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Beware The Correction Of False Prices

Beware The Correction Of False Prices 

Courtesy of Charles Gave of Gavekal Dragonomics

I want to start this paper by reiterating a few of my strongly held convictions about the role of central bankers:

  • Economics is a branch of logic, itself a branch of philosophy, and not a branch of astrology (the good case) or mathematics (the bad case).
  • So when I see the guardians of the Temple of Mammon—otherwise known as central bankers—following an illogical policy, I am mesmerized. I start to have doubts, either about my ability to follow a path of logical reasoning, or about the sanity of the current breed of central bankers. As far as the first option goes, our readers can decide, and the market will be the ultimate judge. As for the second, allow me to make a few remarks…

Four basic postulates for central bankers

To think ‘logically’ one generally starts with a few postulates learnt from experience. What should these postulates be for central bankers?

  1. I expect central bankers to know that the future is unknowable. This has been generally accepted wisdom at least since the time of the New Testament: “But of that day and hour knoweth no man.”
  2. Since Karl Popper, central bankers should know that the amount of risk in a system is roughly constant over time and that any effort to minimize risk or volatility at any point in time (usually just before an election) will lead to its more forceful re-emergence later on (hopefully after the election). In this sense an economic system is much like one of Alexander Calder’s mobiles: if you restrict the motion of one of its branches, any disturbance of the system will lead to much bigger movements elsewhere.
  3. Since Knut Wicksell, central bankers should know that the greater the difference between the ‘natural’ interest rate and the ‘market’ rate, the bigger the subsequent booms and busts. If sustained, a false price for the cost of money increases the risk in a system exponentially. A false price for interest rates leads to a false price for the exchange rate. From there all prices become false and the economy moves ex-growth,


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The Cult of Central Banking

Outside the Box: The Cult of Central Banking

By John Mauldin

In today’s Outside the Box, good friend Ben Hunt informs us that we have entered the cult phase of the Golden Age of the Central Banker:

We pray for extraordinary monetary policy accommodation as a sign of our Central Bankers’ love, not because we think the policy will do much of anything to solve our real-world economic problems, but because their favor gives us confidence to stay in the market. I mean, does anyone really think that the problem with the Italian economy is that interest rates aren’t low enough? Gosh, if only ECB intervention could get the Italian 10-yr bond down to 1.75% from the current 1.85%, why then we’d be off to the races! Really? But God forbid that Mario Draghi doesn’t (finally) put his money where his mouth is and announce a trillion euro sovereign debt purchase plan. That would be a disaster, says Mr. Market. Why? Not because the absence of a debt purchase plan would be terrible for the real economy. That’s not a big deal one way or another. It would be a disaster because it would mean that the Central Bank gods are no longer responding to our prayers.

But, he points out, the cult phase of any human society is a stable phase in the sense that, while change may happen, it will not happen from within:

There is such an unwavering faith in Central Bank control over market outcomes, such a universal assumption of god-like omnipotence within this realm, that any internal market shock is going to be willed away.

However, there is a minor catch: external market risk factors are all screaming red.

I’ve been doing this for a long time, and I can’t remember a time when there was such a gulf between the environmental or exogenous risks to the market and the internal or behavioral dynamics of the market. The market today is Wile E. Coyote wearing his latest purchase from the Acme Company – a miraculous bat-wing costume that prevents the usual plunge into the canyon below by sheer dint of will.



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The Swiss Release the Kraken!

 

Thoughts from the Frontline: The Swiss Release the Kraken!

By John Mauldin

“Below the thunders of the upper deep,
Far far beneath in the abysmal sea,
His ancient, dreamless, uninvaded sleep
The Kraken sleepeth: faintest sunlights flee….

“There hath he lain for ages, and will lie
Battening upon huge sea-worms in his sleep,
Until the latter fire shall heat the deep;
Then once by man and angels to be seen,
In roaring he shall rise and on the surface die.”

– Alfred, Lord Tennyson, “The Kraken

"The exact contrary of what is generally believed is often the truth."

– Jean De La Bruyère

“Cry ‘Havoc!’ And let slip the dogs of war!”

– William Shakespeare, Julius Caesar, Act III, Scene I

“No mas!”

 – Roberto Duran to the referee at the end of his fight with Sugar Ray Leonard, 1980

If you want evidence that central bankers play by their own rules, regardless of what they say or what conventional wisdom tells us, last week’s action by the Swiss National Bank should pretty much fill the bill. My friend Anatole Kaletsky, in a CNBC interview not long after the announcement, quipped (with a completely straight face) that just as James Bond has a license to kill, central bankers have a license to lie.

Swiss National Bank Chairman Thomas Jordan had assured us just the week before that the Swiss would continue to “hold the peg” whereby the SNB kept the value of the Swiss franc from rising higher than €1.22. “The cap is absolutely central,” he said. And SNB Vice Chairman Jean-Pierre Danthine said publicly only last Monday that the peg would remain a cornerstone of Swiss banking policy.

Early Thursday morning the Swiss abandoned that policy. Much of the press coverage in the (largish) wake of their surprise move has focused on the costs to banks and hedge funds around the world, but you have to realize that serious pain is being felt in Switzerland itself. Every bank and business that held non-Swiss-franc debt or investments took an immediate 15–20%+ haircut on its…
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Why the World Needs the US Economy to Struggle

Thoughts from the Frontline: Why the World Needs the US Economy to Struggle

By John Mauldin

The headlines this morning talk about the US dollar hitting an 11-year high. I have been saying for years that the dollar is going to go higher than anyone can imagine. This trade is just in the early innings. And the repercussions will be dramatic, not only for emerging markets that have financed projects in dollars, but also for commodities and energy, gold, and a variety of other investments. The world is at the doorstep of a new era of volatility and currency wars.

In this week’s letter, my associate Worth Wray explores what a rising dollar means for emerging markets and what central banks are likely to do in response. Can they smooth the ride, or will it be the world’s scariest roller coaster? This letter will print long because of the number of fabulous charts Worth provides. I might make a brief comment or two at the end. Here’s Worth.

On the Verge of a Disaster… or a Miracle

By Worth Wray

Twenty years after the first divergence-induced currency crisis of the 1990s, commodity prices are tumbling, the US dollar is rallying, and externally fragile emerging markets are reliving the horrors of their not-so-distant past. Except, this time, major economies like the United States, the United Kingdom, the Eurozone, Japan, and the People’s Republic of China may not be able to side-step the ensuing contagion.

With 2014 now behind us, I want to focus this week's letter on what may prove to be the most important global macro pressure points in the coming year(s):

  • The growing divergence among the world’s most important central banks
  • The ongoing collapse in oil and other commodity prices as a function of excess supply and/or weakening global demand
  • The rise of the US dollar, driven by divergence and risk aversion… and the squeeze it’s putting on the multi-trillion-dollar carry trade into emerging markets
  • The vicious slide in emerging-market currencies
  • The rising risk of 1990s-style contagion and financial shocks
  • And what, if anything, can avert the next global financial crisis

But first, let…
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Happy New Year!

Well, now that it's 2015, let's go over some of the lessons of 2014 with the Reformed Broker.  

[Comments and bold emphasis by Ilene.]

Via Pixabay: here. 

In 2014 I Learned That…

Courtesy of 

I can’t prove it scientifically, but I’m pretty sure the years are flying by faster now than ever before. [Actually I think it is scientifically proven that time goes faster as we get older... Sorry.]  Is everyone just so busy that the passage of time is occurring while we stare at our phones? Or are the events that shape each year simply playing out faster, from start to finish, because of the increased pace of modern life? 

More importantly, will 2015 move even faster? [Yes.]

I don’t know the answers, but you’ve already heard enough from me this year anyway (I’ve heard enough from me too!). So for today’s look back on the lessons of 2014, I got a little help from my friends!

Happy New Year and thanks for reading! See you on the other side. – Josh

***

In 2014 I Learned That…

Aron Pinson (Microfundy): rates don’t necessarily rise in a rising rate environment.

Justin Paterno (StockTwits): if the US economy were a football team it would have the personnel of the Patriots with the fans of the Jets.

Justin Frankel (RiverPark Funds): beating your benchmark isn’t the key to happiness or success, but it’s a fine place to start!

Morgan Housel (Motley Fool): Unsustainable things can last years, even decades, longer than people think.

Tom Brakke (Research Puzzle): A heavily-analyzed, globally-traded commodity can go down fifty percent in response to relatively modest changes in fundamentals.  Therefore, you might want to take the predictions you hear and the models you rely upon with a grain truckload of salt.

Stephen Weiss (Short Hills Capital): terrorists don’t respect copyright or trademark laws as Isis Pharmaceuticals found out.  [Ha ha - is ISIS going to change its name?]


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2015 – Biotech Fever

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

PSW Members – well, what a year for biotechs!   The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down!  The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months.  What could go wrong?

Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys…it is time that something is put together for PSW on biotechs in 2015.

Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies.  A number of companies have gone IPO which have drugs/technologies that fight cancer, including JUNO Therapeutics (JUNO), Bellicum Pharmaceuticals (BLCM), Kite (KITE), Immune Design (IMDZ) in 2014.  On the other side, fibrosis can be a side effect of cancer as well as involved in a host of other diseases (IPF, NASH).  Fibrosis is less understood, and therefore can be harder to treat, and yet a number of high flying companies have been bought due to their drugs (GILD buying Arresto, Roche buying Intermune), and therefore fibrosis remains a very hot area.  One company in this space that just IPO'd is Fibrogen (FGEN). 

Cancer Company to Consider

JUNO Therapeutics (JUNO): Juno was founded on the backs of cancer researchers at Fred Hutchinson Cancer Research Center, Memorial Sloan-Kettering Cancer Center and Seattle Children’s Research Institute.  With more than $300M in funding, the stock IPO'd at 45% above its original midpoint, making it the year's second highest premium behind Castlight Health.  The company raised $265 million, giving it a >$2 billion valuation.  This made it the largest biotech IPO in at least 15 years both by deal size and market cap.  What Dendreon could have done had it picked the right cancer to use its techology!

JUNO's technology is chimeric antigen receptor, or CAR-t for short.  CAR-t technology is where the persons own T-cells (a white blood cell) are harvested and modified to fight cancer cells.  The technology has tested positive early…
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Phil on Oil, Russia, the Fed, and the Trade of the Year

Must See: Phil visits with Money Talk's Kim Parlee on Business News Network. In this great interview, Phil talks about his target price range for oil and presents an options trade idea that he is calling the "Trade of 2015."    

?

Click on the links:

Segment 1 (Oil, Russia, and the Fed) : http://www.bnn.ca/Shows/Money-Talk.aspx?vid=515921

Segment 2 (Trade of the Year 2015) : http://www.bnn.ca/Shows/Money-Talk.aspx?vid=516607

In segment 2, Phil introduces the trade of the year for 2015 and discusses the strategy of "being the house." (See also "Be the House – Not the Gambler.")  

 





Oil, Employment, and Growth

Thoughts from the Frontline: Oil, Employment, and Growth

By John Mauldin

Last week we started a series of letters on the topics I think we need to research in depth as we try to peer into the future and think about how 2015 will unfold. In forecasting US growth, I wrote that we really need to understand the relationships between the boom in energy production on the one hand and employment and overall growth in the US on the other. The old saw that falling oil prices are like a tax cut and are thus a net benefit to the US economy and consumers is not altogether clear to me. I certainly hope the net effect will be positive, but hope is not a realistic basis for a forecast. Let’s go back to two paragraphs I wrote last week:

Texas has been home to 40% of all new jobs created since June 2009. In 2013, the city of Houston had more housing starts than all of California. Much, though not all, of that growth is due directly to oil. Estimates are that 35–40% of total capital expenditure growth is related to energy. But it’s no secret that not only will energy-related capital expenditures not grow next year, they are likely to drop significantly. The news is full of stories about companies slashing their production budgets. This means lower employment, with all of the knock-on effects.

Lacy Hunt and I were talking yesterday about Texas and the oil industry. We have both lived through five periods of boom and bust, although I can only really remember three. This is a movie we’ve seen before, and we know how it ends. Texas Gov. Rick Perry has remarkable timing, slipping out the door to let new governor Greg Abbott to take over just in time to oversee rising unemployment in Texas. The good news for the rest of the country is that in prior Texas recessions the rest of the country has not been dragged down. But energy is not just a Texas and Louisiana story anymore. I will be looking for research as to how much energy development has contributed to growth and employment in the US.

Then the research began…
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Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's this week's Stock World Weekly.

Click here and sign in with your user name and password. 

 





Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's the latest Stock World Weekly, with Phil's trade ideas on the Japanese stock market, CBI, CSIQ and ALEX. 

Picture by DeltaWorks at Pixabay.





 
 
 

Zero Hedge

How AT&T Just "Beat"

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

... in one simple chart.

Courtesy of @Not_Jim_Cramer

...

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Phil's Favorites

Email From US Special Forces Veteran; 500 US Blackwater Mercenaries in Ukraine? US Backs Ukrainian Neo-Nazis

Courtesy of Mish.

US Special Forces in Ukraine?

In response to US Special Forces in Mariupol? I received an interesting email from "Dan" a 23-year Army veteran with four years in special services.

Dan writes ...
I was a soldier in the US Army for 23 years including four years in Special forces Stationed in Germany. I would agree that there is a strong likelihood that this is a US Special Forces soldier.

I can tell you that we were issued AK 74s and would use them on a mission such as this. That is about all I would really want to say at this point.

It is obvious to me that our strategy is the Balkanization of the various hot spots in the world, Syria, Ukraine, Iraq and so forth.

You can call m...



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All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Chart School

S&P 500 Snapshot: A Plunge on Weak Earnings and (Mostly) Bad Economic News

Courtesy of Doug Short.

Weak earnings and an ugly Durable Goods Report for December apparently took their toll today, despite a stunning surge in Consumer Confidence. The S&P 500 plunged in the opening minutes and hit its -1.81% intraday low at 10:45, seemingly ignoring the 10 AM release of the surprisingly cheerful Consumer Confidence report. A slow upward trend ensued and lasted until the mid-afternoon, trimming the decline to -0.68%. But the selling resumed and the index ended the day with a 1.34% loss.

The yield on the 10-year Note closed at 1.83%, unchanged from yesterday's close.

Here is a 15-minute chart of the past five sessions.

...

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Insider Scoop

Morgan Stanley Asks, 'What's Driving Gold?'

Courtesy of Benzinga.

Related GLD Jim Cramer Shares His Thoughts On Gold, Kinder Morgan And Dollar Tree Mike Khouw Sees Bullish Options Activity In SPDR Gold Trust Making Money With Charles Payne: 11/13/14 (Fox Business)

While other commodity prices have further softened recently, Gold rallied – rising from December low of $1,174/oz. to touch $1,300/oz. Joel Crane, an analyst at Morgan Stanley, expressed pessimism that...



http://www.insidercow.com/ more from Insider

OpTrader

Swing trading portfolio - week of January 26th, 2015

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 ...



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Sabrient

Sector Detector: With the Fed fading into shadows, investors look overseas for new catalysts

Reminder: Sabrient is available to chat with Members, comments are found below each post.

Courtesy of Sabrient Systems and Gradient Analytics

By Scott Martindale

Last week, the S&P 500 put an end to its streak of weekly losses, despite giving back some gains on Friday. Thursday provided the big catalyst, with the ECB’s announcement of its bold new monetary stimulus plan. Investors were cheered and soothed for the moment. And U.S. fundamentals still look strong. But with Greece trying to turn back time, with volatility elevated (and likely to continue as such), and with the technical situation still dicey, the near term outlook is still worrisome.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart...



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Market Shadows

Are You Trading or Gambling?

ARE YOU TRADING OR GAMBLING?

An interview with John Ehlers of Stock Spotter and Mesa Software

By Ilene

Ilene: John, in our last discussion about trading systems in general and yours in particular (Can trading be reduced to cycles, stresses and vibrations?) you mentioned Monte Carlo simulations and their use in measuring performance. Can you explain more about how you measure the performance of a trading system?

John: Let's start with comparing trading with gambling. The two have several things in common.  In both ...



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Digital Currencies

Jitters After Bitcoin Exchange Suspends Services

So as I was saying yesterday (Bitcoin: The Biggest Clown Show In History?), Bitcoin has several obstacles on the path to potential success as an alternative currency. But I forgot to mention hacking and theft at Bitcoin exchanges and other technical problems. This is related to the lack of government backing and the fact that the value of Bitcoins is based entirely on confidence.  

Jitters After Bitcoin Exchange Suspends Services 

By 



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Pharmboy

2015 - Biotech Fever

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

PSW Members - well, what a year for biotechs!   The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down!  The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months.  What could go wrong?

Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.

Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies.  A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...



more from Pharmboy

Stock World Weekly

Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's this week's Stock World Weekly.

Click here and sign in with your user name and password. 

 

...

more from SWW

Option Review

SPX Call Spread Eyes Fresh Record Highs By Year End

Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...



more from Caitlin

Help One Of Our Own PSW Members

"Hello PSW Members –

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 jennifersurovy@yahoo.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.

http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743

Thank you for you time!




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About Phil:

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...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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