Which Way Wednesday - The Beige Book Boogie
by Phil - March 3rd, 2010 8:15 am
The last Beige Book report was on January 13th.
At the time the futures were flying and we were bullish but Dow was looking toppy and I thought we were going too far, too fast and called for caution - despite our "Meatball Market" at the time. Just like yesterday, I was not happy with the fundamentals to the point where I felt it necessary to keep pointing them out while the parade of analysts at CNBC et al told everyone to BUYBUYBUY at the 10,750 top. I don’t like to be Chicken Little but sometimes the sky is actually falling! The January book had very little "good" news to report (see my analysis for Members that day) and we took our money and ran on the long side. Although it wasn’t until the next Tuesday that we actually went down - it was a doozy and we fell over 500 points in 3 days, all the way to 10,165 (our 5% rule) and we continued weakly through 2/8, when we bottomed out at 9,900.
Whoever said this charting stuff was complicated? Just follow the 5% rule, draw some lines and PRESTO - we know what’s going to happen! Well, at least we hope we know what’s going to happen because I’ve spent a good portion of my week so far telling Members NOT to trust the rally we’ve been having and to expect a downturn with today’s Beige book a possible catalyst for a correction. From experience, we know there is not generally an immediate reaction to what is essentially a collection of anecdotal evidence about the state of the economy but it does give us an overview of the nation and I haven’t seen much news in the 6 weeks since the last report to make me think this one will be showing any great improvements.
It’s a tough call at the moment because there is clearly a determined effort to get the markets to move up but we are loaded up with bullish plays from our visit to 9,900 so it pays to be a bit more bearish with our short-term plays as we test the top of our MAYBE range. We have had some good news this morning with MBA Mortgage Applications up 14.6% as rates fell back under the magic 5% mark and, of course, that’s a rebound off of last week’s TERRIBLE showing, probably weather related.
69% of the activity was refinancing, which is nice but it doesn’t move homes or employ any construction…
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Tuesday - Bill Gross Gives Us 90 Seconds
by Phil - March 2nd, 2010 8:28 am
Our favorite bond pimp is in some mood this month!
Maybe it’s because, despite PimpCo’s best efforts, they failed to tank the markets last week but Gross starts his March newsletter off with this harsh chart but his words are even harsher - saying of cocktail parties:
I suppose the parties wouldn’t be so bad if there was something original to be said, or if “you” had a genuine interest in “me” as opposed to “you,” but let’s face it folks, no one does. The only reason any of us really cares about cocktail conversations is to quickly redirect someone else’s stories into autobiographies that we assume to be instant bestsellers if only in print. If not, if the doe-eyed listener seems simply fascinated by what you’re saying, you can bet there’s a requested personal favor coming when you finally shut up. “Say Bill, I was wondering if you knew somebody at…that could…” Yeah right! But, as my chart shows, 90 seconds into a typical conversation, no one gives a damn about you and your problems – maybe those shoes and that dreadful eye shadow you’re wearing, but not anything audible coming out of your mouth.
Yow Bill! Tell us how you really feel… After telling us how appalling he finds it to endure 90 seconds of our time at a party, Bill then asks for his own 90 seconds to teach us about economics. I’m not going to edit as it is about 90 seconds worth but after that opening - don’t you find it kind of hard to read what he has to say without looking for a place to throw a virtual punch?
To begin with, let’s get reacquainted with the fundamental economic problem of our age – lack of global aggregate demand – and how we got to where we are today:
(1) Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries’ workers/citizens, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap – making sure that consumers keep buying things. When the private sector assumed too much debt and asset prices bubbled (think subprimes and houses, or dotcoms/NASDAQ 5000), American-style capitalism with its leverage, deregulation, and religious belief in lower and lower taxes reached a dead end. There was a willingness to keep on consuming, there just wasn’t the wallet. Vigilantes – bond market or otherwise – took away…
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Monday Market Mayhem
by Phil - March 1st, 2010 7:49 am
Earthquake in Chile!!!
Did you know that Chile provides 1/3 of the World’s copper? Did you also know the earthquake did not affect the region where copper is being produced other than a temporary power shortage? Certainly copper traders don’t know that as the price of copper shot up to $3.48 (+5%) on yesterday’s open and I already sent out an early morning Alert to Members discussing ways to sell into what is effectively a mindless short squeeze. FCX should be back in play for us to short as a boost in copper and gold should send them right back to our $77.50 sweet spot.
Oil is back over $80 and, as I said in the Weekend Wrap-Up, nothing would annoy me more this morning than a commodity rally and that’s exactly what we’re having in Asia and Europe but Asia was up on commodity fever and Europe is already pulling back of the morning’s excitement as real traders take advantage of the stampede into commodities to pile on the shorts as I’m a LOT more focused on China’s slowdown in manufacturing which is, so I hear, where they are supposed to actually use commodities.
A Purchasing Managers’ Index released by the government today slid to a one-year low. Another PMI, from HSBC Holdings Plc and Markit Economics, showed the weakest expansion in three months (the holiday may have factored in). Today’s reading in the official survey was the weakest since manufacturing stopped contracting last March. Ten industries, including clothing and footwear, reported contractions in export orders versus 10 posting expansions, highlighting the risk that global demand may be weak this year. Jingwei Textile Machinery Co. is among Chinese companies forecasting a loss for 2009. The number is “really ugly,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. “The weakness cannot be explained with the Lunar New Year holiday effect and indicates a slowdown in growth momentum as well as easing price pressures, which is likely to limit monetary tightening.”
In today’s data, a reading over 50 indicates an expansion. The official survey’s output index slid to 54.3 from 60.5. A measure of orders tumbled to 53.7 from 59.9. An index of export orders fell to 50.3 from 53.2 in January. “The decline in new export orders warrants close attention and we need to be cautious on the outlook for export growth,” Zhang Liqun, a researcher at the State Council Development and Research Center,…
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Weekly Wrap-Up - Buffett’s Daring Derivative Deal Does Well
by Phil - February 28th, 2010 9:30 am
I was going to talk about Buffett’s annual letter to investors.
Fortunately, I procrastinated and other people did some detailed reporting like Ravi Nagarajan, Andy Fry, Scott Patterson and Joe Del Bruno - who does a great job of pointing out that Berkshire’s 4th quarter results were propped up by Buffett’s $1.05Bn gains in derivatives betting (something Buffett himself once called "weapons of mass financial destruction" but, as we well know - if you can’t beat them…), which accounted for 1/3 of Berkshire’s $3.06Bn profits.
Buffett’s biggest bet was selling a put against the S&P 500 back in March - a move I said at the time was BRILLIANT and Buffett himself now says about his own options trading: "We are delighted that we hold the derivatives contracts that we do. To date, we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts."
What did Buffett do? Exactly what we teach you to do here at PSW - he took advantage of an irrational move in the markets and SOLD INTO THE EXCITEMENT, getting a fat premium from some sucker that bet the S&P would not hold 666 5 years from now. Buffett effectively sold $5Bn worth of puts that expires worthless at S&P 700 between 2019 and 2027, putting $5Bn in his pocket and holding aside $1Bn in margin, which is how much he’s already ahead on the bet. Like a good options trader, he has a plan and he’s trading his plan, making sure his investment is on track and patiently letting time do it’s work as it eats away at the put-holder’s premium.
What about the risk? Well I can’t speak for Buffett’s stop-loss technique but we’re talking about a company that has (had) $40Bn in cash using their excess margin to make a $5Bn bet that the S&P would not stay below 700 for 10 years. Buffett and I both tell people - NEVER buy a stock (or sell a put against one) that you are not willing to own for 10 years. The S&P was 5% below at the time and would have had to drop, perhaps, 20% more to cost him $1Bn so let’s call the stop 550 on the S&P where Buffett risked 2.5% of his cash against a posible 400% gain on his $1Bn risk allocation over 10+ years. While it is true that if the S&P dropped 50% in one day Buffett would be in deep trouble - sometimes you do have to play the odds…
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Tea Party Out - Coffee Party In!
by Phil - February 28th, 2010 7:45 am
Coffee Party Movement: Alternative to Tea
Furious at the tempest over the Tea Party — the scattershot citizen uprising against big government and wild spending — Annabel Park did what any American does when she feels her voice has been drowned out: She squeezed her anger into a Facebook status update.
Let’s start a coffee party . . . smoothie party. red bull party. anything but tea. geez. ooh how about cappuccino party? that would really piss ‘em off bec it sounds elitist . . . let’s get together and drink cappuccino and have real political dialogue with substance and compassion.
Friends replied, and more friends replied. So last month, in her Silver Spring apartment, Park started a fan page called "Join the Coffee Party Movement." Within weeks, her inbox and page wall were swamped by thousands of comments from strangers in diverse locales, such as the oil fields of west Texas and the suburbs of Chicago.
I have been searching for a place of refuge like this for a long while. . . . It is not Us against the Govt. It is democracy vs corporatocracy . . . I just can’t believe that the Tea Party speaks for all patriotic Americans. . . . Just sent suggestions to 50 friends . . . I think it’s time we start a chapter right here in Tucson . . .
The snowballing response made her the de facto coordinator of Coffee Party USA, with goals far loftier than its oopsy-daisy origin: promote civility and inclusiveness in political discourse, engage the government not as an enemy but as the collective will of the people, push leaders to enact the progressive change for which 52.9 percent of the country voted in 2008.
The ideas aren’t exactly fresh — Tea Party chapters view themselves as civil, inclusive and fueled by collective will — but the Coffee Party is percolating in at least 30 states. Small chapters are meeting up, venting frustrations, organizing themselves, hoping to transcend one-click activism. Kind of like the Tea Party did this last year, spawning 1,200 chapters, a national conference and a march on Washington but with a VERY different mission statement:
“The Coffee Party Movement gives voice to Americans — across every demographic — who want to see cooperation in government. We recognize that the federal government is not the enemy of the people, but the expression of our collective will, and that we must participate in the democratic…
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The Top 1% Control 42% of the Wealth - Servitude for the Rest of US!
by Phil - February 26th, 2010 6:01 pm
Courtesty of My Budget 360:
Many Americans are not buying the recent stock market rally.
This is being reflected in multiple polls showing negative attitudes towards the economy and Wall Street. Wall Street is so disconnected from the average American that they fail to see the 27 million unemployed and underemployed Americans that now have a harder time believing the gospel of financial engineering prosperity. Americans have a reason to be dubious regarding the recovery because jobs are the main push for most Americans. A recent study shows that over 70 percent of Americans derive their monthly income from an actual W-2 job. In other words, working is the prime mover and source of their income. Yet the financial elite have very little understanding of this concept. Why? 42 percent of financial wealth is controlled by the top 1 percent. We would need to go back to the Great Depression to see such lopsided data.
Many Americans are still struggling at the depths of this recession. We have 37 million Americans on food stamps and many wait until midnight of the last day of the month so checks can clear to buy food at Wal-Mart. Do you think these people are starring at the stock market? The overall data is much worse:
Source: William Domhoff
If we break the data down further we will find that 93 percent of all financial wealth is controlled by the top 10 percent of the country. That is why these people are cheering their one cent share increase while layoffs keep on improving the bottom line. But what bottom line are we talking about here? The Wall Street crowd would like you to believe that all is now good that the stock market has rallied 60+ percent. Of course they are happy because they control most of this wealth. Yet the typical American still has negative views on the economy because they actually have to work to earn a living:
The above daily poll asks Americans about their view on the health of the economy. Only 13 percent believe the economy is good or excellent. Funny how that correlates with the top 10 percent who control 93 percent of wealth. Many Americans were sold the illusion of the bubble. They were sold on the idea that their homes were worth so much more than they really were. And many used this phony wealth effect to go out and spend beyond their means. …
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Thank GDP It’s Friday!
by Phil - February 26th, 2010 8:27 am
Wow, a 6% GDP!
I’m guessing as it’s only 7:30 but WOW! What an amazing economy this must be in the fantasy-land where they concoct these numbers. Let’s see, we have 138M working people so we must have added 8.6M jobs, right? NO??? Well, then the people who are working must be putting in a lot of overtime, right? No? I know, everybody must be making 6% more money than last year! No? Well, then it must be coming through in benefits, right? No? Hmm, this is a hard game isn’t it? I KNOW!!! Housing prices - with China-like GDP growth our housing market must be red hot and surely our homes are up 6% in value! No? Damn, I feel like I’m playing deal or no deal and I picked the case with the penny…
Just like our discussion about what total BS the CPI was - GDP is no different. GDP is the sum of Consumption, Investment, Government Spending and Net Exports which means a combination of inflation and government spending can boost our GDP even as real consumption falls and the rising dollar papers over export losses. In other words - I buy $100Bn worth of Toyotas (5M at $20,000 each) from Japan with the dollar at 85 Yen. Now the dollar rises to 93 Yen and I’m "only" buying $90Bn worth of Toyotas (5M at $18,000 each) and our GDP for that segment is up 10%. Wow - FANTASTIC!
Are we happy? Are more Americans working? Is there more shipping? Are there more sales at the Toyota dealership? No. Is Japan happy? Not at all, they are getting less money for the same cars. Another group that hasn’t been happy are the oil exporters, who shipped us an average of 10.5 Million barrels a day at an average price of $60 last year ($630M) and are now shipping us just 8.5Mbd at $80 last week ($680M). Sure they are still getting their $680M a day by choking off production and creating false supply shortages, but they miss the days when they were able to charge us $100 for 11Mbd.
Don’t worry my OPEC pals, JPM and the other oil manipulators are working very hard to make sure you once again have Billions of more American dollars that you can funnel to terrorists and this Democratic Congress turns the same blind eye to the shenanigans as the previous administration did so happy days will soon be here again as our leaders have the unmitigated gall to get up…
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Thursday - Bernanke’s BS Bounce Part II
by Phil - February 25th, 2010 6:46 am
Yay, more free money!
Oh not for you (unless you are a banker) but for all of Ben’s best buddies as the Fed Chairman promised yesterday to maintain "exceptionally low levels of the federal funds rate for an extended period." He can do this because, according to Bernanke:
Increases in energy prices resulted in a pickup in consumer price inflation in the second half of last year, but oil prices have flattened out over recent months, and most indicators suggest that inflation likely will be subdued for some time. Slack in labor and product markets has reduced wage and price pressures in most markets, and sharp increases in productivity have further reduced producers’ unit labor costs. The cost of shelter, which receives a heavy weight in consumer price indexes, is rising very slowly, reflecting high vacancy rates. In addition, according to most measures, longer-term inflation expectations have remained relatively stable.. the range that most FOMC participants judge to be consistent with the Federal Reserve’s dual mandate of price stability and maximum employment.
See! I bet you didn’t realize how well things were going, did you? Oil going from $70 to $80 in 15 days isn’t inflation - it’s SUBDUED! Up from $37 last February and March - SUBDUED - As in, DUED, where’s my money???
I mean come on people - he says it right here in one of the early paragraphs (before people start to nod off) - the cost of shelter (ie. your home’s declining value) is heavily weighted in the CPI and since your home is worth less (worthless?) and will remain so for some time - that offsets all the other nasty inflation that is eating into your paycheck.
Aside from the fact that this assumes your home is something you will be buying at a discount TOMORROW as opposed to something you overpaid for yesterday, the whole measurement that Bernanke uses to define success is ridiculous. Housing makes up 42.7% of the CPI, Transportation makes up 17%, Food makes up 15% Medical Care is 6% and Clothing is 3.7%. That’s 85.4% so we’ll call "other" 14.6%.
Now, let’s say you, like most Americans, already own your home. That means what you pay on a monthly basis doesn’t change. Let’s say though, that the cost of Transportation goes up 20% (3.4 out of 100) and Food goes up 20% (3) and Medical Care goes up 30% (1.8) and Clothing goes up 10% (0.4) - that would be an increase in…
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Japan - Past the Point of No Return
by Phil - February 24th, 2010 5:16 pm
Courtesy of Vitaliy N. Katsenelson:
Japan is suffering from growing expenditures and declining tax revenues. Their population is both aging and declining with a debt to GDP ratio of 197%, second in the world only to Zimbabwe!
The government has accumulated 637 TRILLION Yen in Bond debt at the same time as household savings has been falling from 12% in the late 1990’s to less than 2% today. These are frightening statistics and it begs the question - What happens when Japan can no longer finance their debt internally? Will they begin to compete with the US and Europe for investment capital?
How will that affect global bond rates and, most importantly - how do we make money off it? Have I mentioned I like TBT lately? I also like Vitaliy, who sends me tons of good stuff so I’m making up for not posting him more often by catching up a little:
- Vitaliy also has this overview on our steroid-enhanced economy.
- Yesterday he was on CNBC with Maria mispronouncing his name - discussing our range-bound outlook.
- Here’s Yahoo giving him more time on the same subject.
- Welcome to Another Lost Decade
- Q&A on Range-Bound Market with the FT
(What's this?)
(market folly, 2/25/10)
(Investment U, 12/18/09)
(THE PRAGMATIC CAPITALIST, 1/6/10)
Investing in Japan,
ProShares UltraShort 20+ Year Treasury,
Yahoo!
at Wikinvest
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(