In response to readers’ requests, I disclose my own amateur’s Investment Strategy for Q1 2011: cash is king, and the U.S. dollar looks good simply because almost everyone expects it to collapse.
Despite my oft-avowed amateur-market-observer status, readers often ask me for advice or opinions on where to put their capital. This is not advice (please read the HUGE GIANT BIG FAT DISCLAIMER below), it is a disclosure of my own personal opinion, what we might call "one investment strategy of many possible investment strategies" for the first quarter of 2011: cash, baby, cash all the way.
Why am I in cash? Because I don’t trust the parallel rallies, and I am extremely skeptical of the various "stories" which are driving the rallies. Why am I skeptical? Because everybody and their sister has bought into the stories, and a one-sided trade is rarely the winning one.
Yes, it’s my contrarian nature: when everyone is a believer in a "story" that is too good to be true, then I become skeptical. This often gets me in trouble. When everyone was buying GM at $50, I was shorting it. When everyone was buying Fannie Mae at $60, I was shorting it (via puts). Both GM and FNM were obviously, painfully insolvent, but it took practically forever for reality to intrude on the fantasy/narrative that each firm was a "solid blue chip" investment with numerous analyst recommendations. In the meantime, I lost money treading water for quarter after quarter.
So even though the market is clearly top-heavy, the short-side trade may yet be ground down by the Fed’s prop-job and the Wall Street/Central State partnership’s desperate desire to use a rising stock market as a propaganda proxy for the "recovery."
(Hey, just borrow and squander roughly 13% of GDP, year after year after year (roughly 45% of the entire Federal budget), and you might stimulate a modest "recovery," too.)
So let’s examine each of the "stories" driving the rallies.
1. The global recovery is solid, and Central State stimulus and quantitative easing will keep growth rising and interest rates low. This narrative drives capital into "risk assets," i.e. stock markets, commodities, FX carry trades, Chinese real estate, junk bonds, etc.
Oh boy is 2011 going to be an exciting year! Some things that I think might happen:
-Volatility is going up across the board. If you have the stomach for the swings that are coming across all markets there is a ton of money to be made; balls and timing are all that are necessary. The markets will create dozens of opportunities to make and lose.
-There will be 50 days with a swing in the S&P greater than 1%. There will be 10 days where gold swings $50. There will be two days with a drop greater than 100 bucks. Most of the big moves will be down moves. Bonds will not be spared the volatility.
-Gold will be higher a year from now but off its peak. At some time in the fall, gold will be near 1,800 and the New York Times will do a front-page story that gold is on its way to 2,000. That will be the high point of the year.
-Copper will continue to rise. This metal will benefit as the poor man’s gold. Why buy an ounce of something for $1,600 when you can have a whole pound of something else for only $5? The logic is compelling only because there is no logic. Increasingly, it will become understood that money does not hold value. Copper will do a better job of storing value then a Treasury Bond.
-The US bond market is in for a heck of a year. The 30-year will trade at BOTH 3% and 5%. Higher rates will come early in the year, then the deflation trade will come back into vogue.
-Spain will be the next sovereign debtor that falls prey to the market. This will happen before the end of the 1st Q. The package to bail them out will exceed $500b. This will exhaust the EU resources. There will be very high expectations that contagion will then move to Italy. That will not happen in 2011 (2012?) The European Central Bank will step up to the table (finally) and support the market for Italy. Sometime between March and June Italian bonds will be a great buy.
-The IMF will contribute $125b to the Spanish bailout. The US portion
William Black of UMKC believes the Euro could unravel in the coming 3-4 years as the political tension continues to increase and ultimately creates a divide between the core and periphery. Black says the economies on the periphery are likely to remain very weak and will lead to civil unrest and political overhaul. In the end the strains will be too much for the region to overcome.
Black also discusses the imbalances in China and why the Chinese are likely to experience their own crisis in the coming years. (Video here.)
This morning’s AAII sentiment survey is consistent with just about every other sentiment reading of late – investors are wildly confident that stocks will be higher in the coming 6 months. The optimism is almost near universal. The following chart tells the story of this bi-polar market. On August 26th, just days before the market bottom, the bullish sentiment hit just 20.7% – no one thought stocks were set to rise. Now, after a 20% rise in equities the consensus is uniformly positive.
Charles Rotblut of AAII elaborated on this morning’s results:
“Bullish sentiment, expectations that stock prices will rise over the next six months, rose 13.1 percentage points to 63.3% in the latest AAII Sentiment Survey. This is the highest level of optimism since November 18, 2004. This is also the 16th consecutive week that bullish sentiment has been above its historical average of 31%, the longest such streak since 2004.
Neutral sentiment, expectations that stock prices will remain essentially flat, declined 2.3 percentage points to 20.3%. This is a six-week low for neutral sentiment and the 20th consecutive week that neutral sentiment has been below its historical average of 31%.
Bearish sentiment, expectations that stock prices will fall over the next six months, fell 10.7 percentage points to 16.4%. This is the lowest level of pessimism since July 14, 2005. It is also the 11th time in the past 12 weeks that bearish sentiment has been below its historical average 30%.
The spread between bullish and bearish sentiment is currently at +46.9 points. This is the most positive bull-bear spread since April 15, 2004, when it reached +50.0 points. A wider differential was recorded on March 5, 2009, when the bull-bear spread fell to -51.4 points.
Bullish sentiment is more than two standard deviations from its historical mean, making it a statistical outlier. In simpler terms, bullish sentiment is running red hot. In fact, the current reading is the 18th highest since the survey started in 1987. Higher readings were recorded in 1987, 2000, 2001, 2003 and 2004. Such high levels of optimism have been correlated with a decline in the S&P 500 over the proceeding 24 weeks, though the magnitude of the declines have varied. A spreadsheet showing all of the survey’s historical data is attached.”
A year after Charles Biderman’s provocative post first appeared on Zero Hedge, in which he asked just who is doing all the buying of stocks as the money was obviously not coming from retail investors (and came up with one very notable suggestion), today Maria Bartiromo invited the TrimTabs head once again (conveniently in CNBC’s lowest rated show, during Christmas Eve eve, at a time when perhaps 5 people would be watching) in an interview which disclosed that after more than a year of searching, Biderman still has no idea who actually buying. In response to Bartiromo’s question if the retail investor, who left after the flash crash (thank you SEC), Biderman responds what every Zero Hedger has known for 33 weeks: "Retail investors are not coming back to the US. Those investors that are investing are buying global equities and are buying commodities. We are seeing lots money going into commodity ETF funds: gold, silver…" and the even more unpleasant summation: "individuals have been selling, companies are net selling, insider selling and new offerings are swamping any buyback and any cash M&A activity since QE 2 was announced. Pension funds and hedge funds don’t really have that much cash to invest. So what nobody’s asking is what happens when QE 2 stops: if the only buyer is the Fed, and the Fed stops buying, I don’t know what is going to happen...When I was on your show a year ago I was saying the same thing: we can’t figure out who is doing the buying it has to be the government, and people said I was nuts. Now the government is admitting it is rigging the market." Cue Bartiromo jaw dropping.
As for the simple math of where the money is actually going:
"Money flows come out of income, take home pay of everybody plus money that came from real estate is down about $1 trillion a year. It peaked in the 3rd quarter of 2008, at $7 trillion, that’s take home pay for everybody who pays taxes plus the money that came from real estate. It has now bottomed at $5.9 trillion. We are still down $1.1 trillion in money that people have to spend each year, that 16%. And some of the money that is leaving equity markets we think is going to pay bills."
When confronted with a balance sheet recession the math regarding economic growth gets relatively simple – either the government spends in times of below trend private sector spending or the economy contracts. For several years now I have maintained that we are in a balance sheet recession – an unusual recession caused by excessive private sector debt. Although this balance sheet recession created the risk of prolonged weakness I have been quick to dismiss the persistent discussions that compare this to anything close to a second great depression - as I showed in 2009 the comparisons were always ridiculous. The much closer precedent was Japan, where the economy actually expanded throughout their balance sheet recession, but a persistent malaise left a dark cloud over the private sector as they paid down debts.
Over the last year I have consistently expressed concerns that the USA was going to suffer the same fate as Japan, which consistently scared itself into recession due to austerity measures. At the time, most pundits were comparing us to Greece and attempting to scare us into thinking that the USA was bankrupt, on the verge of hyperinflation and general doom. I wrote several negative articles in 2009 & 2010 berating public officials who said the USA was going bankrupt and that the deficit was at risk of quickly turning us into Greece, Weimar or Zimbabwe. Nothing could have been farther from the truth. The inflationists, defaultistas and other fear mongerers have been wrong in nearly every aspect of their arguments about the US economy.
US government default was never on the table, the bond vigilantes were not just taking a nap and now, with the passage of the most recent stimulus bill it’s likely that we’ve (at least temporarily) sidestepped the economic decline that was likely to accompany a decline in government spending. Richard Koo, however, believes we are repeating the mistakes of our past. In a recent strategy note he said:
“The situation in Europe is no different from that in the US. I therefore have to conclude that the western nations have learned nothing from Japan’s lessons and are likely to repeat its mistakes.”
I have to disagree here. The most important factor impacting economic growth in the prior year…
I think this day chart of the 30 year says it all. After the very stinky NFP numbers the bond made a predictable jump higher. But it wasn’t long after that the air started leaking out and the bond closed on the lows.
Why the stinky price action when we get a big miss on NFP number? QE and the talk of stimulus done it. The numbers were so bad that by 9:30 talking heads and pundits concluded that the tax cuts were coming and we might just get a break on Social Security payroll deductions any day. Forget about restraining QE-2; the talk went straight into high gear with the only question; “How big might QE-3 be?”
So with that gibberish in mind bonds headed to the crapper while gold set new highs. The confirm that QE is now driving bonds lower came late in the day when there was a convenient leak of a Sunday TV appearance by Ben B. The only quote leaked was: “We might do more”. Stocks liked that talk and ended up; while the bonds ratcheted down another notch.
I am pleased that the market has made the connection that more QE and more stimulus is bad for bonds. The market is the only discipline left that may slow the insanity creeping over D.C. When market forces turn on the “New Monetarism” and shut the door on the insanity, the policies will change. Until they get hit hard over the head the Fed will continue to print. We are getting closer by the day. Consider this graph of the long bond since QE-2 was announced:
Long rates have backed up by 40 bp in just the past month. The exact opposite reaction that ‘the Bernank’ wants. How deflationary is this increase in interest rates? Mildly so. My guess is that the impact of rising rates exactly offsets the stimulative benefit of keeping short rates at historic lows. Yes, more debt is financed short term than long, but a back up in mortgage rates and the increase in long term fixed rate capital for municipalities and corporations will offset any benefits from ZIRP.
On the question(s): “Will interest rates fall from the current levels of ~3% for ten-year
Reality briefly penetrated the fog of appearance this morning as US Non-Farm Payrolls came in at 39,000, a significant miss from the expected 150,000. Unemployment ticked up higher from 9.5% to 9.8%.
An analysis of the data showed a slight indication that the recovery has stuttered and stopped, but it will take a few more months data to confirm this.
The adjustments seems to dampen the potential headline number but are within bounds of the prior six years. The Birth Death Model actually came in negative which was a bit of an outlier but certainly a refreshing nod to reality.
Looking at the historical Oct-Nov growth in the unadjusted numbers for the past six years shows a clear downward trend from the high in November 2005, with the low coming in November 2008. The growth as it stands in 2010 is roughly the same as it was in 2004, although the 2010 numbers will likely be revised in the next two reports.
Stocks and the Dollar initially plunged on the news while gold rallied threatening to take out psychological resistance at 1400. I guess we now know why gold and silver were obviously hit by sharp manipulative selling yesterday, in order to take the prices down below breakout levels. Be on watch for shenanigans in the markets today, especially the SP futures markets.
There can be no sustained economic recovery until the median wage and employment improve and this requires specific reforms and programs to repair the damage caused by twenty years of irresponsible monetary, regulatory, and fiscal policy and a growing imbalance in the balance sheets of the middle class. Repairing the status quo merely restores the unsustainable.
The Fed’s approach to quantitative easing is nothing more than an adjunct to the trickle down, supply-side approach. Provide money to the banks and the people will borrow; provide subsidies and tax cuts to those who have the most already and the condition of the many will improve. Trickle down, supply side, and efficient markets hypothesis are at best mistaken economic theories, and at worst coldly calculated propaganda by the same people who co-opted the political process and brought forward the control frauds that led to the financial crisis.
Now that his relentless skepticism, following today’s abysmal data release (orchestrated or not), has been fully validated, much to the chagrin of top ticking flippers such as Goldman and other sundry blog sites, Rosenberg comes out with a must read essay on the state of the economy now versus later, entitled very appropriately "Hope-Based Rally Now, Shock Therapy Later." This is certainly one Rosie’s better pieces out there and a must read for those who refuse to be led by the propaganda machine into believing lies and manipulation: "This has become such a hope-based market that the Dow jumped over 100 points earlier this week on a Reuters news story in Brussels, which reported that the U.S.A. would back an even greater financial commitment to Europe! Quick — get Sarah Palin on the line." Incidentally, if there is any confusion where Zero Hedge stands, we suggest rereading our post from last night which made it all too clear that we still refuse to drink the hopium (and self-aggrandizement) that seems to have gotten straight to the head of such a broad (literally and metaphorically) cross-section of the financial punditry.
HOPE-BASED RALLY NOW, SHOCK THERAPY LATER
I’m on the way back from a two-day business trip in London, U.K. with a few of my Gluskin Sheff colleagues. It’s been a good year-and-a-half since I was last there (the next best thing to old New York), and the first time I can remember it snowing this early — a few centimetres almost shut down the city (enough to make a Torontonian chuckle).
While we continue to refrain from hyperventilating as others throw in the towel, it is completely understandable that investor sentiment has improved. Moreover, the incoming economic data, at least when benchmarked against the double-dip fears that prevailed in July and August, currently look “green shooty” in nature. But is the U.S. economy really out of the woods? Hardly.
The recovery is obviously still so fragile that the Fed felt the need to expand its balance sheet by an additional…
Continuing on the theme of stock market prices vs. real fundamental value, Mish writes: "This is what happens when investors chase "relative value" instead of asking if there is any real value at all…[This] applies to those chasing the stock market at these lofty levels on the basis ‘stocks are cheap relative to treasuries’ or some other nonsensical reason to justify valuations." – Ilene
Curve Watchers Anonymous notes a continuing bearish flattening of the yield curve as shown in the following chart.
click on chart for sharper image
A bearish flattening occurs when the curve tightens with yields generally rising. Conversely, a bullish flattening occurs when the curve tightens with yields generally falling.
Since early November, 5-year treasury yields have risen about 60 basis point, 10-year yields about 45 basis points, and 30-year treasury yields have risen perhaps 5 basis points.
Once again we can see the results in today’s action with thanks to Bloomberg.
Buy the Rumor Sell the News
Note the continued unwind of the "sure-thing" treasury bet, with the Fed concentrating its purchases in the 3-to-7-year range hoping to drive down rates, and everyone front-running the trade. That trade is now unwinding.
Clearly this reaction is not what Bernanke wanted at all.
Reflections on "Relative Value"
Check out that .81 yield on 3-year treasuries. On October 18, investors scarfed up $750 million of 3-year Walmart Bonds yielding .75% for the stupid reason they yielded more than treasuries. Now treasuries are yielding more.
This is what happens when investors chase "relative value" instead of asking if there is any real value at all.
The same idea applies to those chasing the stock market at these lofty levels on the basis "stocks are cheap relative to treasuries" or some other nonsensical reason to justify valuations.
The S&P 500 got off to weak start and, after retracing a modest morning rally, spent most of the day in the shallow red with an intraday low of 0.63%. But in the last seven minutes of trading, the index recovered enough to a make a small gain of 0.14%. This is the fourth advance, the first was Monday's 1.60 surge, but the last three have ranged from 0.05% to 0.17% with today's close near the high of the miserly three-day series.
The index is now up 5.02% for 2012, which is 6.93% off the interim closing high.
From an intermediate perspective, the S&P 500 is 95.2% above the March 2009 closing low and 15.6% below the nominal all-time high of October 2007.
Below are two charts of the index, with and without the 50 and 200-day moving averages.
And it was shaping up to be such a good year. According to the latest just released HSBC hedge fund performance update, increasingly more funds are starting to lose it, certainly for the month, but increasingly more for the year. How many LPs will be eager to keep on paying 2% management fees (forget performance) to funds who at best are long AAPL (at least 226 of them), and at worst have underperformed the S&P, for the second year in a row, by anywhere from 5 to 15%?
TIF - Tiffany & Co., Inc. – A surprise earnings miss and a reduced full-year profit and sales forecast from luxury jewelry retailer, Tiffany & Co., took some of the luster out of its shares today, with the stock trading down 8.5% at $56.55 as of 11:50 a.m. in New York. Options activity on Tiffany this morning suggests mixed sentiment on the st...
RealNetworks, Inc. (NASDAQ: RNWK) today announced that it has reached an agreement with the Washington State Attorney General over discontinued e-commerce practices. In accordance with the settlement agreement, RealNetworks has committed to:
Discontinuing the use of pre-checked boxes for purchases of RealNetworks subscription products; Spelling out more clearly the material terms of RealNetworks product offerings; Offering online cancellation of subscription offerings; Enhancing RealNetworks customer support guidelines regarding cancellation. Statement from Thomas Nielsen, President & CEO of RealNetworks:
"About two years ago, the Washington State Attorney General's Office contacted us regarding concerns they had with some of our e-commerce practices.
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...
First we'll go to the technicals. Back in mid April I had opined a 'bear flag' formation was being created. [Apr 17, 2012: Potential Bear Flag Forming] But the market being the difficult beast it is, head faked everyone and rather than a break down from said flag it first went UP and nearly touched yearly highs. This caused everyone to think the bear flag had failed…. only to lead to a horrid May in the market. Generally a bear flag will resolve relatively quickly but the longer...
Despite the fact that U.S. equities are well-positioned and well-supported to go up, once again it is the headlines out of Europe—especially Greece—that are scaring off investors. Some are saying that it is now likely (and even desirable) that Greece will default on all its sovereign debt, withdraw from the euro, and severely devalue its domestic currency (Drachma?). This will allow them to operate a balanced budget while pumping cash into growth initiatives, rather than suffer the ravages of Germany-mandated austerity.
Some say, so what? Greece makes up only about 2% of the Eurozone’s overall economy. Nevertheless, you might say that t...
Markets died and then rallied to flat again as European leaders “prepared contingencies” for a possible Grexit
Markets died hard and fast earlier today as major indexes registered as much as 1.5% of losses after news that Euro zone officials were unofficially “preparing contingencies” for a Greek exit from the Euro. Unofficial statements were not enough to keep markets down however, as major indexes rallied back to flat levels by the end of the day.
So the world continues to wait on Europe, as the SPDR S&P 500 ETF (NYSEACA:SPY) gained .05%, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:...
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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.
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Here is this week's test version of the latest newsletter. We apologize for some formatting issues that need to be worked out. Please tell us what you think.
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In this article, please revisit an article written two years ago titled, "The Calm Before the Storm." This article focused on the patent cliff that was looming in the pharmaceutical industry, that was later picked up by the New York Times and several other bloggers! Subsequent articles were written about big pharma company's revenue streams, and the pros and cons of of their later stage pipelines. Other articles have also attempted to identify smaller biotechs with the potential to reap big reward...
My last weekend update is dated from January 30 so after a long hiatus, here is an update of our virtual portfolio. Since the last update, we have closed the AA Money portfolio due to a lack of enthusiasm (and activity) and I have stopped tracking the FAS strangle as the low VIX makes it hard to get rewarded for the risk! But we have added a small $5KP virtual portfolio which does not use any margin.
FAS Money
We have had to recover from a big move up by FAS and a low VIX which keeps option prices low. But the portfolio has gaine about 10% since the last update.
Last update P&L - $5499.00
IWM Money
Not a lot of activity in this portfolio where the main focus is on the large IWM BCS. But the portfolio has grown over 20% since the last update.
Last update P&L - $1998.00
$5KP Portfolio
This is the virtual portfolio that replaced the AA Money portfolio. It does not use margin and we will keep holdings under $5K.
AAPL $50K P...
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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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
(