Ethan Harris, US economist at Bank of America Merrill Lynch, put this out to clients two days ago:
As the markets continue to sell-off, an increasingly popular view among investors is that the Fed won’t hike until next year. Global growth is weak, Chinese policy mistakes have destabilized their markets and the US equity market has finally succumbed to the pressure, with a roughly 10% correction. Thus far only a handful of economics teams at major houses have shifted their Fed call to next year, but both market pricing and most clients we talk to see a significant delay in Fed tightening.
We think some delay is possible, but a big delay is unlikely. It is always dangerous to make big forecast changes during periods of turmoil in markets. It is a bit like going food shopping right before dinner—your gut, instead of your mind, starts driving your decisions. Yes, if the Fed met today, they would very likely take a wait and see attitude and delay hiking. Why create further market volatility? Why not wait to see whether this is an economically important shock? However, there are three weeks before the Fed decides. If the markets stabilize, the Fed outlook will feel a lot different.
In the 48 hours since this note, the US economic data has continued to come in stronger than expected. Yesterday’s 3.7% revised print for 2Q GDP growth was the obvious highlight, along with some new data this morning on consumption and personal income.
Personal spending, measuring how much Americans paid for everything from home rent to dental care, rose 0.3% in July from a month earlier, the Commerce Department said Friday. Consumption climbed 0.3% in June and 0.8% in May.
Personal income, reflecting Americans’ pretax earnings from salaries and investments, climbed 0.4%, replicating the gains of the prior three months. Within that category, workers’ wages and salaries climbed at the fastest pace since last November, as did their disposable income.
There’s a tradition at the wirehouses whereby on any day that the overall US stock market has a greater decline than 1%, an email letter is prepared to be blasted out to advisors’ clients sometime in the early evening before they get home from work to check their portfolios. My advisor friends call them “One-Percent Letters”.
It’s a bit of an anachronism given the fact that everyone who cares how the market might have done on a given day has a smartphone loaded with finance apps sitting right in their pocket (palm?) at all times.
But still, it’s prepared and advisors are able to decide whether or not they want to send it out and which clients need to get it.
The gist of the letter is usually some ad hoc “chief strategist” explanation for why stocks sold off, incorporating the latest chatter from the headlines that day. This is, of course, followed by the soothing reminder that volatility comes and goes and that everyone should stay the course and relax.
It’s not a bad message, provided that the client actually has a portfolio that is both aligned with their longer-term financial plans and that their strategy is durable enough to deal with whatever the market is going through. Many do have durable portfolios with built-in mechanisms to get them through it, but plenty don’t.
It’s all happening. I don’t know that a letter will necessarily do the trick for advisors who’ve been performance-chasing in “market leaders”, momentum stocks and IPOs. Now that the sellers are hitting that cohort, things have (finally) gotten real.
Normally there’s a distinct pattern to the impact of Federal Reserve statements on the financial markets. The tone of equities trading in particular starts to improve as the moment of the announcement approaches; the words turn out to be blandly positive, full of promises of easy money and upbeat forecasts; and share prices soar for a day or two. It’s been thus for most of the past six years, leading large numbers of new investors and recently-minted analysts and traders to see the Fed as a modern version of Plato’s philosopher king, wielding absolute power to achieve perfect justice in the form of rising asset prices.
So it must have been a shock yesterday when the Fed released the minutes of its last meeting — which were full of the usual bland equivocations aimed mostly at not upsetting anyone, though with the recently added promise of a tiny rate increase one of these days — and the markets tanked. As of this writing (noon-ish on Thursday) US equities are down over 1% and the S&P 500 has turned negative for the year. Bond yields are falling, gold and silver are rocking, and the sense of fear, confusion, and betrayal is palpable.
What happened? What inevitably had to. Liquidity-driven markets love low interest rates and massive money creation. But those things cause imbalances that eventually become self-negating. The bang for each dollar of newly-printed or borrowed currency falls to zero and then turns negative.
That’s happening now as the major economies continue to borrow but can’t seem to turn the proceeds into measurable growth. Japan, for instance, is running epic deficits and monetizing the whole thing, but over the past five quarters its economy has gotten smaller. Which is another way of saying its ratio of debt to GDP is soaring at an accelerating rate.
So let's say you're an entrepreneur with a particular affinity for the dairy industry, and you have two cows. Depending on the structure of your economic system, you're going to use these cows to set up a corporation. According to Lautner Farms, people who know what to do with two cows, here's what you'll do.
“Formula for success: rise early, work hard, strike oil.”
– J. Paul Getty
This week’s yuan devaluation was big news, but it’s really part of a much bigger saga. Events around the globe are combining to create huge economic change over the next few years. We are watching giant, multidimensional chess games played by some master players.
Energy is the chessboard that connects all the players. What happens when the board changes shape in the middle of the game? If you don’t know the new energy landscape, you’ll have a hard time playing to a draw, much less winning.
Today I’ll tell you about some big shifts in the energy industry. These shifts are about as positive as can be, unless you need high oil prices to run your country. In the long run, these changes are bullish for the whole world, which I think this will surprise many of you. And though we’ve been used to thinking about energy and technology as two different facets of modern life, today they are inextricably linked.
When energy changes, everything else changes, too.
Thoughts from the Frontline is now entering its 16th year of continuous weekly publication. I constantly meet readers who have been with me since the beginning – and even some who read an earlier print version of my letters. I put TFTF on the Internet in August 2000 as a free letter, starting with just a few thousand names, and was amazed at how rapidly it grew. It took just a few years for me to realize that this new thing called the Internet was the real deal, and I discontinued my print version. We now push the letter out to almost one million readers each week, and the letter is posted on dozens of websites.
I began to archive the letter in January 2001; and every issue – the good, the bad, and the sometimes very ugly – is still there in the archives, just as I wrote it. I will admit there are a few paragraphs, and maybe even
It’s been a tough month for investors. As of yesterday, roughly half of the stocks in the S&P 500 have fallen into bear markets, with declines greater than 20%. International stock markets have fallen dramatically, with the losses accelerating on the heels of the latest Asian currency “event”.
We’ve seen stuff like this before. There is a worthwhile lesson in considering how a pair of history’s greatest investors have dealt with this kind of thing in the past.
On the surface, Warren Buffett and David Tepper don’t have a lot in common. One runs a diversified conglomerate and reinvests the insurance premiums into both long-term common stock positions and outright acquisitions of great companies. The other manages a hedge fund and aggressively trades in the markets each day.
But they have something in common that is worth considering today: Both Warren Buffett and David Tepper know that volatility is where returns come from and the losses of today set up the outsized gains of tomorrow. They’ve “lost” some money on the way to earning tons of it.
In the summer of 1998, there was a currency crisis that originated in the far east and eventually wound its way around the globe, culminating in the devaluation of the ruble and the blow-up / bailout of the first systemically risky hedge fund in history, Long Term Capital. Both Buffett and Tepper took quite a beating during this so-called “Asian Contagion” event.
As Nick Murray explains, Warren Buffett was down quite a bit that summer.
A very large sum of money, wouldn’t you say? Now what, you ask, does it represent?
It is roughly how much Warren Buffett’s personal shareholdings in his Berkshire Hathaway, Inc. declined in value between July 17 and August 31, 1998. And now for the six billion dollar question. During those forty-five days, how much money did Warren Buffett lose in the stock market?
The answer is, of course, that he didn’t lose anything. Why? That’s simple: he didn’t sell.
Berkshire Hathaway’s “A” shares had dropped in price from roughly $80,000 per share…
Every quasi-mushroom cloud has a silver lining. That was our cynical conclusion yesterday when we noticed that as part of China's tragic Tianjin mega-explosion, thousands of channel-stuffed cars parked at the Chinese port which likely would have quietly rusted away into the epic nothingness of China's unprecedented excess capacity of pretty much everything, were destroyed, thereby one-time reducing at least some of the gargantuan slack in the Chinese economy.
Which got us thinking: if natural disasters, either accidental or man made, are a tangential blessing to the Chinese economy, why stop at the Tianjin explosion? What about the biggest bogeyman facing China today – its environmental catastrophe, demonstrated best by the impenetrable, carciongenic and toxic smog resulting from the accelerated industrialization of the country, and which the citizens of Beijing, Shanghai, and increasingly more cities, have to breathe in day after day?
It has hardly been a secret that the unprecedented level of pollutants in the Chinese air would impair life expectancy and lead to extensive health problems, but even we were surprised to find out the quantification of China's air problem: according to one study, an average of 4,000 people a day are killed in China, as a result of the dense smog.
According to Bloomberg, "deaths related to the main pollutant, tiny particles known as PM2.5s that can trigger heart attacks, strokes, lung cancer and asthma, total 1.6 million a year, or 17 percent of China’s mortality level, according to the study by Berkeley Earth, an independent research group funded largely by educational grants. It was published Thursday in the online peer-reviewed journal PLOS One from the Public Library of Science."
“When I was last in Beijing, pollution was at the hazardous level: Every hour of exposure reduced my life expectancy by 20 minutes,” Richard Muller, scientific director of Berkeley Earth and a co-author of the paper, said in an e-mail. “It’s as if every man, woman and child smoked 1.5 cigarettes each hour.”
To be sure, Chinese authorities have acknowledged the air pollution situation after heavy smog enveloped swathes of the nation including Beijing and Shanghai in recent years. As a result, they’ve adopted air quality standards, introduced monitoring stations…
It was just after liftoff on the flight from San Francisco to New York that Roger Stone’s face appeared on the back of Seat 9D, looking straight at me.
Gah! Did my Virgin America flight crash? Is Roger Stone’s satellite-fed face my eternal punishment? The power of Christ compels you! The power of Christ compels you!…
But it was just CNN, a more familiar kind of Hell, and a deadlier one. Not what you want on your exit row TV monitor when you’re nursing a tequila hangover: Stone was giving a Big Exclusive interview to a bright white CNN bot named Poppy Harlow, a Heathers type who famously grieved on-air for the Steubenville rapists, “who had such promising futures, star football players”…
The big story: Trump fired Roger Stone from his campaign, or Roger Stone quit, depending on whom you believe (which, if you believe either Trump or Roger Stone, please contact me—I have a new Florida Swampland real estate app to sell you).
Somehow I’d missed the earlier news that Roger Stone—Dick Nixon's dirty trickster, fascist fan of Roy Cohn, lobbyist for some of the worst dictators in the world—was running Trump’s campaign until last weekend. Or maybe I blocked it out—maybe I didn’t want to know, a sign of just how far I’ve reassimilated myself back into mainstream America’s comforting amnesia bubble.
The problem is, I know the Roger Stone story a bit too viscerally well. I even had a brief brush with Mr. Stone during the last presidential election cycle. He responded to a post mortem I wrote on Gary Johnson’s fraudulent 2012 run for president on the Libertarian Party ticket—a political swindle that Stone managed, and whose presence led me to dig deeper into the cesspool of modern third party fake-politics.
After my article came out in NSFWCORP [now owned by Pando], Roger Stone tweeted this compliment at me, calling me “asshole”:
"Each is cheap, each has merit--each had merit even before its price was sawed in half in sympathy with the goings-on in Turkey, Greece, Brazil, Russia, South Africa, Argentina, Colombia, China etc…" — Grant's
In each case, macroeconomic problems have overwhelmed business fundamentals. But as Grant's points out, cheap businesses are a rare commodity. If it weren't for the macroeconomic dislocation, the value wouldn't be there for shrewd investors to profit from.
What's caused the macroeconomic trouble remains a topic of debate. A strong dollar, capital outflows, high levels of leverage and falling commodity prices are all contributing factors. Trying to trade on macroeconomic fundamentals alone can be a risky, and costly endeavor for investors. So, a bottom-up stock picking approach is often the best way to go.
And Grant's has selected unloved emerging market stocks in three emerging markets that are cheap at present levels. Avianca Holdings SA, the Colombian airline; Grupo Nutresa SA, a Colombia-based food distributor; senior debt of General Shopping Brazil S.A. an operator of Brazilian shopping malls; Sberbank of Russia; and the Moscow Stock Exchange itself.
Uncertainty should not bother you. We may not be able to forecast when a bridge will break, but we can identify which ones are faulty and poorly built. We can assess vulnerability. And today the financial bridges across the world are very vulnerable. Politicians prescribe ever larger doses of pain killer in the form of financial bailouts, which consists in curing debt with debt, like curing an addiction with an addiction, that is to say it is not a cure. This cycle will end, like it always does, spectacularly.
When it comes to investing in this environment, my colleague Mark Spitznagel articulated it well: investors are left with a simple choice between chasing stocks that have an increasing chance of a crash or missing out on continued policy effects in the short term. Incorporating a tail hedge minimizes the risk in the tail, allowing investors to remain invested over time without risking ruin. Spitznagel put together a video explaining the point.
To be robust, one must construct a portfolio as an engineer would a bridge and ask what your managers expect to lose should the market fall by 10%. Then ask them again what they’d expect to lose in the down 20% scenario. If that second number is more than two times more painful emotionally than the first, your portfolio is fragile. To fix the problem, add components to your portfolio that make the portfolio stronger in a crash, like actively managed put options. You will be able to build stronger, better bridges, with better returns, that will last for the long term.
By clipping the tail, you can own more risk, the good type of risk: upside with limited downside. And rather than helplessly watching your bridge collapse, you can be opportunistic in a crash, and take the pieces from others at bargain prices to increase the size of yours.
With Labor Day upon us, newspapers across the US will be printing op-eds calling for a mandated “living wage” and higher wages in general. In many cases, advocates for a living wage argue for outright mandates on wages; that is, a minimum wage set as an arbitrary level determined by policymakers to be at a level that makes housing, food, and health care “affordable.”
Behind this effort is a philosophical claim that employers are morally obligated to pay “a living wage” to employees, so they can afford necessi...
With an influx of 800,000 migrants, per year, and rising steeply, Europe struggles with what to to with the refugees.
Here's the Migrant Crisis in Numbers. The EU is struggling to respond to a surge of desperate migrants, thousands of whom have perished in their attempts to seek a better life in Europe. Where are they going and where are they coming from?
The largest group of people reaching Europe through the Mediterranean or the western Balkans are Syrians fleeing a civil war, but there are also many from Eritrea and Afghanistan, as well as Kosovo and Nigeria. EU Migrants
Students of economic history often marvel at some of the phenomena and oddities of past eras such as feudalism, giant stone currency, tulip bubbles and the gold standard. Perhaps in the future inflation will be added to the list of quaint, incomprehensible quirks banished to the history books.
That, at least, seems to be the conclusion of many investors and economists. Aside from a motley group of stubborn doomsayers — who have loudly and wrongly predicted the outbreak of hyperinflation since the financial crisis — the feeling in markets is that inflation is not just an inconsequential dange...
Traders hadn't forgotten the events of last week and were quick to sell their positions in the face of tomorrow's NFP data.
Today's close in the S&P left a bearish inverse doji (gravestone doji), marking supply above 1,950. Bears will feel confident heading into tomorrow's data, assuming Thursday's 1,975 high is not breached. The downside target is a retest of 1,867. A move higher will set up a challenge of 2,044.
The Nasdaq had a quieter day. It didn't suffer the same wide range as the S&P, but today's close finished with a bearish 'cloud cover' over yesterday's trading. Shorts will be liking the risk:reward for a ret...
Reminder: OpTrader is available to chat with Members, comments are found below each post.
This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).
We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options.
Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.
To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here
The dark veil around China is creating a little too much uncertainty for investors, with the usual fear mongers piling on and sending the vast buy-the-dip crowd running for the sidelines until the smoke clears. Furthermore, Sabrient’s fundamentals-based SectorCast rankings have been flashing near-term defensive signals. The end result is a long overdue capitulation event that has left no market segment unscathed in its mass carnage. The historically long technical consolidation finally came to the point of having to break one way or the other, and it decided to break hard to the downside, actually testing the lows from last ...
With the VIX index jumping 120 percent on a weekly basis, the most in its history, and with the index measuring volatility or "fear" up near 47 percent on the day, one might think professional investors might be concerned. While the sell off did surprise some, certain hedge fund managers have started to dip their toes in the water to buy stocks they have on their accumulation list, while other algorithmic strategies are actually prospering in this volatile but generally consistently trending market.
Stock market sell off surprises some while others were prepared and are hedged prospering
Naysyers are warning that the recent plunge in Bitcoin prices - from almost $318 at its peak during the Greek crisis, to $221 yesterday - is due to growing power struggle over the future of the cryptocurrency that is dividing its lead developers. On Saturday, a rival version of the current software was released by two bitcoin big guns. As Reuters reports, Bitcoin XT would increase the block size to 8 megabytes enabling more transactions to be processed every second. Those who oppose Bitcoin XT say the bigger block size jeopardizes the vision of a decentralized payments system that bitcoin is built on with some believing ...
Reminder: Pharmboy and Ilene are available to chat with Members, comments are found below each post.
Baxter Int. (BAX) is splitting off its BioSciences division into a new company called Baxalta. Shares of Baxalta will be given as a tax-free dividend, in the ratio of one to one, to BAX holders on record on June 17, 2015. That means, if you want to receive the Baxalta dividend, you need to buy the stock this week (on or before June 12).
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
Note: The material presented in this commentary is provided for
informational purposes only and is based upon information that is
considered to be reliable. However, neither PSW Investments, LLC d/b/a PhilStockWorld (PSW)
nor its affiliates
warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither PSW nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance, including the tracking of virtual trades and portfolios for educational purposes, is not necessarily indicative of future results. Neither Phil, Optrader, or anyone related to PSW is a registered financial adviser and they may hold positions in the stocks mentioned, which may change at any time without notice. Do not buy or sell based on anything that is written here, the risk of loss in trading is great.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only intended at the moment of their issue as conditions quickly change. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Site owned and operated by PSW Investments, LLC. Contact us at: 403 Central Avenue, Hawthorne, NJ 07506. Phone: (201) 743-8009. Email: firstname.lastname@example.org.