Thrill-Ride Thursday
by Phil - October 13th, 2011 8:24 am
Wheeeee, what a ride!
I hate to say I told you so but I did tell you so in yesterday’s morning post when I said: "Not to be cynical but, if you are going to have some Slovakian Government officials torpedo a vote that will tank the markets – isn’t it a good idea to run them up first and bring in a bunch of suckers to sell to? We remain a bit skeptical until we get back over our "Must Hold" levels and hold them for more than a day." As you can see from David Fry’s chart, a little cynicism is a good thing in these markets as the Slovakian vote was delayed again and the FT rumor popped the day’s bubble.
We discussed shorting oil at $86 (now $84) and gold at $1,695 (now $1,670) as good plays off the morning pump and, as usual, shorting TLT was a winner but now we’re near their theoretical support by the Fed so we’d rather see a run-up to $120 before we play them again. At 1pm, we have a 30-year note auction of just $13Bn but, as I pointed out to Members in Chat, this makes $52.5Bn of 30-year borrowing since August 15th – that’s not even two months!
Who can keep funding this kind of debt load? And it’s not just the US that’s borrowing at an ever-increasing pace – the EU is borrowing as much as we are and Japan is borrowing and Russia is borrowing and Brazil and India are borrowing – Africa would borrow if anyone would lend it to them and our NAFTA buddies, Canada and Mexico, who also borrow about $50Bn a year to fund their own deficits.
How is it possible, a logical person may ask, for almost every single country in the World to run a deficit at the same time? Either A) China has so much of a surplus that they are funding everyone else or B) Everyone is printing money 24/7 to pay bills they don’t have the income for and, if B is the case – where’s the inflation? Is it really possible that, on a planet with a $60Tn GDP and a $4Tn annual deficit (and yes, half of it is ours!) that prices go up less than the 6.66% (why does that number come up so often) printing of…
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DiggThrill-Ride Thursday – Will Dudley Do Right Save the Day?
by Phil - August 18th, 2011 8:02 am
Wheeeeeeeeeee!
Now THIS is an exciting ride. We had a great sell-off in the Futures this morning – the same Futures that I mentioned, in yesterday’s Morning Post, that we had shorted at S&P 1,200 and Russell 710 in a post I had titled "1,200 or Bust!" Of course we also called for our usual monthly oil short with the (/CL) Futures hitting $99 on yesterday’s inventory and now down to $86 (up $3,000 per contract).
Of course, for the Futures Impaired – we still have our straight USO Sept $32 puts at .90, which we whittled down to a .75 in yesterday’s Member Chat as well as the very lovely idea of the SQQQ Sept $25/28 bull call spread at $1 (spread with short RIMM Sept $22.50 puts to make it FREE) that I mentioned right in the 2nd paragraph of Tuesday’s post. Those were just the ideas we gave away for free! In Member Chat, yesterday’s morning Alert to Members was this:
As I said earlier, we like the Futures short at RUT (/TF) 710 and S&P (/ES) 1,200 but the big play today will be shorting oil (/CL) below the $88.50 line or, hopefully, below the $90 mark if they get that high. Expect the Dollar to re-test 73.50 and, if they hold it, then it’s a great time to hit the shorts but, with oil, we’re waiting on that inventory report at 10:30.
As an overall short on oil, the Sept $32 puts are down to .65 and .60 is a good spot to DD in the $25KP (10 more). AFTER that, with an average of .75 per contract, we want to consider rolling up to the Sept $33 puts, now .90 for .30 or less.
Another fun way to play an oil sell-off is the SCO Aug $53/54 bull call spread
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The Commodity Bubble
by ilene - February 16th, 2011 7:29 pm
Courtesy of SurlyTrader
In the future they might coin this the “Bernanke Effect” or maybe the great commodity bubble of 2011. The truth is that commodity prices are rising…dramatically. You might have started to notice this disconnect in your grocery store shopping or in gasoline prices, but if you were to ask our government they would tell you that a basket of goods consumed (CPI) is rising modestly. How modest do these numbers appear to you?
Sugar and Corn? Those are luxury goods.
If the basic ingredients to food are skyrocketing, then prices of food will eventually have to keep pace which will directly hurt consumers.
Of the 853 ETF’s that I looked at, which unleveraged funds do you think had the greatest return over that same time period? It is not a trick question:
Are you noticing a theme?
My conclusion is simple: this time is NOT different. Commodity prices cannot go up forever and China will not continue to support the market regardless of prices. What is this “Bernanke Effect” doing to farmland prices? Well, according to a survey by Farmer’s National Company:
“non-irrigated crop land in central Kansas averaged $3,000 an acre, up 50 percent since June…
Crop prices have seen an extraordinary run since early July. A bushel of wheat priced about $4 a bushel on July 4 is now more than $8.50. Other crops have experienced similar increases.
As the land generates more income, it puts more cash in the pockets of the most likely buyers, nearby farmers. It also provides an attractive return for investors who then rent it out to farmers.
The result: Auctions are drawing twice the number of bidders as before, said area agents.”
As with all hot speculation, the commodity run will surely come to an end and will probably have repercussions for all financial markets. We should have learned by now that large financial dislocations tend to not occur in isolation.
SHELTER COSTS STILL DEFLATIONARY
by ilene - September 20th, 2010 4:48 pm
SHELTER COSTS STILL DEFLATIONARY
Courtesy of The Pragmatic Capitalist
Last Friday’s CPI report was hardly cause for concern with regards to the inflation outlook. The core year over year rate was astonishingly low at just 1.2% while the exclusion of food and energy actually reduced the year over year rate to just 1%. While the PPI reports are clearly showing higher rates of inflation, it’s also clear from the consumer inflation data that these costs are not getting passed along. This is just one more clear sign of weakness at the household sector.
While food and energy tend to catch the media spotlight (they are the most volatile and noticeable after all) they’re not the largest components of consumer costs even if you combine the two. Shelter costs are by far the largest input in the consumer cost equation. A look at last week’s data shows the deflationary tendencies in this data. Econoday highlighted this over the weekend:
“In the core, shelter costs continued to stand out—as weak. Just when you thought they could not get softer, they did. Shelter costs were flat in August after rising only 0.1 percent in each of the prior fourth months. Again, this reflects the weak housing market and also a sluggish travel market for lodging while away from home. Shelter costs are so week that on a year-ago basis they were down 0.5 percent in August.”
When we actually include housing costs in the equation we get a similar deflationary trend. Based on my data housing costs are just marginally deflationary at -0.25% year over year. I’ve taken the CPI data a step further and actually added the Case Shiller data. Since roughly 70% of Americans are homeowners, I replaced 2/3rds of the housing component in the CPI data with the house
The BLS has a relatively controversial way of calculating the housing component of the CPI – they use what is called owners equivalent rent (OER). This estimates what your house might rent for if you were so inclined. What’s misleading here is that the data doesn’t really reflect consumer costs and thus psychology. The last decade is a prime example. Rising home values have a wealth effect. Consumer
Monthly Inflation Update
by ilene - September 17th, 2010 4:36 pm
Monthly Inflation Update
Courtesy of Doug Short
The latest annualized rate is 1.15%.
The August 2010 Consumer Price Index for Urban Consumers (CPI-U) is 218.312. The annualized inflation rate computed from this number is 1.15%, which marks the tenth month of mild inflation after a streak of eight consecutive months of deflation. The annualized inflation rate is well below the 3.99% average since the end of World War II.
The Bureau of Labor Statistics (BLS) has compiled CPI data since 1913 (BLS historic data). Our chart now shows inflation back to 1872 by adding Warren and Pearson’s price index for the earlier years. The spliced series is available at Yale Professor Robert Shiller’s website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline. Click here for additional perspectives on inflation and the shrinking value of the dollar.
Here is a link to an overview of inflation, recessions and the S&P 500 since 1950.
Alternate Inflation Data
The latest annualized rate is 8.50%.
The chart below (click here for a larger version) includes an alternate look at inflation without the calculation modifications the 1980s and 1990s (Data from www.shadowstats.com).
As I’ve expressed elsewhere, my opinion is that the optimum method for calculating consumer prices is probably somewhere between the revised BLS method and the historic method preserved by Williams. However, government policy, the Federal Funds Rate, interest rates in general and decades of major business decisions have been fundamentally driven by the official BLS inflation data, not the alternate CPI. For this reason I think it best to take the alternate inflation data as a interesting, but not authoritative.
Freddie/Fannie Friday – Fat Forclosure Folios Forcasts Further Falls
by Phil - September 17th, 2010 7:56 am
![[FANREO]](http://sg.wsj.net/public/resources/images/MI-BF965_FANREO_NS_20100916200301.gif)
Our zombie GSE’s have now become the Nation’s biggest home sellers.
This could not come at a worse time as winter is always a poor time to sell homes, rates seem to have bottomed and there is no new stimulus (or new jobs, or immigration, or population growth) to spur demand. Yet, Freddie Mac and Fannie Mae now own more than 191,000 homes (as of June 30th), which is double where they were last year and they are still taking back homes faster than they can sell them as we move into the peak (we hope!) of the foreclosure cycle.
Once they take homes back, Fannie and Freddie must not only cover the utility bills and property taxes, but they are also relying on thousands of real-estate agents and contractors to rehabilitate homes, mow lawns and clean pools. Fannie took a $13 billion charge during the second quarter just on carrying costs for its properties.
If demand remains weak, Fannie and Freddie could face pressure to take more aggressive steps to hold homes off the market. Fannie, for example, is testing an effort in Chicago where it will rent vacant foreclosures rather than list them for sale. Such a "lease-and-hold" approach could make sense in certain markets where "you believe the supply will take a long time to absorb, but there’s going to be an increase in employment going forward," says Douglas Duncan, chief economist at Fannie Mae.
In yesterday’s post, we discussed the death of the housing market and that brought about a discussion in Member Chat about my February article where I pointed out that the math of home ownership no longer works for many Americans (I also showed 3 different ways you can shave $100,000 in payments off a $200,000 home loan so I do suggest reading it if you haven’t already). Mark McHugh of The Daily Bail has a nice update today where he does the math and contends that "a look behind the numbers shows home ownership to be a poor investment." Barry Rhitholtz found a chart from Reality Bubble Monitor that matches with my contention yesterday (that the US has likely bottomed) but points out that our "boom" economies in Australia and Canada (and China is about the same) have bubbles that are still likely to pop:
As I said yesterday, home prices are all about affordability of mortgages and, should we get into a rising rate environment, we could…
Morgan Stanley On Why The US Will Not Be Japan, And Why Treasuries Are Extremely Rich (Yet Pitches A 6:1 Hedge In Case Of Error)
by ilene - August 8th, 2010 9:14 pm
Morgan Stanley On Why The US Will Not Be Japan, And Why Treasuries Are Extremely Rich (Yet Pitches A 6:1 Deflation Hedge)
Courtesy of Tyler Durden
We previously presented a piece by SocGen’s Albert Edwards that claimed that there is nothing now but to sit back, relax, and watch as the US becomes another Japan, as asset prices tumble, gripped by the vortex of relentless deflation. Sure enough, the one biggest bear on Treasuries for the past year, Morgan Stanley, is quick to come out with a piece titled: "Are We Turning Japanese, We Don’t Think So." Of course, with the 10 Year trading at the tightest level in years, the 2 Year at record tights, and the firm’s all out bet on curve steepening an outright disaster, the question of just how much credibility the firm has left with clients is debatable.
Below is Jim Caron’s brief overview of why Edwards and all those who see a deflationary tide sweeping the US are wrong. Yet, in what seems a first, Morgan Stanley presents two possible trades for those with access to the CMS and swaption market, in the very off case, that deflation does ultimately win.
Morgan Stanley’s rebuttal of the "Japan is coming" case:
There are many arguments that suggest the US is going the way of Japan, and while UST yield valuations may appear expensive, a regime shift has occurred and we should use the deflation experience of Japan as a guideline. We respect this point of view, and our colleagues in Japan provide some compelling charts.
In Exhibit 3 we show how the richening in the JGB 5y led to a significant flattening of the curve. Ultimately CPI turned negative and Japan did in fact move into a period of deflation. It makes sense for the 5y to outperform, as investors believed in a low rate and inflation regime for an extended period. Most money is managed 5 years and in, which thus makes the 5y point so attractive in low rate regimes because it represents the greatest opportunity for money managers to own duration, yield and return. The same is happening in the US as the 5y point is richening extensively as investors seem to be surrendering to a low rate and low return environment. But this may be premature.
Note that it took ~2-years before the
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Albert Edwards Explains How The Leading Indicator Is Already Back Into Recession Territory And Why The Japan “Ice Age” Is Coming
by ilene - August 8th, 2010 6:54 pm
Albert Edwards Explains How The Leading Indicator Is Already Back Into Recession Territory And Why The Japan "Ice Age" Is Coming
Courtesy of Tyler Durden
Albert Edwards reverts to his favorite economic concept, the "Ice Age" in his latest commentary piece, presenting another piece in the puzzle of similarities between the Japanese experience and that which the US is currently going through. A.E. boldly goes where Goldman only recently has dared to tread, by claiming that he expects negative GDP – not in 2011, but by the end of this year. After all, if one looks beneath the headlines of even the current data set, it is not only the ECRI, but the US Coference Board’s Leading Index, Albert explains, that confirms that we are already in a recesion.
If one takes out the benefit of the steep yield curve as an input to the Leading Indicator metric, and a curve inversion physically impossible due to ZIRP and the zero bound already reaching out as far out as the 2 Year point (it appears the 2 Year may break below 0.5% this week), the result indicates that the US economy is already firmly in recession territory. Edwards explains further: "one of the key components for Conference Board leading indicator is the shape of the yield curve (10y-Fed Funds). This has been regularly adding 0.3-0.4% per month to the overall indicator, which is now falling mom! The simple fact is that with Fed Funds at zero, it is totally ridiculous to suggest there is any information content in the steep yield curve, which will now never predict a recession. Without this yield curve nonsense this key lead indicator is already predicting a recession."
All too obvious double dip aside, Edwards focuses on the disconnect between bonds and stocks, and synthesizes it as follows: "investors are finally accepting that what is going on in the West is indeed very similar to Japan a decade ago. For years my attempts to draw this parallel have been met with hoots of derision but finally the penny is dropping." The primary disconnect in asset classes as the Ice Age unravels, for those familiar with Edwards work, is the increasing shift away from stocks and into bonds, probably best summarized by the chart below comparing global bond and equity yields – note the increasing decoupling. This is prefaced as follows:…
Are we “Trending Towards Deflation” or in It?
by ilene - July 13th, 2010 10:41 am
Are we "Trending Towards Deflation" or in It?
Courtesy of Mish
Paul Krugman is worried we are Trending Toward Deflation.
Inflation has been falling, but how close are we to deflation? I found myself wondering that after observing John Makin’s combusting coiffure, his prediction that we might see deflation this year.
Here’s the thing: the usual way inflation is measured is by looking at the change from a year earlier. But if inflation is trending lower, that’s a lagging indicator — if prices have been falling for the past few months, but were rising before that, inflation over the past year will still be positive. On the other hand, monthly data are noisy. So what to do?
Well, a crude approach would be simply to fit a trend line through those noisy monthly numbers. Here’s what happens when you do this for the Cleveland Fed’s median consumer price inflation number. On the vertical axis is the monthly inflation at an annual rate, on the horizontal axis months with Jan. 2008=0:
What I take from this is that deflation isn’t some distant possibility — it’s already here by some measures, not far off by others. And of course there isn’t some magic boundary effect when you cross zero; falling inflation is raising real interest rates and making debt problems worse as we speak.
There is a second chart and further discussion in Krugman’s article.
The Rising Threat of Deflation
The article Krugman referred to is The Rising Threat of Deflation. Here are a few snips highlighting Makin’s and Krugman’s concern over prices.
U.S. year-over-year core inflation has dropped to 0.9 percent—its lowest level in forty-four years. The six-month annualized core consumer price index inflation level has dropped even closer to zero, at 0.4 percent. Europe’s year-over-year core inflation rate has fallen to 0.8 percent—the lowest level ever reported in the series that began in 1991. Heavily indebted Spain’s year-over-year core inflation rate is down to 0.1 percent. Ireland’s deflation rate is 2.7 percent. As commodity prices slip, inflation will become deflation globally in short order.
Meanwhile in Japan, while analysts were touting Japan’s first-quarter real growth rate of 5 percent, few bothered to notice that over the past year Japan’s gross domestic product (GDP) deflator had fallen 2.8 percent, reflecting an accelerating pace of deflation in a country where the price level has been falling
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Inflationistas Still Can’t ‘Produce The Body’
by ilene - June 17th, 2010 5:37 pm
Joint credit to Jake at Econompic Data and Joshua, The Reformed Broker:
Inflationistas Still Can’t ‘Produce The Body’
Courtesy of Joshua M Brown
May CPI and Core CPI were out this morning. As we all know, nothing is worth anything anymore. Until further notice and some change in trend, the discussion simply cannot be about inflation.
Sorry, Inflationistas. Nothing to see here just yet. Now if only the drop in cost of living expenditures could become a favorable topic of conversation to counterbalance all the moroseness and hand-wringing…
From EconomPic Data:
Source:
What Stinkin’ Inflation? (EconomPic Data)
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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...
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