Panic Selling in Gold

by ilene - August 17th, 2008 6:56 pm

Minyanville’s Kevin Depew discussing his expections for the price of gold in the future:

Panic Selling in Gold: What’s Next?

The panic selling in gold and mining shares has accelerated and the Gold Miners ETF (GDX) is the clearest example of how sharp the selloff has been, down more than 2.5% midd-day as I write. On Minyanville’s Buzz and Banter on July 24, I noted the potential head and shoulders pattern that was forming on the weekly chart:

Buzz and Banter, July 24:

Here’s a weekly chart of the Market Vectors Gold Miners ETF (GDX) showing a deferred potential TD-Sequential 13 sell signal. (I believe that means a strong sell signal - ed.)

Click to enlarge

As well, we could be seeing a potential head and shoulders pattern form. A key to identification would be neckline violation on expanding volume. The right shoulder has already recorded a weekly volume bar that was greater than the left shoulder volume bar peak, and that increases the probability of the formation completing in my interpretation. I should also note that the GDX has given a double bottom point and figure sell signal (1×3 chart) and violated a trendline from the May lows.

Now that this has transpired, the question is: What’s Next?

The GDX has blown through another retracement level that could have served as a potential stopping point. This is an important session today. A close below 34.43 would increase the probability that the selloff is not done and note we still have an unfulfilled DeMark TD-Sequential buy countdown in place, this bar currently on 8 of a potential 13. A close above that level and next week the ~33 area may provide a trading point for longs as the fulfillment of the downside count from the head and shoulders.

As for gold, I would like to be more positive on the metal itself, but I believe this selling is related to a buildup of longer-term deflationary pressures in the credit markets that will dwarf the inflationary mask of (formerly surging) food and energy costs.

When debt and leverage are this excessive, cyclical inflation simply accelerates the deflationary outcome and makes the unwind more severe. Watching the Consumer Price Index is like driving over a cliff with your eye on the rear view mirror. Deflationary pressures will cause bids to evaporate and disappear as financial assets that must be sold to repair balance sheets and destroy debt overwhelm the capital available to compete for them.

Few see this coming because the leveraging of debt in our…

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Financial Markets: Harder, Faster…

by ilene - August 17th, 2008 6:26 pm

Here’s an excerpt from Brett Steenbarger’s article at TraderFeed discussing the "tricky" trading environment.

Financial Markets: Harder, Faster, Not Necessarily Better or Stronger

Excerpt: "It’s been a tricky environment for sector relationships since the July bottom. The U.S. dollar has turned sharply higher, particularly against European currencies; commodities have fallen significantly; U.S. stocks have bounced; and the shares of emerging markets have lagged. You couldn’t ask for a more thorough unwinding of themes from earlier in the year. Just in the last few days, we’ve seen housing stocks break out to multiweek highs, while energy shares languish near their lows (top chart).

Once these themes unwind, they go further than one would expect from a normal correction, shaking out large numbers of participants. Conversely, those who catch the turn in themes can make significant money in a relatively short period. While in London, I read an interesting piece in a financial publication that noted that the sharp down move in gold was initiated and sustained almost entirely in the futures markets by large participants who were trading an algorithmic relationship vis a vis the U.S. dollar. Gold may be classified as a commodity, but it trades as a currency when these algorithms dominate.

All of this makes it difficult to be a classic trend follower or a fundamental, longer-term participant waiting for relatively undervalued assets to return to (or overshoot) their fair value. The normal way of trading those approaches is to wait for markets to confirm your views and then gradually add to positions as the markets move your way. When themes unwind, however, such a money management scheme almost ensures that a trader will be running the greatest risk just as markets reverse.

I’m not sure there’s an easy answer to this dilemma"…. Full article here.

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Weekend Wrap-Up

by Phil - August 17th, 2008 5:21 pm

Wow - what a wild ride this has been!

40% seems to be the number of the month as our $25KP is now up by exactly that much, our $10KX is up 40.6% after its first expiration period and Optrader’s Swing Trade Portfolio hit 41%. All in all it was a great month. Day Trading did well but was reset on 8/4 and is up "just" 13.2% in that period while our "safe" Stocks Portflio made a nice 11.4% and our Butterfly Collection made 11.2% in its first month, which is really good as we absorbed a huge loss in ELN along the way.

We started these portfolios after the 7/18 expiration week in order to more fully illustrate the various styles of option trading along with various portfolio balancing techniques. Only our pokey old Long-Term Portfolio, now up 224.8% for the year, had index puts for protection as we ran this month generally bullish - as we had last month when we were punished for it as we started our bottom fishing just a little bit early. The waters are still very treacherous and we still have plenty of covers but, on the whole, things are going pretty much according to plan.

On December 31st, I did my Index Round-Up ‘07 and it’s good to go back and read these things once in a while to see how on or off track my predictions are as we move through the year. We had expected a rough first half and we expected Q2 earnings to be the beginning of a market turn - so far so good but the bottom was lower than we thought as oil went higher than we expected. Now it depends what kind of pullback we get in crude and how soon the now-recessionary global economy can pull itself back together. Back in December, with oil just getting to $100, I said we needed it to ge below $100 for us to kick-start the economy. After spending most of Q2 in the $120s, $110 just doesn’t cut it, we need to average $80 in the second half of the year and July is already over at $125 avg.

The difference between $80 oil, which is what the second half of ‘07 averaged (and they had terrorism and hurricanes and peak oil too) and $110 oil is $19Bn a month taken out of the pockets of US consumers and $80Bn a month out of global consumers…

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Meredith Whitney, About Average

by ilene - August 17th, 2008 4:40 pm

Chad Brand of Peridot Capital Management LLC discusses Meredith Whitney.

Sorry Fortune, Meredith Whitney Is Just An Average Analyst (You Even Said It Yourself!)

Remember when Henry Blodget made his $400 call on Amazon stock back in the late 1990’s? He will be known forever for that call more than all the other ones he made combined. Fast forward nearly a decade and Oppenheimer banking analyst Meredith Whitney has achieved similar rock star status. The August 18th issue of Fortune Magazine has her on the cover.

Now, I like Fortune a lot. In fact, aside from an online subscription to the Wall Street Journal, my subscription to Fortune is the only periodical I actually pay for. But this Meredith Whitney hoopla is really getting old, and quite frankly, it’s too much.

Like Blodget, whose $400 price target came to fruition despite the controversy surrounding it, Whitney’s early warning on Citigroup (C) stock last year definitely deserves kudos. She got death threats after suggesting the banking giant would be forced to cut their dividend and raise capital. At the time it was a minority opinion, but she was right and deserves credit for a very bold and correct call.

That said, let’s not get carried away. Investors and the media should not judge an analyst on a single call, but rather the entirety of their work. There are great analysts out there, but the track records of most are mediocre at best. When I have the chance to guest lecture undergraduate and MBA students, I often refer to a study that showed the stock picks of sell-side analysts, like Whitney, consistently underperform the market and do so with more volatility.

So, does Meredith Whitney deserve all the attention she has been getting lately from investors and the media (she is on CNBC all the time)? I have nothing against her, but I doubt it. She should be commended for the Citigroup call, but treating her as the "go-to" analyst on banks would only be reasonable if her track record beyond that one call was overly impressive. Unfortunately for investors, it isn’t.

In the Fortune cover story, in fact, it is mentioned that according to Starmine (a company that tracks the performance of analyst recommendations against their industry peers), Whitney’s stock picking ranked 1,205th out of 1,919 analysts in 2007 (the year of the Citi call). During the first half of 2008, Whitney’s picks ranked 919th out of 1,917 analysts.

The only conclusion I can draw…

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Gold, Silver and the Great Unwind

by ilene - August 17th, 2008 6:24 am

In this article, Mish argues that "commodity bulls" are currently underestimating the great unwinding of gold, silver and other commodities and the Implications of the Slowing Global Economy. He argues that a cyclical downturn in commodities is underway.

Gold, Silver and the Great Unwind

What’s happening with gold should be no real surprise. Although I have stated many times that gold is money and gold should do well in deflation, and we are in deflation (see The Future Is Frugality and Implications of the Slowing Global Economy for the deflation case), in the initial stages of deflation, leverage in everything is reduced by force.

There are thousands of hedge funds, pension plans, and individuals over-leveraged in a massive bet against the US dollar and US assets in general. Many themes of the past 7 years are now being unwound. And one would expect leverage to be forced out in deflation as credit simply dries up. I call this the great unwind.

The Great Unwind

Short US Dollar - Long Commodities
Short US Dollar - Long Foreign Equities
Short Financials - Long Gold
Short US Equities - Long Foreign Equities

Gold will reassert itself eventually along with the short financials trade, but as the great unwind continues, the unwinding process for those in gold can be painful.

The reason gold will reassert itself is that Gold Is Money. For more on Gold As Money, please see Misconceptions about Gold and Why does fiat money seemingly work?

Bear in mind that gold disconnected from the US dollar in 2005 for the entire year, so it could do so again. Furthermore, there is really no way to tell just how long the unwinding can last. However, given that commodities were essentially a one way bet for the last seven years, the unwind can last a lot longer than commodity bulls might think.

Gold and Silver Seasonality

Another factor to consider is gold and silver seasonality. August through January is generally a very favorable timeframe from gold and silver, so that might (or might not), slow or even reverse the effects of the unwind.

One additional point is that silver, unlike gold, might easily act more like an industrial commodity and less like a currency than gold. Gold’s primary role is that of money. Silver is a higher risk/higher reward offering when it comes to deflation.

Euro vs. Dollar Weekly

click on chart for sharper image

The Euro has broken the weekly trendline, but barely. Unless it reasserts itself, a drop to the 200…

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Negative $50 Billion Each?

by ilene - August 17th, 2008 3:50 am

Wouldn’t being worth a negative number be being worth less than worthless?… Barry Ritholtz comments on an article in Barron’s, "The Endgame Nears For Fannie and Freddie," by Jonathan R. Laing. (A subscription is required for the full article at Barron’s, but a free text version is available at Marketwatch.)

Fannie and Freddie: Worth Negative $50 Billion Each

Excerpts: "Fascinating piece in Barron’s this week on our favorite junk paper: Phoney and Fraudy.

A few interesting factoids about the GSEs, many of which you may have been unaware of:

• In the "1980s Fannie was effectively insolvent";

• These two GSEs currently have $5.2 trillion debt and guarantee obligations;

• Both balance sheets contain a tax credit entry called "deferred tax assets." These increase Fannie’s net worth by $36 billion and Freddie’s by $28 billion. They don’t represent real cash, but are merely paper credits built up over the years. The worse shape the companies are in, the greater these credits are. To insolvent companies like FRE & FNM, they are meaningless accounting entries.

• The CEO claim that losses were due to being "forced to buy higher-risk mortgages to meet government affordable-housing targets" is provably untrue; The vast bulk of GSE losses came from mortgages where there was no attempt to verify borrowers’ income or net worth. And, most of these mortgages were for principal balances much higher than mortgages made to low-income borrowers;

• It was the lack of lending standards — LTV, Income verification, FICO scores, debt servicing abiloity, down payments, etc. — that was the primary cause of losses, and not a "soft" government goal…

Here’s your Ubiq-cerpt:™

"IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac . It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer’s dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies’ common stock, with preferred shareholders and even holders of the two entities’ $19 billion of subordinated debt also suffering losses. Barron’s first raised the possibility of a government takeover of Fannie and Freddie in a March 10 cover story, "Is Fannie Mae Toast?"

Heaven knows, the two government-sponsored enterprises, or GSEs, both need resuscitation. Soaring mortgage delinquencies and foreclosures have led the companies to gush red ink for the past four quarters, and their managements…

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Short Oil

by ilene - August 16th, 2008 8:05 pm

Phil [in his own words] "did an interview for the BBC in early July and told the guy that the whole oil thing was a scam and that the regulatory noose was tightening and there was going to be a huge correction in crude etc (you know, they typical stuff I say when you wind me up) and he talked to me for an hour and they used about 30 seconds of it. That’s show biz I guess… My bit’s at about 18:40." -

Speaking of oil, here’s an optimistic article on the price of oil coming down, courtesy of Jason Schwarz. Jason’s the Options Strategist for Lone Peak Asset Management. - Ilene

Forget $100 a Barrel - Oil Will Plummet to $30

Remember all those times OPEC tried to tell us that they didn’t want high oil prices and we didn’t believe them? Well, they meant it. They knew that technology was available to crush oil demand but they hoped that the low price of oil would keep the technology buried. The cat’s now out of the bag. The commodity run is over. The talking heads are trying to temper the recent selloff in oil by saying that it will settle around $100 a barrel but that is not what happens when a bubble bursts. Oil is headed back down to historical levels between $30-$50 a barrel. Consider the following evidence:

1. Oil consumers quickly adjust to high gasoline prices. June data from the IEA reports a 4.7% drop in miles driven by Americans year over year. That equals a loss of 12.2 billion road miles of oil demand in just one month. The adjustment has come without a hitch. Staycations have replaced vacations. Honda (HMC) Civics have replaced Chevy (GM) Tahoes.

Not only are we driving less, we are using less gas while we drive. Everyone was shocked at the gigantic $6.3 billion loss reported in GM’s latest earnings announcement. What has happened to automobile demand in just two months is astounding. You only have to go through that type of pain once to never let it happen again. The gas guzzling SUV market has collapsed overnight. Americans have proven how easy it is to adjust to high oil.

2. New transportation technology has arrived. GM recently announced its goal to have 1000 hydrogen fuel cell vehicles on California highways by 2014. Honda expects to have 200 Hydrogen FCX Clarity’s within three years. California is…

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Dr. Doom

by ilene - August 16th, 2008 7:18 pm

Friday night fun! (okay, for some of us) - a visit with Dr. Doom, Nouriel Roubini, who really isn’t a "perpetually pessimistic perma-bear," as he’s often portrayed. - Ilene

New York Times Article on Nouriel Roubini as “Dr. Doom”

Courtesy of Nouriel Roubini.

The New York Times has published a long article/profile about me – available online here – that appears in print on their glossy Sunday Magazine.

The article is a very friendly and sympathetic portrait of my views. I would take issue only with the characterization of myself as being a “perma-bear” or “perpetual pessimist”. For one thing I ended up a realist rather than a pessimist about the current economic and financial crisis; things are turning out even worse than I initially predicted.

Also, while very pessimistic about the U.S. and global financial outlook in the short run, I expect that the global economy can grow at a sustained rate in the medium term and that the integration of China, India and other emerging market economies in the global economy is a very important and positive trend over time. So, yes there is doom and gloom over the short term; but the medium term horizon will be brighter for the global economy if and when the mess of the current financial and economic crisis is fixed. Still, as i have recently argued - and as reported at the end of the New York Times article - this U.S. crisis may be the sign of the beginning of the long run decline of the American Empire.

Here is the text of the New York Times profile of me:

Dr. Doom

Two years ago, Nouriel Roubini predicted the current economic crisis. Now he sees things becoming far worse.

BY STEPHEN MIHM

Published: August 15, 2008, New York Times Sunday Magazine

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie…

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A Tale of Two Markets, Part 3

by ilene - August 16th, 2008 6:46 pm

In this last article of the Tale of Two Markets series, Bennet Sedacca and Rob Roy discuss Option Adjusted Spreads, "Zero Hour," (defined below), AIG, C (expect it to survive, in pieces), the overall credit market (a "mess, and unlikely to recover any time soon"), equity prices (over-priced), and their long-term goal for the S&P 500, 650-900. Courtesy of Minyanville.

A Tale of Two Markets, Part 3

Option Adjusted Spreads (OAS) are defined by Bloomberg as "A methodology using option pricing techniques to value the embedded options risk component in a bond’s total spread."

OAS (Option Adjusted Spread) of 30 year FNMA 6% Mortgage Pool

Click to enlarge

In plain English, it simply tells us how much an investor is being compensated to own a security (in this case a 30 year Fannie Mae 6% mortgage pool) and all of its embedded call options, or prepayment risk in mortgage backed securities.

So you might think that after all of the stimulus, bailouts, surprises, and rule changes that credit spreads would tighten. But no, OAS in most mortgage securities is at recent highs, which simply means that the stimulus isn’t having the desired impact.

This is what I call "Zero Hour," a concept I have been featuring for years that was originally brought to us by Barry Bannister.

I wish that wide spreads were contained to FNMA, GNMA or FHLMC, but sadly they’re not. In fact, spreads in the credit markets are at historically wide levels and show no signs of tightening. It is my belief that the credit market is a rational place where balance sheets, cash flow, and write-downs/write-offs are burying many companies into a hole that they will not be able to emerge from for quite some time.

Equity markets, on the other hand, are much more emotional and susceptible to trades like "Get Shorty." "Get Shorty" would be a very tough trade to pull off in the credit markets, so Fed, SEC and Treasury officials concentrate on equities, even though if credit spreads don’t tighten and credit isn’t made more available to individuals and institutions, the system will continue starving for much needed stimulus.

For another example, consider the case of American International Group (AIG), the once great insurance behemoth. It’s now, in my opinion, been reduced to a company that is spinning out of control, unable to determine how bad its credit portfolio is and how bad its investment portfolio is. Mind you, this is a company with $1 trillion in assets, but bonds are going…

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Panic Selling in Gold