Kaspar's Market Insights

Follow Me on Twitter

2011-03-22T19:00:00.003-05:00

I was asked if there was an easy way to know when I post something. The answer is yes. I have a twitter account that when something gets posted a tweet is sent. You can find me directly on the twitter website or can go to my section on gold shark and click on follow me.

Hope that helps.

From someone who is more tech savvy than I am:

For everyone else's quick access, the Twitter page is: http://twitter.com/kasparscomments

OR as they say on Twitter:

@kasparscomments

Blog Posts - Where You Can Find Me

2011-03-21T14:31:00.002-05:00

Hey all. There are some major changes occurring as far as blog posts go. I have started writing for various websites. Instead of random blog posts (which I still may do occasionally), I will be publishing more regular content that will be picked up by these websites:

Goldshark

Ark Fund Capital Management

Dollar Collapse

321 Gold

Business Insider

Seeking Alpha

Goldshark, Business Insider, and Ark Fund Capital will have everything I publish. The other websites will publish off and on. There are also five other websites pending that may pick up some of my content.

Also - the goal is to become much more regular with writeups once a day Monday through Friday.

I may still post something from here from time to time but it will be inconsistent. Hope to see you on one of the other websites.

Utah Law - Pay your tax in gold or silver??

2011-03-03T19:05:00.004-06:00

This is incredible. The Utah house is going to vote next week on allowing US federal government issued gold and silver coins. This is monumental!!!

From foxnews.

The Utah House was to vote as early as Thursday on legislation that would recognize gold and silver coins issued by the federal government as legal currency in the state. The coins would not replace the current paper currency but would be used and accepted voluntarily as an alternative.

The legislation, which has 12 co-sponsors, would let Utahans pay their taxes with gold and also calls for a committee to study alternative currencies for the state. It would also exempt the sale of gold from the state capital gains tax.

So if you had an American silver eagle or American gold eagle it would be considered legal tender in Utah. This would open up all sorts of opportunities for businesses to transact in gold also. This is truly amazing and I am speechless.

In this same article it mentions one of the stupdiest comments Bernanke has ever utterred (and he has said some stupid stupid things over the years).

Bernanke also said that gold couldn't return as the world standard because there's not enough gold in the world to effectively support the U.S. money supply.

Think about that for a moment. Idiotic. It isn't based on amount. It is a function of price. So you adjust the price of gold to make the value of gold to equal the money supply.

Utah apparently isn't the only state to be considering such a move.

Twelve other states have offered similar proposals: Georgia, Montana, Missouri, Colorado, Indiana, Iowa, New Hampshire, South Carolina, Tennessee, Washington, Vermont and Oklahoma.

Gold and silver are quickly moving back to currency status.

Marc Faber - We are Doomed - Buy Gold

2011-02-28T19:28:00.003-06:00

Marc Faber recently did an interview with McAlvany Financial Group touching on familiar topics to many of you. Over the weekend I was looking at the world and feeling especially gloomy. However bad it could have been in 2008 and 2009 the government has been able to successfully buy a couple of years and make the inevitable that much worse. Faber touches on some of the investment themes that I have talked about in the past. You can read the entire transcript here. A few highlights.

No surprise here. I think it is obvious. It will happen over multiple years but I think the comparison to a computer rebooting is very accurate. The government, Fed, and Wall St have run the system into the ground and it will have to be completely scraped and reboot will have to occur. And as Faber correctly points out it always ends in war.

I think we are all doomed. I think what will happen is that we are in the midst of a kind of a crack-up boom that is not sustainable, that eventually the economy will deteriorate, that there will be more money-printing, and then you have inflation, and a poor economy, an extreme form of stagflation, and, eventually, in that situation, countries go to war, and, as a whole, derivatives, the market, and everything will collapse, and like a computer when it crashes, you will have to reboot it.

One thing Faber did not mention in this interview that I have heard him say recently is that regardless if your bullish or bearish or a deflationist or inflationist, you should be long term bullish on oil. Because at this point all roads lead to war and oil will move strongly when that happens. Of course he is talking over years and so oil could go down 70% just like in 2008 before rallying again.

And than on gold.

That is why I am advising people to accumulate gold. Can gold have a correction? Yes, there has been a little bit too much euphoria about gold, and we may have a correction, but I do not think we are in a bubble in the price of gold. In fact, I could make a case that gold, at this level of $1400 an ounce, is cheaper than in 1999, when I look at the unfunded liability growth of the U.S., at the credit growth of the U.S., and at the household growth, and at the money printing, and at all the wealth creation that happens in China and Russia.

Finally this is what I think is one of the surest bets in finance over the next decade. How it happens I have no idea. Maybe it is 10k like Faber mentions or maybe the Dow goes to 5,000 or something lower or higher. Either way it makes perfect sense.

In a money-printing environment, it is very difficult to know what is actually cheap and what is expensive. Is the price of wheat high, or is it low? Inflation-adjusted, it is extremely low. In nominal terms, it is relatively high. I believe that, in March 2009 when the S&P was at 666, the market was actually much cheaper than is generally perceived, because of the money-printing, and I do not anticipate that we will see 666 on the S&P again, in nominal terms.

In other words, they are going to print so much money that the S&P could be at, perhaps, 2000, but in real terms, it could be down below the lows of March 6, 2009. Maybe in gold terms, we could one day reach a ratio of Dow Jones to gold of 1-to-1, as we were in 1980. In other words, the Dow could be perhaps at 10,000 or 12,000, and gold could be at the same level.

JP Morgan Makes Big Move in Gold Market - Someday a Financial Trap?

2011-02-07T21:25:00.003-06:00

One of the biggest problems in the last few decades with gold is that you couldn't use it as collateral in normal every day finance transactions. So besides the fact it doesn't earn an income stream or pay dividends, it was also a dead asset in that it couldn't be used to leverage other assets. Well all that is changing.

From JP Morgan Press Release:

J.P. Morgan Collateral Management Offers Automated Use of Gold
First tri-party agent to accept gold

London, 7 February 2011 - J.P. Morgan today announced it is the only tri-party collateral manager to accept physical gold as collateral to satisfy securities lending and repo obligations with counterparties. This comes as more clients look to use gold as a hedge against inflation and to post as collateral.

"The ability to finance and leverage the broadest range of asset classes is important to our clients. Many clients are holding gold on their balance sheets as an inflation hedge and are looking to make these assets work for them as collateral," said John Rivett, Collateral Management Executive, J.P. Morgan Worldwide Securities Services. "By combining our collateral management and vaulting capabilities, we provide clients with greater flexibility in how they mobilise collateral."

The automated use of gold in collateral management is introduced under J.P. Morgan's Worldwide Securities Services global collateral engine initiative. This initiative enables clients to mobilize collateral inventories across multiple geographies and trading activities, regardless of the underlying obligation, to extract maximum value and manage risk.

The firm expects to accept additional precious metals and commodities as collateral later in the year.

This is a huge move by JP Morgan. They announced they will accept as collateral physical gold to satisfy securities lending and repo obligations with counterparties. Over time this seems to be a game changer for the gold market and will allow for a potential large gold bubble down the road. It is also interesting because if we do someday have a massive debt implosion and the system collapses this gives the government (i.e. JP Morgan) a way to repo the US gold holdings held by private investors. It has the potential to be a very keen laid trap. I don't want to imply there is a conscious effort of a keen trap being laid. Just that the trap is being created consciously or unconsciously. Used correctly this is very important for money management and opens up all sorts of possible avenues, but what at the beginning wise men do fools will do at the end. As we have learned rules can change overnight. Someday down the road if the system were to collapse and most of the gold is leveraged and used in various derivatives and swaps etc etc it could very easily end up where the banks and hence the government will end up with most of the gold in the world by taking possession of the collateral. They don't have to consciously scheme at all. It just falls into place. The government doesn't have to look bad confiscating anything because it was part of the collateral arrangement.

Who knows what gold does in the short term. It looks sort of weak technically currently but who knows. Long term this creates the dynamics needed for a big gold bubble. It makes gold alot less useless. I can still own gold and leverage it to own income producing assets.

Tomorrow - An Important Day for the Markets

2011-02-03T17:50:00.003-06:00

I haven't talked about the markets in a long time. We are on a runaway train. It doesn't matter much what any data says. I think the next two market days determine whether the trains shifts into a higher gear or gets derailed. Right now nothing is able to stop this market. It seems we are about to break upside resistance where the market would quickly progress higher towards the 1400 range in S&P 500. We have already broek 1300 which is important but we cant get beyond 1310 to 1315 without really leaving 1300 far behind.

It seems shocking (I guess it really shouldn't be) how the market has ignored this Egypt thing. Tomorrow into Monday I think is really important on whether that becomes a stock market issue or not in the short term. Muslim Friday's prayers are tomorrow and I would expect that to get things heated again. Mubarak is picking up his rhetoric that he wont quit before September despite world leaders saying he needs to quit now. We are in the sweet spot for this to become an issue or prove it is a non issue.

Jobs number comes out tomorrow also. I think the only way it is an issue is if it is really strong. In that case the market probably falls in this warped world since Wall St needs liquidity, not positive economic results for Americans.

Republicans - Already a Failure

2011-02-03T16:33:00.002-06:00

That didn't take long. From Bloomberg

House Budget Committee Chairman Paul Ryan announced plans today to cut government spending by $35 billion from last year’s levels as Republicans backed away from campaign promises to slash expenditures more deeply.

and

The government’s deficit is projected to reach $1.5 trillion this year.

and

Republicans promised in their “Pledge to America” issued during the 2010 midterm campaign to roll back non-security discretionary spending to pre-Obama 2008 levels, which would have saved $100 billion compared to what the administration proposed last year in its budget request. Republicans scaled back their plans largely because the government’s fiscal year is almost half over.

The plan amounts to a rejection of calls by the Republican Study Committee, a bloc of self-described fiscal conservatives who had demanded party leaders stick to plans to cut $100 billion this fiscal year. Democrats said the scaled-back cuts still went too far.

$35 billion cut? We are running a 1.5 trillion deficit, total appropriations budget is 1.055 trillion, the total government budget is 3.7 trillion and the Republicans are declaring a victory on 35 billion cut? That is a freaking rounding error!!!

The tea partiers have already been marginalized by the establishment. They are great freinds of the Republicans when it is popular to be so and put in the corner when what they stand for actually becomes an issue. While we don't need Egypt it will take some massive protests to really get things changing.

Billy Walters - Gambling or Maybe Investing Legend?

2011-01-19T16:35:00.003-06:00

CBS had a great 60 minutes piece on Billy Walters - the legendary sports betting individual in Vegas. While watching the piece, it struck me how Vegas has turned into a better "game" than Wall St. I hate to "gamble" but the word gamble needs to be better defined. Gamble in my mind means pure chance where a player is guaranteed over the long term to lose. The probabilities are guaranteed over the long term to work against the player. Playing blackjack is a gamble. Craps, lottery tickets, slot machines is gambling. Sports betting and Texas hold em may or may not be gambling. Gambling one does because one has to much money, one has gambling issues, or the pleasure one receives over the long term from the fun involved is valued higher than the money lost so it makes sense on an individual economical basis.

Unfortunately, Wall St. is turning more and more into a gamble. The reason? Because Wall St. sets the rules. If Wall St. still jacks up, they than change the rules. They also have a "mob boss" - the U.S. government, helping enforce these changes. Billy Walters has found a system and has worked within the rules of the system to win and make money. The rules are not being changed on him mid bets.

One other interesting note. Walters admits there are shady characters in Vegas but per person he has met many more shady individuals connected to Wall Street than Vegas.

Anyway - very interesting video below. There are actually several bonus videos at the CBS website.

Hussman - Best December Read Award

2010-12-31T12:08:00.003-06:00

I thought the piece below was the best thing I read this month. It isn't based on technicals or speculation. Just long term valuation standards and facts. One thing that should have become apparent in 2010 is that there may be absolute truth, but at least in the financial world in the short term, truth is relative.

I encourage you read the entire Hussman piece.

Hope every has a great New Year!!

Why are Treasury yields rising despite hundreds of billions of Treasury purchases by the Federal Reserve? There are two possibilities in the current debate. One is that the Fed's policy of purchasing Treasuries has scared the willies out of the bond market on fears of higher inflation, and that the policy is a failure. The other is that the policy has been such a success at boosting the prospects for economic growth that interest rates are rising on anticipation of a better economy.

From our standpoint, neither of these explanations hold much water. On the inflation front, the recent bond selloff has hit TIPS prices as well as straight Treasuries, which isn't something you'd expect to see if inflation expectations were being destabilized. And although precious metals and other commodity prices have been pressed higher, the commodity run can be more accurately traced to negative real interest rates at the short-end of the maturity curve, coupled with a downward trend in long-term yields that has now reversed dramatically (more on that below). I've long argued that unproductive government spending and profligate fiscal policy are ultimately inflationary (regardless of how the spending is financed, and particularly if it is monetized), but I continue to view persistent inflation as a long-term, not near-term concern. A rise in T-bill yields of more than 15-25 basis points would change that assessment. Until then, velocity can be expected to collapse in direct proportion to changes in the monetary base, with little impact on prices.

As for the notion that the Fed's targeted Treasury purchases have directly aided the economy, the argument requires bizarre logical gymnastics. It demands one to believe that although the purchases were intended to stimulate the economy by lowering rates, they have been successful without lowering them, and in fact by raising them, because the expectation of lower rates was so stimulative that it caused rates to rise, so that the higher rates can be taken as evidence that lowering rates without lowering them was a success. Oh, brother.

And this is the hard part - basically if you have managed money avoiding the ugly you have gotten killed. You needed to to own trash.

The performance of these 133 factor portfolios over the past 13 weeks offers tremendous insight into the extent to which the Federal Reserve has encouraged speculative risk. Investors are chasing stocks with the greatest exposure to market fluctuations, commodities, credit risk, small-cap risk and volatility. Conversely, securities demonstrating reasonable valuation, stability, quality, or payout have been virtually abandoned by investors. Here is a sampling:

FACTOR
FACTOR GROUPING
13-WEEK RETURN

Market Beta
Risk
17.80%

Raw Materials Beta
Commodity Sensitivity
17.47%

Credit Spread Beta
Macro Economic Sensitivity
14.66%

Small vs. Large Beta
Style Sensitivity
12.54%

Silver Beta
Commodity Sensitivity
10.87%

Sigma Risk (Volatility)
Risk
10.73%

Operating Cash Flow Yield
Valuation
-4.02%

EPS Stability
Quality
-5.56%

Value vs. Growth Beta
Style Sensitivity
-5.87%

Return on Invested Capital
Profitability
-6.61%

Dividend Yield
Valuation
-9.34%

10-Year T-Note Beta
Macro Economic Sensitivity
-9.55%

High vs. Low Quality Beta
Style Sensitivity
-15.70%

He writes at length on valuation of the market.

Even if we assume a future dividend growth rate of 6.7%, which is the fastest growth rate observed over any 25-year span during the past century (and again, includes the impact of share repurchases), the S&P 500 would currently have to stand at 748 in order to be priced to achieve long-term total returns of 10% annually. Of course, with the S&P 500 at about 1256 despite a contraction in dividends over the past few years, this analysis would imply that fair value is again about 40% below present levels. It would be nice to be able to rule that conclusion out.

United Kingdom Prepares for Massive Job Cuts

2010-12-15T21:03:00.003-06:00

As riots and protests were occurring across Europe today (incredible the lack of coverage by the U.S. media) the Guardian is reporting that Brits are preparing for massive job cuts.

From the Guardian:

At least 100,000 public servants will receive grim news over the Christmas holidays or soon after as councils, police forces and other public services race to meet a deadline of 1 January to formally announce job cuts.

An analysis of local authority documents reveals that the number of council redundancies directly resulting from the coalition's austerity measures is expected to break the 100,000 mark by early in the new year, fuelled by the swingeing cuts announced this week to councils' budgets and the pressure to start cutting before the new financial year in April.

This comes on top of the 33,000 drop in public sector jobs over the three months to October that was detailed yesterday in official unemployment data and is likely to lead to a torrent of "at risk" warning letters hitting doormats across the country in the next few weeks.

100,000 may not sound like a huge number (or maybe it does) when you first hear it but lets compare apples to applies. The population of the United Kingdom is 61.8 million. The population of the United States is 307 million or 4.96x bigger. So that is the equivalent to the United States government announcing 496,000 job losses in basically one day. Throw in the 33,000 government jobs already lost in the last couple of months which is the equivalent of 164,000 U.S. jobs and the United Kingdom is announcing the equivalent of 660,000 United States jobs losses in just a couple of months. That is a massive number and is akin to the United States losing 600k jobs a month at the depth of the Great Recession.

No wonder there were riots all over Europe today. If you did not see this video it is worth the watch. It is from Greece today.

This is the beginning, not the end. Why? Simply nothing at the foundational level has yet to be fixed in the United States or in Europe.

Guest Post From Llano Llama

2010-12-15T13:10:00.001-06:00

Was posted in the comments by Llano Llama and I agree so much with it that I thought I would make it its own post. Thanks

There are so many angles on this.

I think Prechter is making the better case because he is taking into consideration more of reality. Unfortunately, to explain things clearly, laying out the arguments and counter-arguments requires multiple book length treatise that few would ever read. Our ability to process complexity is limited so we prefer simple answers and simple models. But alas, the economic world is not a simple linear predictable beast. It is a non-linear, non-equilibrium, path dependent, complex interaction of systems and sub-systems.

If anyone asks, I push the path dependent idea first. People seem to understand that we will get a different result if we raise taxes in 2011 rather than leave them at current rates. If they are more economically inclined, they will understand that Europe moving to a tighter monetary union and sharing the pain is very different than breaking up the EU/EMU.

If they are still listening, I try to lay out some cases where the expected simplistic story didn't occur. For example, in 2008 we heard that oil going over $140/bbl was a sign of runaway inflation or Peak Oil. And yet a few months later oil traded to the $30s. Similarly, you will hear that "A central bank in a country with debt denominated in their own currency can force as much inflation as they want." And yet Japan has gone about 20 years in some form of economic stagnation. Apparently, there are more forces at work than mentioned in the simplistic story.

At that point the discussion is either about human nature, the limits of Capitalism, or "should I buy gold?"

The Must Watch Videos of the Year - Peter Schiff and Bob Prechter

2010-12-13T21:36:00.002-06:00

There has been no bigger debate over the last two years than that over deflation and inflation. Perhaps the biggest deflationist Bob Prechter debates one of the biggest hyperinflationist Peter Schiff in the two videos below. They both believe the same thing, a complete collapse is coming in the next few years. They couldn't be more different in how that collapse will occur. Schiff believes we are heading towards a hyperinflation and Prechter believes deflation will come with a vengence and that banks will fail and people will lose deposits etc. (hyperinflation comes on the back end)

Unfortunately they both are just throwing out scenarios. There is little to go off of to conduct fundamental analysis. Collapse is coming, that can be fundamentally analyzed, how it occurs can't because it is based on social mood and political decisions. For my two cents, I think Prechter will be proven right but not to the extent that he is predicting. Deflation will lead to inflation. Dow will never get to 1,000 like Prechter is predicting. Hyperinflation is a political event and Dow well above 1,000 will cause collapse to jump start massive inflation.

I really think one of the more important things to listen to in 2010.

Part 1

Part 2

Money Printing?? - Hasn't Happened

2010-12-08T11:54:00.003-06:00

Maybe I am being naive but I think I figured out the technical way the Fed worked before almost anyone on Wall St. (Hoisington had it figured out) The knowledge and my efforts have cost me dearly as the perceived truth is much more powerful than actual truth. (i.e. David Teppers comments become gospel though completely 100% wrong in how the whole thing actually works) In other words it is a puzzle I wish I never would have solved. Sunday on 60 minutes Bernanke said the Fed wasn't printing money after saying in 2009 and 2002 he could. Now all of a sudden several Wall St firms analysts are echoing him. No one thinks!!! If the Fed says it must be gospel so when Bernank said he was printing money everyone assumed he was without actually looking. I have about determined Wall St. never thinks. It is 100% about gaming others, not fundamentals.

Below are a few excerpts by Morgan Stanleys David Greenlaw. (who also had it figured out earlier than most) The entire thing I can be found here. It is the best description I have read explaining a very complicated topic.

QE2 departs from the textbook. The issue is confusing because all of us who took a basic undergraduate Money & Banking class learned that a central bank's open market purchase of securities was effectively the same thing as printing money.[My comment - no one actually challenges the textbook. No one challenges perceived truth!!!] But the experience of the last few years has taught us that this logic is not always correct. In fact, Fed officials have been reluctant to adopt the QE terminology because the impact of asset purchases is all about rates - not quantities.

and

Fed will respond to inflation as needed. Interestingly, the market moves that we are seeing in currencies, commodities, inflation expectations, etc., appear to reflect a belief that the Fed has been printing money - or will do so at some point down the road as the money multiplier normalizes. Bernanke tried to address this point in the 60 Minutes interview. He indicated that the Fed could raise rates in "15 minutes" if necessary and that he is "100%" certain of the Fed's ability to respond to an inflation threat. Of course, it remains to be seen whether the Fed will follow through on this pledge - and it remains to be seen what the FOMC will consider to be a legitimate inflation threat. But the market moves that appeared to coincide with the reintroduction of Fed asset purchases reflect speculation - as opposed to a fundamental supply/demand shift - because there hasn't been any money creation to date. Ultimately, the success or failure of the Fed's asset purchase policy will depend on an interest rate transmission mechanism, not a quantity channel.

A Day to Take Note Of

2010-12-07T20:08:00.002-06:00

Very very interesting day today. I thought so during the day today and was reading some commentators tonight who thought so as well. The first prints of the day I covered some shorts and towards the end of the day I put half of it back on. Yes, that was a bad short term trade but the reversal today was amazing in ALMOST ALL asset classes. In technical terms hammers in the NASDAQ, S&P, gold, silver, copper, VIX etc.

Tomorrow will tell you alot. If we don't follow through to the downside it is ignorable but if we start selling off confirming today's price action it could get really interesting.

Today's news of course was the president became Republican showing there really isn't much difference between two parties. Republicans won today, Democrats won today, and America got screwed. You have to cut spending on the other side of it and the bond market noticed that didn't happen. Maybe that is when this all finally blows to bits, when the bond market sells off hard causing interest rates to spike. Typically bonds and stocks move inversely. That hasn't really happened this year. Bonds went way down looking like the economy was going to crunch while stocks continued to climb. However, when the game is up, both can go down. Look at Spain. Bonds go way down and stocks go down with it. There is some differences since Spain can't print its own money.

Anyway, today was a day to take notice of. Very interesting and tomorrow will tell you alot.

More of the Same

2010-12-01T21:21:00.003-06:00

Strong day on Wall St. I wasn't surprised that we were up (was expecting it yesterday with the start of a new month and Europe being sold hard the last few days), but as usual I was surprised how fercious the up move was. Because it was so strong it puts the odds that the market has higher to go. First watch 1227ish and than 1250. That is if the market doesn't reverse tomorrow, which could still happen. The reason we were up so strong is very suspect. Many are credited the "strong" China number last night which doesn't make alot of sense because the futures yawned at the number and the Chinese markets finshed flat. It started with Europe and unlike when Europe sells off hard and the U.S. markets shrug it off, when Europe surges it gives an excuse for the U.S. to surge. So up up and away we went. ADP employment numbers were strong but annouced layoffs were the highest they have been in 8 months. There was also a rumor that the U.S. would bail out Europe which was quickly denied.

I think the market continues to rest on Europe first and China second. If the problem spreads to where Spain has to be bailed out - game is up. The question is which game. Will Germany buckle and allow the ECB to start its own version of QE or will haircuts be taken on debt, losses taken, and we revert back to some sort of capitalism? More and more thoughts on some sort of QE in Europe.

Tomorrow the ECB meets and it is likely the bears only hope for the remaining of this year. The market seems to be indicating that it is expecting some form of signal that the ECB will loosen up buy more government debt. It is entirely unclear that will indeed happen. If it doesnt and the Euro starts heading down again, than todays rally should reverse tomorrow somewhat. Not really expecting it will but we will see. Someone was out there today buying European debt today and it almost had to be the ECB.

Gotten a few comments that I havent been blogging as much lately, and I haven't. I have been really busy but it is getting really old talking about the same thing over and over again. This is bad but it doesn't matter because the government will print more money. The last couple of weeks the market should have been down really strong with Europe falling apart but it wasn't. Probably bullish in the near term. The market won't start going down strong until something happens outside of Bernankes control. That will come from politicias, the populace, or an oustide nation (i.e. China). Like I said - if tomorrow the market doesn't reverse, the odds are strong that the market heads higher between now and year end.

David Einhorn on Consuelo WealthTrack

2010-11-29T20:21:00.002-06:00

David Einhorn was on Conseulo WealthTrack. Very good interview as one would suspect from Einhorn. I encourage reading or listening to the entire thing. Below are some highlights.

On what has changed (this is my big thing, the market can go up every day until it doesn't but absolutely nothing has changed fundamentally that caused this whole mess. It is worse)

CONSUELO MACK: Has anything changed? Are any of the watch dogs doing their job better?

DAVID EINHORN: Well, the truth actually is, what we’ve seen is, even in the bigger financial crisis, the same watch dogs have just repeated the same behavior, just in a much bigger way. So what we’ve seen, the same kind of sort of forbearance towards Allied Capital has been granted to the big banks, the big investment banks, and so forth.

and

CONSUELO MACK: So even with what we’ve seen, with the banks being more prescribed in what they are able to do, I mean, using much less leverage, being more scrutinized, you don’t think that that’s enough?

DAVID EINHORN: It’s just not enough. If you look at the big banks, they’ve gone from maybe 25 or 30 times leverage to 15 or 16 times leverage, or something like that. That’s still a lot of leverage. And it doesn’t count the derivatives books. And you have these huge notional derivatives books that, they’re just sort of tail risks that are sort of out there, and nobody really knows what’s in them, and nobody knows what risk they pose, and you certainly know that if any of the big four or five books that have the massive derivatives books was going to be on the cusp of failing; you would need to bail them out, the same way, in the future, that you would in the past. Notwithstanding whatever the new rules supposedly say.
on gold

CONUSLEO MACK: Now, one of the things you just mentioned is inflation. And we are seeing inflation in hard assets. And one of the hard assets that you own at Greenlight Capital is gold. It’s your largest position. So what does gold represent to you, in your portfolio?

DAVID EINHORN: To me, gold represents money. And there’s different types of money. Some people think gold is a commodity, and they want to think about jewelry demand, and how many weddings there are in India, and so forth. And how much is coming out of the ground. I think of gold as money. And you can have dollars, or you can have Yen, or you can Euros, or you can have Pounds, or you can have gold. And there’s other currencies in other countries, but those are the sort of the major currencies as I see it, and I think that the merit of gold is, given our current monetary policy and our fiscal policy, as well as the problems in the other major currencies, gold is the money, I think, of choice, that we would like to have a meaningful amount of our assets denominated in.

and

CONSUELO MACK: For individual investors, who don’t have the kind of flexibility that you do to trade and, nor the sophistication, I mean, how should we view gold, as individuals? I mean, should it be in all of our portfolios? And should we, too, view it as a substitute for paper currency?

DAVID EINHORN: I think so. I think it makes sense as a diversifier, and to have this sort of money, particularly because this is the kind of money that Chairman Bernanke can’t print more of.

On owning banks

CONSUELO MACK: So as an investor listening to you, would you touch a bank with a ten foot pole? At this point, would you invest in one of the major money center banks?

DAVID EINHORN: No. We wouldn’t invest in the major money center banks.

QE Explained - Cartoon Style

2010-11-17T22:40:00.001-06:00

Below is a video that has been featured on many blogs and has gone viral (over 1.3 million hits). It was so good decided to post it here also. Don't endorse all of what is said but it isn't to far off.

Catch Up

2010-11-17T22:24:00.003-06:00

Wow it has been a long time. I have been traveling some and been busy with other things. It also gets tiring writing about the same story. If you look at the headlines over the last two years, little has changed. Why the market decides to care now or care 6 months ago and not care a month ago is beyond me. We have been here 3 or 4 times over the last two years. Are we on the precipice of this thing falling apart or does the governments still have some wiggle room to keep this going? Europe is again falling apart, U.S. muni bonds are blowing out like they haven't been since 2008, an anti move against the ponzi perpetrator - the Fed - is growing in momentum, obvious spending cuts going into next year, China pulling back- are we done or is this another false break and there is yet another move up? If we are done going up why now versus last August? Logic need not apply.

The chart below was on zero hedge. It is the most amazing chart you will ever see. It shows domestic equity outflows. It has been 28 weeks in a row with domestic mutual equity fund outflows. All time record. That is over 80 billion dollars. Somehow the market goes up. Who is buying? I don't know. The government? Investment banks? I don't know.

There are three really interesting things going on right now. China seems to be slowing, Europe is cracking, and U.S. muni bonds have sold off hard. All three are very dangerous going forward. I just don't know if there is another push higher or not. Europe is more dangerous than Wall St. gives it credit for. The bickering among European leaders is what will topple the Euro.

The NY fed manufacturing index was horrid. Worst drop since 2001 I think. Components that make up the number were also really bad. Tomorrow is Philly Fed. I think that number has more importance than normal. Will be interesting if it diverges or confirms NY.

QE Impact on Japan's Stock Market in 2001

2010-11-05T10:26:00.004-05:00

I had been wondering about this. From David Rosenburg:

Let’s learn from the Japanese lesson with its QE experiment. The day the Bank of Japan launched the program on March 19, 2001, the Nikkei surged 7.5%, from 12,190 to 13,103. It went on to make a fresh high on May 7, at 14,529 (just under two months after the announcement) — rallying another 11%. Fully three-quarters of the post-QE rally to the May highs occurred in the first four days. And that is all she wrote.

Three months later, as it became painfully obvious that the real economy was not responding well to the shock therapy, the Nikkei index slid 16% to just over 12,000. Moreover, the day before 9/11 it had already tumbled all the way down to 10,500 (down 27% from the nearby post-announcement high and 14% lower than the day of the announcement itself!).

That is a huge move higher in a short amount of time on the QE announcement. My follow up question would be how much the QE was telegraphed. In otherwords did the market know QE was coming for sure like it was in the U.S. How much was the rally priced in here and how much do we still have to go?

Ron Paul Is About to Totally Revolutionize the House Monetary Policy Panel

2010-11-04T20:25:00.002-05:00

From CNBC

Odds are you haven’t heard of the monetary policy subcommittee. Officially known as the House Subcommittee for Domestic Monetary Policy and Technology, it’s a subdivision of the House Financial Services Committee that has mostly occupied itself with pressing questions of issuing commemorative coins and whether or not to eliminate the penny.

That’s about to change. Ron Paul, the Republican Congressman from Texas, is the ranking member of the monetary policy subcommittee, and when the next Congress takes over he’ll likely be the chairman of the subcommittee.

And Congressman Paul has some big plans.

“I will approach that committee like no one has ever approached it because we’re living in times like no one has ever seen,” Paul said in an interview with NetNet Thursday.

Paul said his first priority will be to open up the books of the Federal Reserve to the American people.

Time will tell how much power he will really have and how much he can really do. I have a feeling at some point this will be a big 2011 story.

Say Hello to Your Market God - Ben Bernanke

2010-11-04T19:28:00.004-05:00

Well if there was any doubt left over how much the Fed really monopolizes everything, it should have ended today. EVERYTHING was up and UP BIG.

I thought Art Cashin said it best today when he said:

It is becoming far more evident that the true purpose of QE2 is not to hold down interest rates. It is, instead, to raise asset prices, especially stock prices.....QE2 is beginning to look like an open-air multi-month version of the PPT.

Bernanke has taken over the throne of market god and he believes he has the wisdom to know what asset prices should be. Let's not believe in the market and what prices the market sets but we need a czar to decide where stocks should goes.

What this means is the markets are firmly in control by the Fed and the markets will not go down until an event occurs that the Fed can't control. What would that look like? Europe fracturing at the seams. Or Japan. Or Ron Paul gets some power over the Fed.

It is absolutely amazing to me that the Euro continues to climb. Look at these bond spreads. European stocks are making new yearly highs also. This should be yelling danger.

The problem with this of course is the Fed is the market. This is no different than the upteen manipulations throughout history. Look at the chart below. It is a manipulated market and the manipulator eventually lost control. Can you tell which market it is?

This is of course the silver market and the manipulator was the Hunt brothers. So pretend you know it is a rigged market. You know it is going to crash but pretend that is all you could invest in. At what point do you invest? Do you go long and try to get out somewhere near the top? Do you short and if so where? 10, 20, 30? How long is it going to last? Because the graph covers such a large time frame you lose the sense of time. That was really a 3 to 5 year event before it all played out.

The market is bigger than any manipulator. Eventually the manipulator loses but it could take a long long time. Bernanke will lose this and it will leave a trail of tears but in the interim I have no idea how you or I or anyone elses successfully plays it without it just being a gamble.

Economic data hasn't been bad this week. I find it interesting that the market surged on the worst data of the week. Jobless claims were way above expecatations. A few more Americans lost their jobs. Perfect - the stock market can surge.

The Elections and the Coming of Spring

2010-11-02T18:43:00.004-05:00

Most of Wall St. is focused on the Fed decision tomorrow. I think the election today has far more ramifications for the market than more QE which will distort asset prices but do little for the economy. Since February I have said, and written several times in various blog posts, that a huge Republican tea party led win would be extremely bearish for the markets and the economy. It seems we will get a chance to see if my thesis is indeed true. The economy at this point is a sham. The only thing propping it up is government spending and government transfers to the private sector. This is completely unsustainable but to keep the economy propped up and growing, not only do you need to maintain it but you need to grow it!!! Using play numbers but if the economy is $20 and the government spent $2 dollars the government is 10% of the economy. Next year the government spends $4 (a 100% increase) and assuming the rest of the economy stays the same causes the economy to grow 10%. (2 increase / 20) Of course that growth is very low quality growth and now the government is 18% of the economy. Well the next year all things equal (again assuming no private sector growth) the government has to spend $4 dollars just to maintain what it did previously. To have the same percentage impact as the year before the government needs to spend $6.20. (economy was $22, the government made up $4 and to get the same 10% increase needs to spend $2.20 on top of the $4 so needs to spend $6.20) Now of course that isn't all true as some of the spending may increase productivity or generate its own future growth (though most of government spending is waste) but the point is mathematically without strong productive private sector growth it becomes mathematically difficult for the government to continue to have the same impact. Add now a massive Republican win and the feel for a need of a balance budget, resisting stimulus measures, state and local budget cuts, and you are potentially looking at a massive black hole economically.

The markets are used to gridlock being good for the markets. It hasn't been gridlock that saved the economy or the market over the last several years. In fact it has been cohesion that Keynesianism is the right way to go. Think back to the fall of 2008 with the huge TARP senate bill that failed to get past. It was on all the tv networks and as soon as it failed the market plummeted. It was right before the election and many senators, especially Republicans, quickly switched their votes a couple of days later. That was gridlock and that started a collapse that was reversed. This time I don't think there would be any switch of votes to save banks and the more Tea partiers that win would ensure that. What has caused this massive market rally and extremely tepid economic recovery is massive government spending that was possible because and only because you had cohesive government to jam whatever had to be jammed through. Create gridlock and there is no more that can be jammed through.

There is an entire other aspect to this that Wall St. isn't looking at. Oversight of the Fed. Currently Ron Paul is the ranking minority member of the Domestic Monetary Policy and Technology subcommittee in Congress. What does that mean? Well he is line to take over the subcommittee chair. So what? Well that subcommittee is directly in charge of overseeing the Fed!!! So the individual who would like the Fed abolished will be overseeing it? Sounds like a friendly subcommittee. Of course Ron Paul won't be able to have the type of power to abolish the Fed but he will have the power to push certain legislation. His audit the Fed bill got gutted at the subcommittee level. Wall St. isn't talking about this at all but it seems to me to be HUGE!!!! It isn't a lock that Ron Paul will get that position. It used to be that the heads of subcommittees went directly based on seniority. Today that is still normally the case but you need to be favored by party leadership. That historically hasn't been the case for Ron Paul as he was looked as an individual with crazy views but Ron Paul's status has climbed in the last several years as he is associated with the tea party movement and is now seen as right on many topics he was previously ostracized for. This was John Taylor's take on the situation in his latest letter (Taylor is head of FX concepts - one of the largest currency trading shops in the world).

...After the Republican victory things will change. The Fed will be hamstrung, as Ron Paul, a conservative standard-bearer and harsh critic of the Fed, will head the sub-committee overseeing its actions. Liquidity expansion or new programs will probably drop sharply under his watch. Paul would argue that the Fed’s unfettered ability to “debase” the currency is about to come to an end.

This is potentially a landmark shift.

How will all this affect the markets. Well right now the markets are celebrating the idea of a split government. I don't think the markets realize how things will change. It is the absolute inverse of November 2008. Remember then the markets made a new low in March of 2009 after the elections as the markets (and me) failed to realize the implications of Obama and the democrats taking charge and the willingness to do whatever it took to get asset prices up. Even if it meant ponzism. The Democrats partnered with the Fed in an evil alliance to push asset prices and the economy up no matter what the long term costs. As a result of this faulty idea that gridlock is now good, the markets may have another day or several months of moving up on a Republican win (I personally think it will be a very short rally) but I think it will not take terribly long for the markets to realize that gridlock and a competing sheriff in town is not economic or ponzi friendly. In fact it is downright unfriendly. To keep growth going the government is going to have to continue to increase its overall spending. Right now that is not the way 2011 is materializing as state and local budget cuts take hold before the Republicans take over. Maybe the Republicans will again not act like Republicans after this election and take the free spending way of former President Bush but the influx of the tea partiers and the feel of 1994 when a Newt Gingrich conservatism swept the halls of Washington will probably keep the resistance up to the way it has been done.

This is also extremely dollar bullish as the Republicans will not be most likely making an alliance with the Fed who is hell bent on destroying the dollar. Ron Paul is as passionate about hard money as anyone around and his influence will grow as well as being joined by people who think like him.

A major shift is upon the markets. The Republicans will try to do the right thing. Unfortunately, I think currently the situation is unfixable. There were multiple chances to fixes over the last 10 years but the opportunity passed as the idea to hide it through banning short selling or changing mark to market accounting played into the current sham. On the outside chance it is fixable it means massive pain in the interim. The best analogy I can think of is some major disease. The doctor tells you that you need surgery but your chances of surviving surgery is about 10%. (If you would have surgery 3 years ago there was a 80% chance of surviving) If you don't have surgery you will live two years. That is all the time if you have left. If you do have surgery you will live for 30 more years. The democrats and the Fed are taking the route of living the year. The Republicans seem like they would prefer to take the chance of the surgery.

As John Burbank of Passport Capital said at the Value Investing Congress a few weeks ago, the United States now has to be looked at as an emerging market. No longer are the economic prospects as important as the political landscape. Washington matters much more than Wall St.

This election may just awaken the bears from a winter hibernation. For the bears, a Republican landslide may just be their spring as they stumble out of their dens from a long winter more grumpy than ever.

This has been my thesis for almost a year and it will be interesting to see if it plays out. One thing is certain. If I am right it proves yet one more time that the market really isn't a discounting mechanism at all. Just a drunk sailor where prices really carry no informational value. A far cry from what capitalism in the United States used to be.

Wall St - Main St Disconnect

2010-10-27T13:57:00.003-05:00

Somehow the market is shrugging off more horrific news as Portgual's government seems to be unraveling. The market of course has been a farce for over a year now. Even PIMCO's Bill Gross is now openly calling what is occurring a ponzi. There isn't a much better graph of the disconnect between stocks prices and reality than the chart below. Not much shocks me but this chart surprised even me today.

Away From Wall St Live the 99ers

2010-10-24T22:55:00.003-05:00

Currently futures are surging. Why? Ha, I have no idea. Your guess is as good as mine. Away from "wealth and prosperity" and a surging stock market is the real economy - what is really going on in America. 60 Minutes had a very interesting piece on the 99ers. Those who have been on unemployment benefits for close to two years as the longest downturn since the Great Depression continues. My fear of course is that somewhere between now and thirty six months from now, many Americans will look back and think that these 99ers had it pretty good.

See video below:

Emergency Alert on Home Prices

2010-10-22T12:00:00.002-05:00

Clear Capital puts out monthly data on housing prices but today they did something very unusual. Two weeks into the month they issued a house price warning. Apparently, according to their numbers house prices are starting to collapse. Down nearly 6% in 2 months. That is a plunge for an asset class that usually has very sticky prices and a warning sign potentially of things to come.

Flip Flop - The Inverse Matrix

2010-10-20T21:55:00.003-05:00

Today was the complete inverse of yesterday. I honestly wasn't that shocked. There was some surprise but as I pointed out yesterday, the market really hasn't had a topping process. Today we closed below previous highs, the S&P 500 is up .01% from a week ago. It looks like a more legitimate rollover. Not saying it is going to roll over but it looks better than it did yesterday.

The Euro also rallied hard. Again though it closed at a lower high. I actually more comfortable with the Euro here than the stock market and for the first time in my life I shorted the Euro today. Just a little bit. You have a good set up. You cover above 1.40. That is your stop. After the big surge I like the way it traded all day. We shall see if it has a new high in it or it is done.

The rumor today was more on QE. How many times can you rally on the same rumor? Seriously!! The rumor seems to be having a smaller impact each time but still.

Anyway - tomorrow will be telling. Jobless claims in the morning and it will be very interesting if the Euro rally today was a one day wonder.

What Color is That - Red???

2010-10-19T18:28:00.002-05:00

I saw a color I hadn't seen in a couple of months today. In fact I had just assumed it got taken out of the color spectrum. Yes it was red. Red across my screen. I had to go buy a pair of sunglasses because it was bright compared to the "nice soothing" green that we have had for months.

A bunch of things converged at once to create this move. Apple and IBM earnings which were good but were already priced in and than some. China with a surprise rate hike overnight. Continued problems and protests in Europe. German business survey that came in below expected. PIMCO, the Fed, and a host of others indicating intentions to sue Bank of America for bad mortgages. Now if any of this news would have come alone it would have been "good" news because it meant more money for the ponzi. All of it together poses risk to the ponzi. Hence you have a major selloff and boy was it a doozy. Gold was down over $40. Copper, oil, the Euro, everything was sold hard. The dollar screamed higher. I had been thinking for a couple of days that we were seeing a possible topping pattern in the Euro. Remember I thought that 3 weeks ago and it ended up being false. This time not so false. Many will be confused by the gold move. Remember gold has gone parabolic the last 10 to 15%. Was it fundamental or liquidity driven? At least for today it shows it was liqudity driven. That poses continued risk to the downside for gold.

I think the elections are starting to become a drag also. The Republicans are really starting to pick up steam. I have postulated for months that a big Republican win would not be good for the markets. A small Republican win could possibly be because it would increase gridlock somewhat (I even think a small win would not be good for the markets over the longer term) but a big win could mean that Republicans try to fix things. A balance budget, more constraints on the Fed etc. Stuff that was much needed several years ago but now I think it would collapse the ponzi. It would cause a big drop in the economy because Washington is holding up the economy. In otherwords I don't think it is fixable anymore which means it is either up or die. You can go up until you can't and than you die. So die now or die later. That is a little dramatic but the analogy for the point I am trying to get across works.

So the markets? Shzz is it tough. We haven't broken any major technical stuff. Need to go below 1155 before that happens and really below 1130. From a pure guessing point, assuming we have put in a top, the highest probability is that by the end of this week we will be lower than we are now. Somewhere next week, maybe mid week or maybe later the markets bounce hard and the Euro bounces hard correcting this latest sell off. It will the last buy the rumor before the elections the following Monday and the Fed on Tuesday. After that you roll over and a huge sell the news event. If you short now you will be risking that A) the high really isn't in and B) you have to go through a big rally next week. If you don't short now you risk that you actually don't get the bounce.

In general I feel like the Euro has had its topping process. It is done and it is going to be heading much much lower (remember a big Republican win is probably bullish dollar). The markets didn't have as nice of a topping process as I would have liked. A topping process isn't a necessity but it is nice. Remember however that in June/July of this year the Euro bottomed first and than the stock market bottomed a week or two later at 1010. It could be similar.

Kye Bass Notes from the Vaue Investing Congress

2010-10-13T22:59:00.003-05:00

I listened to Kyle Bass give an hour presentation this morning. Below are my notes from his talk. He had some incredible slides I hadn’t seen anywhere else. It was the scariest presentation I have ever heard. He is convinced the collapse of Japan is very very soon - within in the next 2 to 3 years. He sees no hope for Europe or the United States. Thinks it is almost impossible for the United States not to be in a recession by Q1 of next year. United States could still hypothetically fix the long term problems (think he was talking about from a math standpoint) but there is no way politicaly that is a possibility. Other thoughts talking to him after the presentation is that if China’s currency depegs from the dollar that China’s currency appreciates 25% and than plunges. Thinks the dollar needs to devalue 50%. However, thinks there is a high likelihood that the dollar surges at some point when things start to unwind. This will be the last gasp of the United States. I put huge emphasis on market history and talking to him I have honestly never heard anyone spout off economic history and historical facts as quickly as he did. I was in awe. He talked as if he lived during those times.

Starting with the United States.
- He put up the very familiar graph of consumer debt going back to 1900. It showed a small downtick recently but still massively above any long term historical perspective. Household debt has fallen from 104% to 98% of GDP. This drop is almost exclusively foreclosures. Consumers still aren’t choosing to delever.
- The next graph showed how the marginal benefit of debt has plummeted. According to Kyle each dollar of debt only produces $.07 of GDP currently. We can create all the debt we want at this point and it won’t help.
- He than showed a graph of unemployment duration and how headline unemployment massively understates actual unemployment. He made the point that the recent Nobel Prize winner won based on his study showing how increasing unemployment duration and unemployment benefits increases unemployment. Thought it was interesting that is who they decided to give it to considering what is happening today.
- He than showed the labor participation rate graph and how it has collapsed. He referred to the prior graphs on employment and made the point that the United States have been losing jobs for years and will continue to lose jobs overseas. Either you need wage deflation which will not happen or the dollar needs to lose 50% of its value.
- He shifted to the CBO projections for the next 8 years highlighting specifically 2013 and 2014. He titled the slide The Anatomy of a Utopian Economy. He pointed to the assumptions and said they are not possible. Humanly mathematically impossible.
- His next slide was titled what can $1 trillion can buy. He hosted a conference at a ranch the week prior where he posed this question and talked a lot about it with various people. You could implement the entire Pickens plan transferring every car and metropolitan center for natural gas usage. Making the transportation system the envy of the world and much more competitive. You could transfer every coal plant to a nuclear facility lowering the cost of energy to a fraction of what it is and make this country much more competitive. One could pay every unemployed person $67,000. A trillion dollars could buy a lot of things instead of what we are focusing on. By early next year the Fed will be the biggest holder of treasuries in the world surpassing China and Japan. Another trillion simply to extend unemployment benefits is absurd.

Europe
- He showed a lot of graphs in this series not directly related to Europe and most of them were really busy. The first one was that world wide governments need to issue 4.5 trillion.
- He than started talking about Iceland and mentioned some book (couldn’t get the name and t was written decades ago) talking about global crises and cultural epicenters and how Iceland and some country in the South Pacific would never default. Well Iceland at the time of the banking crises had 35% debt to GDP. Icelandic people were shocked at what happened and how the banking assets completely devastated the country. Ireland is in the same situation. In his mind there is no way they don’t default. The banking assets are huge. All of Europe could step in but mathematically it would not be easy even for that to occur.
- He than showed a graph of banking assets (I think it was specifically MFI) to GDP across countries. Said he was visiting a Harvard professor (again – couldn’t get the name) who specialized in sovereign problems. Kyle asked him how these countries could possibly get out of this. Kyle said the professor took off his glasses, leaned back, and said “Oh my God – I had no idea it was this bad.” Kyle’s point was that if someone who focused on it didn’t see this how in the world can someone like Trichet or Bernanke have seen it or doing anything to prepare for it. His point is that no one is looking at what is going on. It never mattered to look at this stuff.
- He also showed government debt compared to government revenue. Said investors should care about this and it shows the same picture.
- He showed balance sheets of several countries. He talked about how Ireland has cut 10% of government expenditures but government revenue has dropped 15%. The deficit may be up 40%. There is no way out.
- He spent along time talking about the IMF and how it works. I was unfamiliar with all of it and need to listen to it again to understand it. Basically the IMF is an optical backstop. It was created by the U.S. based in Washington but run by Europe. The backstops are never meant to be spent. Kyle had a meeting with Barney Frank a few weeks ago. When talking about the IMF Barney leaned over and said (paraphrased) – C’mon Kyle, it’s not real money. It is just a journal entry.” Kyle said after almost coming out of his chair he collected himself and his retort was if it isn’t money than why not make the number 15 trillion.
- The IMF is made up of nations who pay into it. This is supposed to cover drawing rights over time. Hungary was the first to draw on these rights. They drew 800%. Greece would need to draw 3000%. This is money the IMF knows it will never get paid back.
- The next graph was showing sovereign defaults over the last 200 years. Every 50 to 70 years have sovereign restructurings. In the past it was all about war. To the victor went the spoils and to the loser came restructurings. We have no war and yet we have more debt compared to any war period in the last 200 years.

3) Japan Will Default Not If.
- The government has 2.5 quadrillion in debt (think that was the number). Showed a graph and said this is what happens when a government steps in and tries to hide previous mistakes.
- Every 1% move on interest rates increase Japan government interest expense to 10 trillion. Inflation isn’t possible for Japan.
- Showed the Japan’s balance sheet and showed how the interest expense now exceeds government revenue. He said this is when Keynesiasm runs out.
- Some of this can work for a long time but last year more people exited the work force than entering it. It will continue. This is like a ponzi end game when more investors leave the ponzi than come in.
- What the big macro funds have missed over the last 20 yeas was the huge trade surplus. It switched in 2008. It is the game changer and will be the catalyst for what changes Japan’s situation. It is like taking Japan’s biggest asset and switching it to a liability overnight.
- If thesis is right - the largest buyers of government debt become net sellers. Than showed articles pulled from Japanese papers showing how the two biggest buyers have to start selling.
- Thinks the yen is intrinsically worth 250 to 1 compared to the dollar.
- He has a series of bets on Japan that pay 50 to 100x. No one believes what is going on. The tail risk you can buy is extraordinarily cheap. Cost less than one basis point in some instances. No way for retail investors to buy it. Need a couple of hundred million dollars.

New York City - Value Investing Congress

2010-10-13T00:30:00.000-05:00

I am currently attending the 6th Annual New York Value Investing Congress. Flew in yesterday which was its own nightmare. It is always fun to try and fly in and out of LaGuardia. Either way I always thoroughly enjoy this conference and today has not been an exception. Tomorrow is when the two big dogs I really want to hear speak give their presentation – Kyle Bass and David Einhorn.

One of the more interesting morning sessions was John Burbank of Passport Capital. His presentation was entitled the Math of Democracy. He discussed how he has gone from apolitical to maxing out his limit for political contributions which is $115,000 a year. He says that the United States now must be studied as an emerging market and analyzing Washington is pertinent. You need feet on the ground in Washington. Investors need to be visiting Washington and engage in the political process. Essentially, since we have become an emerging market you have to look at the domestic investment landscape in 2 year cycles. Bottom up investing is now not possible anymore.

His view is that the Republicans will take over the House and the Senate will be a toss up. As a result it will be gridlock for the next two years. This carries risk if spending slows down. After the gridlock - he thinks 2012 could be a watershed moment. He encouraged all in the crowd to become active politically and started running through the numbers on how easy it is to impact elections. If as few as slightly over 20,000 people in the United States maxed out there contributions possibility it would double amount of money that went to political campaigns and those people would drastically shift the outcome of an election.. He thinks we are either going the Argentina road or the Germany road and the next two elections will determine that outcome. He also pointed out how a Washington investment has the highest return of any investment he has seen – at over 100 to 1 and if you look at government discretionary spending only compared to political donations the leverage implied is close to 400 to 1.

In general he likes emerging markets (not in reference to the United States) but says that is consensus now and is very illiquid now and if that turns it will go down sharply. Likes anything China has to bring across its borders (potash, copper, crude oil, soybeans, coking coal), and Big Western Caps.

It was a very interesting presentation.

Another interesting presentation was from Amitabh Singhi of Surefin Investments talked about the investment landscape in India, Pointed out that India has over 5,000 listed companies which he thinks is 2nd only to the United States. The opportunities to talk to companies and find inefficient markets is much greater. He talked about India’s problems such as infrastructure, housing, commercial transportation, power distribution, judicial issues, and corruption. All these give investors opportunities.

It has been an interesting Congress so far and some very interesting conversations. I will try to write some more over the next few days.

Sentiment Off the Charts

2010-10-06T23:34:00.002-05:00

Things are absolutely crazy. I have never seen sentiment like this before looking back through history. Everyone seems extremely sure where everything is going.

All from the daily sentiment index:

Dollar bulls - 4% currently 77.439 (bottom at 74.17 in Oct 2009 - 7% bulls)
Euro bulls - 97% currently 1.3928 (peak at 1.5147 Oct 2009 - 93% bulls)
Gold bulls - 95% currently (don't know if there has been a higher high than that)
Silver bulls - 96% currently (98% bulls on Feb 29, 2008 - 3 days later it made its high and declined 57% within 9 months)
Equity markets - 88% ish bulls (don't have the latest number) - (87% ish was the April high)

I have never seen so many investors so sure on where everything is going across a wide swath of markets. Take the non farm payroll number this Friday. Everywhere I turn I read - If it is bad and more Americans are unemployed that is equity bullish because it means more quantitative easing. If the number is good than that is bullish equities because the economy is doing better than what was thought.

These number don't tell you when exactly a turn is coming but at some point a turn is coming. Not only are these extremes but the coordination of the extremes are unbelievable. Stay nimble.

Today was fairly constructive to restart a topping process. NASDAQ was knocked down hard with several high fliers getting really beaten down. Time will tell.

Knock Out Punch

2010-10-05T15:56:00.003-05:00

The bears got knocked out today. Just absolutely brutal. Not so much the massive spike but what it erased. Tops in markets are usually not one day affairs but multi day or multi week topping process. The last week or two looked like a classic topping process and today erased all of that. It most likely started a new leg up and then the market will have to have the topping process all over again. It would seem likely now that 1170 in the S&P would be visited and that possibly the DJIA will see a new high for the year. If the market is close to topping it probably moves the time table to mid/late October before the market would start going down in a serious way. Imagine the market as a bus. It takes awhile to turn a bus around compared to a smart car. Strong up moves usually don't just end with the market going straight down. Like I said, for over a week now the bus had been turning. So much for all of the effort by the bus driver.

Some will credit the service ISM today which adds to the overall confusion of what is exactly going on in the economy since that was another good number but the market was flying before that number came out. So I don't really think it had much to do with anything. So why the strength in the equity market? The dollar was getting pounded...again. The Euro looked like it was putting a top in also. We are on hold now also for that. Euro 1.40 seems likely at this point though that rise has to be coming to a close soon. I don't really know why I come to work anymore. I can roll over as soon as I wake up, take one look at my phone glancing at what world currencies are doing and tell you exactly what the market is going to do during the day. To circle back to the Service ISM number, the number wasn't bad. That should have been dollar positive. Instead the dollar lost more value after that number came out.

The latest iteration of this global mess is what is openly being called a currency war as every country is trying to destroy its currency the most. Sounds insane but somehow that means strong economic policy. In actuality it means the ponzi can live another day.

I was covering a little bit today licking my wounds. Maybe today was the top but it would shock me. Right now the central banks and the sloshing of liquidity is firmly in control and as long as the dollar keeps going down, stocks will keep going up.

The destruction of the this country will ensure your 401k statement will look good.

ISM - Not Pretty - Even Uglier if You Lift the Skirt

2010-10-01T15:19:00.003-05:00

Yesterday I was saying how the Chicago PMI was a very very bullish economic number except it didn't match any other economic number. Well today the ISM widened this divergence. Not a good number and the internals were especially weak. As a result the dollar got pounded again and the stock market went up.

Basically all you have to look at is this:

New Orders June Through September:

June 2010 - 58.5
July 2010 - 53.5
August 2010 - 53.1
September 2010 - 51.1

Inventory June Through September

June 2010 - 45.8
July 2010 - 50.2
August 2010 - 51.4
September 2010 - 55.6

Inventory is building and new orders are declining. Enough said.

A Screwed up World - And Investors Are Supposed to Invest How?

2010-09-30T09:12:00.002-05:00

Chicago PMI number came out this morning and it was a very very bullish economic number. Came in at 60.4 versus expectations of 55.5 compared to a previous read of 56.7. The problem is the entire thing doesn't match up with any other September data. It doesn't even match up with the Midwest data as reported by the Fed. So what in the world is really going on and how is an investor supposed to know?

From the Wall Street Journal entitled: Chicago Fed: Cars Drag Down Midwest Manufacturing Activity.

Manufacturing activity slowed in the Midwestern U.S. during August, as automakers chose to stop building up inventories, the Federal Reserve Bank of Chicago reported Monday.

The Chicago Fed’s Midwest Manufacturing Index dropped 1.4% to a seasonally-adjusted level 79.9 in August, from a downwardly revised 1.9% in July. The July index stands at 81.0, down from the original estimate of 81.4.

What in the world? The inconsistencies continue. The new orders portion of the Chicago PMI. The regional Fed numbers that have come out the last week showed weak or declining orders. The most ridiculous part of the Chicago PMI was that prices paid (so input prices) came in at 55 versus 57.2. All the regional Fed indexes saw big increases in prices paid.

So the question is what in the world is going on? These things don't actually measure output. They are surveys. Does the Chicago PMI focus more on Catepillar (which is booming) and less on the general economy? What is the real picture?

One thing is for sure. The number this morning is bullish dollar and the stock market is one massive currency trade right now. If this reverses the dollar the market is going to have problems.

I tried to bet a friend $10 paying 2 to 1 that the market would end down today after this number was released. He wouldn't take it. It is going to be interesting. Bull runs often end in a burst of positive news. Like I said this number is bullish dollar which has been bearish stock market. Tomorrow the ISM number comes out. Will that match the Fed regional numbers or the Chicago PMI? Good grief we lived in a messed up world.

David Tepper - High on Hopium or Embracing a Ponzi?

2010-09-29T13:33:00.003-05:00

David Tepper is a famed value investor who manages and is the founder of Appaloosa Management. An incredible fund who has had an incredible record. He is semi close to legendary status. He has been in the news lately for his comments last Friday on CNBC when he basically said the markets are a two headed coin. If the economy recovers the market is going to continue to boom. If the economy continues to falter the Fed will step in and perform some additional quantitative easing and the market will rise. These thoughts have been repeated numerous times in various market circles.

There is much ridiculous with Tepper's comments and to be fair I do not know in what context everything was said. On the surface it sounds absurd. Besides having a misunderstanding of what QE really is, he is basically admitting the entire system is a ponzi. All ponzi's initially implode. Last time the market was here heading up (back late last year) the chatter was about how this was going to be a V shaped recovery. WHEN WAS THE LAST TIME YOU HEARD THAT FROM A BULL? No longer is the argument that the economy is in great shape and going to be a great V shape recovery. Now the argument has shifted to the Fed will save us and won't let the market go down. How well did that work in 2008? In fact it is the same exact argument that emerged after the initial argument in 2007 failed. The initial argument in 2007 was that it was going to be a very shallow recession. After that argument failed than it became the Fed was ahead of the curve and going to save everything. After that it was the Treasury and John Paulson was going to save everything (remember the Paulson bazooka?) After that is was we are all going to die.

So now the prospects of a V shaped recovery are off the table but if you listen to Tepper there is no risk. The market will only go up. Ponzi 101 until the entire thing collapses.

A friend of mine sent me something else by Tepper which I actually really liked. However, the premise is completely wrong in the context of how he uses it.

“In 1898, the first international urban-planning conference convened in New York,” he said. “It was abandoned after three days because none of the delegates could see any solution to the growing crisis caused by urban horses and their output. In the Times of London, one reporter estimated that in 50 years, every street in London would be buried under nine feet of manure.”

He paused, allowing people in the crowd to snicker to themselves, then went on to recommend a handful of investments most would consider highly risky, among them debt in AIG and equity in financial companies like Bank of America and even some banks in teetering Europe. “I know, everyone hates the financials,” he said. “But the PIIGS”—Portugal, Ireland, Italy, Greece, and Spain, considered to be the most troubled European economies—“every single one has a deficit-reduction plan! The ECB—the Bundesbank—bought back government bonds!” He paused for dramatic effect. “Holy Christ. It’s like the chastity belt is off, and the girl is starting to play.”

The crowd tittered nervously. “On the way to work this morning, I got a headache because I was listening to one guy talking about how there’s gonna be hyperinflation. And then after him there was some guy telling me there’s going to be a depression and deflation. Neither—neither—is most likely going to happen,” he said. “The point is, markets adapt, people adapt. Don’t listen to all the crap out there.” - David Tepper

Like I said - I really like what he said above. It embraces capitalism. The market will solve the problems. HOWEVER, the market right now is not allowed to work. Furthermore, unlike other "problems" debt is inherently different. It is the millstone that holds you down. It cannot disappear unless it is paid off or defaulted on. Once you have to much debt the market is handicapped until that is resolved. If the problem was to much housing, I wouldn't worry about it. The market would fix it. If the problem was China wasn't consuming enough, wouldn't worry about it, the market would fix it. If the problem is to much debt, the market would fix it, it would be really painful, but if it isn't allowed to fix it, it can be catastrophic. Tepper is comparing not apples to oranges, but apples to asparagus.

He may be right though in one respect. It may be alot more ponzish than anyone would care to admit. In a ponzi it doesn't go down gradually. You wake up one morning and you lost 100% from the day before. It is possible that the government can keep everything together until over a very short time period - they can't.

Meredith Whitney - Tragedy of the Commons

2010-09-29T12:55:00.004-05:00

Meredith Whitney was on CNBC yesterday talking about her new report which places a rating on all 50 states. She started looking at them a couple of years ago in her analysis on the banks and was startled to realize how similar things looked. She thinks a financial crises is coming within the states and that bond holders at the municipal level are going to be very disappointed. I would love to get my hands on this report. She did say Texas is by far the best positioned state. Not even close when compared to other states.

She also talked about how bad a quarter it will be for the banks and discussed some of her thoughts on the economic future.

Video below: (having trouble determining if the video is posting correctly - can be seen here http://www.cnbc.com/id/15840232?video=1602262513&play=1)

Friday's Follow Up

2010-09-27T13:34:00.002-05:00

Well the market took the durable goods number and ran with it. Like I said, you needed to watch the market reaction. It wasn't a fundamental number. The market reaction said the rally is still on. As a result, as a bear, I continue to hide in the bunker, try to maintain my current shorts, and don't short anymore. Fundamentally, as mentioned, durable goods order is not a number I watch much anyway. Even the core number is incredibly volatile. If you want to find a bearish tilt to it you can look at the 3 month annualized rate. As David Rosenburg pointed out it has dropped from 39.3% in May, to 23.9% in June, to 11.5% in July, and 8.8% in August. Like I said, that is if you want to find a bearish argument. In general I think it is just better to ignore it fundamentally and take the cues on how the market reacts to the number to judge the mood of the market.

So the market loved that number on Friday. That is what matters It seems it is extremely unlikely the market doesn't break 1150 as a result. The problem for bears is if we really break 1150 there aren't any great levels to look for a potential top. You have maybe 1170 and than your back to year highs. The market is convinced that there is no way equities can go down as the Fed and all of its power will keep them going higher. Even if the premise is completely a joke, the belief and growing belief by everyone makes it extremely difficult for the market to go down. It becomes reflexive as George Soros likes to call it.

Again it comes down to Europe. Irish and Portugal spreads were wider again today. Moody's downgraded the unsecured debt of Ireland's Anglo bank. Right now it is assumed the Euro will only go up which is a ludicrous assumption but market sentiment is higher than it was in November 2009 when the Euro peaked. As long as the Euro is moving higher I think it is impossible to be super bearish. Any U.S. economic weakness will be "good" news as it means a higher QE 2 number in November.

Durable Goods Number

2010-09-24T08:01:00.002-05:00

Very good durable goods number ex transportation and the futures are flying. Ex transportation durable goods order was up 2% on expectations of being up 1%. All the numbers were revised higher from the previous month.

So we have the mirror image from last month. Very good number, markets at highs looking like they are going to break higher, and futures flying pre market. The way this market trades in response to this number throughout today will be fascinating. The durable goods number is so volatile on a month to month basis that fundamentally it is hard to glean anything from it. However, the bulls have the excuse to send this market screaming. If they can't and the rally fades it will tell you alot.

Market Musings

2010-09-23T21:51:00.002-05:00

It has been awhile since I have mused about some of my market thoughts. Main reason is because I haven't really had that strong of an opinion. After realizing (to late) that we weren't breaking down at 1040 a month ago, it has been a matter of hiding in a bomb shelter for us bears. Starting last Friday I started thinking it was possible we could be reaching some sort of topping process. I told several friends I would hate to be short before the Fed meeting and I would hate to be long after. Monday was a big up day but we have lost basically all of that as of today. Are we consolidating or have we indeed been in the topping process I suspected over the last week and are now ready to break down?

One of the main market data points that a month ago made me scratch my head and wonder if something wasn't right (and like an idiot I didn't act upon it) was the durable goods number. Usually, I don't pay much attention to that number (which is why I talked myself out of doing anything last month) but last months number was horrific. Durable goods ex transportation was down 3.7%. If I remember correctly the previous expectation was close to flat. It was a horrible absolute number and a horrible relative number. The market crunched pre market and than rallied and basically ignored a horrific data point. It caught my attention but like I said, talked myself out of doing anything much to my detriment. So this number is going to be interesting. If it is bad and the market sells off hard I think it will be interesting. If it is good and the market pops and than sells off to only finish slightly up or even down I think that tells you alot also.

What I describe above is just a trading signal I will be watching. More fundamentally it is still Europe Europe Europe. The European stock market is now down 3 days in a row and the economic data this morning was flat out lousy showing a very disturbing slowing trend. Ireland is now considered the 5th most likely sovereign to default joining such illustrious names as Venezuela, Argentina, and Greece. Portugal spreads are also widening. Spanish banks seem to be rolling over. Not a good situation. The thing that is holding up right now is the Euro which was surging after the Fed announcement on Tuesday. It may have a little higher to go based on trading technicals but that rise also seems about done. Based on European debt spreads, Europe appears to be in worse shape than it was four months ago. It is just a matter of time before the market pays attention again.

In general the market feels like it has topped. I am watching European government debt spreads, the Euro, and copper to try to give some clues if this is indeed the case. We have the end of the quarter coming up so the likelihood is the market doesn't just fall apart but it will be very telling if it fails once again in this area.

The Ultimate CDO (or Ponzi) - EFSF Rated AAA

2010-09-20T16:21:00.002-05:00

Remember one of the main causes of the housing crises and the mess we find ourselves in today? Well it was the structured products and how Wall St was able to take junky credit mortgages, wrap them together as one security, and sell them convincing the rating agencies and buyers that they were AAA. Basically, throw one hundred junk mortgages together and boom, you have the perfect mortgage. The argument was because of diversification it was really safe.

Well that thinking with tons of leverage almost caused the entire system to collapse. It would have collapsed except the government took all the risk.

Welcome to today and the governments have managed to do the same thing. According to the New York Times "The European Financial Stability Facility, as the fund is known, was rated AAA by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. Standard & Poor’s said its understanding was that 'guarantees from member governments supporting the repayment of E.F.S.F. obligations will be unconditional, irrevocable and timely, and thereby consistent with our criteria for sovereign guarantees.'"

That is tragic or funny (depending on your perspective) on all sorts of levels. 1) The facility has not been pre funded. It is only going to be funded if there is an actual problem. I am sure everyone is setting money aside so it can be guaranteed to be there if need be. Truly AAA material. 2) What is even worse is that 3/4 of the countries that make up the EFSF aren't AAA. Basically we have just taken a bunch of junky mortgages, thrown them together and presto made it AAA. In this case we just took a bunch of junky countries and made them AAA.

Of course there is no problem now so the market prices it as if there will never be a problem.

More brokenness as our system slips towards the abyss.

Anglo Irish Bank = Creditanstalt?

2010-09-17T08:07:00.003-05:00

I have been saying watch Europe watch Europe watch Europe. I still think that is where the next leg down in this whole mess will originate. Well news from Ireland just caused a major reversal in Europe and while U.S. futures are still positive, the luster has been taken off. Creditanstalt may be upon us.

From the Irish Independent

These are desperate economic times. So desperate that the subject of Ireland defaulting on its bank and sovereign debts is now routine conversation among academics, bankers and economists.

However, up until now, such an idea was rarely entertained by senior politicians, but in a surprising move yesterday the leader of the Labour Party, Eamon Gilmore, came very close to suggesting such a course of action when he talked about the Government "negotiating'' with bondholders in Anglo Irish Bank.

While Mr Gilmore trenchantly denied such an approach meant defaulting, he certainly came very close to that position.

If the market sees this as a gesture towards default, it's over. It is like the banks CEO being forced to come out and say everything is fine. When I got a call two days before suggesting I take money out of Bear Stearns money market funds as a precaution, I knew the game was up.

It continues...

Of course, Mr Gilmore (and his position got some support from Barclays last night) has some options. One is to simply press to reduce the total amount owed to the bondholders, allowing Anglo to book a gain from having to pay out less interest than originally agreed.

The second approach, one championed by the 'Financial Times', is to tell the bondholders you intend to swap their bonds for shares in Anglo.

This would effectively leave the bank, which is a heartbeat away from technical insolvency, in their hands. This is known as a debt-for-equity swap and is very common in downturns when companies run into problems. Technically it is also known as a distressed exchange offer. This approach could be taken, but again it comes with significant risks which need to be acknowledged by political commentators like Gilmore and others pressing for this course of action.

The problem with this idea is that there is no way Anglo Irish Bank is worth €16.5bn at the moment. So if the bondholders swapped all their bonds for Anglo shares they would be settling for less than par value. This is a selective default.

Of course, the big danger is not what would happen in Anglo if this course is taken, but what would happen at the other Irish banks. By how much would their fund-raising costs go up?

That is exactly right. Anglo Irish is big but not that big. The question is contagion. Is it Creditanstalt all over again? (the Austrian bank that declared bankruptcy in May 11, 1931 that really got the depression going).

finally...

The final danger is: would an Anglo technical default raise the funding costs for Ireland Inc itself? Again it is hard to say. There are two schools. One suggests that by cutting Anglo loose, Ireland becomes a better credit risk and funding costs could actually drop.

Others suggest once you welch on any debts, your funding costs elsewhere rise and you may even be locked out of the bond market entirely.

That is a danger and it may spill over to Portugal sovereign or Spain etc. but I think the bigger danger is other European banks. A) the funding costs could shoot up with an entire knew liquidity squeeze and B) all of a sudden you have precedence for sovereign nations not to take responsibilities of the banks. A for sure popular choice among the electorate. I mean if Ireland allows a default on one of its large banks why should Greek people suffer? Or Spaniards?

Something almost has to happen now in the next week. Irish - Bund Spreads are exploding.

Charlie Munger Interview

2010-09-15T19:14:00.002-05:00

A couple of days ago Warren Buffett was being quoted as saying how amazing the United States is going to be and how bullish on America he was. Well there may be some schism with the famous partnership because Munger is not as optimistic.

Yesterday Munger participated in a interview of sorts with CNBC's Becky Quick at the Ross School of Business at the University of Michigan. He spoke and fielded questions for 2 hours!! The video is freaking long but worth every second. It can be seen in its entirety here. He talks about the economy (about 10% of the video) and says employment problems are around for a long time and that many industries haven't seen the worst of it.

He also said "Tom Friedman said its like the car that has to run across 300 miles of hot desert without a spare tire. We have used all the standard tricks that it is safe to use and now we still have the damn desert to cross without the spare tire."

I don't want to give the impression he is cataclysimic because he is not. He thinks it could get as bad as Japan but doesn't think the odds are that it will. Of course in my opinion Japan is a positive outcome.

Another thing that really struck me was that he talked about the bailouts, and how they were a must. He said you do not want to know what would have happened if they didn't occur. He than goes on to talk about how the Germans had such a great system but how Hitler came around with enough economic hardship. My question is this: what has changed from the bailouts? I completely agree. No bailouts and the world would have changed in ways you cannot imagine. However, that is why I am so bearish on where we are currently. The bailouts did not change anything and just ratcheted up the pressure. Instead of cleansing the sewage system we just got more sewage that is more toxic than ever. So if what would have happened was going to be so bad that even someone like Munger who is a hard core capitalist endorses them, you have to think of the probability of it still happening since the problem is still there. It is unwise not to be prepared for at least the possibility.

The the very end may have been the biggest nugget as far as overall wisdom though not related to the economy at all. He said you must study Singapore's Lee Kuan Yew, the first prime minister of Singapore. That he, almost single handily, created the best system in the history of man including Athens and the United States. For any life alive today it is a must study.

Like I said, it is freaking long, but well worth your time to watch the entire thing.

Japan to Lend to California?

2010-09-13T21:32:00.002-05:00

Now to the really absurd item of the day. A Japanese state owned bank is planning on lending the state of California billions of dollars to build a high speed train to run from San Francisco to Los Angeles. You just can't make this stuff up. Part of the reason Japan is making the loan is to help Japanese companies in the bidding process. That makes alot of sense. Let a bankrupt country make a loan to a bankrupt state so they can hire a company from your country to paid with money from your country. If we are going to play ponzi why do it in such an inefficient manner? Just give the money directly to the Japanese company?? This money being spent can't possibly be expected to be paid off from earnings. Instead the gamble I am sure is that someone will refinance it down the road. The way our system is run.

From Bloomberg

Japan said it’s ready to lend California money to help pay for a planned high-speed railroad as trainmakers from Asia to Europe compete for work on a project that will cost at least $40 billion.

and

California won $2.3 billion of federal funds to help build the high-speed train, the biggest award in Obama’s high-speed rail funding program. The state also approved in 2008 a $10 billion bond sale to help fund the line, which is due to start services in 2020.

The California State Auditor has said that the state’s business plan for the high-speed rail network doesn’t include steps to replace all of the $17 billion to $19 billion in federal funds initially envisioned for the system.

Bill Fleckenstein Latest Views

2010-09-13T13:53:00.002-05:00

The market is back to stupid mode and matching any bears worst fears I mentioned was possible a couple of weeks ago. I don't feel like talking about it, at least this second. In the interim: The Diary of a Mad Hedge Fund Trader had a good interview with Bill Fleckenstein which can be found here.

I have always liked Fleckenstein and enjoy his thoughts. He covers his thoughts on gold, the bond market, emerging markets and other odds and ends. I tend to have deflationary thoughts when I look at the world and Bill tends to be more inflationist. I feel like if you are going to make the inflationist argument he has the right one. That is an eventual collapse in confidence and not just money printing. If you have a collapse in confidence in the currency the end result leads to massive hyperinflation. Why deflation leads to inflation. Not surprisingly he hates government bonds and loves gold. When talking about gold he mentioned that he has to stay long gold until there is some legitimate other alternative which he does not see. He seems fairly agnostic about the economy and the stock market. I wished he would have talked a little bit more about his views here.

Good interview. There are few inflationist who make logical argument that make alot of sense but he is one of them. Eventually it is a loss of trust in the currency that will start the inflationary parade. I just tend to think it is farther off than some.

Ireland Ireland Ireland

2010-09-07T09:49:00.002-05:00

Americans are far the most part clueless on anything other than what is going on in America. Below is one set of problems going on in Ireland.

From the Ireland Independent:

Anglo: a weapon of mass financial destruction

JUST how much worse can things get at Anglo? With the bank writing off a further €8.3bn of bad loans, it is hard to avoid thinking the nationalised lender is determined to single-handedly bankrupt the State.

and

If these sound like enormous numbers, it's because they are.

With Irish GNP, the only meaningful measure of our economic output, down to less than €130bn, a €35bn-€40bn tab for bailing out Anglo works out at between 27 per cent and 31 per cent of our total economic output. All this for just one rogue institution.

Mortgage Crises Gets Worse with 36,500 now in arrears

A sharp rise in the number of families unable to repay their mortgages was being seen last night as a sign the mortgage crisis is worsening.

The number of homeowners who are three months or more behind on their repayments surged to almost 36,500 in June.

Financial experts said the shocking figures showed that thousands of households were now stuck in a financial quagmire.

and

Financial adviser Karl Deeter, of Irish Mortgage Brokers, said: "The growth in arrears as well as the rate of growth in the arrears is heading only one way. Sadly, our only growth industry in 2010 is that of debt deterioration."

To default, or pay through the nose

Should Ireland let itself go bust? It's not the Green Jersey option, that's for sure. But national pride aside, is it time to think the unthinkable? Should we jump off the runaway debt-train and default?

and

The 'debt limit' catalysts for Ireland are racking up: historically high bond debt spreads; soaring Anglo losses; a plummeting tax take; Nama; a yawning budget deficit; rising GDP to debt ratio; credit rating downgrades and a battered domestic economy (GNP).

We have borrowings secured to last to the end of next year and we have enough reserves to pay our national bills for a while, but the threat of debt overwhelming us and pushing us into default down the tracks is very real.

If we are heading towards going bust anyway, or at least some dolled-up form of sovereign default like going to the EU Stability Fund support, should we do it now, while we still have some reserves and bargaining power?

Wind up toxic bank, urges Conor Lenihan

Scandal-ridden Anglo Irish Bank should be "decommissioned" as soon as possible, a government minister told the Irish Independent yesterday.

Although Innovation Minister Conor Lenihan would not be drawn on a timeframe for a wind-down of the now state-owned bank, the comments are further evidence that the Government is moving away from a 'good bank/bad bank' solution for the institution.

These aren't only Irish problems.

From The Baseline Scenario:

Irish Worries For The Global Economy

Ireland’s difficulties arose because of a massive property boom financed by cheap credit from Irish banks. Ireland’s three main banks built up loans and investments by 2008 that were three times the size of the national economy; these big banks (relative to the economy) pushed the frontier in terms of reckless lending. The banks got the upside, and then came the global crash in fall 2008: property prices fell more than 50 percent, construction and development stopped, and people stopped repaying loans. Today roughly one-third of the loans on the balance sheets of major banks are nonperforming or “under surveillance”; that’s an astonishing 100 percent of gross national product, in terms of potentially bad debts.

The government responded to this with what are currently regarded as “standard” policies in Europe and America. It guaranteed all the liabilities of banks and began injecting government funds to keep these financial institutions afloat. It bought the most worthless assets from banks, paying them government bonds in return. Ministers have promised to recapitalize banks that need more capital. Despite or perhaps because of this therapy, financial markets are beginning to see Ireland as Europe’s next Greece. In the last few weeks the perceived probability of default by Ireland (as traded in credit-default swap markets) has shot up, so that markets now price a 25 percent risk that Ireland will default within five years.

From Bloomberg:

Irish Ask How Much Is Too Much as Bank Rescue Trumps Austerity

It may just be a few billion euros too far for Ireland’s beleaguered taxpayers.

Anglo Irish Bank Corp. said Aug. 31 it needs about 25 billion euros ($32.1 billion) in state funding, equivalent to about two-thirds of this year’s tax revenue. Standard & Poor’s, which last week cut the country’s credit rating to AA-, said the state may have to inject as much as 35 billion euros.

and this is ridiculous...

“When you talk about letting a bank collapse or fail and imposing losses on the lenders, you would be imposing losses on depositors and imposing losses on the European Central Bank,” Alan Ahearne, an adviser to Lenihan, said in an interview. “It is unthinkable.”

Unthinkable???? Are you freaking kidding me?!?!?! A for profit institution where investors supposedly take risk - it is unthinkable for it to fail? That is just absurd thinking and why the world is in this mess. Talk about getting me angry!! It is unthinkable that it is assumed it can't fail. Instead the taxpayers can pay it. They can take the risk that investors and bank employees actually never took but just pretended they took.

Murry - Buy Farmland and Gold

2010-09-07T09:18:00.003-05:00

Well I said if you wanted to be bearish you need problems in Europe. Euro down big today, German factory orders much weaker than expected, and Ireland spreads blowing out. The real question is if you take off exposure around 1080/1085 or not?

An interesting article from Bloomberg with some thoughts from Michael Burry. Remember he was the head of Scion Capital who made a fortune betting against the mortgage market. His story was told in Michael Lewis book The Big Short. What is he doing now?

Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, said he is investing in farmable land, small technology companies and gold as he hunts original ideas and braces for a weaker dollar.

When investors talk about a weaker dollar the question should always be against what? Against other currencies or against precious metals or all commodities?

This is what I have been complaining about for awhile.

Burry, who now manages his own money after shuttering the fund in 2008, said finding original investments is difficult because many trades are crowded and asset classes often move together.

“I’m interested in finding investments that aren’t just simply going to float up and down with the market,” he said. “The incredible correlation that we’re experiencing -- we’ve been experiencing for a number of years -- is problematic.”

There is also a couple of video interviews one of which can be found here.

Musings Gathered from Connecticut

2010-09-06T17:08:00.003-05:00

Back in Texas and hopefully will be in Texas for at least a month!! I love to travel but the last 45 days have been ridiculous. For Labor Day I was up in Connecticut for a wedding. Hung out with alot of Wall St types and heard alot of different thoughts about the market.

Last week was just brutal for the bears. A 5 to 6% move in a matter of hours over three trading days. Definitely many body bags being carried out. Right now I really have no idea where the market is going. I have a sickening feeling that last week may have started a March / April move seen earlier this year where the market just went up and up and up. There are many similarities between now and than.

One of the things that worry me the most is how bearish everyone is. Besides many of the sentiment surveys that are pointing to very high bearish levels, my conversations over the weekend confirmed as such. I am usually one of the few who are really bearish. Not so much anymore and it makes me really nervous. Unless the bearishness turns into a panic move down, it is very hard for the market to grind down with this many people bearish.

I also feel to some degree that the huge move down in equities I was looking for already happened, it just happened in the treasury market, not the equity market. The 10 year yielded around 2.45% towards its lows. It fell from 4% to 2.5% in a few months. That is A MASSIVE MOVE. That is telling you recession, deflation, and more rough economic waters ahead. The last time the bond market was yielding so little, the equity markets were around 750 to 800. The problem is the equity markets this time followed it down only a little bit. We didn't get anywhere close to 800. If the bond market starts selling off (and it already has, with 10 years now yielding 2.7% now) that seems to be bullish for stocks. You have many newsletters and market commentators (the real bears among us) talking about the equity markets collapsing and the bond market collapsing. That very well may happen but the correlation of how bonds move with stocks that has dictated market action over the last decade won't break down overnight. If the 10 year move back above 3% the likelihood is the stock market won't collapse to 800. The end game, probably a couple of years away if it occurs, sees the 10 year go above 5% and equity markets sell off hard. That is when the system collapses. This won't happen anytime soon and leads me back to sentiment. The sentiment really has gotten extreme with bonds. 98% of traders were bullish on bonds making it very very unlikely in my mind that the bond market is going much below 2.5% in the very near term. Now the equity market can lag. The top in bonds occurred January 2009. The bottom in equities didn't occur until March 2009. However, I feel like the circumstances are somewhat different.

Another problem for the bears is the elections coming up. Talked to a couple of investors this weekend who do not lean towards conspiracy theory type thinking but openly admitted that chatter is that the democrats are going to massage the economic numbers between now and the election. I did a couple of posts on why the ISM number on Wednesday made little sense and Friday's NFP number didn't much either. That could make it difficult for stocks to go down at least until earnings season. Then your betting companies will start warning about earnings.

There is still a story for the bears in the short term and that is Europe. European bond spreads have once again been inching higher and several stories over the weekend with how Greece is still likely to default. The Financial Times ran an article yesterday talking about how the European debt crises is about to enter a critical phase as the amount of debt needed to be raised in September is double the amount in August. Spain needs to raise 7 billion in Euros compared to 3.5 billion in August. So if your bearish and want a bearish catalyst I really feel like you have to be focused on Europe looking for something occurring across the pond. The problem with that is it the timing is always almost impossible to predict as it there are very few "leading indicators" for such events to occur and it should be once again U.S. Treasury bullish. The U.S. Treasury market could easily have another spike, but once again, it seems like the bond market needs to go sideways and consolidate for awhile at the very least.

Anyway, alot of things on my mind over the weekend. I am an extremely nervous bear right now. After such a violent move higher I am not sure there is much to do but the real question is if we retrace back to 1070 or 1080. Is that a chance to get out of some short positions or should one hold strong? One thing that came out loud and clear in my conversations over the weekend is that everyone hates this market. Nothing makes much sense. Stock pickers everywhere are pulling their hair out. So your really just forced to be right and remain solvent long enough to benefit. The big macro funds have left (lowered) their exposure to the equity market and increased in the foreign currency market. It is a brutal game and one that isn't typically long term accretive.

David Rosenburg's Take on the ISM "Number"

2010-09-02T11:29:00.002-05:00

AS I wrote immediately yesterday the ISM number was just BS. The bigger question is even if you know that you know that you know this, what do you do with that knowledge? My biggest problem right now is how bearish the sentiment indicators seem to be. When your that bearish you start looking for a big turn because it usually has legs. The sentiment was this bearish several days ago but there was no wash out and I figured we would at least test 1010. The fact that we bounced so hard could we possibly go down again and break 1040 with sentiment this bearish? Seems to be a very difficult proposition which makes me think we go up or chop higher for a couple of weeks. Yesterday's rally was just miserable for bears or for those looking for clarity because it leaves everyone in no man's land.

From Rosenburg:

STRANGE ISM NUMBER ... DOESN’T PASS “SNIFF TEST”

Here’s why:

1.Most of the regional reports were very poor in August. Either they collectively all wrong or the ISM is.

2.The share of respondents saying the experienced "growth" was 61%, the exact same as a year ago when the ISM was sitting at 52.8.

3. The ISM gain was led by employment (58.6 to 60.4 - best since December 1983) in the same month that ADP manufacturing fell 6,000 (second decline in a row - it was -11k in July when ISM employment was 58.6, so clearly the latter is proving to be, at least for now, an unreliable labour market barometer). Production also ticked up to 59.9 from 57.0 and inventories rose to 51.4 from 50.2. These are all coincident indicators, as an aside (but an important aside).

4. According to the ISM, 76% of the manufacturers surveyed said that their customer inventory levels were either “too high” or “about right". At the turn of the year, just ahead of the big inventory swing that bolstered the GDP data, this metric was sitting at 60%. As a result, it would be folly to assume that the inventory and production categories will contribute to further ISM increases in the near- and intermediate-term. Norbert Ore, who presides over the ISM survey, had this to say about inventories: “If the inventory build isn't voluntary then we have a huge issue on our hands.”

5. Meanwhile, the more forward-looking components dropped, though were hardly a disaster. But orders slipped for the third month in a row, to 53.1 from 53.5 in July, 58.5 in June and 65.7 in both April and May. That is still a sharp squeeze in the growth rate of capital goods-related order books. At 53.1, ISM orders index is down to levels last seen in June 2009 (but when they were rising in “green shooty” fashion).

6.Backlogs were down as well, to 51.5 from 54.5 in July, 57.0 in June and 59.5 in May (and peaked in February at 61.0). At 51.5, order backlogs stand at their low-water mark of the year.

7. Supplier deliveries (measure of production bottlenecks) eased for the fifth month in a row — to 56.6 from 58.3 in July and well off the March peak of 64.9.

8. Looking at five decades worth of data, the share of the time in which we see orders, backlogs and vendor deliveries all decline in tandem, and the headline ISM index rise, is the grand total of 1%. No wonder equities rallied so much — we just witnessed a 1-in-100 event! Bring your camera.

9. Export orders dipped to 55.5 from 56.5 — the lowest they have been since last December. If the overseas economy is rocking and rolling, then why onearth would this component be declining? Not only that, but it looks as though yet again, a good part of the inventory boost we still seem to be getting is being filled by imports — that sub-index jumped four points in August and does not bode well for the trade deficit, which subtracted 3.4 percentage points from headline GDP growth in Q2.

In a nutshell, ISM did smash consensus expectations in August but the composition left much to be desired. The coincident indicators firmed but the categories that actually lead manufacturing activity softened across the board.

As we said at the outset, the ISM index was at complete odds with the regional surveys. Philadelphia, New York, Milwaukee, Richmond and Kansas City were all down. Dallas and Cincinnati were up. In the past, when we had a 5-to-2 ratio to the downside, the share of the time ISM managed to eke out an advance was 4%.

It would be wise to lean against the market's initial dramatic reaction to this data. The ISM orders/inventories ratio is a decent leading indicator and it sank to 1.033x from 1.065 in July. 1.278x in Julne and 1.441x in May. The hidden nugget in today's report is that this ratio has decline to levels not seen since February 2009. And the last time it fell this fast to this type of level was in the September to December 2007 period (1.03x from 1.30x) when once again, there was tremendous confusion and intense debate over whether it was a recession/soft patch in the economy and the bear market/corrective phase in equities.

Suffice it to say that in the past 30 years, with eleven observations, ISM dropped to 47x in the three months after such a decline in the orders/inventory ratio to such a low level as is the case today. That is the average, the median, and the mode. The highest ISM reading three months hence was 51.9, so if past is prescient, today's data was likely a huge headfake.

Complete BS Number

2010-09-01T09:13:00.003-05:00

ISM just came out at 56.3. There is no way. Completely BS number. I don't care if you think the bears are on crack or if you think the world is full of tooth fairies and santa clauses, the ISM numbers do not come anywhere close to reality. Either the ISM number is wrong or about 10 other numbers are wrong.

A - the ISM is made up of regional manufacturing reports. Most of these regional subindex get reported. The Philly Fed, Kansas City, Dallas, NY Empire, etc. etc. These indexes all showed dramatic slowing if not downright contraction. The strongest sector for various reason has been autos. That gets caught up in the Chicago PMI. Even that slowed down in August as portrayed yesterday.

B - the ISM number is also split up into various components. One of those components is employment. The regional reports were showing contracting employment pretty much across the board. The ADP employment report that came out today showed contraction for the month of August. You had a large spike in jobless claims. How in the world does ISM employment go to 60.4 from 58.6??????? Makes no sense.

Some of the important components didn't look so hot. New orders went down. As did backlog of orders. And inventory up.

For today the bears get blown out of the water. The bulls get to romp and play. And a jacked up world remains jacked up. The conspiracy individuals can have some fun today also. Did somebody known yesterday what the ISM number was going to do? Remember that last MASSIVE surge in volume and futures the last 120 seconds of the trading day yesterday? And how did this ISM number come in so far from any sense of reality?

How does this play out going forward? I don't know. The rest of the day and the way the market trades will be interesting. Definitely puts 1100 back on the table as a possibility. Like I said, the big boys put high emphasis on the ISM number. We could have a few good weeks. Or this is a spasm. I guarantee you it sure killed several bears.

Bloody Wednesday?

2010-08-31T16:59:00.003-05:00

Shzzz, the market pressure is palatable. You can feel it. Tomorrow is going to be one interesting day. Technically, tomorrow starts in a few hours with the release of China's PMI. Than you have the ADP employment report tomorrow morning before the market opens. The really big one other than the China PMI is the United States ISM released at 9:00. Anything below 50 on China PMI and below 52 on United States ISM should be a major event.

Technically the market is on a precipice. We have bounced off of the 1040 S&P area countless times and on the upside bounced off of 1070 countless times. We are going to break up or down very very soon. If we break higher I think up we go again to see 1100. I was shorting today though it is far from clear that we break down. Right now if your short you just need strong hands being willing and able to sit through a week or two of rally before once again we come back down to potentially break through the 1040 levels.

While yesterday the volume did not exist, today the volume was the highest in over a week and may have been the busiest day for all of August. It is end of the month so that may be part of it but what is interesting was the heavy volume and the market basically finished flat. Two ways to look at that. The bears used alot of bullets and couldn't get the market to move down or the bulls used alot of defensive maneuvers and couldn't get the market to move higher. Take your pick. I did not like the very end of the day (like last 120 seconds) surge in volume in the e mini futures and push higher. If it wasn't for that I would be alot more comfortable than I am currently.

So we have a few more hours to wait. 1,100 or 1,000? It makes sense the market closed at 1049.33. The market rarely likes to give clues.

Is there any chance a horrific ISM number causes a big bounce. You know, the worse the number the more the government has to intervene type of thing? I don't think so. The big money on Wall St. look at the ISM as one of the most important numbers. If it falls apart (like I said below 52, expectations are around 53 I think) the big money I think will start moving and selling. It is possible there is a lag of 24 hours or something but I think as the knew ISM number gets loaded into models that selling will take hold in a major way.

Hussman Annual Letter

2010-08-30T11:02:00.003-05:00

Dr. Hussman of the Hussman funds came out with his annual letter over the weekend. Can be found here. He runs several mutual funds so most of the 52 pages is financials and other information required for regulatory purposes. The first few pages however has some of Dr. Hussman's thoughts which are always worth considering.

Starts with:

I continue to be concerned about credit conditions and the underlying fundamentals of the U.S. economy. In recent months, fresh deterioration in leading economic measures, narrowing compensation for credit risk, and rich stock market valuations have increased the vulnerability of equities and corporate bonds to price weakness. These concerns are reflected in the restrained exposure to risk that the Hussman Funds presently accept.

I continue to be concerned about credit conditions and the underlying fundamentals of the U.S. economy. In recent months, fresh deterioration in leading economic measures, narrowing compensation for credit risk, and rich stock market valuations have increased the vulnerability of equities and corporate bonds to price weakness. These concerns are reflected in the restrained exposure to risk that the Hussman Funds presently accept.

Really incredible the level of silliness that was reached in less than a year from the massive move down in the markets. And this is just amazing even if you previously knew it:

Given that GDP growth over the past year has amounted to $563 billion, while Federal government debt has increased by $1.6 trillion, there appears to be little evidence that the positive economic growth of recent quarters was driven by much else but the deficit spending of government and to a lesser extent, the aggressive purchase of mortgage securities by the Federal Reserve.

Talk about low return on your money.

There is much more related to valuation of the equity markets and additional thoughts on the current economic situation.

UK Home Prices Begin to Fall

2010-08-30T09:50:00.002-05:00

Back from a nice vacation. Took until Wednesday before mentally I was able to slow down and enter vacation mode. Was kind of nice to be out of the office last week as I would have been very frustrated with the bleakness of the economic news and the way stocks for the most part shrugged them off. Very very big week for economic data with China PMI, United States ISM, and United States BLS employment numbers. It will be interesting if the market can hold it together through Labor day. Leave Wednesday for a wedding in the Northeast so will be on the road again shortly. Probably post a few things I have read that caught my interest.

Remember all that QE that was supposed to be highly inflationary for England? Well U.K. house prices dropped the most in 16 months according to Hometrack Ltd. From Bloomberg:

U.K. home values dropped in August by the most in 16 months as the housing market endured a “modest re-pricing” that is likely to last as long as a year, Hometrack Ltd. said.

The average cost of a home fell 0.3 percent from the previous month to 158,200 pounds ($246,000), the London-based property researcher said in an e-mailed statement today.

and

The report adds to mounting evidence that the housing market is weakening, and economists predict data tomorrow may show that banks granted the fewest mortgages in more than a year last month.

England and Australia remain the biggest two residential housing price bubbles. Canada is close by. Jeremy Grantham argues that England home prices are 3 standard deviations overpriced.

Another Week of Travel

2010-08-22T02:33:00.003-05:00

Hey all - going to be out of the country all next week. Yet another trip. I have about 3 more weeks of this before hopefully things calm down.

This week should be very interesting in the markets. In fact it could be the most interesting week since June. Last week I thought was a win for the bulls. Yes the market went down but overall I thought it was very frustrating from a bear perspective. The market could have gone down alot more breaking some major resistance but the bulls were able to hold on one more week.

Coming into Monday I would not be surprised to see strength from the markets as the bounce that started late Friday morning potentially continues. Going into Tuesday though, watch out. Existing home sales could really shock some people. The market is expecting a drop in home sales but maybe not enough. From Bloomberg:

Home sales probably plunged in July, and orders for long-lasting goods climbed for the first time in three months as the U.S. strained to sustain the recovery from the worst recession since the 1930s, economists said before reports this week.

Purchases of new and existing houses dropped 12 percent to a 5.01 million annual pace, the lowest since March 2009, according to the median forecast of 54 economists surveyed by Bloomberg News. Durable-goods bookings climbed 3 percent last month, the survey showed.

Wow, a 12 percent drop. Pretty big fall but hardly a plunge.

Compare this to calculated risk.

Housing economist Tom Lawler's preliminary forecast was 3.95 million SAAR (based on a bottom up analysis).

Many of the regional reports showed sales declines of 20% or more from July 2009 when the NAR reported sales of 5.14 million SAAR. A 20% decline from July 2009 would be in the low 4 millions ...

Now that is a plunge. If that number is anywhere near correct, the market may throw one hissy fit. In general I think you sell any strength on Tuesday. Friday also could be a day the market doesn't like if GDP gets revised much below 1.5%.

Sticky Equity Prices

2010-08-19T22:35:00.003-05:00

I found today to be extremely frustrating. I am usually pretty laid back when it comes to how the market is trading but was agitated all day today. I felt like today should have been death for equities. If I was dreaming the night before I couldn't have thought up worse data. It is scary how fast the economic numbers appear to be falling and the equity market just refuses to budge. They remain sticky up near this 1100 area. Yes the Dow lost 144 points and yes the S&P 500 was down 1.69% but we ended up right back where we were late last Friday. Above resistance. Getting a 5 handle on jobless claims I thought would have sent the market down 2% on its own. Combine that with the Philly Fed index showing manufacturing was contracting and just an across the board slaughterfest and it should have created the volume to get the market back below resistance. Instead we are sitting above resistance going into two days with no economic data and option expiration tomorrow.

I really have no idea where the next two days of trading are going to go. If I had to guess options expiration combined with geopolitical risk going into the weekend (Iran switching the switch on nuclear power) causes stocks to surprise some people on the downside breaking through resistance. Than Monday surprises everyone and reverses going back above resistance. I really have NO IDEA. I remember a similar setup in September 2008 but what you just read should be considered just interesting speculation.

What I think could put a death nail in equities next week is the existing home sales on Tuesday and GDP revision on Friday. If existing home sales come in weak enough that months of supply of housing inventory comes in above 12 months, watch out. Also GDP revisions usually mean absolutely nothing but if it gets revised all the way down from 2.4% to less than 1% (a possibility) again watch out.

It feels like the market knows it is headed lower but it is the dog days of summer with many traders on vacation and like a lazy dog it is waiting for slightly cooler temps before it starts moving.

Jobless Claims - Market Killer?

2010-08-19T07:31:00.002-05:00

If this doesn't send the market down I give up. Jobless claims just reported. Hit 500k. The four week moving average was over 482,000. The highest number since December of 2009. This is real time data and shows what I have been saying now for weeks pointing to the leading indicators, the U.S. economy is falling. The market should be down alot but should and will are two different things. We got the bounce I chickened out waiting for but I was shorting more yesterday. Let's see if once again the market can shake off another bad number.

Consolidation

2010-08-16T20:18:00.004-05:00

Since the last time I did a blog post the market has changed fairly dramatically as equities have been falling like a hot knife through butter . I came into today expecting some sort of bounce in the early part of this week. We had a gap down at the open and I covered some within the first hour of trading. Well we bounced but it was the most pathetic worthless bounce I may have ever seen. The lightest cumulative NYSE volume day of the year, including holidays. We sold off into the afternoon. Now the S&P future volume wasn't nearly as bad which I tend to thinks drives more of the action. Anyway, by the end of the day, while I think the odds are still for us to move higher, the potential to miss something on the downside I felt was to great so put right back on all the short exposure I took off. Very rarely I trade like that but even if we do a several day pop I do think we are headed lower. Anywhere between 1090 and 1110 is very possible for a bounce. I will be shorting most likely if we do get there.

This week is a light week for economic data which should also add to the bullish bias. Tomorrow has several economic releases but looking back to July and not terribly important. Wednesday has virtually nothing. Than you have Thursday with jobless claims and Friday with another regional manufacturing index in the Philly Fed release. That last Philly Fed release is important because it looks at August data. The jobless claims number is extremely important. We have had two gooseggs in a row. Another goosegoog and move towards 500k jobless claims could start the next move down in a serious way. Anyway, would not be surprised at a sideways action or up action for another day or two but I don't want to be to cute and potentially miss out on that not happening.

The fireworks going on lately hasn't been the equity market but the bond market. Massive gap up in bonds. So massive in fact I wonder if it wasn't some sort of exhaustion gap that you see occasionally in equities. Either way it seems to be screaming a warning to equities which try to play deaf some times.

My bigger question is if the markets can really break down before labor day or if much of Wall St being on vacation will keep the market propped a little longer as people making big money decisions just won't be around to sell if the economic data looks really bad.

Quick Take

2010-08-10T16:26:00.002-05:00

Well today was definitely frustrating for many. Scenario A started to play out. That burst what many bulls were hoping for, a spike to take some profits. The bears didn't really get to play either. We are left wondering.

The S&P future volume surged. Yesterday we didn't break a million contracts trading hands. Today we broke 2 million. Up 100%. However, the NYSE volume was still a pathetic 980 million shares traded. Up about 25% or so from yesterday bust still did not even clear a billion.

My quick take today was that it was a win for the bears. Unfortunately, instead of being a 4th down conversion, I feel like it was just a 3rd down stop. We still have fourth down ahead of us. The interesting stuff to me was actually not the Fed release but everything going around it. The Euro was very weak early this morning. Some weak data out of Europe and sovereign bond spreads started widening out again. European government bond spreads have very quietly moved to two and three week highs. Copper was weak as was oil.

There is very little economic data tomorrow so the attention shifts to the jobless claims number. It is only significant if we have another big spike. If it stays the same or declines a little, I don't think it will mean much. The decline won't mean much because it will confirm that the spike last week wasn't significant and it is still stuck in this no man's land of 450 to 460k ish number.

So the jobless claims number could be a catalyst for a move lower as could be the June retail number on Friday. Or it could come out of Europe. Watch the Euro and European government debt spreads. Or maybe we go back to no volume, inching our way up until Labor day. Without a break below 1110 (maybe 1100), 1140 is still a very real possibility. Nothing is ever easy is it? I was shorting some today (both pre and post release) as the Fed mess is passed us at least for awhile.

I am traveling again tomorrow so not sure when I will be back blogging.

Buffett Concerned about Inflation? Maybe Not

2010-08-10T09:50:00.003-05:00

Good grief. I used to get so frustrated with financial media and would rant on the blog about this piece of poor reporting or how this was taken out of context. I have gotten away from that as I just read less and less financial news from financial media outlets but I couldn't help it this time after reading this Bloomberg article. I actually saw this article about midnight last night and was like, ridiculous, but hoped it would just go away. Instead it became front banner Bloomberg news this morning. Let's start with the title. "Buffett Shortens Bond-Holding Duration After Inflation Warning." I am a Buffett follower and remember no such recent chatter out of Omaha. So I look in the article.

This is the supposed warning:

Buffett, 79, urged Congress last year to guard against inflation as the U.S. economy returned to growth. In an August 2009 op-ed in the New York Times, the Berkshire chief executive officer said government must address the “monetary medicine” that was pumped into the financial system after the 2008 crisis.

Are you kidding me? From a year ago. Opinions on Wall St. have changed drastically from a year ago. Buffett was wrong like everyone else was (well, almost everyone) that inflation was coming. That has no bearing on what Buffett thinks now.

Well what about him shortening duration of his bond portfolio? From the article:

Twenty-one percent of holdings including Treasuries, municipal debt, foreign-government securities and corporate bonds were due in one year or less as of June 30, Omaha, Nebraska-based Berkshire said in a filing Aug. 6. That compares with 18 percent on March 31, and 16 percent at the end of last year’s second quarter.

So he increased his holdings in bonds due in less than one year from 16% of his portfolio to 21%. So an entire article on how Buffett is gearing up for inflation making front page news is based on a warning from a year ago and the fact a 5% increase in the portfolio in bonds due less than one year? Are you kidding me????? I mean the reporter should be fired. Now 5% is not a small move but it isn't gigantic either, but there could be an additional reason for this move THAT IS NOT MENTIONED AT ALL that has nothing to do with inflation. Credit risk!!! Ding ding ding ding. Do we have a winner? This article doesn't mention at all that in June (so only 2 months ago compared to a year ago on his other comments) he warned in front of Congress about the municipal bond market and the possible train wreck it is headed for. Many very savvy investors are also worried about a sovereign debt bubble.

Okay - so if I am worried about credit risk in municipal bonds and potentially in the future on government bonds - I may just shorten the duration of my bond portfolio. That would be logical and has nothing to do with inflation concerns.

Buffett may or may not be really worried about inflation, I would guess not, but there is nothing at all that Buffett has done in the last six months that should generate a headline article on how Buffett is concerned about inflation and we should also. Really really poor reporting.

Stage is Set

2010-08-09T18:56:00.003-05:00

Wow, I mentioned last night on how light trading volume was worldwide and than we see a day like today in the U.S. markets. I don't know if I have ever seen a full day like it. We didn't break 1 million contracts in the e mini futures. I don't know if I have ever seen that. The NYSE didn't break 800 million shares. I mean, it was like a holiday.

Well the stage is set for the next fall in the markets. Now the question is if it occurs. I have had tomorrow circled on my calendar for a couple of weeks for when a possible top would be in or very close to in. It may not happen but the market has been buying the rumor that the Fed will save the world so we shall see if A) the market is severly disapointed or B) if it is sell the news. I have been thinking we would get a spike and slam down but that almost seems to easy. Everyone seems to be expecting that - even bulls (though they think it would be just a pause)

Assuming I am right that the market is topping there are several ways for this to play out. The market is always interested in max frustration.

A) Max frustration for the bulls

We are never positive tomorrow. The market opens down and sells off all day never looking back at 1120. The bulls were looking for a spike to take profits and never got that spike. Don't put this as very likely because the bears never have it that easy but who knows.

B) Max frustration for the bears

We get the spike above 1130, maybe even 1140, and start to roll over but the market closes with the market above resistance. Bears are sweating. Wednesday comes and the market opens flat to up or moves up some during the day, the bears give up hope and cover. Thursday another bad jobless claims number comes confirming last week wasn't a fluke and the market tanks.

C) Mix frustration for bears and bulls

Big spike tomorrow with the release causing bulls to get more bullish and bears to start covering. Market doesn't last through the day and sells off hard frustrating everyone. This is what would normally happen and I could be wrong, but it seems to be what most are talking about / expecting. For that reason, what I normally would think would happen I don't think will happen.

Trading Volume Worldwide Slowing

2010-08-08T17:33:00.002-05:00

From Bloomberg:

Stock brokers in the United Arab Emirates are struggling to make ends meet as trading volumes tumble to the lowest in four years, forcing some to close.

The number of brokerages in the country may drop to as low as 55 from 81, according to Shuaa Securities LLC, the brokerage unit of the U.A.E.’s biggest investment bank. Twelve firms, from Abu Dhabi-based Makaseb Islamic Financial Services to Dubai- based IFA Securities LLC, filed requests to the Securities and Commodities Authority to halt operations this year as costs rose and revenue fell. Seven shut or suspended operations last year and three in 2008.

and

The average daily volume of shares traded in Dubai has slumped to 173 million so far this year from 477 million in the year-earlier period.

I have mentioned many times how volume has just disapeared. Bull markets die in low volume. However, I wonder if there isn't something more going on? If worldwide the interest to invest, to speculate, isn't slowly dying? I have no idea. Just hypothesisizing.

A Weekend Musing

2010-08-08T17:24:00.004-05:00

Friday looked like a bear trap and I covered just a little early Friday afternoon. I wanted to have a some room to short some more if we get a market bounce Monday / Tuesday but I am ready to add it back on. Just a portfolio flexibility thing. The thinking was that we have zero economic news on Monday and the only chatter was going to be about the Fed meeting on Tuesday. Looking for a bounce up to 1130/1150 and the market is done. The possible thesis anyway but not married to that idea and we could be done right here and now. The Hewlett Packard news Friday after the bell throws a wrench into everything. Not that it means anything fundamental to anyone besides HP but it is the outside event that can mess with sentiment on the margin. Remember the Goldman SEC suit in late April? Basically marked the top for the market.

Everything in me tells me the market is getting ready to roll over in a major way. A mix of fundamental stuff, technical stuff, and gut instinct watching the market for years. I could be very wrong but I feel like we are on a tipping point where within the next two weeks the next major leg down will begin.

Bear Trap?

2010-08-06T08:42:00.003-05:00

I could be wrong but my gut is telling me this is a bear trap. The jobs numbers were awful. Just dreadful. Huge revision to June. Miss on total jobs and private sector jobs...but, the emphasise will move to Tuesday and the Fed meeting. It is the classic bad news is good news for the equity markets. The markets will start looking towards Tuesday for possible easing from the Fed. It looks like currencies are starting to price that in. Euro up strong. Copper is flat not having any follow through from the sell off yesterday. I am not shorting additional here. It smells fishy. I do think you will know in another hour though whether this is a trap or the real thing.

2Q Letter for Kaspar Investments

2010-08-05T07:59:00.001-05:00

Yesterday I sent you my quarterly letter. If you are a regular reader of this blog and are not on my mailing list, put your email address in the comments and I will add you to my distribution list.

Jobless Claims Number - EEEKKK

2010-08-05T07:54:00.003-05:00

Don't look now but jobless claims came in at the highest initial claims rate since April - 479,000. Ouch. If we are rolling over like I believe we are - this number should start peculating higher. One caveat though is much fewer people are employed than they were two years ago. A week doesn't make a trend but it will be interesting to watch that number over the next month.

I sort of doubt the market will tank on this number before the non farm payroll report tomorrow morning.

Getting Super Bearish

2010-08-04T00:15:00.002-05:00

I am starting to get super bearish again. After just sort of ignoring the market for a few weeks as we bounced around in what I think is a meaningless counter trend rally, I think we are getting close to the markets completely falling apart again. In other words 1010 on the S&P would be taken out. Economically, things appear to be hitting the skids. The market seems zeroed in on the Fed meeting on Tuesday which could be a big sell the news event. I still think the market could have another bounce left in it back towards 1140 but tonight I have been feeling like we are down to a few weeks if not a few days before this thing rolls over. The market cannot keep ignoring the economic reality for very long. Right now bad news is being bought because it increases the odds of government action. That is not sustainable.

Jim Rogers and Commodities

2010-08-03T14:45:00.002-05:00

I was asked to comment on this CNBC piece that quotes Jim Rogers and his bullish thesis on agriculture commodities.

The July rise in wheat prices, the fastest in 51 years, indicates that shortages in agriculture are coming, Jim Rogers, chairman of Rogers Holdings, told CNBC.com Tuesday.

and

"Anybody who's got potentially good agriculture land and good weather" is likely to emerge a winner out of this situation because prices of nearly all agricultural commodities are set for steep rises, Rogers said.

"Prices aren't high enough and most people don't believe it," he said. "Unless prices are high you're not going to attract people in the business. Eventually people will go into farming again but it's going to take a while."

Shortages in agriculture are likely to add to problems created by governments who printed money to spend their way out of the financial crisis, according to Rogers.

"It's all happening at a time when governments are printing more money… it's a very dangerous situation," he said.

If there was any asset I would like to own over a five year period besides gold, it would probably be agriculture commodities. However, like gold, I do think agriculture prices are not about to skyrocket to all time highs. They could, but I just don't think the probabilities are in their favor. In the intermediate term (six to 18 months) I think gold and agriculture prices will be lower but there is no way I would put money on that bet. In fact, even though I think that, I would want to own gold currently because the possible alternative is gold goes parabolic.

Jim Rogers has been an agriculture bull for at least five years. He has been mostly right though did not see agriculture prices getting killed in late 2008 with all other commodities. I think we are in a similar situation now and it seems we are following a similar playbook to 2008 in the way the commodities are spiking right as the economy seems to be slowing. Oil going above 140 in the summer of 2008 helped add a final bullet to the head of the consumer.

Finally, there is not much money printing occurring. Only reserves being built.

Bears in Hibernation

2010-08-02T17:51:00.002-05:00

Hey all - after being out of town for a couple of weeks, I am back. Been absolutely crazy with business related dealings where sleep has been something that has been little and far in between. Flew back from Chicago late last night. First time I have ever really been in Chicago. Absolutely lovely city.

So my thoughts on the markets. Well the last couple of weeks has all been part of this correction move from the July lows. Not surprised at all that it has happened but I have continually been surprised at the ferocity of such moves. My investing "history" is the late 90s and the early part of this last decade and things just don't go up like this with as much violence. Stair step up elevator down is the old idiom. Well it has been elevators up and down the last couple of years. Today's rally was a right hook to the jaw for many bears. Looks like a legitimate breakout and wasn't expected by many bears. There is a bearish spin which is discussed below.

Volume today again was non existent. Becoming a theme I know. It was the lightest 2% up day in the markets in years. It was also the beginning of the month which saw new money get put to work. Actually, beginning of the months usually follow the previous month if it was a violent move in one direction. Beginning of July was a very bearish day as June was very bearish. The reverse happened in the beginning of the month here. It was also seemed to be a sell the rumor buy the news type of day regardless if the news was bad. China PMI data came out over the weekend. The official government PMI number came out at 51.2 down from 52.1 The separate HSBC number fell to 49.4 from 50.4. Anything above 50 is growth and below is contraction. It was the weakest number in over a year for China and was not a good number but the spin is that China has now slowed their economy down and will now ease back on the tightening measures. The U.S. ISM number also came out today declining to 55.5 down from 56.2 but above expectations. The third month this number has declined. Once again it was met with a sense of relief even if it wasn't great.

It will be difficult for the markets to turn on a dime and so today was probably not the high. I have postulated for awhile that 1140 to 1150 was very possible. We are getting close. Looking for catalysts of potential highs is the ISM service number on Wednesday with the ADP number, jobs number on Friday, and FOMC meeting on Tuesday. All possible events that could turn around this market.

I still think the Euro's up move is getting close to being done. I was a little early but correct that a rally coming when everyone thought it was going to parity and I may be early in my thinking that it will start to roll over but anywhere between here up to 1.35 (maybe 1.40) seems prime territory for a turnaround. Inversely the dollar's sell off may be getting close to being done. One trade sentiment index has the percentage of bulls on the dollar fall from 98% (at the June high) down to 7% now. That can extend for awhile but enough of a move to potentially shake some bulls out getting ready to make another move.

The bigger breakout may be commodities with oil and copper up huge. Remember the economy was in recession for over 7 months before commodities, specifically oil made its high around July of 08. In general, oil going any higher is a net drag on the economy.

Finally, the consumer metrics index (CIM) seems to be falling off a cliff. Other blogs mention this from time to time and something I have followed for about six months. Similar to the ECRI in tracking leading indicators. The ECRI, the CIM, and the 10 year Treasury - all say the same thing. A meaningful slowdown is in process for the U.S. economy. The stock market and commodities are saying something very different. Time will tell which is correct. (it is usually not stocks or commodities - remember I just pointed out commodities peaked in July of 2008 well after the slowdown started)

So to sum up, the bulls really are in charge right now. I doubt today was a high (it could be). It seems to go with the theme of a broken market as there is no conviction in buying, it continues to melt up, and moves up or down make little sense. Just have to take side, take the gains/losses and stick with it.

Break Out?

2010-07-23T01:00:00.003-05:00

I would say no but tomorrow is important. Today was another confusing day. We lept above the trendline at the open and than just stopped. No real follow through. No volume. Today was like watching paint dry. Seemed very odd. Would not be surprised at this point if we broke back down or if started moving dramatically higher. In otherwords, I didn't feel like anything was really resolved today which is very counter to how I thought it would be when the stock market opened.

Pressure and More Pressure

2010-07-22T07:39:00.004-05:00

Add another reason why I hate this market, regardless if I am making money or losing money. The market is curling up like a high pressured spring. Something very large is going to happen in short order and there is little way to determine what that move is going to be in the short term. As a result, you have know your right in the longer term and manage the risk (which means lowering potential gains if the market does move your way in the short term) so a sharp move against you in the short term doesn't destroy you.

The market is torquing. I had been thinking for days that the probability would be it would break higher. The severity of the move down yesterday with the drop in the Euro made me think the probabilities had changed. However, like I said last night in my post, I was very unhappy with the way the market closed. There are two major trendlines in play right now. The one coming down from the April highs. We have hit that one half a dozen times. We also have an upward trendline coming off the July lows. These are coming together forming a sideways triangle. We hit the upward trendline yesterday before rolling over and basically hit the downward trendline yesterday during the sell off. The space is becoming very narrow and one of those trendlines will break very soon. Any move will probably be violent.

If we break higher, the built up pressure from scrambling shorts will send this market screaming. I still think it will be very short term (days to a few weeks) but that is how you get the stocks to move towards 1140. It will also cause everyone to get on one side of the boat again setting up for the fall.

The bearish case is we gap open up here (and we will gap big time)and there is no follow through. It gets us through tomorrow for the release of this European stress test staying below the big downward sloping trendline.

The bullish case is we climb above it and continue screaming above it. European economic data was really strong today. It probably has to do with the weakness in the Euro last month.

Adding to the bull case is copper is screaming higher again today.

Just Not Easy

2010-07-21T22:04:00.002-05:00

Nothing is every easy is it. The markets broke down hard but it left investors questioning and bears wanting? I moved fairly swift adding alot of short exposure. The odds definitely went up that bulls worst nightmare may have started but like I said, nothing is ever easy. If the market would have closed below 1060, that would have been huge. Copper was up HUGE in the morning and than reversed. The reversal was big but not breath taking. Most of the move up was technical in nature and the reversal at a key area was a technical failure but once again it didn't reverse strong enough to quell all questions.

As mentioned in the previous blurb of a post, the sentiment is shifting negative against the European bank stress test. The Euro got pounded today. It has been up so much that some sort of snapback was almost inevitable but the last few days still remind me of a topping process.

At this point the market may completely fall apart or it may still try to hold it together. In my mind it has two trading days to try to trigger a short squeeze leading to something bigger before the door is slammed shut. Time is definitely running low. For the bears the market has no business going over 1085 and especially 1100.

Stick a Fork Into It?

2010-07-21T13:17:00.002-05:00

Market percption of bank stress test is starting to turn negative. Bernanke opens his mouth (which is almost always market positive) and the market tanks. Very very bearish!!

Bears Should Be Nervous - Bulls Should Be Terrified

2010-07-21T00:27:00.004-05:00

A couple of very interesting days. A couple of days that probably have most investors a little confused. Whether they know it or not, I think bears should be nervous right here. You have Bernanke speaking tomorrow, not alot of economic data this week reinforcing the economic double dip in progress, and the European bank stress test that will be released Friday that will for sure paint the most rosy picture possible. It is very possible the market could shoot higher multiple percentage points for a few days. In fact, I have been the most active I have been in weeks covering shorts especially yesterday and some today. The weakness in the morning has given some opportunities to prune some positions. Some of these positions were puts that were re-initiated at the end of the day extending out the duration. Overall I am less short than I was two days ago but I remain on a trigger finger. This leads me to the thought that I think bulls should be terrified.

I think starting next week, the ugliness could return with a vengeance. My focus shifts from market indicator to indicator. Today the sell off did not feel right at all and I was covering some of my short duration puts early in the morning. The short term indicator I was focusing on was copper and the volume related to the gap down. Copper never moved down. It was positive all day and than started skyrocketing very early in the trading day. The longer term indicator I am looking at is the Euro. My gut tells me the Euro has topped or is very close to topping. The last couple of days the Euro has stopped its upward climb trying to chop higher above 1.30 before each time failing and getting slammed back down. There could be another spike but I really think these bank tests are going to be buy the rumor sell the news type of events. Hungary is having problems even though the market is ignoring it currently and overnight rates continue to indicate stress. I think the bulls are protected by the stress test to some degree because I don't think the market is going to plummet before it but the next big leg down I think will be because of Europe and I think the clock is ticking. Any bear hoping for an earnings miss to help cause a market sell off is looking in the wrong place. If earnings could perpetuate what they are coming in at, the market isn't that expensive. However, if there is a global macro hiccup, which I think is almost a certainty, earnings are leveraged like never before. So the bears have to be looking forward and outward. Maybe the market can hold it together longer than I think but the clock seems like it is ticking. Tick tock tick tock.

Anyway, look for a potential spike for the rest of the week into next week blowing out some shorts and establishing a bullish bias. If (and that is a decent if) we get the spike look to take an aggressive swing anywhere between 1110 and 1150 on the short side.

The most immediate bearish scenario I think centers around Bernanke testimoney tomorrow if he his words start sounding more downbeat than investors would like to hear.

Euro Rally About Done?

2010-07-19T11:10:00.003-05:00

On June 13th when the Euro was around 1.20 and on June 24th when the Euro was around 1.22, I postulated the Euro (which at the time was hated) could see a bounce to 1.30. Well we are at 1.30. We are getting close to where it makes sense to potentially starting shorting the Euro. I think a 1.33 to 1.35 handle is possible but at this point I wouldn't bet on it.

This is like the counter trend bounce from the March 2009 lows for the equity market. I tend to be early with respects to when I think it could be over (I did start getting really bearish on the equity markets again around August / September of 2009 only to be really early). So the Euro may have further to go but I think we are closer to the top than the bottom (for that statement not to be true the Euro would have to rally above 1.40). You have the banking stress test results this Friday. This Euro rally could be buy the rumor sell the news sort of thing. Or it may cause the final spike.

With Hungary over the weekend, rumors of problems in some European banks, and overnight rates that continue to creep up, it shouldmt be long (days to a few months) before the Euro starts heading lower in earnest.

Republicans - A Nightmare for the Stock Market

2010-07-19T09:55:00.003-05:00

This is not meant to be a political post. I typically vote Republican, lean Libertarian, and abhor free spending. But, in my opinion, this Bloomberg article has it 100% wrong.

From Bloomberg

Growing dissatisfaction with U.S. President Barack Obama before this year’s elections is good news for stock investors, if history is any guide.

The Standard & Poor’s 500 Index has surged 48 percent on average starting in the second year of each U.S. presidential term, measured from its lowest level through the high the next year, according to data going back to 1928 compiled by Bloomberg. That compares with trough-to-peak gains of 38 percent in other years.

An advance this year would come after Obama already presided over the biggest rally during the start of a presidency since Franklin D. Roosevelt in the 1930s. Bets on Intrade show a 54 percent chance Republicans will take control of the House, enabling them to block Obama’s policies. That may help prevent a bear market after equities tumbled as much as 16 percent in the past two months, says billionaire Kenneth Fisher.

“I envision a rally from before the midterm elections,” said Fisher, who oversees $35 billion in Woodside, California, as chief executive officer of Fisher Investments. “Markets love gridlock. What the market wants to see is no change: less legislation that engages in changes in taxes, spending, regulation or property rights.”

Wow. Talk about relying on an old playbook losing all sense of context. I have never really liked Kenneth Fisher, and like the last several years believe he is wrong here also. Republicans winning in November has been one of my catalyst for a big stock market meltdown. I professed this theory to several investors back in February and stand by it. Republicans take over Congress and I think the market tanks (it will tank before that leading up to the election). The reason has to do with the only thing that had been holding up the market was free spending by Washington and other world governments. The MASSIVE shift in market sentiment back in June surrounding the IMF and the global move to austerity. That is extremely deflationary and very stock market negative.

If the Republicans win Congress it will be because of the tea party movement type candidates who will feel like they have a mandate to cut spending and watch over the Fed. For the stock market I think there couldn't be a more negative scenario. We need to go through a depression (actually we don't need to but it is inevitable) and that would greatly quicken the process. Right now Intrade is putting it at 57% that Republicans take over the house. That started moving up big time in May ish which is when the US markets started rolling over. If that becomes more certain, I think the stock market will head lower.

Europes Tipping Point?

2010-07-18T23:57:00.003-05:00

Well, this market remains one to hate whether your making money or losing money. In my opinion Friday should have been Thursday. Classic tipping point where the bad economic news all week just built and built and built until finally the last piece of economic news, the consumer sentiment, just pushed the market over the edge. Thursday was where the real meat of the bad economic news occurred but was blurred with the BP news that the oil well was capped and the Goldman Sachs news that they had settled with the SEC with basically a slap on the wrist.

Friday was nice but there was several things I didn't like. The VIX never elevated. Was this complacency or a sign that the market isn't ready to go down? Also, volume was lighter than alot of down days especially considering it was an options expiration day. From a bears perspective, what I did really like was the market closed below 1070.

Tomorrow is a key day. If you would have asked me Friday I would have guessed that the market was a correction of the overbought nature and the market still has some juice left in it before the final roll over from the economy slowing. This Saturday through a wildcard into it though.

This from Reuters is potentially huge news.

The IMF and EU suspended on Saturday a review of Hungary's funding program, set up in 2008 to save the country from financial meltdown, saying it must take tough action to meet targets for cutting its budget deficit.

Suspension of talks means Hungary will not have access to remaining funds in its $25.1 billion loan package, created by the International Monetary Fund and European Union and which it now uses as financial safety net, until the review is concluded.

Negotiations with the lenders had been expected to finish early next week. Analysts said the forint currency could fall sharply when financial markets reopen Monday due to uncertainty over the international safety net for Hungary, which has financed itself from the markets since last year.

Is this Europes Lehman? This could be a massive catalyst for a blow up in Europe or the market may ignore it. It really shouldn't be the catalyst but the question is if it ruptures the tipping point. Just the consumer sentiment number was probably the least important economic number of the week, once again it was just the final push that sent the market over the edge? Is this it for Europe? I really have no idea. It also may not happen first thing tomorrow if it does happen. It could be slightly delayed. Things to watch for? Watch the CDS of European countries. Watch the Euro. Watch the markets (both government bond and equity) of the periphery countries (i.e. Spain).

Like I said, it probably shouldn't be the tipping point but it could be.

If the market really has turned over, tomorrow into Tuesday is very important. You should probably see some awesome earnings numbers out this week. Microsoft being one of them. It just depends whether the market is looking forward and the macro hurricanes on the horizon or the rear view mirror with the earnings from last quarter. As a bear I don't want to see the market get back above 1075 which isn't that far away.

Bulldozed

2010-07-14T00:07:00.002-05:00

The professional hazards of blogging. Boy was I wrong yesterday. Not only did things reverse but they reversed with a vengeance. The frustrating thing was, I had no idea why. I woke up this morning and do what I normally do. Roll over in bed, grab my blackberry, and scroll through the headlines. I look at the headlines, and I said to myself, eww, we are going to be down today. Than I looked at futures which were screaming and do a double take. I am like, I most have missed something. Go back through the headlines only to see the same bearish headlines I saw before. German survey well below what was expected, U.S. small business survey just abysmal, Portugal downgraded, Asia down the previous night with China really getting nailed, and some bad numbers out of the UK. By noon I just wanted to punch something, so I went and worked out. :)

Anyway, I have no idea what sparked the rally today. Alcoa lagged the markets. CSX whose earnings were also talked about was down. Maybe it was all a lead into Intel. Intel's numbers were truly amazing. Even as a bear, I must admit they were solid on every single framework.

The bears were getting their heart ripped out. I heard from all my bear friends who I don't hear from unless they are getting squeezed to death. What that means of course is a capitulation on the bear side. That doesn't mean the market will start going down as it isn't a capitulation to buy as much as a capitulation just to get out of shorts.

I hate this market. I hate everything about this market. I hate when I am making money. I hate when I am losing money. There is no rhyme or reason for anything. It is straight up or straight down. Has been for months. The market is broken. Just entirely broken.

We are now as much overbought as we were oversold 2 weeks ago. That is incredible. 7 days, up about 9%. ON NOTHING. No major economic news as the last two weeks has sort of been a quiet period for economic news. The news that has come out has been neutral to bad UNTIL the Intel numbers today. That was legitimate good news. So you could say all the bad stuff is priced in. Great, but the market shouldn't go up 9% in 7 days going to extreme overbought territory. That just isn't healthy even if your a bull. It is just absurd.

So where do we go from here (after my thoughts from yesterday, you probably shouldn't read this part)? I don't really know. Odds are high for some sort of pullback ASAP because we are so oversold but because of Intel the market may be up strong tomorrow exacerbating the situation. 1105 is important. We are at the 50 dma. The 200 dma is above around 1110. At this point after a pullback I could easily see us going to 1140. We may not. The market is really schizo right now. Not much makes alot of sense and from an investor standpoint I don't think there is alot to do. Is the economy slowing or isn't. So many warning signs that it is.

One other point. Again, copper underperformed today. It was basically flat on the day when the dollar was getting pummelled and other commodities and the market was screaming. It may be nothing but I still look at it as at least a warning sign.

Fish Losing Its Smell

2010-07-12T23:29:00.002-05:00

Today made me a little more comfortable with the bear case. Alot of underpinnings in the market looked like it was starting to reverse. How big this potential reversal is I don't know, but all in all today was a bearish day.

I'll start off with copper since I named it as one of my top concerns in the last post. Copper lagged the markets badly all day. Overnight it is selling off again. A top risk appetite metric.

I also mentioned the Euro. I mentioned over a month ago I was expecting a rally. People had just gotten to bearish on it. I mentioned in the previous post I thought it might have more to run. Reading some over of the weekend and thinking about it I am starting to doubt that proposition. I am longer term bearish on the Euro so just a question of timing. Today looked weak and there is more and more chatter (especially in European newspapers)about provisions for sovereign default and problems with the stress test. We could see a serious move down in the Euro soon. If it is for the wrong reasons (Euro viability concerns), the correlation will return strongly of Euro down / stocks down.

There were problems on the periphery today with Spain taking a hit. Bond offerings didn't go so well in Europe and there are alot more the next couple of days.

The Russell 2000 got slaughtered today (at least relatively). I did a double take at the end of the day. Dow, S&P, and Nasdaq were up but the Russell 2000 was down over 1.1%. That is a huge relative move also showing risk off.

Though even the major indexes were up volume was lighter again today. Friday was the slowest full day of the year and today was even slower. Than if you look at market internals, there were more stocks down than up today.

Finally, on a short term basis the stock market is very overbought.

I think the odds have shifted that there is a very good chance at least for a short term sell off if not something bigger. Something bigger is dependent on Europe. I was shorting a little today. Should be interesting.

It will be interesting if the market does turn down hard and earnings are coming out looking good if investors will finally get that individual corporate performance is a small part of the equation right now. Alcoa came out with "good" earnings but it was a slide of hand again. This is getting old. Below is a compilation of thought on Alcoa earnings from me and a friend.

"My thing about Alcoa is it comes in at $.13 EPS versus consensus of $.11. We got a whopping 18% beat!! A month ago (just 30 days) the consensus was $.16 EPS. So the headline could have been Alcoa misses estimates by 19%. Now we can all cheer and marvel at how Alcoa beat EPS estimates by 18%. I am glad 30 days and a little slide of hand can make everyone feel better about everything."

"You got to love Alcoa claiming demand is picking up with prices down over 10% YTD. Hope springs eternal."

"Another interesting Alcoa tidbit - look at their capex - 213 million. 2nd lowest quarter (4th quarter of 2009 was 208 million) since like 2000. Back in 2007 and 2008 cap ex never dropped below 700 million and a couple of quarters was over a billion. Management obviously has alot of confidence."

A Fishy Smell

2010-07-09T14:41:00.002-05:00

Sorry all. Been on the road. First the 4th of July holidays and than working on some business related issues. We are in a very predictable rally but where we go from here is very unpredictable. This is why I hate this market and have hated it for months. This is why to a large degree bottom up investing has been dead for a couple of years. Everything moves together either straight up or straight down. After essentially 10 days down in a row now we are up 5 days in a row. Not little moves but massive moves up and down. I postulated about a break back above 1040 and we are getting really close to where we need to stop if this isn't something bigger. It is just a stupid game of timing but if your on the short side you have to at least look at that stupid game.

Since I am bearish and think the inevitable move at some point will be back below 900 I will focus on the bearish viewpoint and my immediate concerns in the short term. Top among them is copper. Copper has very quietly gone back above it 50 day moving average. Why. I have no idea. It is a great harbinger for risk appetite and economic strength. At the same time the Baltic Day Index is down a record 30 days in a row. This typically means less need for shipping. There is a disconnect there. Watching copper not make new lows when the markets broke 1040 was one thing that gave me pause thinking there would be a bounce but seeing copper continue to move up makes me wonder if there isn't something more going on.

Secondly is the dollar and the euro. The correlation broke down some but I speculated the Euro would bounce and it continues to bounce and it seems like there could be more to come. Can the U.S. markets really plummet if the dollar is falling as that means more risk appetite? Let me be clear, I don't think the Euro has made its final low. I also think there are going to be some major European problems coming yet again in the relatively near future. But I could easily see the Euro rallying for several more weeks or a few more months.

This leads me of course to the European Bank Stress Test. Can the markets really be that stupid two times in a row? The American Bank Stress Test was a farce but was it enough to shift sentiment. This combined with the fact that banks were raising equity help them get away it. Can this one do the same thing or is it buy the rumor sell the news type of thing? That is extremely important to figure out. That is in two weeks so maybe the Euro rallies through than before rolling over?

Than you have the way this rally looks. It seems much stronger than the rally a month or so ago from 1040. We get so dang oversold and what you want to see is sideways choppy action with spurts and starts as you grind higher. That works off the oversold condition. This stupid rally has been straight up in a very short amount of time. It doesn't do nearly as much to work off oversold conditions and get overbought.

Finally and most importantly is the sentiment. Gotten extremely bearish. Stocks just can't go down when everyone is bearish. That means everyone has sold who has wanted to sell. Now this week hopefully helped some but has it helped enough? I don't know. Doug Kass was out at the beginning of this week saying we have seen the low for the year. While I think he is wrong he was zeroing in on how bearish everyone had gotten.

If we do have a much bigger rally ahead of us the target has to be around that 1150 are. So do we see 1150 or 950 first. If you asked me two weeks ago I would have guessed on a rally but strong probability for 950. The way this rally is unfolding I still think 950 but the probability break down in my mind is more like 60% not the previous 80 or 90% like I was thinking. So at least for me it is hard to bet either direction.

For the bearish perspective one has to hope this is just a relief rally before news hits. Buy the rumor sell the news. Earnings start next week and in two weeks is the release of the European stress test. Both in reality mean very little but it is always the reaction.

The biggest things going for the bears (and it is a big deal) is that once again on the moves up volume is becoming less and less. Todays volume was nonexistent. I mean the street was dead. 1.2 ish million ES contracts. Maybe 800 million on the NYSE big board. TALK ABOUT DEAD!!

Anyway, I don't really have a clue right now. All I know is that from a bears perspecitive this rally smells fishy in it could be a trap. Of course if your wrong and than right you just have short term pain but if your using options or leverage being to wrong on timing can be very painful.

Steve Wynn Interview

2010-07-01T16:47:00.004-05:00

This is a short interview of Steve Wynn from late May that I missed. Talk about saying the way it is. It reminds me so much of the book the Forgotten Man which is about the Great Depression. We are getting close to the time when everyone will start claiming they saw the double dip coming, the markets going back down. Complete BS. Think just three months ago and how the world was wonderful, was saved, and the stock market was going to new highs. What has changed from 3 months ago, 6 months ago???? Absolutely jack. Nothing has changed it is just people wanted to blindly hope. Belief in the tooth fairy is always better than thinking about taking care of your teeth and getting that root canal you need.

Weird - Simply Weird

2010-07-01T16:24:00.003-05:00

Today was a weird weird day. May have been the weirdest day of the year. Even weirder than the flash crash day. The Euro surged. I mean took a rocket ship higher. A move you very rarely ever see in currency land. The supposed reason is liquidity squeeze in Europe which meant that European banks desperately needed Euros to meet obligations denominated Euros causing a mad rush for Euros. That is a net negative longer term for Europe and the Euro but the technical nature of it caused a massive squeeze in the Euro. This caused the dollar to plunge.

Now I had been warning about the potential of dollar weakness and Euro strength. Did not think it would happen this way. It was a very negative event in Europe that caused the Euro to spike and this could go on for awhile before it plunges again. What caught investors off guard though is the plunge in the dollar was accompanied by a plunge in commodity prices in dollar terms!!! Oil down over 3%. Copper down over 2%. Gold down over 4%. Down $50.00 an ounce!! Adjust that out of dollar terms and it was an incredible liqudiation. Just annihilated.

Stock market was also interesting. US stock market was down. I was really expecting a gap down at the open and then big reversal up. We basically opened close to flat. Sold off hard until mid morning and than had a big reversal still finishing down. The non farm payroll number and the long holiday could cause a spike tomorrow. That is very possible. Challenging the 1135 area is very possible but everything that went on today screams of market stress, of a system that is falling apart. One has to be careful from a leverage standpoint because some kind of squeeze could happen that could cause the stock market to go up 4% in a fashion caused by a negative event. I don't know what but I wouldn't have thought that my idea for Euro currency strength would be because of negative events in Europe that caused a massive negative technical squeeze.

It is very dangerous out there. We are standing on the edge of a precipice. We are below 1040. At least on a short term time horizon you have equal danger for the bears. When the markets get this out of whack it is very hard to be a massive winner because the risk on both sides are very large.

Bill Gross - "Bond Markets Priced for a Depression"

2010-06-30T14:26:00.003-05:00

I have had some issues with Bill Gross over the years though there is no denying he is a great investor. Mainly I felt like he was one of the prominent voices last year cheering on the spending that I felt would make the mess worse just a little ways down the road. Well he has seen the light. Very good monthly outlook from Pimcos Bill Gross.

Starts out with a doozy of a first sentence.

Global financial market returns stand at the threshold of mediocrity. With bonds priced not for recession but near depression, most major global bond indices now yield less than 3%, surely a forerunner of returns to come.

and he is right here (how many times have I said this over the past 2 years?)

It is this lack of global aggregate demand – resulting from too much debt in parts of the global economy and not enough in others – that is the essence of the problem

The entire thing is very good.

Pure Speculation

2010-06-29T10:56:00.002-05:00

I don't do this very often but am going to throw out what I think is the most likely outcome over the next couple of days. This is pure speculation and probably wrong so take it for what its worth.

There are all kinds of cross currents going on related to horrible Asian economic data, European bank woes, and end of quarter. We have 1040 sitting as major resistance which we have bounced off 2 or 3 times.

Remember back in 2008. The 1040 than was 1200. We bounced off of it July and than bounced and bounced off of it again in September. Finally broke it and got alot of people short very quickly. Than we bounced again all the way up to like 1270 getting people slammed. Finally we broke it and plummet ted again.

So my speculation for whatever it is worth. We will break 1040 today with a close below it. Tomorrow morning we will go down somewhere between 1010 and 1030 before a big rally into Wednesday afternoon and Thursday morning possibly back above 1040 before kissing it goodbye for the final time.

Alot of money managers are wanting to raise cash at this point going into quarter end. The sell orders are lined up and eventually all who will have wanted to sell would have sold. The selling finishes tomorrow morning and volume dries up pushing the indexes up into Thursday morning at least.

Purely speculative conjecture. I woulnd't bet a 10 dollar bill at one to one odds that I was right but it is what is in my mind right now. That is why I have this blog. To put my thoughts in front of me so I can muse about them.

Hussman - Another Recession on Tap

2010-06-28T10:47:00.002-05:00

More and more money is moving to the viewpoint that a new recession (if it hasn't already started yet) is not only possible but likely. The latest is John Hussman whose comments I have posted from time to time.

His weekly commentary found here starts out pretty bleak:

Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.

Yep, the data has definitely started rolling over and the forward looking data is flashing danger signs.

A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession. While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.

He than goes and talks about what you could possibly expect from the markets. The problem is (and it is a good problem) for the United States the data sets are very limited because we haven't gone through any major sovereign debt crises. He quotes the widely quoted book This Time is Different by Kenneth Rogoff and Carmen Reinhart. All stuff I have talked about before.

Reinhart and Rogoff observe that following systemic banking crises, the duration of housing price declines has averaged roughly six years, while the downturn in equity prices has averaged about 3.4 years. On average, unemployment rises for almost 5 years. If we mark the beginning of this crisis in early 2008 with the collapse of Bear Stearns, it seems rather hopeful to view the March 2009 market low as a durable "V" bottom for the stock market, and to expect a sustained economic expansion to happily pick up where last year's massive dose of "stimulus" spending now trails off. The average adjustment periods following major credit strains would place a stock market low closer to mid-2011, a peak in unemployment near the end of 2012 and a trough in housing perhaps by 2014

This is how I have felt for months!!!

In recent months, I have finessed this issue by encouraging investors to carefully examine their risk exposures. I'm not sure that finesse is helpful any longer. The probabilities are becoming too high to use gentle wording. Though I usually confine my views to statements about probability and "average" behavior, this becomes fruitless when every outcome associated with the data is negative, with no counterexamples.

Than he just lays it out there.

Put bluntly, I believe that the economy is again turning lower, and that there is a reasonable likelihood that the U.S. stock market will ultimately violate its March 2009 lows before the current adjustment cycle is complete.....Moreover, from a valuation standpoint, a further market trough would not even be "out of sample" in post-war data. Based on our standard valuation methods, the S&P 500 Index would have to drop to about 500 to match historical post-war points of secular undervaluation, such as June 1950, September 1974, and July 1982. We do not have to contemplate outcomes such as April 1932 (when the S&P 500 dropped to just 2.8 times its pre-Depression earnings peak) to allow for the possibility of further market difficulty in the coming years. Even strictly post-war data is sufficient to establish that the lows we observed in March 2009 did not represent anything close to generational undervaluation.

There is much more from his latest weekly update. It talks about inflation and deflation and gives warning to investors about gold. The very things I have talked about over and over the last several months. He brings up the point that the governments are running out of room.

Anyway very interesting read. I strongly believe the S&P 500 will be below 800 by the end of this year and put 50/50 odds that the market will have broken its March 2009 lows by the end of this year. As we have seen already (and this is the pregame show) when the markets begins unraveling this time it will do so very very quickly. We already have a much weaker system with much fewer options.

The next few days will be very interesting as we go into quarter end and start a new quarter. The next couple of weeks could be bloody. The question is if the markets can hold it together through Wednesday or not.

A Shuffling in the World

2010-06-24T10:17:00.002-05:00

There has been an amazing shift in the world in the last three months. The idea that one can spend, borrow, and print money to reach prosperity is slowing losing clout while basic common sense of balanced budgets is starting to gain traction. Understanding what this means and doesn't mean is very important. For over two decades our world has moved full speed heading for a cliff. In many ways we have gone over the cliff. Europe is trying to pull back from the cliff now but they may have already gone over and trying to make an impossible climb back up. This effort is admirable but could be fruitless. While I support this new wave of enthusiasm for common sense, there is a distinct probability it is to late.

The new growing sense by government leaders that what has been created is not sustainable and the Keynesian effort to reflate out of the problems has failed is a tectonic shift. You now have open mockery by European leaders at what the United States has done and the road they have traveled. The new path being taken is one of austerity and an effort to balance world government budgets. This is admirable but I have said many times before that doing the right thing will cause massive human suffering and a large depressionary type outcome. The hope is that 2020 will be a good year. Not 2012.

This road should have started being traveled in 1998. Every year builds up a debt to the piper. This debt owed is human suffering. The longer it goes the higher the eventual human suffering will be. The growth in this debt is exponential. At some point the market (the piper) won't allow the debt to grow any higher. Could the world governments possibly buy another month or year? It is possible. Currently Europe is trying to start to pay off the debt. They are isolating the United States heading into the G-20 this weekend who still doesn't want to pay the debt.

What this means for asset prices is extremely bearish. What it means for society is extremely troubling.

The equity markets seem to be at a breaking point. The rally to the 1140 area came up short and at this point it seems like one should be shorting and asking questions later. Financial stress in financial markets is showing up world wide and economic data is plunging off a cliff at worst and rolling over at best.

If the new European viewpoint takes hold it will probably mean a major shift in how asset markets react. Of top importance is gold. I am becoming moderately bearish on gold. This is a short term thought (1 to 12 months) but what Europe is moving towards is full deflation. This could spell trouble for gold in the short term. Gold does well in deflation (i.e. the Great Depression) and severe inflation (1970s). Most investors do not realize how well gold does during deflation. The reason is deflation puts stress on sovereign nations and the currencies backing those nations. Even if gold goes down I am still a buyer but there is a growing risk that gold could drop 20 to 30% over the next twelve months. Like I said I am keeping and buying more gold regardless.

The other MAJOR shift that is occurring is that I think currency correlations are going to start breaking down. For 2 years if the Euro went down, basically the US stock market went up and vice verse. Even more relevant was the Euro / Japanesse cross. This correlation has been strong but is not necessarily a must. It was a risk trade signal. If the Euro went down the European stock markets went down. The same can happen in the United States. That correlation isn't a market rule. Europe is taking actions to protect their currency. While this will ultimately fail I think it is distinctly possible that the Euro still has some more rally left in it. 1.30 seems very possible to me. I won't bet on it but the reason I bring it up is that I don't necessarily think the U.S. markets will rally hard if that occurs like they have previosly. Another important point in all this is European "states" started having troubles first but their budgetary problems are just as big as U.S. state budgetary problems. This is inherrently dollar negative and U.S. economy negative. So despite being dollar negative it is also deflationary and U.S. equity market negative.

Anyway, there have been a couple of major shifts in the way the world is operating in the last few months. These changes may give 2020 a chance of being a good year but in the next couple of years it is very bearish for asset prices.

Bridgewater Associates Principles by Ray Dalio

2010-06-22T14:34:00.002-05:00

Been busy so haven't commented much on the market action. Last couple of days have been really interesting. Big reversal yesterday with DOW bouncing off the 50 day moving average. Today we broke back down below resistance below 1110 than the 200 day moving average and than the 1100 area. Tomorrow the Fed meeting decision is released. That is typically bullish. We shall see. World news again has become fairly bearish. The U.S. existing home sales number was a shocker even for me. It was bad bad bad. I have not jumped on adding to short exposure (still plenty short). Still nervous about the Euro though it has been selling some off recently. I think that correlation is going to weaken soon but I don't want to be the one betting on it. I am watching that 1185 area. Breaking that could mean this rally stage is over. I had been watching 1140. We got up to 1132 area yesterday. Close enough. So on watch for major deterioration but with the Fed meeting tomorrow I wouldn't want to short in front of it. We shall see.

Here is the full PDF of Bridgewater Associates Principles by Ray Dalio for those who are interested.

Thanks goes to John

A Ray Dalio Profile

2010-06-21T19:55:00.002-05:00

One of the most admired investment firms / hedge funds in the world has to be Bridgewater. The founder of Bridgewater is now billionaire Ray Dalio. The WSJ had a profile of him in the weekend edition. I like Ray because he thinks in terms of natures models. He is very bearish and for someone like Bridgewater did not do very well in 2009. There was a recent interview in Barrons however where he reiterated his bearish views.

From the WSJ

WESTPORT, Conn.—The euro was plummeting. The stock market was gyrating. And Ray Dalio, president of one of the world's largest hedge funds, took a moment to talk about mosquitoes.

"Man will never be able to build a flying device like a mosquito," mused Mr. Dalio, the 60-year-old founder of Bridgewater Associates. "I look at nature's complexity and think, man has the intelligence of mold growing on an apple."

Mr. Dalio, his staffers readily admit, is an unusual boss. His firm runs on a set of 295 principles that Mr. Dalio devised and distributed to all employees. The 83-page treatise, which draws lessons from the natural world, advises employees on how to achieve fulfillment at work and in life.

and

Mr. Dalio is among a handful of philosopher-investors known not only for moneymaking prowess but also for their distinctive take on life.....Mr. Dalio's basic philosophy is what he calls "hyper-realism," a notion that brutal honesty, no matter how uncomfortable, yields the best results. Principle No. 8: "There is nothing to fear from truth....Being truthful is essential to being an independent thinker and obtaining greater understanding of what is right."

and

Principal No. 11: "Never say anything about a person you wouldn't say to him directly. If you do, you are a slimy weasel."

The entire thing is a good read.

Greed Back In Favor

2010-06-21T01:01:00.004-05:00

Last week started feeling like March of this year all over again. Or the fall of 2009. It is getting absurd. The economic data was not good. Jobless claims, regional manufacturing surveys, Fed Ex warning on earnings, ECRI, building permits, and housing starts. All misses, all showing signs of rolling over. It didn't matter. The market grinds higher. Doesn't matter what the data is, volume disappears and the market goes up.

Now Asia is screaming and US futures are screaming higher on the news that China will supposedly will devalue the Chinese yuan against the U.S. dollar. Let's see, US futures are screaming higher, China stock market is screaming higher, Japan stock market is screaming higher, everyone is screaming higher on this news. HOW DOES THAT MAKES SENSE???? Currencies are a zero sum game. It CANT be good for EVERYONE!!

Well we are quickly approaching that 1140 area that I have been talking about. Why? Because the Euro is going up? I don't know. That correlation hasn't broken for over 2 years. Why is the Euro going up? I thought we would see such a bounce and mentioned it on this blog several times but I don't know why it is really going up besides the fact that it ran out of sellers. Bond spreads in Europe continued to widen last week. Nothing has made sense for over a year. Up or down the market is broken. No one really should be playing it. Just insane.

New home sales, existing home sales, durable order, jobless claims and FED meeting all this week. Of course it won't really mean anything. If we are really back to stupid time the existing home sales number will look good because those homes that met the tax credit deadline will close in May and June and so will be a lag in the data. So that data will good even as every current piece of data with no lag shows housing crashing again. So this good data will be bought with a vengeance as the market screams higher. That 1140 may be a low estimate of where a stupid market can head.

Thoughts From Investing Legends

2010-06-16T08:52:00.004-05:00

News flow is very bleak today. Spain bond spreads over bunds is the widest ever and this morning brought a string of weak economic data out of U.S. (though industrial production wasn't bad) but so far the markets are ignoring it. Like I said yesterday a close below the 200 day moving average in my mind makes it 50/50 the rally is over. Without that close the odds are high we are going to at least 1140.

Two interesting articles citing two investing legends.

The first from Reuters citing George Soros thoughts on Europe.

Europe faces almost inevitable recession next year and years of stagnation as policymakers' response to the euro zone crisis causes a downward spiral, billionaire investor George Soros said on Tuesday.

and

European banks had bought large amounts of the sovereign bonds of weaker euro zone countries for a tiny interest rate differential, Soros said.

"That's one of the reasons why the banks are so over-leveraged and why the German and the French banks own Spanish bonds," he said.

"Now ... they have a loss on their balance sheets which is not recognized and it reduces the credibility of those banks so the banking system is in serious trouble," he said.

And this article from Australia Hearald Sun citing GMO's Jeremy Grantham thoughts on the great Australia housing bubble.

The Australian reported he said yesterday that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend.

"You cannot possibly miss it," he said.

"The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or . . . 7.5 (times).

"Australia is having one now. You are at near 7.5 times family income . . . which suggests you are twice the size that you should be."

Oh I am sure many people are missing it.

Risk On

2010-06-15T21:18:00.003-05:00

Well much of what I thought about blogging today Cramer covered in the previous video. Ha. Today was a bad day for news flow though you wouldn't know it by looking at markets world wide. It was risk on. Everything was up. You had poor European economic data and the U.S. data stunk it up as well. Fresh signs of potential stress in Spain but Spain rallied with everything else.

Today was also gruesome because again yesterday you had a head fake with the sell off into the close with the market just getting slapped down from the 200 day moving average. Just like last week a usual decent signal ended up being completely false as today not only did we rally but closed above technical resistance I am sure hurting bears taking yesterday as weakness. I am halfway expecting at least for tomorrow a similar thing to happen for the bulls. Would not be surprised to see a slap down tomorrow catching all the bulls off guard after breaking resistance today. The markets should be heavy with BP bad news flow again going into the open. Tonight the estimated barrels per day being released into the gulf was upped, apparently some banks are starting to pull in trading lines, and Obama was blasting the airwaves tonight. You have a bunch of economic data coming out before the market opens tomorrow also but as you saw today the market is going to trade in whatever direction it wants regardless of the data.

If we close back below the technical resistance tomorrow(200 day moving average and below 1110) I put it at 50/50 that the rally is done. The other 50/50 is that we will go to that 1140 area I have talked about numerous times. Even if we get slammed tomorrow I would be very hesitant to short unless the news flow is equally bad out of Europe. It can't be just about BP. Another interesting thing to watch tomorrow if the markets are down will be the volume. The NYSE volume was abysmal today and has been getting progressively worse as the rally has rolled on. The ES futures volume was decent which means almost the entire move today was driven by futures. The slowing volume on the NYSE is also a warning signal.

The economy is on life support, the market is on life support, and danger signs are flashing but in the interim it still seems like this market could grind higher.

Cramer Gets it Right?!?

2010-06-15T20:56:00.003-05:00

I don't very often say this but wow...Cramer is actually right. He said it the way it is. I think the market has been broken for months so he may be late to the game but what he said is 100% right. The market is broken. Today was an endless day of bad news. It is downright ridiculous. At the end of the video I don't agree with his view on housing but he is Cramer. I don't expect Cramer being right to become the norm.

What this means for the equity markets I don't know. I mean can you get a contrarian play off of this? Remember when Cramer started going nuts about Bernanke knowing nothing. That was the beginning of a 2 year slide so I don't want to read to much into the video. Just enjoying it for what it was. Overall a very good video with alot of truth.

Danger Danger!!!

2010-06-13T21:56:00.003-05:00

Despite last weeks rally the market is flashing neon danger signs. It is like standing by a frozen pond on a warm spring day and hear cracks that sound like gunshots as the ice becomes stressed. With that said, it seems like the highest probability in the short term would be higher as the tipping point hasn't quite been reached. Still, do you want to be the one to test the ice?

After getting BP'd again last week the market ended up moving legitimately higher. After Trichet started talking on Thursday the markets did begin to roll over. Germany lost over .5% in 10 minute time frame and the U.S. futures lost 5 points. Ten minutes into the speech the German constitutional courts came out and said they would not issue an injunction against the European bailout. On a dime the markets took off and never looked back. This was very under reported here in the U.S. but I think the cause of the major rally on Thursday.

In general the news was neutral out of Europe despite a few rotten tid bits. It was enough neutral that Europe rebounded nicely and the Euro moved up. I have speculated on this blog over the last two weeks that the Euro may be near at least a short near term bottom. It is a dangerous short. If Trichet actually had something fundamentally to work with I would be buying the Euro. He is doing almost everything you want if you owned the currency unlike his U.S. counter parts who would like nothing better to destroy the dollar. The problem is the very structure of the Euro is flawed so Trichet is fighting a losing battle.

Would not be surprised at all to see a multi week rally in the Euro pushing it up towards 1.30. It is a hard bet to make and for me I don't want to participate either way but with the correlation between the Euro and U.S. equity markets (if the Euro rally does develop) that would speak to some sort of equity rally continuing. How long and how far? I don't know. The 200 day moving average sits at 1108. The 50 day moving average sits at 1146 but is falling fairly quickly. I would not be shocked to see it reach and test the 50 day moving average which by the time the market makes it up there it would probably be in the 1130 to 1140 range. That is sort of jumping the gun though because it has to get over that 1100 to 1110 area first.

In general the range of outcomes are very wide and I was shrinking the portfolio Thursday into Friday because of this until some clarity emerges. If we get the move over 1100 you would want some dry powder to add to shorts.

Like I said at the beginning, the ice is razor thin. Anything could develop out of Europe. Financial reform poses a major threat here in the U.S. and economic data continues to come in weaker than expected.

So while I would expect the highest probability is a continued rally over the next week or two I can't stress enough that fundamentally your staring into a double barrelled shotgun and the risk remains to the downside.

The biggest short term signs for the bears is that last week equities left credit behind. Credit didn't rally and this divergence won't last long. Also, volume really dried up Thursday going into Friday.

Yep BP'd Again

2010-06-10T08:16:00.002-05:00

Looks like yesterday was nothing more than the market being BP'd. Fool you once than shame on you, fool me twice than shame on me. Well I guess shame on me. Thought there was more to yesterday's sell off than simply BP.

The Euro is screaming higher. I am not really that surprised and have mentioned the possibility a couple of times. If Trichet actually had something to legitimately work with I would have great admiration for what he is doing and be buying Euros like crazy. He is doing everything you want if you were the owner of the currency. The problem is the underlying structure of the Euro is not sustainable and so I don't think in the end Trichet will have a chance. I will probably write more on that someday but the in the short term the risk is the Euro has a very sizable rally starting now or in a few weeks. What this means for U.S. equities in not clear as the correlation has been close to one. At some point that correlation will break down but I wouldn't want to bet when that will happen.

Anyway 1070 to 1080 is what to be watched. Think the odds of breaking 1040 have dropped to close to zero. Now we will see what kind of strength we have to see if we go all the way back to 1100. Chopping and grinding chopping and grinding. A least for today we are staying in our range.

BP'd Again?

2010-06-09T21:13:00.002-05:00

Alot of similarities to last Wednesday when I had the post BP'd. Market looked like death at the end of the day before with all the news on BP. Just like today.

Last Wednesday I wrote:

Part of the problem for the bears is yesterday we were going down for the wrong reasons for the drop to be actually legitimate. Yesterday it was all about BP and the oil trade. Oil companies (basically all of them) got slaughtered. This weighed on the markets until it finally drug the entire market down. The market got BP'd. It isn't about BP though. If the news is all about BP that is bullish because fundamentally BP doesn't matter to the broader market. Europe has very quietly dropped from the financial headlines. BP is everywhere. That is bullish because it is Europe and the financial system which is going ruin the system.

And here we are again. Today was largely about BP. Where we BP'd? I could be wrong but I am going to guess no. I think the probabilities set up where tomorrow we will make a run at and this time break 1040. It may not happen but the odds favor it.

First, this was a massive sell off at the end of the day which is never good. We fell 150 points to close near the lows. The market cannot catch a bid. Investors just are not interested in buying. Volume picked up as the market was selling off. This sell off looked very ugly.

Two, more rumblings out of Spain with banks supposedly cut off from the capital markets. This can't go on for long. The more ignored it today? Will it be able to continue?

Three and probably most important is that at 2:30 p.m. Central European Time Trichet and the ECB Vice President will explain the Governing Councils monetary policy decisions and answer journalist questions. So far everytime Trichet opens his mouth it has been very bad for the markets. Unlike Bernanke who is the market whipping boy Trichet almost seems to have a vendetta against the markets. I think if the markets are not down within an hour or two of this speech, than I will reverse course in thinking a 1040 break is imminent. So what time is 2:30 p.m. Central European Time? From what I can tell it is 7:30 a.m. central time here in the U.S. The risk of course is that this time Trichet does change his tune and the market spikes. You should know before the market opens. If we bounce we have no business going back above 1070 for this scenario to play out.

So what happens if we break 1040? HA!!! I have no idea. We could quickly go to 950 (over a few days or a week) we could bounce off of say 1000 to 1020, you had so much selling to get through 1040 that you have selling exhaustion and now you bounce back to 1100. Maybe it picks up steam and we are headed to the 800s by the end of June. It seems the likelihood is we have some sort of mini crash of several percentage points before coiling up for a big bounce since we it would be adding extreme oversold conditions to already oversold conditions. I have no idea though.

Europe was up today fairly strong after being down 3 days in a row. Those three days were vicious as France lost 5%. It would seem Europe would need another day or two to bounce. Maybe it bounces into the afternoon until Trichet starts talking and sells off like the U.S. did today going into the open for the United States markets?

I was shorting today as I said I would once we got above 1070. As we started selling off I started adding even more. Tomorrow if my scenario doesn't play out quickly I will look to take some of this off (go from more short to just less short). I don't think we have any business going back above 1070.

I am dealing with probabilities. This break of 1040 isn't a "call" by me but just trying to say the probabilities for tomorrow and Friday are very high. I will make the call (and this I think is the key) if we break 1048 that we will break 1040 this time. I don't think the bulls can hold it a third time.

China Real Estate Coming to A Screeching Halt

2010-06-08T18:36:00.003-05:00

I have been giving alot of short term thoughts lately because when the markets go down it is alot more tradeable than when the markets go up (moves are magnified). However, lets not lose the forest among the trees. Fundamentally, things are deteriorating and that is what I am basing my investment thoughts on. These numbers out of China are just jaw dropping. Sales volume 50% from the previous month? Prices down 10% from the previous month? WOW!!

From The China Daily.

Property sales in China's major cities of Beijing, Shanghai and Shenzhen dropped in May, with house prices declining as well, the Economic Information Daily reported Tuesday, citing data from a real estate brokerage.

Sales volume of new properties in Beijing in May fell by 50 percent from the previous month to 9,639 units, while the number of properties resold hit 14,501, a decrease of 58.5 percent, according to the real estate brokerage Century 21 and bjfdc.gov.cn.

Sales volume of the city's new residential properties fell by 47.8 percent to 6,360 units in May, while the number of homes resold dropped 58.8 percent to 13,545 units.

Shanghai witnessed its secondhand home transactions dive 69 percent from April, and decrease in this sector in Shenzhen was 24.1 percent month-on-month, according to Century 21.

Meanwhile, statistics from China Index Academy show that among the 30 cities it tracks, 29 met a decline from April, and house prices fell in most of the cities, with Beijing and Shanghai declining more than 10 percent.

More Churning

2010-06-08T18:14:00.003-05:00

It was as I speculated yesterday, the markets were to oversold to muster enough juice to get through 1040. We went down twice and amidst some heavy thrashing bounced both times. Going down the second time threw me for a loop because once we bounced I figured that was it. I was covering quite a bit at the open though looking back I obviously wish I would have done more but it gives me some room to look at adding short exposure between 1070 and 1100.

Besides some outright crash the best scenario for the bears is to bounce around here for a day or two staying below 1070 and especially 1080 working through some of the oversold conditions building up energy to really bust downward.

I passingly glance at technicals and my technical friends are being very vocal that the technicals are saying to buy for a decent bounce. Makes it very tough because we are coiled up to the extent where the wrong piece of fundamental news sends us crashing down. I would say technicals over and over again had sell spots during the 2009 rally and the market just kept powering higher. Why it is easier to be a fundamental person because if you get your timing wrong but are still fundamentally right you can just sit awhile.

There isn't much economic news this week though you do have some numbers coming out Thursday with the jobless claims and Friday with retail sales and consumer sentiment. With no real economic numbers tomorrow, unless something develops out of Europe we should continue upward tomorrow I would suspect.

Grinding Lower

2010-06-07T22:38:00.002-05:00

Alot I could write about. This past weekend the news was very bearish for equities and the world economies. The G20 ended up a disaster with no one being able to agree on anything and indication that governments were going to tighten anymore. This means less stimulus elixar moving forward. Supposedly there was heated debate in South Korea at the meeting. Than reports of a German court considering an injuction against the EU rescue package. The futures were way down over night only to bounce back with the markets actually opening up before rolling over and giving it all back.

Just like last week when we were up at 1105 and I said we really had not gone anywhere, this week we are right back to where we were two weeks ago. Around that 1140 to 1160 area. The markets really continue to go nowhere though I am sure bulls and bears are feeling huge moments of exhilarition followed by worry. We are still very oversold. In fact one could make an argument that we are even more oversold than when we were here last time a couple of weeks ago. I know that doesn't make much sense but the day was so bearish on Friday with so much selling that it put a large dent in selling potential while only getting us back to where we were two weeks ago.

The line in the sand is still 1040 for the bears. Unfortunately for the bears, I am not sure there is enough dry selling powder to power through it on the downside without first bouncing. It would take a massive selling event to break through and despite the end of the day today it doesn't necessarily look like there is massive selling available without some major news.

Ahh but major news we could get. Just from a bears perspective it is hard to bet on the timing of such news. There is alot of debt being issued in Europe this week by the likes of Belguim, France, Germany, Austria, and Spain. Problems in those bond auctions could definitely cause the next batch of selling.

On the upside I would start getting nervous if we were able to power back up above 1070 and than 1080. That is 20 to 30 points away so somewhat of a cushion where the markets could sort of move up or bounce around for a day or two.

Fundamentally, the world is being roamed by grizzlies. Deflationary pressures is back with a vengence, world credit problems is once again showing its ugly head, and governments are starting to realize they can't spend their way to prosperity.

In the short term I don't have much of an opinion though I think at least for the next day or two it favors the bulls unless some major news out of Europe once again dominates the headlines.

A Tribute to John Wooden

2010-06-05T14:19:00.002-05:00

Today, America lost one of its greatest minds, one of its greatest teachers, and one of its greatest heroes. I have always had an obsession with those who lived wisdom, who were truly exceptional in an understanding outside of themselves. Benjamin Franklin, Warren Buffett, Charlie Munger, and Albert Einstein would be part of this very small list. Maybe above all of them was a man named John Wooden. A truly remarkable individual who became the undisputed symbol of excellence in his field of coaching as the UCLA head basketball coach. He became known as the Wizard of Westwood. He won 620 games in 27 seasons and ten NCAA championships during his last twelve seasons including seven in a row. He had four perfect season and a record winning 88 games in a row. He was the first person to be added to the basketball hall of fame as a coach and a player and was named the Greatest Coach of All time in 2009 by The Sporting News.

But he never defined success as winning. He never discussed winning with his players. He took teaching his players about life as more important than teaching them about basketball. He was as quickly to quote Plato or Sacrotes as he was to discuss basketball strategy. He put the highest emphasis on love, faith, and family.

Rest in Peace John Wooden. You were truly an amazing individual.

To hear John Wooden speak is to get lost in another realm of wisdom, of understanding. There are many videos out there about John Wooden. Below are just a few. Here is John Wooden's official website which has many other videos of him.

John Wooden Introduction

John Wooden on Success and Life

John Wooden Love Letter

John Wooden (1910 - 2010) The Final Tribute

Europe CDS - Lights OUT

2010-06-04T08:06:00.002-05:00

Sorry - Can't get this to format correctly. You will get the point. Look at the percentage change!!!!

Entity 5 Yr Spread Change (%)Change(bps)

Austria 95.44 +23.33 +18.05
France 102.11 +22.19 +18.54
Germany 52.04 +18.70 +8.20
Belgium 130.33 +18.27 +20.13
Sweden 43.32 +15.89 +5.94
Spain 295.47 +15.25 +39.09
Ireland 297.60 +14.51 +37.70
Finland3 4.28 +13.87 +4.17

Horrific Jobs Number

2010-06-04T07:33:00.002-05:00

Compared to what the market was hoping for, pricing in, counting on to save the world this is a freaking HORRIBLE jobs number. Increase of 431,000 (there were rumors of 700,000. Huge consensus miss!!. Even more important is that U.S. private sector (so ex census workers) only up 45,000.

Market will be down over 3% today. Futures TANKING!!!!!

Europe is Back ALL Over the Headlines

2010-06-04T07:13:00.002-05:00

No more BP. Europe in the headlines is everywhere this morning as Hungary is falling apart spreading to Austria, Spain bonds are blowing out, along with cds from some of the major countries (i.e. Germany and France), and Euro approaching 1.20. We are 15 minutes from the NFP report. It doesn't matter. Futures down but holding in there compared to news flow ahead of this report. If this number does manage to get the market positive you sell it.