by ilene - September 13th, 2010 9:09 pm
One of my favorite analysts is Albert Edwards of Societe Generale in London. Acerbic, witty and brilliant. Emphasis on brilliant. The fact that he is a Doppelganger for James Montier (who long time readers are well acquainted with) is a coincidence (or he would say vice versa). I only kind of have permission to forward this note to you, but better to ask forgiveness… So, this week he is our Outside the Box. And a short but good one he is.
I am in Amsterdam and it is late, but deadlines have no time line. Tomorrow more work on the book. It is getting close to the end. Most books are finished when the authors quit in disgust. How many edits can you do? I am close.
I wonder late at night, with maybe a few too many glasses of wine, why I feel like a book is so much more than an e-letter. Really? The last ten years of what I have written are on the archives. Good (ok, sometimes really good) is there. But some are an embarrassment. What was I thinking?
But somehow in my Old World brain, a book is more than a weekly letter. It is somehow more permanent than an “online” letter. Which may be archived forever. The book is “paper” and may be around for a few years. But the online version is here for a long time.
I know that is stupid. Really I do. But what is a 61 year old mind to do? A strange world we live in.
It is really time to hit the send button. More than you know! The conversation tonight has been too deep!
Your trying to figure out the purpose of life analyst,
Market still deluding itself that it can escape the inevitable dénouement
By Albert Edwards
The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar…
by ilene - July 17th, 2010 1:05 am
Courtesy of The Pragmatic Capitalist
The Chinese equity markets have continued to diverge from U.S. markets and U.S markets have continued to ignore the action in what I believe has become an important leading indicator of global economic growth. ISI Group’s Head of China Research, Don Straszheim, believes China is at risk of a substantial second half slow-down. The Chinese equity markets are clearly worried as well as the 10% rebound seen in other global
by ilene - July 14th, 2010 10:52 pm
Intel Corp (INTC) set the stage for what could have been a 7th consecutive bullish day for all 3 major indexes, but in the end the S&P closed just below the flat-line for the day, down 0.17 at 1095.2. There were two apparent reasons the market struggled in the face of such an upbeat report from INTC. The first was that financial stocks slumped all day, finishing down 0.9% as a group. STI, which we shorted in our last update, was down 2.75%. JPMorgan (JPM) announces its quarterly report tomorrow morning and that could be contributing to overall weakness in the financial sector. The second factor holding the market back today was the FOMC meeting minutes in which real GDP for 2010 was downgraded from 3.2-3.7% to 3.0-3.5%.
The S&P 500 is trading right along the 50 day Moving Average. Our Dark Horse Hedge portfolio is tilted short, 2:1. That is, our positions are weighted 67% short and 33% long, so while DHH is largely hedged, it has a net short exposure. We would change to a balanced Short/Long ratio, 1:1, if our models supported such a move. So far, they have not, even though they’re close.
In determining when a shift in "tilt" is appropriate, we apply a "hysteretic" model. Hysteresis refers to systems that have memory, where the effects of the current input (or stimulus) to the system are experienced with a certain memory for the previous input and a certain delay in reaction time. Hysteresis is defined as "the phenomenon exhibited by a system in which the reaction of the system to changes is dependent upon its past reactions to change" and as "the lag in response exhibited by a body in reacting to changes in the forces." Using a hysteretic formula, we look for more confirmation of a breakout than just breaking across a Moving Average on a given day.
Quantitative analysis involves a graduate level economics course to thoroughly explain, but that isn’t necessary for our purposes. The important thing to understand is that we take into consideration the direction of the movement across a Moving Average, and the support from other indicators such as…
by ilene - June 2nd, 2010 1:43 am
Courtesy of The Pragmatic Capitalist
“Individual investors held 50.9% of their portfolios in stocks and stock funds according to the May 2010 AAII Asset Allocation Survey. This is a 9.5 percentage-point drop from April and the smallest allocation to equities since May 2009. The historical average is 60%.
Bond and bond funds accounted for 25.5% of individual investor portfolios. This is the highest allocation to fixed income since the survey started in November 1990. The percentage of portfolio dollars held in bonds and bond funds rose 5.1 percentage points from April. The historical average is 15%.
Individual investors kept 23.6% of their portfolio dollars in cash, a 4.4 percentage point increase. The historical average is 25%.”
According to Charles Rotblut at AAII investors are focusing more on the return OF their capital than the return ONtheir capital:
“Individual investors placed a greater emphasis on return of capital last month because of the volatility in the stock markets. The movement of portfolio dollars out of equities and into bonds/bond funds and cash corresponds with the latest AAII Sentiment Survey, which showed bearish sentiment at 50.9%, the highest level of pessimism recorded since November 5, 2009. (Bearish sentiment is the expectation that stock prices will fall over the next six months.)”
Are small investors beginning to shun the equity markets? I think that’s highly doubtful as greed tends to be as American as apple pie, but this is a clear sign that investors are becoming less and less likely to leave their money in the
If the volatility in the business cycle has increased and increased (failing) government intervention is making the markets more recession prone then we could be on the verge of a renewed de-risking on Main Street. …
by ilene - March 24th, 2010 1:51 pm
Proof? Let’s see. (My comments in red.) – Ilene
The Stock Market Is Patterned — Here’s Proof
You don’t have to sift through the latest economic data as if they were tea leaves.
Courtesy of Elliott Wave International
This is an excerpt from Elliott Wave International’s free Club EWI resource, "What Can a Fractal Teach Me About the Stock Market?" by EWI’s president Robert Prechter.
In the 1930s, Ralph Nelson Elliott described the stock market as a fractal — an object that is similarly shaped at different scales. Scientists today recognize financial markets’ price records as fractals, but they presume them to be of the indefinite variety. Elliott found something different:
You see that each “wave” within the overall structure subdivides in a specific way. If the wave is heading in the same direction as the wave of one larger degree, then it subdivides into five waves. If the wave is heading in the opposite direction as the wave of one larger degree, then it subdivides into three waves (or a variation).
Understanding how the market progresses at all degrees of trend gives you an invaluable perspective. No longer do you have to sift through the latest economic data as if they were tea leaves. You gain a condensed view of the whole panorama of essential trends in human social mood and activity, as far back as the data can take you.
OK, now you try it. Figure 3-7 shows an actual price record. Does this record depict two, three, four or five completed waves? Based on your answer, what would you call for next?
My answer (having blinded myself to the rest) is that you could argue either three or four waves have been completed.
Let’s compare your answer with mine. From the simple idea that a bull market comprises five waves, The Elliott Wave Theorist in September 1982 called for the Dow to quintuple to nearly 4000 and on October 6 announced, “Super bull market underway!” The November 8 issue then graphed the forecast for the expected fifth wave up, as you can see in Figure 3-8.
As you can see, Elliott waves are clear not only in retrospect. They are often — particularly at turning points — quite clear in prospect.
(I don’t know that I’d call this clear proof, but it is a valuable tool to market analysis anyway.)
by ilene - February 18th, 2010 10:09 pm
Courtesy of Mish
The Fed has been talking about its "exit strategy" for quite some time. Few believed he would pull the trigger on anything soon. Yet, Bernanke, unexpectedly raised the discount rate headed into options expiration.
Please consider the Federal Reserve Discount Rate Announcement released after the market close on February 18, 2010.
The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.
Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities.
The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.
In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010. ….
The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC’s 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.
That move comes on the heels of St. Louis Fed President Hoenig saying policy was on an unsustainable course as noted in "Three Paths Forward" – Kansas City Fed on Current U.S. Fiscal Imbalance, Hyperinflation, Printing.
From Hoenig …
No Short Cuts
Finally, there are no short-cuts. We currently must adjust from a misallocation of resources. There is no way
by ilene - January 21st, 2010 1:13 pm
Pragcap turns more bearish in the face of proposed rules for reforming Wall Street. My highlights. – Ilene
Courtesy of The Pragmatic Capitalist
- President Obama isn’t taking the Scott Brown victory lightly. He has just announced some stunning measures to curb bank risk taking. The news is taking Wall Street (myself included) by surprise as stocks tank on the news. The measures appear to be an early move back towards the Glass-Steagall Act. Specifically, Obama said no banks will own hedge funds or private equity funds. The details are few at this time, but that is stunning, must sell stock news. We continue to believe the secular bear market is with us, and such policy action creates a sense of uncertainty that is simply staggering. I would use strength in the coming days and weeks of earnings season to reduce risk until some of these clouds clear. Stocks cannot and will not rise substantially when the government appears to be on the attack against Wall Street and that appears to be the only response from the White House after the Brown win. While this is likely a very positive measure in the long-run, it has the potential to cause a great deal of near-term volatility. The combination of uncertainty in the Eurozone, China’s liquidity restraints, and this new policy reform in the United States creates a three pronged reason to avoid owning stocks in the near-term. While I hate to sell into downturns it’s best to take the meager gains since the beginning of the year and look for a better entry point. Uncertainty is a markets worst friend and there is a growing abundance.
- Earnings continue to come in quite robust. Goldman Sachs crushed analysts estimates and Ebay reported a solid quarter last night. Unlike previous quarters, investors are largely ignoring the earnings
seasonas the above three macro themes dominate the headlines. A continuing concern is a lack of strong revenue growth. Corporations are still largely relying on cost cuts to generate their better than expected earnings growth.
- This morning’s data is compounding matters. Jobless claims spiked to 482K vs expectations of 440K and the Philly Fed surprised to the downside. A Labor Department analyst
by ilene - December 7th, 2009 9:47 pm
Courtesy of The Pragmatic Courtesy
David Rosenberg takes one more stab at explaining why the
1. For the time being, the equity
marketis going to have to contend with more chatter of the Fed’s exit strategy.
2. The market also faces a new reality. While employment stabilizing (maybe) is a good thing, it means the era of declining unit labour costs and margin expansion is behind us.
3. Market leadership is beginning to fade as seen by the receding advance-decline line on the big board.
4. Market complacency is a worry with the VIX index back down to 21.25. The good news is that insurance against a correction is priced about as low as it can go. Protection is cheap.
5. The WSJ (page C1) reports that not only have individual investors been selling into this last leg of the rally (then again, the S&P 500 has really done nothing for over six weeks), but pension funds have been rebalancing too.
6. Volume has declined markedly and has surpassed 4.7 billion shares on the NYSE just once in the past three weeks.
7. With the correlation between a weak greenback and a positive stock market above 90% over the past eight months (versus zero over the past 30 years), a countertrend rally in the U.S. dollar would likely coincide with sputtering equity prices.
8. The Dow transports/utilities ratio has turned in a classic triple-top and this is a signpost to get defensive.
9. The latest Investors Intelligence poll shows the bull camp at 50%; the bear share at a mere 16.7%. In other words, there are three bulls for every bear. This is negative from a contrary perspective (another sign of complacency).
10. Corporate bond yields have stopped narrowing over the past three months and have actually recently shown modest signs of an upward bias.
While David notes 10 very solid reasons for the market to be under pressure in the coming months I think he fails to note the positive (note that I did not say strong) underlying earnings picture that exists. This rally has not been on solid fundamentals and any signs of real strong economic growth, but rather an improvement…
by ilene - November 10th, 2009 7:43 am
Courtesy of Karl Denninger at The Market Ticker
The U.S. currency dropped against 12 of its 16 major counterparts as the International Monetary Fund said traders are probably using the dollar to fund so-called carry trades around the world and it may still be overvalued.
I hope everyone here in The United States takes a moment to understand what this means. Let me lay it out for you:
When the global economy truly recovers oil will skyrocket up to or beyond the $150 where it was in late 2008. If the dollar is indeed still "overvalued" and going to 40 as many technicians predict, oil will likely reach $300 a barrel. This will in turn drive gasoline prices north of $6, heating oil will reach $7-8/gallon, and diesel will be commensurate with heating oil.
This will in turn decimate the trucking industry. Now you know why Buffett bought BNI. Many things he may be, but dumb isn’t one of them. Trucks will of course remain for terminal-to-door deliveries but for long-haul they will simply be uneconomic. Those who currently are employed in this business will lose their jobs. All of them.
The middle class will be decimated. Those who live in suburbia, who are primarily middle-class Americans, will find themselves faced with commute costs that are double or more what they pay now. Those in the middle class who live in the Northeast where heating oil is the primary fuel for winter, where natural gas infrastructure does not exist to replace heating oil, will find themselves choosing between heat and food in large numbers.
What’s far worse is that all carry trades eventually unwind and in the history of the markets I have never seen it happen in an "orderly" fashion. Japan witnessed the destruction of the Yen Carry last year and it was horrific. We will see it in the future – exactly when cannot be predicted with certainty, but that it will happen in an uncontrolled fashion will be. While this "unwind" will bring relief from sky-high commodity prices it will do so at the expense of asset prices, which will collapse.
by Zero Hedge - November 4th, 2009 9:22 am
Courtesy of Tyler Durden
The Goldman 10-Q is out, providing numerous interesting datapoints for those willing to scour through them. The key one: Goldman lost money on just one trading day in Q3, making money on all the other 64. As a reminder, even in Q2 Goldman lost money on two trading days. The statistical probability distribution of 1 out of 65 is something that not the SEC, but Richard Feynman should be looking into, as Goldman Sachs, after rewriting the lass of risk/return, is now set to redefine normal distributions and other Statistics 101 concepts.
Looking at Goldman’s risk profile, total VaR presumably declined from $221 to $189: this was due to declines in Interest Rates and Equity Prices VaRs, coupled with an increase in Currency Rates and, more importantly, Commodity Prices. Notably, the "diversification effect" of numbing VaR provided about a ($93) benefit to reducing overall risk. One wonders what will happen to Goldman’s VaR when the dollar carry trade bandwagon hits a wall and death and destruction become pervasive.
And an indication of just how much of a hedge fund Goldman has become instead of a client servicer, the firm’s Equities Commissions revenue for the quarter dropped to $930 million from $1.2 billion YoY, while prop Equities Trading skyrocketed from $354 million to $1.8 billion YoY! And just in case you were wondering someone, somewhere was motivated to destroy Fixed Income powerhouse Lehman and Bear, look no further than Goldman’s Fixed Income, Currency and Commodities which did a gentle jump from $1.6 billion in Q3 2008 to $6 billion last quarter. And that explains all you need to know about motivations and backstops.
More to come.