistair Darling's budget forecast of a 3.5% decline. Previously, the OECD had pencilled in a 3.7% contraction for Britain this year.

The OECD's Economic Outlook said the UK was in a "severe recession" and could expect only a mild recovery during the course of 2010, when it believes output will be unchanged.


Britain's budget deficit, the OECD warned, would hit 14% of GDP next year - the biggest of any of the OECD's 30 member countries. "To improve stability, the government should continue to develop a concrete and comprehensive plan to ensure that debt is on a declining path once recovery takes hold", the outlook said.

Then this article from Bloomberg. Finally, a government bureaucrat who actually has an honest assessment.

“There has to be a risk that it will be a long, hard slog” because of the problems in the banking system, King told lawmakers in London today. “I feel more uncertain now than ever. This is not the pattern of a recession coming into recovery that we’ve seen since the 1930s. Having an open mind and not pretending to foresee the future when it’s so uncertain is important.”

Fed Statement

At first blush this should be a bearish Fed statement for equities. At least it should take the tail risk away from a major rally. Would not be shocked to see the market drift down the rest of the day.


Careful on this up move....there is absolutely no volume. I don't know where the market is going but this move up is highly suspect on no volume before the Fed annoucement.

Tuesday, June 23, 2009

Fed Day

Tomorrow is Fed day. In my opinion, it has been awhile since a Fed meeting has held such importance. Not only is what the Fed does and says going to be important, even if you knew what it was, trying to figure out how the market will react will be a whole another issue. If I was trading it (which I won't be), you have the dollar up and long term interest rates up on your screen seeing how those react. That will be the guide to tell you how to trade the equity market. The most bullish scenario for equities is that the dollar goes down, interest rates go down, and equities are almost sure to fly. Next best scenario is that dollar goes down, interest rates digest the news staying flat and move up a little bit, and the stock market should move higher. A bearish scenario is the dollar moves up strongly.

I think the last scenario, dollar strength is the most likely scenario. The dollar has gotten pummelled over the last couple of months. It sold off hard today after chatter out of Europe that they may actually raise interest rates. I think the dollar is setting up as sell the rumor buy the news and would not be surprised to see dollar strength. I also think for once that the Fed may actually be looking at the dollar conscious of where it is trading. Finally, I am not sure how the Fed can risk seeing the 30 year mortgage rate spike. If the Fed is really looking at that, they have one of two options. Back down a little bit and maintain the status quo. The market my guess would worry less about inflation and yields will fall. The other scenario is they double down, announce more efforts at intervening to get interest rates down. This may work in the short term. This is the dollar goes down, interest rates drop and equities will surge scenario. That is a very high risk move by the Fed because the market could say forget it and have more revulsion to government debt sending rates higher. If the Fed choose such a scenario, it will be a short term fix (maybe a few weeks to a few months) but sets up for more major failure.

Either way you should have some fireworks. Usually the market gets a whiff of what the Fed is going to say or do so if the market is up right before the Fed announcement, it will go higher afterwards and vice versa. This was not the case January of 2008 when the Fed was completely not communicating with the market very well. Your bogy is the 875 to 880 area on the downside and 905 on the upside. I would be very surprised to see the market be above 900 to 905 before the announcement. If your bearish and as the announcement gets closer the market starts moving up into this range be very careful.

In general it has been a good bet that the Fed will do everything possible to receive some short term pleasure at the cost of destruction of our country in the longer term.

Watch the dollar, it will tell you all you need to know.

Government Intervention in the Stock Market

A very detailed gathering of quotes and articles at maketskeptics making the case that the government steps in to manipulate the stock market when it wants to. I find that type of stuff interesting but useless. I think it is inconceivable to assume the market is not manipulated by the government considering the fact they are openly trying to manipulate a much bigger market, interest rates. So I assume it occurs and work within those assumptions. For those who are interested, it is a good read.

"He begins most workdays at 5 a.m. by checking the status of overseas markets… and ends them 11 p.m. the same way. In between, Mr. Fisher SWAPS [Crudele's emphasis] intelligence and rumors with traders and dealers from his office in the Fed's 10th-floor executive suite that overlooks the trading floor he runs," the piece continues.

As I pointed out in a previous column, the market has done some strange things in the wee hours of the morning, especially between 5 a.m. and 7 a.m., which ultimately affect how equities do in the New York market.

June Retail Sales - Looking for an Excuse

Found this Reuters news article humorous. June isn't over yet but apparently the media is already trying to find excuses that don't involve blaming the economy on why June retail sales are bound to be horrendous. Let's see, you have gasoline shooting sky high, employment getting worse, interest and mortgage rates spiking higher, etc. etc. but if the sales numbers come in bad, we can blame it on the weather. For some reason I don't think the weather matters that much right now. Just for the record - Texas has been melting. We are experiencing August weather.

Rain and cooler-than-usual weather so far in June may have dampened demand for summer items such as sandals, swimwear and beer for retailers already hard put to counter sales declines during the recession.

Wait - shouldn't this be a boost to retailers? You know, more discretionary spending dollars available.

Given the cool weather, not many consumer found a need to turn on air conditioners.

According to Bastardi, there was lower demand for power to run air conditioners in much of the U.S. Northeast.

Monday, June 22, 2009

The Market - Volume Watch

No surprise on the sell off today. All last week looked horribly bearish which is why I was selling as I had previously mentioned. We may have a little bounce but I can't see how the next 10 points aren't lower. I would be shocked if we do hit the 880 to 885 level that we bounced off of at least five times back in May. After that it becomes very interesting. I am as bearish as they get in the longer term but I would still not be shocked to see housing prices stabilize in the next couple of monthly updates and the Fed liquidity injections from many months ago to still work there way through the system. All this means the markets may have another bounce to head higher. I am not all in short with the risk of another serious bounce.

For a stronger sell off to occur, volume has to pick up. Last week I had alot of bearish friends who were concerned about the sell off because it was on no volume. That didn't bother me. Bear market rallies die in no volume and to see markets moving down on no volume initially is not unusual. Also when the market sold off, though volume was light, it was heavier than the up days from the previous week. So I didn't see it as that big of a deal. Now to break through 880, volume will have to pick up. Today's close was very interesting. Another day of zero volume until the last 30 minutes when the cash market volume exploded. We finished with 1.4 billion shares traded. That is the most volume in several weeks. You will have that and greater volume to get through 880. If you break that, you are looking at the 840 area. Wednesday, you have the Fed meeting which considering mortgages rates becomes very important. That could be a catalyst for a market bounce since the market seems to be selling the rumor. Once the meeting is done it may be buy the news.

I think volume may be the tell tale sign of whether this sell off picks up steam. Low volume going down on the initial sell off in a bear market rally is not uncommon. It should start picking up if the sell off is to accelerate and continue.

New Orleans

As mentioned in the previous post, I am back from a trip that took me to College Station, then a little detour Thursday night to Houston, then Friday trip to Lafayette, then Saturday to New Orleans, and then Sunday all the way back through Houston home.

Never been to New Orleans. Amazing how different the culture is just 5.5 hours down the road. Sitting at dinner with a buddy and he started talking about family fixers. I was like what in the world is that? He was like you know, someone who you never talk to except if you need something fixed. If you have been arrested or any kind of problem. You call him and he takes care of it. Well I had never heard of a fixer in my life.

I was traveling with people who like to travel in style. Every meal was an unbelievable restaurant where I think the cheapest entree I saw was $27. They decided Saturday night to get a private car with a private driver. This driver was awesome. He took care of us. When we went in and decided we wanted champagne and red bull when we got back, he took care of it. Another friend who used to live in New Orleans knew the owner of a top club in New Orleans. We rolled up and went in VIP having our own couches with free bottle service and drinks.

Needless to say I am not used to living in that type of style but it was quite a trip.

Short Term Top in Gold?

I am back in the office after being a vagabond for many days. I will have more on that later. First, let's chat about gold. I actually trimmed my position quite a bit in gold a couple of weeks ago. Do I love it just as much long term as I have for the last year? Absolutely!! Little doubt in my mind that within 3 yrs or so we will be above $2000 an ounce but in the short term I think gold may be done. It is to popular. Nothing brings that out better than this story from Dealbreaker. There is now vending machines in Europe where you can buy gold. "Gold to Go" is the marketing slogan. Anyway, I did not sell out of gold, I am a huge gold bull but made a trade to trim the position planning on buying it back a little later.

How many times have you sidled up to a vending machine, selected your candy of choice, popped it in your mouth and thought, "This is really good but you know what would make it better? Another layer of nougat and some gold"? A whole bunch, I'm assuming. You're on your own lobbying the Mars company for that extra inch but Thomas Geissler's got you covered on the g.

Geiss, via his company TG-Gold-Super-Markt, will be rolling out "a substantial number" of gold dispensing machines in Germany, Austria and Switzerland within three months and, if the demand is there, around the world.

Thursday, June 18, 2009

Aggressive Selling

For whatever it is worth (believe me, not much), I was selling all day today. The last few days in my opinion have been very bearish and today seemed very bearish in context of the last week. I was selling calls I was long on a financial index that I was using as a hedge, was selling covered calls on a stock that I like over the long term but expect will probably go down in the short term (if I am right I can lower my entry price through the call sell and minimize tax by keeping the stock), and sold completely out of a position.

Who knows, I think there is a high probability we will go back and hit that 903 to 905 level we bounced off yesterday (that I had originally cited a couple of days ago) and slice right through it on the way to 875.

Tomorrow may throw a curve ball with options expiration or it may add jet fuel to the downside. We shall see.

9 Failed Currencies

I consider massive hyperinflation a possible end game. Unlike many investors who are worried about it in the short term, I think such a scenario has 2 or 3 years to start developing. At the mint website it gives a brief (to brief to give much practical value) overview of 9 failed currencies in the last 100 years. Germany Weimar Republic from 1922-1923, Hungary from 1945-1946, Chile 1978,91, Argentina 1975-1992, Peru 1988-1991, Angola 1991-1999, Yugoslavia 1992-1995, Belarus 1994-2002, and Zimbabwe 2000-2009.

There are many other examples of severe inflation not mentioned such Mexico. My argument is that the government has not done enough yet to create such a scenario but Ben's helicopter is always a threat and eventually deflation could cause Bernanke to overshoot creating a massive inflation.

I would love to read more in depth on each of the 9 failed currencies mentioned. Understanding the playbook may be vitally important.

Tuesday, June 16, 2009


I actually shorted two stocks in the market today. It has been a long time since I have been actively shorting. The interpretation of the news seems to have shifted. Paramount for a market decline. I wouldn't be surprised to see a bounce tomorrow but I wouldn't be surprised to see an additional sell off. The market will probably not like Obama speaking on new regulation and Fed Ex probably won't have many good things to say. 905 is a key level to watch. You break that and the odds become very high we go back down to at least 875.

I will be traveling to College Station tomorrow to meet with a potential investor and then off to Louisiana where Saturday I will be in New Orleans. Have never been there so I am looking forward to it. I love Cajun food.

Anyway, may not be back until Sunday. Thursday and Friday should be volatile with a big option expiration on the docket.

A Handcuffed Government

I try not to put stuff that I see on other blogs but this was to good. I originally noticed it on naked capitalism. It is from a website that focuses on China news but captures very nicely the problems the Fed is facing here in the U.S. It is why I keep saying deflation will lead to inflation. The deflation will either cause the government to respond with more and more money giving up acting like they care about inflation or the deflation will cause international government solvency issues causing inflation.

The article

A combination of growth optimism and inflation fear has catapulted asset markets in the past few weeks. These two concerns should drive markets in different directions: Inflation fear, for example, should limit room for stimulus and prompt stock markets to retreat. But the investment camps expressing these opposite concerns go separate ways, each pumping up what seems believable. As a result, stock and commodity markets are mirroring the behavior seen during the giddy days of 2007.

Incredible how the government is able to create a mini bubble within a bust. I am not convinced that after a correction the bubble doesn't have more to inflate.

The dollar's weakness can limit Fed policy options. It heightens inflation risks; a weak dollar imports inflation and, more importantly, increases inflation expectations, which can be self-fulfilling in today's environment.......The Fed may have to change its stance, even using token gestures, to assure the market it won't release too much money. For example, signaling rate hikes would soothe the market. But the economy is still in terrible shape; unemployment may surpass 10 percent this year. Any suggestion of hiking interest rates would dampen growth expectations. The Fed is caught between a rock and a hard place.

Now this is interesting. I have never seen it put this way exactly.

Stagflation in the 1970s spawned the development of rational expectation theory in economics. Monetary stimulus works by fooling people into believing in money's value while the central bank cheapens it. This perception gap stimulates the economy by fooling people into demanding more money than they should. Rational expectation theory clarified the underpinning for Keynesian liquidity theory. However, as they say, people can't be fooled three times. Central banks that tried to use stimuli to solve structural problems in the '70s saw their stimuli didn't work. People saw through what they tried again and again, and began behaving accordingly, which translated monetary stimulus straight into inflation without stimulating economic growth.

I think it will come late 2009 and the market will realize it a little earlier. 2010 is definitely possible though.

Movements in Treasury yields, oil and the dollar underscore the return of rational expectation. Policymakers have to take actions to dent the speed of its returning. Otherwise, the stimulus will lose traction everywhere, and the global economy will slump. I expect at least gestures from U.S. policymakers to assuage market concerns about rampant fiscal and monetary expansion. The noise would be to emphasize the "temporary" nature of the stimulus. The market will probably be fooled again. It will fully wake up only in 2010. The United States has no way out but to print money. As a rational country, it will do what it has to, regardless of its rhetoric. This is why I expect a second dip for the global economy in 2010.

It is the normal cycle in a bigger non normal cycle. People don't get this

Contrary to all the market noise, there are no signs of a significant economic recovery. So-called green shoots in the global economy are mostly due to inventory cycles. Stimuli might juice up growth a bit in the second half 2009. Nothing, however, suggests a lasting recovery. Markets are trading on imagination.

and finally

The world is setting up for a big crash, again. Since the last bubble burst, governments around the world have not been focusing on reforms. They are trying to pump a new bubble to solve existing problems. Before inflation appears, this strategy works. As inflation expectation rises, its effectiveness is threatened. When inflation appears in 2010, another crash will come.

Monday, June 15, 2009

Focusing on What Matters

When the market is moving down or up, talking heads seem to always focus on noise. Data points that really do not matter. Currently, there are two major things that matter. Consumer demand - a 2% drop in consumer demand has massive implications for investments made by companies. I am making up numbers here but a 2% drop in demand can mean a 20% drop in planned capital investments. Capital investments can bounce all around, down 5% one month, up 2% another, down 10% the next but it is the tail being wagged by the dog which is consumer consumption. The second data point relates to the first. Consumer credit availability. The NY Times has a little blurb about the 50% drop in credit card solicitations sent out to consumers. This drop in credit card solicitations was met by an approximate 100% increase in debit card offerings and the ever sexy checking account. In otherwords banks are not interested in issuing consumer credit. Considering Capital One announced charge offs rose to 9.4% and American Express charge offs rose to 10% and the consumer credit will continued to be squeezed. This obviously does not help consumer demand.

banks sent out only about 500 million credit card solicitations in the first quarter, half as many as in the last three months of 2008. That is fewer than in any year since 2000. At the same time, banks cranked out more ads for safer but less profitable products like checking accounts (up 29 percent) and stand-alone debit cards (up 96 percent).

Markets Come Alive - Sort Of

The first big down day the markets have had since the beginning of May. Breadth was very negative but the volume on the NYSE was still not spectacular with only 1.15 billion shares traded. Very busy compared to last week but still slow compared to any historical context.

Still the market in my opinion had its first pure break in weeks and the first time since late March I was actually somewhat busy. I was not adding to shorts, not yet, but I was taking profits on a few longs that have moved up that I was looking for an excuse to sale. I think we need to stay below 930. If we can do that, I will see how the market feels to try to determine if I want to add some short exposure. I have so many short ideas but unlike longs, shorts have to be timed much more carefully. There has to be a competition between Amazon and Palm as the most overvalued companies on the NASDAQ but both continue to defy gravity.

The futures were really really busy today. This may have been because the front month contract (June) is about to roll off or it may have been the invisible hand was trying to keep the market from really selling off. Either way at 2:36 the futures really kicked in volume just like in weeks past. Invisible buyer? I don't know but today after a couple of point rally on this big surge sellers stepped up to the plate. A big break compared to weeks past.

The next few days will be interesting.

Sunday, June 14, 2009

More On China - Bust to Bubbles

A very interesting read in Shanghi Published China Stakes. Basically the economy is slowing but bubbles are devloping in real estate and possibly the stock market due to the huge liqudiity boost. World governments have been able to stop what is natural, a long needed system flushing, for that which is unnatural. This of course also occurred in 2003 and lasted until 2007 before the problems reared their ugly heads worse than before. My guess the same will occur again but will not take four years for markets to realize this.

There's ice on the export side, while there's flame on the real estate market side, and China's effort to create internal demand is being distorted. China's economic stimulus, which is bulldozing ahead, is causing problems for China's economic recovery. Manufacturing is steadily declining, employment and consumption growth are weak, but bubbles are beginning to gather in the real estate industry.

and more protectionism

Compared with figures of previous months, May's decline was steeper. Foreign trade rebounded a bit in the first quarter and exporters gained some orders. But new orders have decreased since, and the second half of this year is unlikely to see a recovery in overall foreign trade.

Policies to stabilize external demand are set to be implemented since the May foreign trade figures have been released. In the short-term, the export tax rebate ratio for 2600 goods has been raised to help maintain the share of “made in China” in overseas markets.


But go figure--China's real estate market is booming along with its stock market. The March rebound in the real estate market has developed into a luxurious banquet for the property industry.

The latest National Bureau of Statistics figures show that between January and May China's commercial housing sales reached 24,644 square meters, a leap of 25.5%, year on year, with residential housing sales growing 26.7%.

The real estate market boom is led mainly by a liquidity surplus due to a huge increase in credit. The Obama administration is printing money to beat the band, over $2 trillion. China's currency placement is also very high. At the end of April, M2 growth reached 25.95%, the highest level in the past 10 years.

The Week Ahead

Friday there were crickets. Slowest trading day of the year with around 850 million shares traded on the NYSE. To put that into context that was only slightly more than the shortened trading days around the Christmas holidays. The market continues not to be able to have a sustained break above 950. Everything seems overdone but that has been the case for several weeks now. I continue to just watch. Until sellers step in or the invisible hand in the futures market disappears there doesn't seem to be much to do. There are some stocks that are back in bubble territory (hello Amazon on Palm) but they just keep going up. Trend following isn't my game. This week there will be some big data points such as CPI, home data, and industrial output data. For the last several months the data really hasn't meant anything, just the markets mood when the data came out.

Thursday, June 11, 2009

China's Exports Decline Accelerating

Another great data point that should be rushed and bought by all. I am sure the spin guys are working overtime. These are the numbers that I see as important. Anything that points to demand, not production. China exports which feeds a large portion of the world their desire for things is a good barometer. U.S. May retail sales number looked decent today up .5% from April though it was down 10.8% yoy but if you dig into the number more of the same thing. Increase because of gasoline prices, auto parts, food, and health. Anything discretionary was down from April, electronic, furniture, department stores, etc.

From Bloomberg:

China’s exports fell by a record as the global recession cut demand for goods produced by the world’s third-largest economy.

Overseas sales dropped 26.4 percent in May from a year earlier, the customs bureau said in a statement on its Web site today. That compares with the median estimate for a decline of 23 percent in a Bloomberg News survey of 15 economists, and a 22.6 percent contraction in April.

More protectionism?

The government said this month that a quick rebound in trade is becoming less likely and unveiled higher export rebates on some steel products, electronics, machinery and toys, the seventh increase since August.

And I don't see how this is possible since imports (raw materials for China's exports) has been a leading indicator for exports.

Still, China’s export orders index advanced to 50.1 in May, marking the first expansion in 11 months, a government-backed manufacturing index showed. Japan’s exports and production rose in April from the previous month, and orders placed at U.S. factories gained for the second time in three months.

China’s imports dropped 25.2 percent last month, compared with the 22 percent decline estimated by economists and a 23 percent fall in April. The trade surplus was $13.4 billion in May, smaller than the $14.9 billion estimated by economists in the Bloomberg survey.

Wednesday, June 10, 2009

Jim Grant

Jim Grant was on CNBC this morning. I love reading his work. Always very insightful. He is in the inflation camp. He believes very strongly it is coming with a vengence. I believe so also. I just think he is early. Much to learn from the video. Thanks goes to Pete.

Negative Feedback Loop....AKA Deflation Will Lead to Inflation

A great read in Business Week entitled the Fed's Mortgage Muddle. It hits on many points that I have been writing and talking about. Thanks Goes to Peter.

Here's a feedback loop that nobody expected: It looks like investors' expectations for an economic recovery could end up delaying that very scenario.

Umm no. At the risk of sounding self promoting I have talked and written about that numerous times. My line is that deflation will lead to inflation. Not inflation fears will lead to inflation or even inflation will lead to inflation. The government has not printed enough money to start hyperinflation. They have shown they are committed to doing so. In the coming years if a major country defaults (i.e. Great Britain or Switzerland) the Fed will print tons of money to try of offset the near term deflationary forces. Or when (I would say when not if) Citigroup is finally nationalized the government will print tons of money to swallow the balance sheet. Those deflationary forces will cause (I should say the Fed will choose incorrectly) the Fed to massively lead to inflationary actions. When the market is crumbling during this time period. That is when you go all in because massive inflation will be close.

Fear of inflation and concerns over the long-term impact of ballooning government debt have been driving up yields on 10-year U.S. Treasury notes, which reached 3.91% on June 8 before easing back to 3.84% the next day.

That is why inflation fears can't lead to inflation. At least not now. It will prevent the inflation from occurring as it will cause the velocity of money to slow further as the economy slows due to higher raw material costs and higher borrowing costs creating more deflation eventually leading to the inflation. Get all that?

The whole article is a good read in understanding how inflation fears will stop inflation though it doesn't word it in this way. Talks about 30 year mortgage rates, refinancing activity, and foreclosure problems.

Tuesday, June 9, 2009

Looking Towards the Treasury Auctions

Seemed like a pretty bullish day today and an invisible buyer wasn't even needed. The big 10 year treasury auction is tomorrow. I can't imagine how the Fed doesn't already have it sold. Alot of worry about it and so it is a important auction. I am sure the Fed has worked the phones and will have it oversubscribed which would make it a bullish event for the equity markets. My thought was that we would sell the rumor and buy the news. So be down yesterday and today and up tomorrow. The invisible buyer yesterday messed that up. Like I said pretty bullish day today. Who knows but I would have to say Friday's slam down which made me think a solid interim top was in has been at this point neutralized. We could easily go down but we may go up. What may be a bigger issue is the 30 year treasury auction on Thursday.

IMF to Europe - Get Your House in Order

Why is it that the IMF has been the only logical voice the last couple of months?

From the Telegraph.

The International Monetary Fund has called on eurozone governments to take urgent steps to clean up the banking system as losses mount, and advised the European Central Bank to prepare "all unconventional options" in case the crisis deepens.

"To restore confidence, you need total disclosure of possible losses," said Dominique Strauss-Kahn, the IMF's managing director. "Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets. There are lots of things that still have to be disclosed," he said, adding that credit mechanism remained jammed.

That should be obvious but every goverrnment in the world seems to be trying to limit disclosure not maximize it.

This does not surprise me at all though the first I have heard about the German elections.

There are widespread concerns that Germany in particular is hiding bank problems until after the September elections, using its "bad bank" scheme to keep "zombie institutions" alive.

Who is Buying Driving the Market Up at the End of the Day?

Let me first say, I don't know. So if your looking for a concrete answer you can stop reading now. This does not happen every day but has happened alot from the beginning of April and classically occurred yesterday.

I am addressing this issue because I have received alot of questions concerning it.

Their are two potential candidates who are pounding the futures higher, some government entity or a large (or group) institutional fund(s). (there may be other possibilities but those in my mind are the most likely)

In general I work very hard not to be a conspiracy theorist and argue that the government is trying to manipulate something. Most people who fall in this camp are arguing this as an excuse because there on the wrong side of the trade. The market is going up and they are caught short. So they find an escape goat. Even if they are right, it is dangerous psychologically because it prevents you from assessing the situation and considering that you may be wrong. An investor can become mentally locked in and just blame an invisible hand missing an actual change.

With that said, I also do not cast a blind eye that the government can't be involved like many talking heads on CNBC want to do. It would make complete logical sense if they were. Think about it. They are trying to manipulate (and failing) the biggest markets in the world. They are open and honest about this. What markets? The treasury and mortgage market. They are buying to try to keep rates down. This market is multiples the size of the equity market. The government has always been involved in manipulating the market in some form or fashion so why could they not be in the futures market? Investors who immediately dismiss such a possibility are equally as blind as those who automatically assume it has to be the government. Remember the Fed and the Obama administration has gone on a full blitz to try to convince everyone that everything is okay. They are trying to play a game of perception change and so what better way to do that then for the equity market, which is flashed on every local news channel at the end of the day, to go up.

If it is the government, the game will end. Major market manipulations always end in tears but they can last a long time.

If it was the government, what vehicle are they using? My guess is it wouldn't be the Fed but some entity underneath the Treasury. My guess is it would be more computer based so very few people would have to know about it. My guess is it would be programmed to kick into buy under certain circumstances. Alot of speculation centers on some TARP money that may have been diverted away to buy S&P 500 futures.

What if it is not the government? That is possible and I would say almost equally likely. Big funds, think big pension funds, macro funds, $20 billion plus hedge funds, often times get exposure through S&P 500 futures and then will work through buying individual stocks or indexes later. So if one or several very large funds decided they are now bullish on equities and want to change to overweight from underweight over several months this would involve billions upon billions of dollars. They would try to allocate additional money every day and would hit the futures market to make sure they got this exposure. As volume has disappeared they are becoming a bigger and bigger part of the market forcing these late surge spikes.

In my mind, one of the biggest arguments against big funds is the trading appears sloppy. This guys should have in place the ability to mask big purchases and get good prices. These spikes at the end of some days appear sloppy with more the purpose to move up the markets versus buying at a good price.

Regardless, it doesn't matter from my perspective. If it is truly manipulation, I believe it will end in tears so I try not to worry about that scenario. I try to worry about managing my risk and not lose to much money since I have a very short bias. At the same time I try to determine if I am wrong. Is there really something underlying the the system that supports more and more buying.

Be aware of the possibilities, understand what is going on but focus long term on the fundamentals. At the end, even the strongest government in the world can't override that.

Monday, June 8, 2009

Future Buyers Only

So another day and it is getting so easy to recognize when the big buyer steps into the future market and what the end result will be. The cash market had its slowest day yet. Only 1,077,228,000 shares traded on the NYSE today. Normal volume since like January has been about 1.7 billion and normal for the month of May may have been around 1.4 billion ish. There is no trading interest in the market. As more and more market participants realize they don't want to buy because stocks have run so much without much economic improvement but they also don't want to sell because someone somewhere is stepping in through the futures market to drive the market higher, the actual market is becoming a ghost town. I know that applies to me. I have barely traded in the fund at all for weeks. I refuse to short against this invisible buyer but I don't want to buy anything either because it seems all smoke and mirrors and valuations have surged. Friday to me still looks like a short term top and the market action acted like it today also until the big futures buyer stepped in at 2:20. There is little or no buying interest. There hasn't been for weeks. This game can't last forever. Until it comes to end though, I will continue to play spectator.

There was one difference today compared to the normal rocket ship in the futures. Higher beta stuff like the Russell 2000 ETF IWM did not participate. This may or may not be significant. Shows fewer traders were willing to jump in other areas of the market when the S&P 500 futures were getting pushed higher.

Weekend Recap

Wow - what a weekend. I literally slept 1.5 hrs Friday night (actually probably less, I laid down for 1.5 hours), 4 hours Saturday night and about 5 hours last night. Running on fumes to say the least. What was I doing? Having a blast!! Swimming, dancing, socializing, eating, going out in Austin Friday and Saturday night, latenight at my buddy's 8000 square foot house on Lake Austin they are renting, debating the markets non stop, and everything in between. At its peek, I think the reunion had about 70 people or so which was the main event the lobster fest Saturday night. One of the best weekends of the year.

The 2:20 Buyer

Huge buyer just hit the futures market. Volume is going beserk. This is turning almost predictable.

Friday, June 5, 2009

Weekend of the Year

I am out headed to Austin for the Texas A&M Titans Lobstorfest/Reunion that occurs every year. I believe there like 65 Titans scheduled to convene at Britt Harris house (CIO of TRS) tonight into tomorrow. It will be awesome, catching up with friends, talking markets, being goofy, swimming in Lake Austin, and having a grand time.

The market didn't quite roll over like I thought they would. The close will be interesting. Futures are finally back to a more normalized volume but amazingly NYSE volume is again really really light. It is incredible how few market participants are out there. I still think today's top was probably an interim top. Maybe a few days, maybe a few weeks. It is possible that was a long term top. That is what tops look like but I remain doubtful about that. Either way I still think 900 to 910 will likely be seen before 950. Next week will tell the tale.

The pound has been getting crushed the last couple of days after being on a rocket ship higher. Eastern Europe could be a big story next week also. Any move on yields higher should also put a stop on stocks. My guess is this is now looked at as a negative versus a green shoot.

Have an awesome weekend. I will!! :)

Very Bearish

For those of you not understanding what is going on all you have to do look is look at the 10 year treasury. The market is finally noticing this. It broker higher just like the S&P 500 did last Friday. Same technical pattern.

The jobs number was a very bearish number. How?? All of a sudden the talk is going to flip to the Fed raising rates or pulling liquidity.

I have said numerous times that deflation will lead to inflation. Not inflation will lead to inflation or inflation fears will lead to inflation. What is happening is the rise in yields will completely choke off any recovery. This will choke off commodity usage. Gold slaughtered, oil down, soft commodities down. The inflation talk in the market for America is actually a good thing. It will force the economy down and continue its clensing process. Now the Fed will mess this up and some point pumping more money into the system (I am talking months or even a year out) and the deflation will lead to the inflation.

We failed at 950. I think the market is heading lower. We may see 900 in the next few days.

Thursday, June 4, 2009

Cases Where Inflation Fears are Warranted

Good column in the Wall St. Journal on why there should not be inflation fears unless...then it goes on to list four reasons why inflation may be a concern sooner rather than later.

Not so long ago, we were warned about the prospect of devastating deflation, a widespread decline in wages and prices. Today, we hear equally dire warnings of an outbreak of inflation. It's like preparing for an epochal drought and suddenly being told, "Never mind! Get ready for a flood of Biblical proportions."


An immediate outbreak of inflation is improbable. Consumer prices in industrialized countries have risen less in the past year (0.6%) than in any 12 months since the Organization for Economic Cooperation and Development began keeping records in 1971. In the U.S., unemployment is at 8.9%, and forecasters see it hovering above 9% into 2011. American industry is operating further from full capacity than at any time since the Fed began keeping track in 1948.


But what would have to happen for inflation to soar above the 2% target that most Fed officials set for their favorite gauge?

It then goes on to list four things that could bring on inflation.

The Normal Cycle in the Non Normal Cycle

There has been alot of talk recently about inflation and even the Fed pulling back some of the liquidity they have added to the market. Hence, the ideas of a V shaped recovery are popular.

I think it is all ridiculous. I don't think the odds of a depression have really dropped off that meaningfully in the last four months and in some ways I think the playbook for a depression is being followed fairly closely.

In my latest quarterly letter I talked about the normal cycle within a non normal cycle. I said:

Modern economic history in the last hundred years has been split into two basic cycles. The “normal cycle” which ends with a Fed induced recession caused by raising interest rates, forcing the economy to slow with the overall goal of keeping a lid on inflation and the “non-normal” cycle which is the result of too much leverage in the system outside of the Fed’s control. This is what occurred during the Great Depression and Japan’s implosion in the 1990s. It is incredible that investors are still trying to apply the economics of normal cycles to the current economic decline. The world is in a “non-normal” mega deleveraging cycle. Of all the premises circulating in the marketplace, this appears the most obvious.


As production stabilizes, investor’s optimism rises, but investors are looking for the normal cycle. In reality, it is the normal cycle embedded in a non-normal cycle, the production stabilizing after inventories are worked off, but the underlying demand is still deteriorating. A stabilization in overall production occurred in late 1930 into early 1931. There was great hope that the bottom was in; yet, demand was still deteriorating. This demand stabilization is what matters (not production or inventory levels) and investors are once again failing to recognize the difference between today and normal recessions.....If the deleverging continues, which seems inevitable, demand will continue to decrease. If this decrease continues, once the inventory correction is complete, the production will once again turn lower. It is what occurred in late 1930 and unless the deleverging stops, it will occur again.

What is occurring is what I wrote about. We have had two months in a row of retail sales dropping, both months missing forecast. We are almost assured now a third month in a row (May). That should mean consumer spending was down in Q2 after a bounce in Q1. Today same store sales were reported. Chain store sales were down a record 4.6% in May.

We probably have another month of two for production to catch up to the depletion in inventory but what matters is the demand stabilization. There sill appears to be little of that occurring. This means the normal road of a depression / non normal cycle is being followed very closely.

U.S. Mortgage Rates

This is becoming a big issue. The 30 year mortgage rates have hit the year high. Like the other big issues that the market is ignoring, the market is continues to ignore this one. For all the efforts of the Fed and the U.S. government to keep mortgage rates low, this is a complete slap in the face.

I tend to think this is all more tied to the inflation trade and what is forcing oil and other commodities higher. I still think it is premature and the rates and the commodities will head lower before really taking off sometime in the next 1 to 3 years. Could be wrong but in the short term, the more the mortgage rates stick north of five percent and the more commodities climb, the more pain the consumer will feel.

From Bloomberg

Fixed U.S. mortgage rates jumped to the highest level this year, signaling the Federal Reserve’s plan to lower borrowing costs has stalled.

The average 30-year rate rose to 5.29 from 4.91 percent a week earlier, Freddie Mac, the McLean, Virginia-based mortgage buyer, said today in a statement. The last time the rate was higher was Dec. 11, when it was 5.47 percent.


Yields on the benchmark 10-year Treasury note and Fannie Mae mortgage bonds are higher than they were before the Federal Reserve said March 18 that it would buy as much as $1.25 trillion in mortgage-backed securities to help drive down borrowing costs.

Wednesday, June 3, 2009

Zeke Ashton Interview

One of my favorite probably lesser known investors is Zeke Ashton from Centaur Capital. I have met him a couple of times and he is a great guy besides being a great investor. I love how he approaches the investing world and believe our views are pretty similar in how we look at things like portfolio construction. He uses options and leaps alot to minimize risk which I am very activity involved with as well. He did an interview with the Manual of Ideas that Seeking Alpha republished. I highly recommend reading it. It covers many of his points from his speech at the Value Investing Congress and discusses some major risk management themes in investing. Risk management in investing is not about formulas but about common sense. Of course when your losing money it sometimes means doing what you don't want to do but have to force yourself psychologically into doing it. Great read.

Another Quirky Day

Another day where there was no volume and a buyer stepped into the close to propel the markets higher in the last fifteen minutes. Most of the time I don't have any opinion on where the market is going in the short term and this is one of those times. We may go higher, we may go lower, who knows, and I don't care all that much. The economic news was dreadful, more dreadful than usual, especially if you consider Europe's news on consumption and exports and then the revisions in previous months for the U.S. data. The market actually did fairly well considering all of that. The lack of volume said there was no sellers, there was just no buyers also which caused the market to head lower.

Outside the short term, the tension continues to build. Eastern Europe problems continue to build and with mortgage rates over 5% another host of problems are being created. In my opinion, it is just a matter of when not if this all finally blows and lower we go.

"We are all going to die" - Jim Rogers

Okay, that is not exactly what Jim Roger said in this interview with The Economic Times but pretty close. Jim is always fairly frank and he holds no punches in this one. Talks about currency collapse and the Dow going to a 1,000,000 in dollar terms because of the collapse.

In a word I think it is nutty (in the time frame he is talking about). His points if you cut the drama from it are very very valid and things I have been talking about over and over again.

Even if he is 100% right, this stuff does not happen overnight. If you study the history of the Wiemar Republic in the 20s into the 30s it took years before things really unraveled. There was high inflation (well at least by our standards) of 5 up to 15% for years before the 100,000% inflation rates hit. The stock market went way down before skyrocketing in local currency terms before basically going to zero.

A major sovereign default will cause deflation, not inflation, in all countries outside of that nation. So if UK defaults or devalues similar to 1931, just like 1931, it will lead to deflation in the United States.

Anyway, read the interview, glean from the themes, understand the inherent meaning behind the themes, and discard the rest keeping a piece of it in the far reaches of your mind.

The possibility of a sovereign default in the developed world could further depress sentiments. You think it’s possible?

In 1918, the UK was the richest and the most powerful country in the world. Within one generation it was in shambles, within two-and-a-half generations it defaulted. The UK defaulted in 1970s and had to be bailed out by the IMF. Many of the countries in the developed world are in serious trouble right now.

Iceland has already defaulted. I think there could be a currency crisis because of sovereign debt problems later this year, next year or 2011. Developed nations have defaulted before. Remember the Asian crisis. It was a default of one kind or the other. It has happened before and it will happen again. Thanks goes to several of you.

Are you worried about any particular market or region?

I am glad that I have no investments in the UK. Neither long, nor short. I am convinced that it’s in trouble. I am worried about the US. I have sold nearly all of my US dollars. I always had some as I am an American citizen. But I see serious problems developing there. Those two of the big developed countries are the ones that I see with the most likely problems.

But the problem is that it never works that way. Everybody is sitting here watching the UK and US and it may happen in say Portugal or some place we haven’t thought of and it will come suddenly to surprise us all.


What kind of a market are you witnessing now?

It's a bear market rally. I was going to say I don't think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,00,000.

Your Tax Dollars at Work at JP Morgan

Goldman has been playing this game and now JP Morgan is jumping in the mix. According to Bloomberg JP Morgan has leased a tanker to store heating oil off shore. Goldman has been doing this with regular oil for months.

So, as I have said numerous times, we are drowning in oil. Inventories are sky high. Yet, oil prices keep going up (until today). This is because of 1) market manipulation - if held offshore they don't go in the official inventory numbers and it makes current supply scarce and 2) China stockpiling probably because they would rather pay for an overpriced asset like oil than pay for an overpriced long term US bond.

Either way, this drives up input prices for companies and hurts the consumers where more of our dollars go to pay for fuel at the pump. JP Morgan of course has TARP money, tax payer money, to play this game. If the bet goes bad, I guess they are to big to fail and you and I will bail them out. Got to love the world we live in.

JPMorgan Chase & Co., the second- largest U.S. bank by deposits, hired a newly built supertanker to store heating oil off Malta, shipbrokers reported, in the company’s first such booking in at least five years.


“It’s opportunity-driven,” Sverre Bjorn Svenning, an analyst at Fearnley Consultants AS in Oslo, said by phone. “I doubt it’s going to be a permanent or new sort of trade.”

Tuesday, June 2, 2009

From One Type of Debt to Another

A very good write up in the Financial Times by Edward Chancellor of the GMO Asset Allocation Team. It touches on several of my thoughts. The United States is fixing nothing but moving the problem from the consumer to the government. The end result will end in tears. Thanks goes to Charles.

As the stock market revival survives its third month, talk is turning from “green shoots” to a “sustainable recovery”. Yet this economic pick-up, like the one which followed the technology bust, has a potentially fatal weakness – it is fuelled by the rapid expansion of non- productive credit. America has not yet been cured of its addiction to debt. All that has happened is that excessive growth of household credit has been replaced by an even more extravagant expansion of government borrowing.


Public policy today serves to delay the day of reckoning rather than promote a return to economic equilibrium. We have been through this process before. During the technology boom of the late 1990s, US corporations were expanding net debt at an annual rate equivalent to 6 per cent of GDP.


Yet the US government cannot support both the economy and the financial system indefinitely without ruining its own balance sheet. The alternative is for Washington to retrench. Only when that happens will we discover whether the current recovery is any more soundly based than the one which preceded it.

Monday, June 1, 2009

Screaming Market

My thought that if we didn't gap down at the open we would be at 950 before you knew it didn't take long to play out. High was like 947.77 in the S&P 500 which is close enough for government work. Didn't think it would happen all in one day but that is what it is. We have been screaming for a day and 15 minutes so I wouldn't be surprised to see a pullback potentially back to the 200 day moving average but assuming nothing major hits I think the market is heading higher. The idea or hope for any 10% pullback has probably been pushed off for awhile. It is really amazing when you think about it. In the last two weeks you have had North Korea test nuclear missiles, threaten South Korea, economic news that is still only less bad (PMI on Friday was just bad), the first DOW component in the history of the index declare bankruptcy, the 10 yield go parabolic, the dollar plummet etc. etc. and the market is able to launch a major breakout to the upside.

The fact that the treasury market is becoming just as volatile if not more volatile than the equity markets should be concerning. Today was also weird with the huge spike in volume early on and nothing else going on all day with volume drying up until once again in the last two minutes. Also the internals were strong but not what you would have expected on a major break out like this. Financials also really didn't participate.

Either way, I think the market has decided which way it is breaking and we may get some pauses and moves lower but the market seems like it will want to move higher in the next few weeks.

David Rosenberg CNBC Visit

David Rosenberg was on CNBC this evening. He has been a big bear and right. He thinks the economy will not show a great Q3 or Q4 recovery but thinks you won't know this until August or September and the stock market could likely keeping running on technicals alone. I read many of his economic pieces. There good stuff and been right on regardless of what the market decides to do in the interim.

Speech by Bob Rodriguez of FPA Capital

A very very good speech by Bob Rodriguez. He spoke at the Morningstar conference last week. He has been selected Morningstar Manager of the Year three times and after this speech received a standing ovation. He was one of the early bears and still thinks we are in a bear market rally. He believes the U.S. government is walking down the wrong road. I couldn't agree more. The speech is worth the time to read. Thanks goes to Pete.

On the government's bailout policies.

At FPA, we fundamentally disagree with these “rescue” programs since we believe our impaired financial system is being distorted by protecting inefficient and questionable business enterprises. These programs reflect a philosophy of DWIT—Do Whatever It Takes—to stabilize the economy now. Maybe I should call it DimWit? In my opinion, a perfect example of unwise policy has been the economic support of the automotive industry, especially GMAC.

On the stimulus package

I expect little bang for the buck from the latest economic stimulus plan since most, if not all, of the anticipated positive economic effects will be offset by an increase in personal savings and a reduction in U.S. exports.

On Congress

My confidence is being undermined by this new financial system and era. The House of Representatives responded to the voices of the mob, when it voted 328 to 93, to punitively tax AIG employees in an ex post facto fashion. Many of these employees committed to aid in AIG’s corporate restructuring and expected their employment contracts to be honored.

Outlook on the Markets

My financial market outlook is rather cautious. I believe the recent stock market rally is nothing more than a bear market rally. It is being driven by some highly optimistic expectations.