For whatever it is worth (believe me, not much), I was selling all day today. The last few days in my opinion have been very bearish and today seemed very bearish in context of the last week. I was selling calls I was long on a financial index that I was using as a hedge, was selling covered calls on a stock that I like over the long term but expect will probably go down in the short term (if I am right I can lower my entry price through the call sell and minimize tax by keeping the stock), and sold completely out of a position.
Who knows, I think there is a high probability we will go back and hit that 903 to 905 level we bounced off yesterday (that I had originally cited a couple of days ago) and slice right through it on the way to 875.
Tomorrow may throw a curve ball with options expiration or it may add jet fuel to the downside. We shall see.
Thursday, June 18, 2009
9 Failed Currencies
I consider massive hyperinflation a possible end game. Unlike many investors who are worried about it in the short term, I think such a scenario has 2 or 3 years to start developing. At the mint website it gives a brief (to brief to give much practical value) overview of 9 failed currencies in the last 100 years. Germany Weimar Republic from 1922-1923, Hungary from 1945-1946, Chile 1978,91, Argentina 1975-1992, Peru 1988-1991, Angola 1991-1999, Yugoslavia 1992-1995, Belarus 1994-2002, and Zimbabwe 2000-2009.
There are many other examples of severe inflation not mentioned such Mexico. My argument is that the government has not done enough yet to create such a scenario but Ben's helicopter is always a threat and eventually deflation could cause Bernanke to overshoot creating a massive inflation.
I would love to read more in depth on each of the 9 failed currencies mentioned. Understanding the playbook may be vitally important.
There are many other examples of severe inflation not mentioned such Mexico. My argument is that the government has not done enough yet to create such a scenario but Ben's helicopter is always a threat and eventually deflation could cause Bernanke to overshoot creating a massive inflation.
I would love to read more in depth on each of the 9 failed currencies mentioned. Understanding the playbook may be vitally important.
Tuesday, June 16, 2009
Travel
I actually shorted two stocks in the market today. It has been a long time since I have been actively shorting. The interpretation of the news seems to have shifted. Paramount for a market decline. I wouldn't be surprised to see a bounce tomorrow but I wouldn't be surprised to see an additional sell off. The market will probably not like Obama speaking on new regulation and Fed Ex probably won't have many good things to say. 905 is a key level to watch. You break that and the odds become very high we go back down to at least 875.
I will be traveling to College Station tomorrow to meet with a potential investor and then off to Louisiana where Saturday I will be in New Orleans. Have never been there so I am looking forward to it. I love Cajun food.
Anyway, may not be back until Sunday. Thursday and Friday should be volatile with a big option expiration on the docket.
I will be traveling to College Station tomorrow to meet with a potential investor and then off to Louisiana where Saturday I will be in New Orleans. Have never been there so I am looking forward to it. I love Cajun food.
Anyway, may not be back until Sunday. Thursday and Friday should be volatile with a big option expiration on the docket.
A Handcuffed Government
I try not to put stuff that I see on other blogs but this was to good. I originally noticed it on naked capitalism. It is from a website that focuses on China news but captures very nicely the problems the Fed is facing here in the U.S. It is why I keep saying deflation will lead to inflation. The deflation will either cause the government to respond with more and more money giving up acting like they care about inflation or the deflation will cause international government solvency issues causing inflation.
The article
A combination of growth optimism and inflation fear has catapulted asset markets in the past few weeks. These two concerns should drive markets in different directions: Inflation fear, for example, should limit room for stimulus and prompt stock markets to retreat. But the investment camps expressing these opposite concerns go separate ways, each pumping up what seems believable. As a result, stock and commodity markets are mirroring the behavior seen during the giddy days of 2007.
Incredible how the government is able to create a mini bubble within a bust. I am not convinced that after a correction the bubble doesn't have more to inflate.
The dollar's weakness can limit Fed policy options. It heightens inflation risks; a weak dollar imports inflation and, more importantly, increases inflation expectations, which can be self-fulfilling in today's environment.......The Fed may have to change its stance, even using token gestures, to assure the market it won't release too much money. For example, signaling rate hikes would soothe the market. But the economy is still in terrible shape; unemployment may surpass 10 percent this year. Any suggestion of hiking interest rates would dampen growth expectations. The Fed is caught between a rock and a hard place.
Now this is interesting. I have never seen it put this way exactly.
Stagflation in the 1970s spawned the development of rational expectation theory in economics. Monetary stimulus works by fooling people into believing in money's value while the central bank cheapens it. This perception gap stimulates the economy by fooling people into demanding more money than they should. Rational expectation theory clarified the underpinning for Keynesian liquidity theory. However, as they say, people can't be fooled three times. Central banks that tried to use stimuli to solve structural problems in the '70s saw their stimuli didn't work. People saw through what they tried again and again, and began behaving accordingly, which translated monetary stimulus straight into inflation without stimulating economic growth.
I think it will come late 2009 and the market will realize it a little earlier. 2010 is definitely possible though.
Movements in Treasury yields, oil and the dollar underscore the return of rational expectation. Policymakers have to take actions to dent the speed of its returning. Otherwise, the stimulus will lose traction everywhere, and the global economy will slump. I expect at least gestures from U.S. policymakers to assuage market concerns about rampant fiscal and monetary expansion. The noise would be to emphasize the "temporary" nature of the stimulus. The market will probably be fooled again. It will fully wake up only in 2010. The United States has no way out but to print money. As a rational country, it will do what it has to, regardless of its rhetoric. This is why I expect a second dip for the global economy in 2010.
It is the normal cycle in a bigger non normal cycle. People don't get this
Contrary to all the market noise, there are no signs of a significant economic recovery. So-called green shoots in the global economy are mostly due to inventory cycles. Stimuli might juice up growth a bit in the second half 2009. Nothing, however, suggests a lasting recovery. Markets are trading on imagination.
and finally
The world is setting up for a big crash, again. Since the last bubble burst, governments around the world have not been focusing on reforms. They are trying to pump a new bubble to solve existing problems. Before inflation appears, this strategy works. As inflation expectation rises, its effectiveness is threatened. When inflation appears in 2010, another crash will come.
The article
A combination of growth optimism and inflation fear has catapulted asset markets in the past few weeks. These two concerns should drive markets in different directions: Inflation fear, for example, should limit room for stimulus and prompt stock markets to retreat. But the investment camps expressing these opposite concerns go separate ways, each pumping up what seems believable. As a result, stock and commodity markets are mirroring the behavior seen during the giddy days of 2007.
Incredible how the government is able to create a mini bubble within a bust. I am not convinced that after a correction the bubble doesn't have more to inflate.
The dollar's weakness can limit Fed policy options. It heightens inflation risks; a weak dollar imports inflation and, more importantly, increases inflation expectations, which can be self-fulfilling in today's environment.......The Fed may have to change its stance, even using token gestures, to assure the market it won't release too much money. For example, signaling rate hikes would soothe the market. But the economy is still in terrible shape; unemployment may surpass 10 percent this year. Any suggestion of hiking interest rates would dampen growth expectations. The Fed is caught between a rock and a hard place.
Now this is interesting. I have never seen it put this way exactly.
Stagflation in the 1970s spawned the development of rational expectation theory in economics. Monetary stimulus works by fooling people into believing in money's value while the central bank cheapens it. This perception gap stimulates the economy by fooling people into demanding more money than they should. Rational expectation theory clarified the underpinning for Keynesian liquidity theory. However, as they say, people can't be fooled three times. Central banks that tried to use stimuli to solve structural problems in the '70s saw their stimuli didn't work. People saw through what they tried again and again, and began behaving accordingly, which translated monetary stimulus straight into inflation without stimulating economic growth.
I think it will come late 2009 and the market will realize it a little earlier. 2010 is definitely possible though.
Movements in Treasury yields, oil and the dollar underscore the return of rational expectation. Policymakers have to take actions to dent the speed of its returning. Otherwise, the stimulus will lose traction everywhere, and the global economy will slump. I expect at least gestures from U.S. policymakers to assuage market concerns about rampant fiscal and monetary expansion. The noise would be to emphasize the "temporary" nature of the stimulus. The market will probably be fooled again. It will fully wake up only in 2010. The United States has no way out but to print money. As a rational country, it will do what it has to, regardless of its rhetoric. This is why I expect a second dip for the global economy in 2010.
It is the normal cycle in a bigger non normal cycle. People don't get this
Contrary to all the market noise, there are no signs of a significant economic recovery. So-called green shoots in the global economy are mostly due to inventory cycles. Stimuli might juice up growth a bit in the second half 2009. Nothing, however, suggests a lasting recovery. Markets are trading on imagination.
and finally
The world is setting up for a big crash, again. Since the last bubble burst, governments around the world have not been focusing on reforms. They are trying to pump a new bubble to solve existing problems. Before inflation appears, this strategy works. As inflation expectation rises, its effectiveness is threatened. When inflation appears in 2010, another crash will come.
Monday, June 15, 2009
Focusing on What Matters
When the market is moving down or up, talking heads seem to always focus on noise. Data points that really do not matter. Currently, there are two major things that matter. Consumer demand - a 2% drop in consumer demand has massive implications for investments made by companies. I am making up numbers here but a 2% drop in demand can mean a 20% drop in planned capital investments. Capital investments can bounce all around, down 5% one month, up 2% another, down 10% the next but it is the tail being wagged by the dog which is consumer consumption. The second data point relates to the first. Consumer credit availability. The NY Times has a little blurb about the 50% drop in credit card solicitations sent out to consumers. This drop in credit card solicitations was met by an approximate 100% increase in debit card offerings and the ever sexy checking account. In otherwords banks are not interested in issuing consumer credit. Considering Capital One announced charge offs rose to 9.4% and American Express charge offs rose to 10% and the consumer credit will continued to be squeezed. This obviously does not help consumer demand.
banks sent out only about 500 million credit card solicitations in the first quarter, half as many as in the last three months of 2008. That is fewer than in any year since 2000. At the same time, banks cranked out more ads for safer but less profitable products like checking accounts (up 29 percent) and stand-alone debit cards (up 96 percent).
banks sent out only about 500 million credit card solicitations in the first quarter, half as many as in the last three months of 2008. That is fewer than in any year since 2000. At the same time, banks cranked out more ads for safer but less profitable products like checking accounts (up 29 percent) and stand-alone debit cards (up 96 percent).
Markets Come Alive - Sort Of
The first big down day the markets have had since the beginning of May. Breadth was very negative but the volume on the NYSE was still not spectacular with only 1.15 billion shares traded. Very busy compared to last week but still slow compared to any historical context.
Still the market in my opinion had its first pure break in weeks and the first time since late March I was actually somewhat busy. I was not adding to shorts, not yet, but I was taking profits on a few longs that have moved up that I was looking for an excuse to sale. I think we need to stay below 930. If we can do that, I will see how the market feels to try to determine if I want to add some short exposure. I have so many short ideas but unlike longs, shorts have to be timed much more carefully. There has to be a competition between Amazon and Palm as the most overvalued companies on the NASDAQ but both continue to defy gravity.
The futures were really really busy today. This may have been because the front month contract (June) is about to roll off or it may have been the invisible hand was trying to keep the market from really selling off. Either way at 2:36 the futures really kicked in volume just like in weeks past. Invisible buyer? I don't know but today after a couple of point rally on this big surge sellers stepped up to the plate. A big break compared to weeks past.
The next few days will be interesting.
Still the market in my opinion had its first pure break in weeks and the first time since late March I was actually somewhat busy. I was not adding to shorts, not yet, but I was taking profits on a few longs that have moved up that I was looking for an excuse to sale. I think we need to stay below 930. If we can do that, I will see how the market feels to try to determine if I want to add some short exposure. I have so many short ideas but unlike longs, shorts have to be timed much more carefully. There has to be a competition between Amazon and Palm as the most overvalued companies on the NASDAQ but both continue to defy gravity.
The futures were really really busy today. This may have been because the front month contract (June) is about to roll off or it may have been the invisible hand was trying to keep the market from really selling off. Either way at 2:36 the futures really kicked in volume just like in weeks past. Invisible buyer? I don't know but today after a couple of point rally on this big surge sellers stepped up to the plate. A big break compared to weeks past.
The next few days will be interesting.
Sunday, June 14, 2009
More On China - Bust to Bubbles
A very interesting read in Shanghi Published China Stakes. Basically the economy is slowing but bubbles are devloping in real estate and possibly the stock market due to the huge liqudiity boost. World governments have been able to stop what is natural, a long needed system flushing, for that which is unnatural. This of course also occurred in 2003 and lasted until 2007 before the problems reared their ugly heads worse than before. My guess the same will occur again but will not take four years for markets to realize this.
There's ice on the export side, while there's flame on the real estate market side, and China's effort to create internal demand is being distorted. China's economic stimulus, which is bulldozing ahead, is causing problems for China's economic recovery. Manufacturing is steadily declining, employment and consumption growth are weak, but bubbles are beginning to gather in the real estate industry.
and more protectionism
Compared with figures of previous months, May's decline was steeper. Foreign trade rebounded a bit in the first quarter and exporters gained some orders. But new orders have decreased since, and the second half of this year is unlikely to see a recovery in overall foreign trade.
Policies to stabilize external demand are set to be implemented since the May foreign trade figures have been released. In the short-term, the export tax rebate ratio for 2600 goods has been raised to help maintain the share of “made in China” in overseas markets.
and
But go figure--China's real estate market is booming along with its stock market. The March rebound in the real estate market has developed into a luxurious banquet for the property industry.
The latest National Bureau of Statistics figures show that between January and May China's commercial housing sales reached 24,644 square meters, a leap of 25.5%, year on year, with residential housing sales growing 26.7%.
The real estate market boom is led mainly by a liquidity surplus due to a huge increase in credit. The Obama administration is printing money to beat the band, over $2 trillion. China's currency placement is also very high. At the end of April, M2 growth reached 25.95%, the highest level in the past 10 years.
There's ice on the export side, while there's flame on the real estate market side, and China's effort to create internal demand is being distorted. China's economic stimulus, which is bulldozing ahead, is causing problems for China's economic recovery. Manufacturing is steadily declining, employment and consumption growth are weak, but bubbles are beginning to gather in the real estate industry.
and more protectionism
Compared with figures of previous months, May's decline was steeper. Foreign trade rebounded a bit in the first quarter and exporters gained some orders. But new orders have decreased since, and the second half of this year is unlikely to see a recovery in overall foreign trade.
Policies to stabilize external demand are set to be implemented since the May foreign trade figures have been released. In the short-term, the export tax rebate ratio for 2600 goods has been raised to help maintain the share of “made in China” in overseas markets.
and
But go figure--China's real estate market is booming along with its stock market. The March rebound in the real estate market has developed into a luxurious banquet for the property industry.
The latest National Bureau of Statistics figures show that between January and May China's commercial housing sales reached 24,644 square meters, a leap of 25.5%, year on year, with residential housing sales growing 26.7%.
The real estate market boom is led mainly by a liquidity surplus due to a huge increase in credit. The Obama administration is printing money to beat the band, over $2 trillion. China's currency placement is also very high. At the end of April, M2 growth reached 25.95%, the highest level in the past 10 years.
The Week Ahead
Friday there were crickets. Slowest trading day of the year with around 850 million shares traded on the NYSE. To put that into context that was only slightly more than the shortened trading days around the Christmas holidays. The market continues not to be able to have a sustained break above 950. Everything seems overdone but that has been the case for several weeks now. I continue to just watch. Until sellers step in or the invisible hand in the futures market disappears there doesn't seem to be much to do. There are some stocks that are back in bubble territory (hello Amazon on Palm) but they just keep going up. Trend following isn't my game. This week there will be some big data points such as CPI, home data, and industrial output data. For the last several months the data really hasn't meant anything, just the markets mood when the data came out.
Thursday, June 11, 2009
China's Exports Decline Accelerating
Another great data point that should be rushed and bought by all. I am sure the spin guys are working overtime. These are the numbers that I see as important. Anything that points to demand, not production. China exports which feeds a large portion of the world their desire for things is a good barometer. U.S. May retail sales number looked decent today up .5% from April though it was down 10.8% yoy but if you dig into the number more of the same thing. Increase because of gasoline prices, auto parts, food, and health. Anything discretionary was down from April, electronic, furniture, department stores, etc.
From Bloomberg:
China’s exports fell by a record as the global recession cut demand for goods produced by the world’s third-largest economy.
Overseas sales dropped 26.4 percent in May from a year earlier, the customs bureau said in a statement on its Web site today. That compares with the median estimate for a decline of 23 percent in a Bloomberg News survey of 15 economists, and a 22.6 percent contraction in April.
More protectionism?
The government said this month that a quick rebound in trade is becoming less likely and unveiled higher export rebates on some steel products, electronics, machinery and toys, the seventh increase since August.
And I don't see how this is possible since imports (raw materials for China's exports) has been a leading indicator for exports.
Still, China’s export orders index advanced to 50.1 in May, marking the first expansion in 11 months, a government-backed manufacturing index showed. Japan’s exports and production rose in April from the previous month, and orders placed at U.S. factories gained for the second time in three months.
China’s imports dropped 25.2 percent last month, compared with the 22 percent decline estimated by economists and a 23 percent fall in April. The trade surplus was $13.4 billion in May, smaller than the $14.9 billion estimated by economists in the Bloomberg survey.
From Bloomberg:
China’s exports fell by a record as the global recession cut demand for goods produced by the world’s third-largest economy.
Overseas sales dropped 26.4 percent in May from a year earlier, the customs bureau said in a statement on its Web site today. That compares with the median estimate for a decline of 23 percent in a Bloomberg News survey of 15 economists, and a 22.6 percent contraction in April.
More protectionism?
The government said this month that a quick rebound in trade is becoming less likely and unveiled higher export rebates on some steel products, electronics, machinery and toys, the seventh increase since August.
And I don't see how this is possible since imports (raw materials for China's exports) has been a leading indicator for exports.
Still, China’s export orders index advanced to 50.1 in May, marking the first expansion in 11 months, a government-backed manufacturing index showed. Japan’s exports and production rose in April from the previous month, and orders placed at U.S. factories gained for the second time in three months.
China’s imports dropped 25.2 percent last month, compared with the 22 percent decline estimated by economists and a 23 percent fall in April. The trade surplus was $13.4 billion in May, smaller than the $14.9 billion estimated by economists in the Bloomberg survey.
Wednesday, June 10, 2009
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