Absolute Capital

Greed in the India Equity Markets

2010-07-13T05:57:00.000-04:00

Infosys reported earnings that missed estimates today. In addition the industrial production numbers came in at around 11% while the market and analysts were expecting 15%.

Other signs are also beginning to appear that the Indian economy is slowing down. Obviously this is a case of glass half full or half empty. The Indian stock market has avoided the doldrums faced by U.S., European and Chinese markets and has performed relatively better compared to these markets.

However, I see today's news out of Infosys as a sign that we are witnessing the exporting of a crisis as we have in the past. In addition, BMW Audi and other German exporters are hiring due to an unexpected rise in demand. This is exactly what was forecast to happen, the Europeans are exporting their recession to the Asian countries.

The Indian export model cannot survive a 20% devaluation of the Euro relative to the local currency. The Indian economy has already started decelerating. It is only a matter of time before the stock market acknowledges this.

The market can remain oblivious to bad news for longer than your account can stay liquid. Making money in the market requires patience, or a microphone in the offices of Goldman Sachs and the Fed.

Today's Indian market is a product of greed by investors that are jumping back in (capitulating) as they see 18000 on the index and fear being left out. Investing based on greed and fear usually results in losses. This time will be no different. Now is not the time to be investing in equities.

A Massive Rounding Top in the Indian Stock Market

2010-07-06T04:49:00.000-04:00

From a technical perspective the Indian Stock Market is building a massive rounding top which ties in well with the sentiment prevailing in the market.

We are going to spend the next few years going down. Each time the market looks like it is off to the races, investors will jump in and subsequently get killed. It's going to be a very long decline.

Every time the bottoms and rallies, people are going to say "OK, that's enough; it's over." But it won't be over. It's just going to be a long, long process. It will take a long time for Indian optimism to break down and reality to set in that the Indian story is closely linked, like every other country now, to global growth.

Optimism should actually remain dominant through the next two years and even as prices will be edging lower, most people are going to think it's a buy, and you shouldn't get out of your stocks, and recovery is just around the corner, probably for the next three years. And then, for the final half of the cycle, the final three years, that's when you'll get the capitulation phase when everyone finally gives up.

This is a non consensus view, as today the prevailing sentiment in the market is strongly optimistic.

Traxis Partners - Getting It Wrong.. Consistently - Perfect Contrary Indicators

2010-07-06T04:35:00.000-04:00

In the summer of 2008, many of you may not remember this, Cyrille Moulle Bertaux of Traxis Partners came out with a WSJ article telling us that housing had bottomed and he had charts and data and analyses that convinced Traxis that the bottom in housing and the market was near.

Barton Biggs was consistently bullish through S&P 880 and the market bottomed at 666.

Then in May of this year, we had Barton Biggs on Bloomberg when the S&P was around 1180 telling us that the economic recovery was strong and he saw another 15% upside in the markets.

As more of these bull market gurus fall, all it does is convince me that the entire pay structure for fund managers and Wall Street is skewed and this will be corrected before all is said and done.

Less than 1% of these guys has any skill. The overwhelming majority are idiots and clueless about the markets and should not be managing money.

The only bigger idiots are the institutions that buy into their pitches and invest with them.

Barton made his name with the bull market of the 80s. What is it that they say, do not confuse a bull market with brains?

Interestingly, Charles Reinhardt of Morgan Stanley is another uber bull equity whore that was predicting a multi year bull market at precisely the top on the S&P 500 in May.

Wall Street has truly become a wasteland and is being exposed for what it is - a bunch of talent less over paid back stabbers that will do anything to make a buck.

You would do well to ignore ALL advice you receive from investment companies, whether in the U.S. or India.

A Bubble In Optimism While the World Is Sinking

2010-07-02T02:27:00.000-04:00

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We are bombarded from all corners of the country, the media, the television, the neighbors, the internet about how India's growth is unstoppable.

The World Is Flat is a classic and bible of business. Business titles about management, creativity, success dominate bookstore displays. Thomas Friedman is the God of Business in a country that is comfortable with many Gods. Consensus thinking rules and to be skeptical is akin to being unpatriotic. It is a reasonable and understandable sentiment pervading the country.

Indians spent 50 years of being mauled by government policies that promoted corruption while suppressing the entrepreneurial spirit of the people. India is finally an arguably open market.

The populace is bought into the growth story. As with all bubbles, this one will only be evident after the fact. Property prices have risen almost a 100 fold in many instances. Not 100%, a 100 fold. Yet the prevailing sentiment is that property prices will continue to rise. An apartment in Gurgaon costs roughly $400,000 which would be enough these days to buy a mansion on the ocean in California. Prices in India are no longer cheaper than the rest of the world. Purchasing power parity has arrived for goods. Compensation however is not keeping up. Average salaries still hover under $25,000 a year for all except the businessman and higher level corporate executive.

India's success came about as a result of India's cost advantages and economic reform. Economic reforms continue but the cost advantages are starting to disappear. Companies are now turning to villages to find cheap sources of capital. But incremental business on the margin is being lost to the Phillipines and South America, Romania.

No country is an island. Particularly not today. Europe is struggling with massive debt and potential sovereign defaults. The U.S. is not far behind but benefits from the ability to print unlimited amounts of the world's reserve currency and have debts denominated in dollars. Yet I am told that Africa and islands in the southeast are growing and flourishing and will pick up the slack.

The most worrisome aspect is that Europe and the U.S. - the major markets for Indian exports - are in a deflationary vortex and a double dip recession is likely in the cards the second half of this year. Europe has had a devaluation of its currency by around 20% which is another way of saying Indian exports just got 20% more expensive to that region. China is slowing down dramatically as it is becoming apparent to the rest of the world that the growth story there was really a bubble that owes its origins to the now moribund U.S. consumer.

Worry not, I am told. Government spending and domestic demand will pick up the slack. Unfortunately, the lesson of the past 2 years from the U.S. and countless other countries over decades is that government spending is rarely an efficient use of capital and its effects are temporary and usually not multiplicative. Much depends on the monsoon and optimism about the monsoon is justified by the weather forecasters, which may be the only profession with predictive powers worse than those of economists.

Investing is about the future, not the past. The market already recognizes the growth of the Indian market over the past few years and it is priced in the valuation of stocks. The future however seems far more doubtful.

Japan was anointed the new superpower before a dramatic 20 year decline that continues. The Tiger economies were dominant in the 1990s and anointed kings untill a dramatic collapse in 1997-1998. China was anointed the next heir to the throne but the fall from the throne looks to be quite nasty. It is India's turn. Will India deliver where others have failed. The consensus thinks so. The consensus is usually wrong.

Investment in stocks NOT a must for a complete and balanced portfolio

2010-06-30T07:09:00.000-04:00

The Economic Times reports today

Investment in stocks must for a complete and balanced portfolio
'If you really want your money to grow - stocks is the only way to go'- Haven't you heard this umpteen times. Well, it holds true every time.

As compared to fixed deposits, investments in equity will pay 26.5 per cent higher returns in 5 years. Even for a longer term, investment in stocks pay higher returns even in comparison to real estate and gold.

Investments in equity WILL? pay 26.5% higher returns in 5 years? Well there you have it... Economic Times India writers know exactly what equity market returns will be in 5 years. And if they know what equities are going to do, why are they writing newspaper articles, they should be hedge fund managers.

They trot out Infosys and Tata Steels. Tata Steels share price performance is shown above. What if you were unfortunate enough to have bought tin 2006 and sold in fear in 2009? You would have a significant loss!

That is the issue that unsuspecting investors in India are learning for themselves. Stop listening to the mutual fund industry marketing buzz and start being wise investors.

There is a time to buy equities and when that time comes, I will invest agressively. Today is not that time.
Success in the markets requires patience and waiting for the fat pitch. Investors entering the market today are likely going to be disappointed as opposed to investing in secure investments.

Management Hubris - India Decoupling Stock Market Will Be A Myth

2010-06-29T06:17:00.000-04:00

How ironic that HDFC's Aditya Puri's article prints today just when the China market is down roughly 5%.

Here is the link to HDFC Aditya Puri article "Decoupling is set to become a reality soon" a self serving media spin article by the head of HDFC Bank

I am going to deconstruct his comments. Mr. Puri makes the argument - correctly - that European and American economies are struggling and the world has changed structurally. True, no arguments there.

The financial markets, however, are slow learners, creatures of habit, and therefore, create confusion in the short-term or transition (defined as volatility) period.

Really? I would love to know when the markets corrected in Nov 2007 they foresaw a correction ahead in 2008. I do not know if Mr. Puri made any such calls and protected his stockholders. Fact is that yes, markets do forecast 9 of the past 5 recessions but they usually are smarter in sum than any one individual. Anyone that considers himself smarter than the market is suffering from a God complex and has an ego problem.

The forecast GDP growth rate during the next 3-5 years for the following countries are (%): US: 1.8; Europe: 0.8; East Asia: 8; China: 8.5; India: 8. This reflects the level of structural adjustments required in the Western countries in terms of asset bubbles, financial contagion, stimulus, exchange rate, etc.

I am stunned that any corporate executive would be out there spewing forecast statistics, that too from economists? Economists forecasting record for this cycle and most cycles in my lifetime has been dismal. The fact that economists are forecasting 8% growth rates for Asia is meaningless.

These same economists were forecasting similar forecasts for Japan in the late 80s and the Tiger economies in the mid 90s.

Besides, investors seeking higher returns on their investment will flock to Asia; this will result in a flood of capital and Asian currencies will see a phase of secular rise against their G-7 counterparts. This could erode export competitiveness, and economies within Asia such as India and Indonesia that are more internally focused, will outperform the others.

Yes, investors will probably flock to Asia to seek higher returns. However, in a bear market, there are no safe havens. Just as almost every company benefited during the bull market from global market expansion, what I am seeing today is that there is deflation in Europe and the U.S. and wages are falling dramatically in these countries while wages are rising and inflation is rising in India and China.

Further, Europe has exported a 20% decline in its currency, the net result of which will be a deterioration in competitiveness for India and China.

It is shocking to me that the CEO of one of our major banks does not recognize the risks posed by a rising Rupee. The consensus today is that India will decouple. The consensus will be proven wrong in the near future, yet again.

Mr Aditya Puri might want to check the performance of China over the past 12 months and would see that the present market correction / selloff initiated in China.

We are entering a phase where the recession is about to be exported to Asia. Europe and U.S. have experienced significant declines and a severe recession. However, a double dip is likely headed. This time around, emerging markets will suffer along side global markets.

There is no decoupling.

Here is the first piece of news that Mr. Puri would do well to read.
Chinese growth May Slow

China & India - No Economic Miracles, Just Purchasing Power DISParity

2010-03-15T11:49:00.000-04:00

As I sit here newly arrived in India, I am amazed at how the public is convinced and fully bought into the hype.

Maybe over time I will stand corrected and begin to see the miracle that is India.
But I know what I see now. I see a preconstruction cycle that I saw play out in the U.S. firsthand. I see an unending supply of land.

I see a populace that is hustling. It's surprising the number of kids here that are desperate to retire in their 30s and 40s. Maybe that is a sign of prosperity. More likely, they are hating life and sick and tired of the misery that is called a U.S. multinational (MNC). These corporations are chewing and spitting out these workers and garnering market share. Over time Indians will learn the same painful lessons learnt in the U.S. ... Walmart versus the Mom n Pops, Credit Card misery and teaser interest rate nightmares.

What I also see is that there is a purchasing power disparity. Everything is cheaper in India, for the most part, except for imported items. Those trade at global parity give or take a few bucks. And that more than anything explains the economic miracle that is India. This will continue until the disparity disappears.

But already there are cheaper options emerging - the Phillipines, European Eastern Bloc countries like Romania etc. India has to move up the value chain, is what the experts say. What exactly does that mean?

More R&D, higher education, more creativity. And here is where the miracle will run into roadblocks. India lacks the infrastructure - physical and electronic - to make this a reality. Yes there are certainly pockets of wizardry. But the economic product is a sum total of the market. Color me skeptical. And possibly wrong. I will gain more confidence in my views as I get more insight.

Real Estate in Gurgaon Is Peaking, Optimism Reigns, I Am Shorting S&P 1150

2010-03-15T05:21:00.000-04:00

I am in the land of the optimists. Indians are truly an optimist populace.

But tell me what I am missing. A friend of mine rented a 4 bedroom luxury condo in Gurgaon, India. For those of you that are unaware of Gurgaon, it is an IT and BPO hub, probably the largest in India outside of Bangalore.

Here's what the building looks like:
http://www.theicongurgaon.in/

Now you can buy a unit in this building for Rs 1,54,00,000. Or $342,000.
Or you can rent for Rs 45,000 per month. Or $1,000 per month.
A back of the envelope calculation suggests the cost of ownership is roughly $2,300 per month at 10% down, not including taxes and maintenance, which I am guessing is another Rs 10,000 per month minimum, or $250.

Two things come to mind. The market is overheated as is obvious to any real estate investor/owner living currently in the U.S. Second, the actual cost of ownership is still pretty cheap to be able to rent a 4 bedroom luxury apartment with all amenities for under $1,000 a month.

Now the lack of rental pricing pressure tells me that these greedy developers will keep developing until the marginal cost of development and sucking in preconstruction investors is exceeded by the risk. There is no shortage of land around Gurgaon. Nor for that matter in Bangalore, Pune, and other IT hubs. And they will keep developin this until buyers are exhausted, unwilling and uninterested. And the cycle will turn.

While there is a purchasing power advantage in India, I think it is deflation in the U.S. that will eventually bring the U.S. to parity with India. Either way, color me somewhat skeptical about India's emerging superpower status. India has enjoyed tremendous advantages in terms of costs when offering BPO services to U.S. corporations.

It has been a story driven by cost advantages. Indian workers and Indian infrastructure is not more efficient than the U.S.

India also has the benefit of a young work force with some 60% of the population under the age of 40. But I am guessing there will be a lot of older guys willing and able to work in the U.S. for a long time to come. Sad but true.

As far as the market goes, the average retail investor is now growing ever more confident and complacency is rampant. As we all know, it is precisely times like these that the market serves up a cruel reminder.

Greed or Fear for the Rest of the Year?

2010-03-12T12:05:00.000-05:00

Now that I am somewhat settled in India, I hope to recommence my commentary on the Stock Markets.

With the preponderance of articles available on the Indian market and my distance from the U.S. markets - I am now living in Gurgaon, India - I intend to focus more on the global macro environment as well as Indian stock market.

Having somewhat successfully timed the previous top 1150 and exiting in the 1085 range on the S&P 500, the same setup presents itself.

My three weeks in India have been illuminating in terms of the optimism that is driving this market. But I fear that most - actually almost all - investors are naive about the markets and may end up learning some harsh lessons. Even the supposed pros posting their views in the Outlook India magazine this month seem inexperienced to deal with the challenges of the current market. One that impressed me though - Sanjoy Chatterjee. I learnt something while reading his missives.

Coming back to the markets, global markets have moved in synchronized fashion since the March lows and each has been flirting with technical retraces. It is striking how optimistic Indians are about the economy and their future prospects and in striking contrast to my experience in the U.S. (Florida, NYC).

The Indian story reminds me of the U.S. circa 2007, soaring and ridiculous real estate valuations, a consumer addicted to purchasing and an expectation of continued hockey stick progression. One difference though is that the Indian consumer is spending within his means and not overextended, yet. All that could change though, were the real estate market to correct as a significant amount of wealth is being attributed to the mind boggling rises in property values.

Investors - particularly institutional - continue to ignore the ramifications of a market that is driven by huge amounts of liquidity pumped in by central banks.

In anticipating what lies ahead, it will certainly not look like the consensus. The consensus is a global economic recovery and improving fundamentals. Certainly that is what stock markets are forecasting. The risks are significant - particularly of the sovereign variety - but the catalyst for a surprise is lurking in the shadows.

Markets are beginning to see positive economic news. It is precisely in this type of economic environment that the policy execution risk becomes elevated and a misstep could lead to unexpected consequences.

Given the overvaluation in equities, the moribund U.S. consumer, severe amount of monetary stimulus in the global economy and the weakening sovereign balance sheets, the risks look to outweigh rewards at these levels and this stage of the rally.

Covered Prior to Fed Meeting today at S&P 1084

2010-01-27T17:29:00.001-05:00

Re Entering Short S&P 1147

2010-01-13T20:42:00.003-05:00

Bullish sentiment continues to increase as measured by both the weekly II data and a Bloomberg survey. II said Bulls rose to 53.4 from 48.3, the highest since Dec ‘07 while Bears fell 1 pt to 15.9, just shy of the lowest since Apr ‘87.

Bloomberg said bulls on the US market rose to the highest since ‘07.

Bond Market Makes It's Presence Felt

2009-12-15T16:40:00.000-05:00

As the administration pushes its spending proposals, the bond market has been speaking quite loudly the past few days and just broke through its trading ranges of the past six months.

Technically speaking, we have a clear inverse H&S pattern possibility on a 60 min and a much larger daily scale.

These technical setups equate with fundamentals and it is difficult to say when the vigilantes make life difficult for the various government entities. But this much is clear. While equity markets can be controlled and manipulated even for a time, the bond market is far bigger than any government entity.

While some are calling for the markets to go higher, and it is highly likely, the preponderance of news today has to be considered negative between the Empire State survey, the PPI, the rise in yields.

Eventually insitutional money will realize that this time really is not different, ie, not different than past credit crises which are usually followed by fiscal crises.

That being said, the markets will likely break through resistance and head higher anyways I guess.

The Same Old Story with Real Estate

2009-12-15T15:06:00.000-05:00

Realtors are again putting out the same old story, are these guys ever bearish?

Prices are on sale and if you do not get in now, you'll miss out.... the same old story of greed and fear.

Having been a landlord for many years myself, let me tell you that a vacant apartment can be death to your finances. If you're an investor buying on financing, it is a risky business. We're still clearly in a deflationary path on rents.

One very simple way to determine demand and supply is looking at the craigslist listings for rentals. Search craigslist las vegas or craigslist palm beach or any other location and if you've been tracking this data over the past years you'll see that where listings used to average about 100 a day during the peak we are now up to over 500 listings each day! Care to compete with that kind of competition?

Here is what is happening in the Palm Beach market based on my personal conversations with agents and investors

Lenders like Option One that own defaulted inventory are not foreclosing on that inventory. I know of property that owners have walked away from over 18 months ago and is still not foreclosed. Why? Because lenders know if they foreclose they'll be responsible for taxes and maintenance and liens. So lenders are opting to let the foreclosed owner keep the property until they find a willing buyer.

Option One recently offered a tenant at a local community $3000 to move out so that they could start showing the property without actually owning it. This kind of illegal activity is underway in Florida and I am guessing other parts of the country.

All it does is confirm the huge amount of shadown inventory that continues to sit on lenders books.

Rising Rates Coming
Now if you're an investor that has the cohones to buy in this market, granted there are a few good deals if you know how to land a renter. Hats off to you.

But if you're an investor, you need to consider what will happen to prices when rates go up. It does not take a rocket scientist to figure out that prices will continue to stay under pressure for a long time to come as rates are most definitely headed higher over the longer term. And if you don't get that, then you really have no business being an investor.

Regardless of how you spin it, investing in real estate is an unattractive opportunity unless you have a 20 or 30 year horizon and are willing to deal with the headaches of being a landlord during that time.

Time Symetry

2009-12-10T13:16:00.000-05:00

EW normally requires Wave 5 to be 100% of the time spent in Wave 1. That requirement was satisfied to the T in the chart below. No idea if the count is right but it does offer hope to us bears. If this is indeed the count, this may be the confirmation that Wave C is finally complete. And if that is true, time for the fireworks to begin on Wave 3 down.

As an aside, added small position at 1105 earlier today.

The Real Story on Bonuses & Value Provided

2009-12-10T12:25:00.000-05:00

Me Likey. However this news will only contrast how powerful the finance lobby is in U.S. as it will never happen here.

Bankers furious at UK bonus supertax

Bankers in the City of London reacted with fury to UK government plans to levy an immediate 50 per cent supertax on’ bonus pay-outs, saying the move played into the hands of rival financial centres.

France to impose tax on bank bonuses

President Nicolas Sarkozy is to follow Britain’s lead and impose a one-off tax on bonus pay-outs by banks operating in France.

The French government is still working out the details, but intends to bring Paris in line with London by forcing banks to pay 50 per cent in tax on bonus pay-outs for 2009 above €27,000.

As a former worker on Wall Street let me provide some details on how the bonus structure on Wall Street works.

I was a Senior Analyst at a top 5 investment bank. Total compensation was a combination of a base salary, and a bonus. Bonuses were usually a combination of cash and restricted stock.

Base salaries today range from $120k to $150k for senior analysts, possibly higher as i have been out of the industry a few years. In addition, bonuses ranged from 100% to 200% of the base. Managing Directors and VPs have base salaries in the $200s and bonuses multiples of that.

The question though is this - does the Wall Street employee provide a corresponding value to the salaries? No. In my opinion, my job and those of most analysts and senior analysts could be performed by an average finance graduate and unfortunately, even better by a finance graduate coming out of India.

And that is the reason for the outrage amongst Americans. Wall Street salaries have no connection with performance.

Adding to Shorts - S&P 1107

2009-12-07T12:03:00.002-05:00

I could talk about fundamentals, but why bother. This is a technically driven market rally and this trade is based on technicals weakening.

Back In The Channel ... What Happened to the Dollar trade?

2009-11-30T13:55:00.000-05:00

I cannot help but be satisfied that the S&P is comfortably back in the bear channel.

Tech is showing leadership to the downside and on a day when the dollar is down
, the markets are down as well? What happened to the relationship that drives all asset markets? One day does not a trend make but this is now the second day this has happened.

Impulse Character - One of the other items that I would point out is that the moves down have a definite impulsive characteristic to them. Impulse waves generally point to the direction of the trend. Particularly on a smaller time frame you can see this clearly, a struggling upwards move and a strong down move in bunches.

Sadly when the market breaks most that believe they will be able to exit will not be able to exit. Tops are a process and it certainly seems like reality is starting to set in.

Time will tell, I remain short for now.

PS - will be travelling next couple days so I may or may not be able to post.

A Great List of Resources

2009-11-27T14:32:00.000-05:00

Although I follow a number of bloggers, I rarely find any useful resources or indicators.

Mact is one of the guys that I respect and he posted these indicators and I think an excellent analysis that I wanted to share with you. Mact is the disqus name, look him up. The guy is a good trader. Generally I find that I agree almost 100% of the time with his commentaries and views match my own almost without exception. That being said, I'm more a swing trader and he is a day trader.

His post is below:

1. highest SOS on SPY since the march lows....big boys jumping ship.

2. Sentiment - 8th lowest bear reading in past 20 yrs

3. ISEE showing blowoff sentiment

5. price keeps goin up but internals and volume cont's to weaken.

Goddamn Tryptophan!

2009-11-27T12:24:00.001-05:00

Due to a bout of overeating - why do fat people always cook so well? - turkey, I woke up too late today to take early profits.

I was able to close out shorts and reopen at slightly higher levels.

I am astounded at the goldilocks market, good news, bad news it does not seem to matter.

Market participants seem to be in the "Dont Fight the Fed" phase. But this is getting absurd. As usual futures were gunned and bulls have got to be feeling giddy with today's performance.

At some point, maybe not in my lifetime, reason will return to the market.

However, from this market observer's perspective, being long this market is riskier than bunjee jumping off a bridge.

Risk levels have just gone up. Who will be next? My guess is something is brewing in Greece and Eastern European countries intermediate term and longer term, I am certain China will deliver a shocker.

The U.S. carry trade just got a lot riskier as well from a currency perspective. It is clear that emerging markets represent higher risks than U.S. equities.

I will be focusing on shorting emerging market stocks and small caps.

Dubai: A Repeat of Miami

2009-11-26T16:59:00.000-05:00

Those of you think that this news is a $60 billion check and not a big deal are not thinking this through.

If you have followed Dubai over the years, the only true comparison to what is happening in Dubai is Miami. Now this may be hard to believe, but the Dubai bubble is going to be actually far worse than Miami.

Investors were convinced that millions in oil money would have to be invested somewhere. The plans were audacious - the second tallest building in the world, a man made complex in the ocean visible via satellite and numerous skyscrapers, stars being paid huge contracts to be a part of the story.

What was missing? Demand. The story that unfolded in Miami, Las Vegas, Arizona and Florida will unfold in Dubai.

Why? Fundamentally, when massive overbuilding and speculation occurs, as it has in Dubai, the mania is difficult to identify to the participants. It is only now starting to sink in with the unfortunate real estate speculators that Dubai is a massive bubble.

Expect to see this news lead to a wave of investors walking away from contracts, speculators walking away from projects and follow on impacts.

Equities - You are Back of the Bus

2009-11-26T16:31:00.001-05:00

Time and again, it has been proven over the years that the bond markets are usually smarter than the stock market.

To Wit:

Fear pushes US rates into negative
By Michael Mackenzie in New York
Published: November 24 2009 19:19 | Last updated: November 24 2009 19:19
Negative interest rates are back. Yields on short-term US government debt have fallen into negative territory as banks and investors park their cash in havens before the end of the year.

Equity investors have been ignoring the robust demand for treasuries, negative short rates.

One need only be reminded of Sep 2008 and Dec 2008.

Ignore the bond market signals at your peril. Robust demand for bonds at historically low yields, negative short rates are not a healthy sign.

Secondly, we have Dubai and we also have an imploding Greece. These could be one off events. But they could also be the first dominoes. In the larger scheme $60 billion or thereabouts in Dubai is not that big a number given where we have come from.

But what is far worse is the structural damage that is being inflicted in the region. China is a bubble. India is a market share gain story and FDI flows, not much more. Brazil is a commodity play.

And we have seen the bogus recovery stats with the bulk of GDP growth this past quarter driven by cash for clunkers and housing programs.

Take it all away and what do you have left?
A strapped, over debted, suffering consumer and governments entering the scenario consumers were in 5 years ago, teaser rate debt. Leverage is a bitch. It usually comes back and bites you.

Out of Gold Miners

2009-11-25T14:35:00.001-05:00

Taking profits on recent entry in gold miners
After a huge move, the risks are now to the downside

Adding to TZA, SDD Shorts at S&P 1108

2009-11-25T12:56:00.001-05:00

While the S&P index and Dow appear at highs, the small caps are telling a different story. Limited bailout monies, limited exposure to weak dollar.

SDD and TZA both look to be forming rounded bottoms. According to McHugh :

Stocks continue to trace out the path we annotated over the past few night's newsletters, a small Rising Bearish Wedge, which is usually a termination top pattern. Historically, stock prices generally rise the day before and after Thanksgiving, and historically have a bad Monday afterwards.

Despite the S&P rising the past few days, my TZA position is still profitable. SDD is another small cap play.

As I have mentioned previously, I use these highly leveraged securities as short term plays. Timed correctly, they offer significant benefits versus options. The leveraged returns allow me to play with smaller positions than I would normally need to invest to generate returns.

My position is relatively light as the pattern is not entirely clear, but the divergences building on the 60 min RSI make me comfortable that my entry will pay off. Having enough ammo on hand is critical to playing this strategy. And I do.

Happy Thanksgiving.

Secular Trends Trump Cyclical

2009-11-24T15:30:00.000-05:00

Here's a secular trend:

Adults Moving Home in Recession; Delaying Marriage, Kids
The recession has caused many adults to move home, shack up with roommates and delay having kids according to a study to be released today by the Pew Research Center. The report, which draws on Census data as well as a nationwide survey, follows media reports on some of the same phenomena.

One-in-ten adults ages 18 to 35 (10%) say the poor economy has forced them to move back in with mom and dad.

12% said they moved in with a roommate.
Recession Hits Immigrants Hard - Survey Shows First Decline in Foreign-Born U.S. Residents in Nearly 40 Years

The number of foreign-born residents of the U.S. declined for the first time since at least 1970, as a recession and tight labor market dented America's image as the land of opportunity.

A decline in construction jobs lured fewer immigrants from their home countries, especially those from Mexico, according to the Census Bureau's annual American Community Survey.

Due to the ill advised policies, more homes and inventory will continue to come into the market. Despite what NAR wants you to believe, secular trumps cyclical.

The Fallacy of Investors

2009-11-23T22:33:00.000-05:00

Sadly, it is only a matter of time before we reach similar situations in the U.S.

JAL seeks 40 percent pension payout cut for survival
TOKYO (Reuters) - Japan Airlines Corp (9205.T) asked retirees and employees on Monday to accept an average 40 percent cut to their pension payouts and warned the struggling airline could face bankruptcy if an agreement could not be reached.

The cuts will impact 17,000 current employees and some 9,000 retirees.

Meanwhile, more speculation in China:

Chinese are just like New Yorkers. They can't stop talking about real estate. There's one distinctly American habit the Shanghaiese seem to have picked up easily: talking about money, profits, and real estate prices without self-consciousness.

The fallacy of investors over the ages has been an expectation that the recent past will extrapolate into the future. However, real estate like all other investments can be a painful asset to hold as it is one of the most leveraged of investments that individual investors can have exposure to.

The parents, in their 50s, are both longtime employees of Shanghai's public bus company—the husband a middle manager, the wife a retired laborer. Their daughter, Yang Gao, a recent graduate of Fudan University, is going to start work at Ernst & Young next month. They were happy to share details of their personal finances. The Gaos were given the opportunity to buy workers' housing elsewhere in Shanghai very cheaply a few decades ago. That apartment, which they still own and rent out, has soared in value.

When taxi cab drivers, bus drivers and the common man start to benefit and get caught in asset bubbles, it is usually in the last stages. Nasdaq stocks, Florida real estate anyone?

Just to jog memories, New Yorkers - along with their NJ cousins - were amongst the most aggressive investors in Florida and Las Vegas and in my opinion, responsible for the speculative frenzy that drove Florida into stratospheric valuations.

Short Stocks Long Gold may be the easiest trade

2009-11-23T13:17:00.001-05:00

My recent re entry into Gold Miners is paying off handsomely today.

As mentioned I exited stocks late last week and took profits, that was timely.

I entered a very small position at the end of the day Friday. That position is at a loss now but more than offset by my longs in the Gold Miners.

This week will likely be portrayed in a positive light because we need the lemmings to spend on Black Friday.

I have not had a chance to review the economic data. Will be taking care of some business matters most of the week. Letting the miners run for now with a hedged position in short equities.

Long Gold Short Equities is the easiest way to stay profitable in a hedged fashion.

That being said, it feels like classic distribution. Financials are lagging, XHB lagging, transports are lagging, Russell 2000 is lagging, QQQQs have not made a new high.

The Dow which is easy to manipulate is at new highs and large caps are probably what is pulling the market. Why? Foreign profits repatriated into cheap dollars equals good profits.

Bottom line? This is a rally on the legs of a cheap dollar. If fundamentals were healthy, governments would not be lining up to purchase Gold.

ReBuilding Shorts S&P 1092

2009-11-20T15:48:00.003-05:00

This Is Not What a Recovery in Month 9 Looks Like

2009-11-20T14:28:00.000-05:00

Japan says economy back in deflation

By Robin Harding in Tokyo
Published: November 20 2009 06:31 | Last updated: November 20 2009 10:18

The Bank of Japan moved towards a neutral stance on the risk of inflation on Friday even as the government formally declared that the world’s second-largest economy has entered deflation for the first time since 2006.
The government’s declaration sets the scene for heightened tension with the bank, which has been resisting public calls by politicians for greater aggression in the fight against deflation.

State, local budget cuts a "time bomb" for jobs

NEW YORK (Reuters) - Budget shortfalls pose a direct threat to millions of U.S. jobs, many in the private sector, as state and local governments lay off workers and cut spending on contracts and other business services, a think tank said on Thursday.
State and local governments will have to raise taxes and cut spending in the current and next two fiscal years to cover shortfalls totaling $469 billion, according to an Economic Policy Institute report.

Obama mortgage rescue: Only a few get lasting help
Only a tiny percentage of troubled homeowners have received permanent modifications under President Obama's foreclosure prevention plan, raising concerns about the effectiveness of the $75 billion effort.

U.S. Mortgage Delinquencies Reach a Record High - 1 in 7 is delinquent, 1 in 10 at least 1 payment behind
Nearly one in 10 homeowners with mortgages was at least one payment behind in the third quarter, the Mortgage Bankers Association said in its survey. That translates into about five million households.

Upcoming Week

There’s a lot jammed into a holiday shortened week ahead. Readings on October homes sales (existing and new), September home prices from Case-Shiller, another look at 3Q GDP, November consumer confidence, October durable goods and personal income & spending are among the highlights packed into the first three days of next week.

Next week could be a nasty surprise for the complacent self preserving idiots we call mutual fund managers.

Exiting Last Close Positions Now for 2% Profit at S&P 1088

2009-11-20T10:08:00.001-05:00

Will exit substantially most of the short positions soon

Sentiment Overview

2009-11-20T10:03:00.000-05:00

1. Interesting Timing on this headline and post - could be downright prescient as a contrary indicator

LA Times Blog - 'Buy the dips': The Wall Street cliche that has worked like a charm

November 18, 2009 | 6:00 am

2. Barron’s Big Money Poll which found that the most bullish positions also highly correlate to the highest net speculative futures positions:

Below chart highlights the latest Barron’s consensus on the various asset classes — percent bullish and bearish. As expected 60% are bullish and only 13% bearish on equities.

Amazing!

Dell Lays An Turd -- What? Businesses are not spending?

2009-11-19T20:06:00.000-05:00

Revenues down from last year, losing market share to Acer, profits down 54% from last year.

Expectations were priced in that Dell would beat, so the earnings ugliness is a surprise to the green shooters.

Dell reported a net profit of $337 million, or 17 cents a share, for its fiscal third quarter, down from $727 million, or 37 cents a share, in the year-ago period.

Revenue fell 15 percent to $12.9 billion, missing the average analyst estimate of $13.2 billion, according to Thomson Reuters I/B/E/S.

While the revenue shortfall was troubling, some analysts also expressed concern about Dell's margins, particularly because the company had stressed profitability over growth amid a $4 billion cost-cutting effort.

Dell, which relies primarily on sales of PCs to businesses, has suffered as companies dialed back spending during the economic downturn. Acer and HP have also been waging a price war, analysts say, particularly in consumer laptops.

But weren't consumers the ones that were holding back the recovery? Now businesses are unwilling to spend? Huh, What A Surprise (sarcasm)

This will likely have a impact early in the morning, and I will look to take immediate profits on the shorts added this afternoon, and exit additional positions as the selling slows down.

It looks to be a good idea to have added shorts at the close.

Looking to Add Short at the close 1099

2009-11-19T15:50:00.003-05:00

Edit : 3:58 pm - Increased short exposure moderately in TZA QID & EDZ
Not risking too much here

Taking Some More Profit at 1090

2009-11-19T13:27:00.000-05:00

How Far Will Productivity Take Us? Main Street & Wall Street's Differing Perceptions

2009-11-19T13:10:00.000-05:00

Businesses have been benefiting from cost cutting and productivity the past couple of quarters. Large businesses are also benefiting from a weak dollar allowing them to post large currency gains on overseas earnings.

Employers have in large part achieved this rise in productivity through moving jobs overseas - bad for the U.S. consumer, laying off workers - bad for the U.S consumer and thirdly through efficient use of networking technology, reducing travel costs - bad for the U.S. economy.

Secondly, government has made abundantly clear that their approach is clearcut handouts for financial firms and no clear cut programs to help consumers.

It is my view that amidst this abundance of optimism on Wall Street, Main Street has not participated in this rally, which has enriched the fat cats only further. Main Street is hurting in a way that Wall Street just cannot relate to.

Wall Street's view of the economy extends about 20 miles around New York City. New York malls are packed, the city is flush with bailout bonuses and Hampton sales are booming. Housing prices have not declined as the average New Yorker's net worth coupled with generous severance packages positions them to survive the downturn well. Until now.

Unemployment benefits will start to run out soon. While Main Street recession started in 2006-7, Wall Street's recession started in October 2008. We are just now entering the period where New Yorkers will start to feel the pain.

Living in New York, it is evident the city is faring well, but not so much that it can survive unscathed. Many stores are empty, even on thoroughfares like Broadway & Madison Ave.

What Wall streeters are missing is that the economy is a reflection of Main Street. The government had an opportunity to fix this problem. It will now be apparent that we are headed down a path of dollar debasement, debt explosion.

Despite the street's view that this will lead to inflationary asset prices, they are about to find out that the consumer will refuse to participate, earnings will suffer and certain asset prices will correct substantially.

The true bottom lies ahead of us, unfortunately.

Finerman Does Not Get Gold, Paulson Launches Gold Fund

2009-11-19T12:51:00.001-05:00

Finerman? on the Fast Money show does not understand. Gold isn't necessarily just an inflation trade as Finerman believes. She is afraid of Gold "look out below" on inflation expectations. She is clueless.

Gold does well in environments when fiat money is being abused and vulnerable and being debased. Can we say with certainty that is exactly what is happening in the U.S., Japan, Europe and China, yes, China? The answer in my opinion is definitively Yes.

Meanwhile Paulson, billionaire hedge manager, is launching a gold fund.

I should not have sold my miners earlier. I am now scaling in very gradually into Gold miners.
A great site to learn about gold stocks is Gold Versus Paper

Taking Profits at S&P 1092.03

2009-11-19T12:01:00.001-05:00

Sold QQQQs for now
Took partial profits on TZA and EDZ
Entire position is in profit, up roughly 6%

I will be looking to take some more off later today & tomorrow

Out On Positions Initiated This Morning

2009-11-18T14:17:00.002-05:00

Edit: 3:00 pm - Back in Shorts

Creative Destruction at Amazon

2009-11-18T13:50:00.001-05:00

Amazon has expanded its potential market base to world wide with the introduction of the Amazon Kindle for PC and Amazon Kindle for Mac software products.

While everyone is focused on the Kindle, the more exciting opportunity is in the software for the computer in my opinion. Kindle is still expensive and will only be adopted by first adopters while the PC and MAC software is FREE and easy to use.

If you're a resident of a country that Amazon does not deliver to, say India, the Middle East, Africa and you need a title, all you need is a PC. Think about what that does to their model.

We're looking at a worldwide technology delivery company, lower COGS, larger market and electronic delivery model.

The impacts of this surge towards electronic delivery will be felt starting immediately in my opinion. I'm late to the stock as the market has obviously recognized this and the stock is expensive. But this is a story that I will be looking to accumulate on dips.

A similar type of model extends to NetFlix along with similar competitive advantages. Valuation for Netflix is far more reasonable than Amazon and it is a stock I have owned since it was in the mid 30s.

Concern: One of the concerns that does get raised is that this does potentially lower the barriers of entry for amazon.com. So what's to prevent Google or Apple or Walmart from entering the digital book selling space? To date, Amazon has succeeded on fulfillment and execution. So will the expansion of the addressable market override the competitive concerns. At the end of the day, the web will be controlled by dominant brand names and this is a net positive for Google and the like and a positive for Amazon for now.

Adding Short Exposure to Smallcaps & Tech at S&P 1105

2009-11-18T12:59:00.003-05:00

Initiated short position via QID in tech stocks
Added to small cap position via TZA
S&P 1105

Could It Be This Simple?

2009-11-17T17:46:00.000-05:00

From Prechter:

The blue-chip stock indexes appear very close to the start of a decline, if one did not already start today. The structure and strength of the decline will determine whether Primary 2 (circle) is complete or if it still retains upside potential.
Friday night we said, "The subdivisions of the rise would count best with a new high early next week, above Wednesday's high, but we'll see." The market's delivered today, with the Dow and S&P rising above last Wednesday's high in what has the earmarks of a fifth wave, an ending wave, from at least November 2. Today's 10,434.20 Dow high, as well as the 1113.68 S&P high, falls within the time frame and price parameters that we've been discussing throughout all of last week.

Kenny had a similar observation. The five wave structure seems too easy. Markets are rarely this easy and that is the one thing that concerns me about this count. In hindsight we will see where the trap possibly was and the structure will reveal itself.

Elliott wave aside, the technical conditions and fundamentals are ripe for a reversal as well which is why I continue to be exposed to the short side, reasons discussed and listed in my previous post.

But because of the multiple traps that have been laid by the bulls I continue to be cautious in terms of my exposure and am ready to engage the bulls with plenty of ammunition to spare should they spring a surprise.

Moment of Truth - This time is no different

2009-11-17T15:06:00.000-05:00

Conditions are in place across various indicators for a drop. It does not matter where I look, the direction points down for me.

Technical Stochastic indicators such as the RSI are demonstrating huge divergences on multiple longer term timeframes. Eventually this situation resolves itself, in this case, downard.
We have reached major fibonacci retraces on time and price that signify that this rally has met all anticipated targets and we are due to begin Wave C.
On a positive note, the market has now pierced a major trendline that has defined this market and it will be critical to see if this is a breakout or a fakeout.
New Highs have not confirmed this recent rally. The number of new highs is significantly lower than the prior high.
Volume is not confirming the rally across a variety of time frames, particularly on the daily.
The advance decline line is showing a large divergence
We are wedging yet again which has been a decent indicator

Fundamentally, the news disappointed again this morning with the miss on Industrial Production.

I am anticipating a possible final 5th wave surge higher, but 5th waves can truncate as well. Timing wise, this could be coinciding with a disappointing Thanksgiving sales season. We'll see how the spin masters spin it.

Retail Sales - Not Rosy Despite What the News Media Tell You

2009-11-16T22:46:00.002-05:00

Just how much consumers are spending can be an important window into the prospects of the economy. However, there is a risk relying on advance retail sales as it is based on quite a small sampling.

That being said, here is the key takeaway on the "rosy" numbers reported this morning:

Lets look at the year over year numbers first. Total retail sales are down around 3% year over year from a terrible October last year. What green shoots exactly are we talking about?

Ex Autos picture is even clearer and down worse than the total number. What's up? Autos, courtesy of the clunker program.

Now for a review of the month over month:
Change from prior month for Total Retail Sales: +4.7
Change in autos: +4.0

The majority of the increase in retail sales was a result of a rise in auto sales.

What are Financials, Goldman Sachs, IBM Telling Us?

2009-11-16T13:09:00.000-05:00

As the market zooms to new highs, leaders such as Goldman and IBM have failed to make new highs and Financials are telling a whole other story.

Expected Up Move Underway, Adding to Shorts 20%

2009-11-16T12:11:00.000-05:00

S&P 1110.67

Short position initiated based on divergences that are developing in the S&P 500

Anecdotal Stories from the Upper West Side of New York

2009-11-14T14:36:00.000-05:00

These are personal stories I have heard or seen with my own eyes and ears the past 10 days:

Today at Gristede's Upper West Side:
I see a middle class guy leaving the store, despondent. The counter clerk told me the guy was buying 2 packets of peanuts and the card only had $0.90 and the poor guy's bill was only able to cover 1 packet. The guy told her that was all the money he had and the peanuts would be his dinner for tonight. Happy Halloween, America.

Couple days ago Walking Down Broadway in the 80s:
A man walking down the street with his family of wife and two little girls. I overhear the man say, "Sorry honey, I can't, I'm unemployed..."

Yesterday, was on my way back from Blockbuster and I looked into the faces of the people on a bus heading uptown and it broke my heart. The saddest, most forlorn, broken, sad people that I can ever want to see. Spirits broken. Unhappy.

The coup de grace. Today my landlord who happens to be Jere Burns - you can look him up on IMDB - has his third wife who is probably 20 years younger contact me and tell me that they are going to be taking over the apartment 1 month early. No discussions, no nothing. Why? Because Jere is going to be back in New York and wants the apartment. I paid the guy for the full term upfront. The wife maniacally called me every day while fedex was delivering the check, it felt so petty and embarassing to have to deal with her. Obsessed with money.

I am back in New York after a few years. I left during the dot com years because I was tired of the assholes that work here, tired of the hustlers. But when I left people were happy. You could still see people walking down the street laughing and cheerful. Today it is hard to find people walking down the street smiling, at least where I live on the UWS.

Even so, I find that New York is far better than the rest of the country and is faring relatively well. Prices of real estate have corrected but there are no foreclosures in Manhattan, a few in the suburbs. The UWS is still a tough place to find an apartment, being one of the more desirable places in the city for families.

The city has become the poster child and in some ways always has been the poster child of what is right and wrong with our country. We can all form our own conclusions. I would love to hear your thoughts.

What Could Possibly Go Wrong With the Recovery?

2009-11-14T01:34:00.002-05:00

Debt
Just one month into the 2010 fiscal year, the U.S. government is on track for a record $2 trillion annual budget deficit. That’s the word from the Treasury Department, which quietly announced a $176.4 billion October budget deficit yesterday.

The U.S. government finished its historic streak of debt sales today with a record $16 billion offering of 30-year bonds, auction results on the weak side. This was on top the $65 billion in 3-year and 10-year paper auctioned earlier this week, both records in their own right.

“The market is sending many errant signals right now,” notes Dan Amoss. “U.S. policymakers are trying to reinflate stocks, houses and wages, while also recapitalizing an undercapitalized banking system with overt and covert subsidies. All of these actions are extraordinarily costly — so costly that creditors are getting nervous.

“A failed auction for U.S. Treasuries, looking out over the next couple of years, is not out of the question.

If this happens, conditions in the interest rate derivative market, with a notional value in the hundreds of trillions of dollars, could get ugly fast.

The question then becomes: who bails out the federal government? The Fed’s printing press could be cranked into overdrive, but if holders of dollars look to get rid of them as quickly as they’re created, this sort of policy route will losing its potency over time.

The U.S. is not Japan, We are Worse
the US economy is not exactly like the Japanese economy. Japan had high savings…and a positive trade balance. It could run up huge government debts and “owe it to itself.” It could finance its government debts with the savings of its own people, in other words. It never had to worry about foreigners refusing to buy its bonds…or selling them suddenly.

America’s government debt is different. The US doesn’t save enough to finance its own deficits. So it depends on the kindness of strangers. And if those strangers ever lose faith in America’s ability or willingness to repay its debts, they’ll drop the dollar like an annoying girlfriend.

FHA Cash Reserves At All Time Low
The Federal Housing Administration said Thursday morning that its cash reserves had dwindled significantly in the last year after a record drop in home prices.

The results of the F.H.A.’s annual audit showed the agency’s capital reserves to be 0.53 percent, far under the 2 percent minimum mandated by Congress. A year ago, the capital reserves were 3 percent.

It is tightening loan standards in hopes it will not become another drain on the United States Treasury, but is reluctant to clamp down so much that it snuffs out the tentative recovery in housing.

During the news conference, Secretary Donovan and the agency’s commissioner, David H. Stevens, said that the cash reserve, the figure that has fallen to 0.53 percent of loans outstanding, was merely a supplement to a much larger fund that the F.H.A. was holding against expected losses. Between the two accounts, the agency has $31 billion to cover losses over the next 30 years.
Barofsky Says TARP ‘Almost Certainly’ Will Bring Loss to U.S.

New Mortgage Applications Plummet
Housing demand is not sustainable. Applications for new mortgages, announced Thursday morning, dropped sharply in the previous week to levels not seen in almost a decade. This decline was consistent with Toll Brothers' (TOL Quote) conference call on Wednesday, in which the company's Chairman described demand since Labor Day as uneven.

I don't see what replaces housing as a driver to growth -- the sector was responsible for over 40% of job growth in the 2001-2007 period.

IEA Says Rising Oil Price Risks Derailing Economic Recovery
The International Energy Agency Thursday revised it 2010 world oil demand forecast slightly higher, but warned that rising crude prices, if sustained, risk smothering the fragile economic recovery underway.

Dollar Dying
We have a Federal Reserve and Treasury which have agreed to double team the ailing dollar as they print money to no end and effectively punish the prudent while rewarding the speculators (the same bastards that helped create this mess to begin with). Our tax issues have not yet reared their ugly head, but trust me, they are coming.

Massive Govt Revenue Shortfalls
What we haven’t quite dealt with is how the government is going to overcome their massive revenue shortfalls and ever expanding debt. As Jim Jubak recently described, they are going to come back to the consumer for another blow to the knees. No, the bailouts weren’t enough. Destroying the dollars in your pockets isn’t enough. Because of their fiscal irresponsibility they are going to raise your taxes in 2010. And don’t be fooled. The income tax may not spike, but they will get you in every other way they can. Sales tax, real estate taxes, etc etc. You are paying for their mistakes. Whether you were prudent or not.

Municipalities are in financial disarray and won't provide their normal anchor to growth - 10 states face financial peril
Dropping tax revenue, rising unemployment and yawning budget gaps are wreaking havoc in states from Arizona to Wisconsin, a new report shows. The 10 most troubled states are: Arizona, California, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.

Other states -- including Colorado, Georgia, Kentucky, New York and Hawaii -- were not far behind.

Already, less than five months into fiscal 2010, several states are looking at additional budget cuts.

And in California, Gov. Arnold Schwarzenegger said Tuesday that his state is facing a budget gap of up to $7 billion. Budget projections show that states could face deficits as large as $260 billion in 2011 and 2012 after stimulus funding is exhausted. State economies usually take up to two years longer to recover after the nation's fiscal health begins to improve.

Yet More Bubbles & A Warning from Donald Tsang

The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said.

“I’m scared and leaders should look out,” said Donald Tsang, chief executive of the city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown…

“We have a U.S. dollar carry trade at the moment,” Tsang, 65, said in a speech where leaders of the Asia Pacific Economic Cooperation forum are gathering for a weekend summit. The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

“Where is the money going — it’s where the problem’s going to be: Asia,” Tsang said. “You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

A sampling of recent inflationary developments
* A 15 percent increase in health insurance premiums for small businesses

* A 50 percent increase in car rental costs

* A 15 – 25 percent increase in long-term care insurance rates for California retirees

What Could Possibly Go Wrong? S&P 1200 here we come

Richard Russell - 6 Reasons to Own Gold

2009-11-14T00:32:00.004-05:00

Richard Russell “There are a number of items favoring higher gold now.

(1) Interest rates are at zero, which means the ‘opportunity cost’ of owning gold now is highly favorable. You sacrifice no yield in owning gold vs. Treasury bills. T-bills pay you nothing, so you might as well have your money in gold.

(2) The Bernanke Fed will evidently stop at nothing in its all-out attempt to ‘jump start’ the wobbly US economy. This means spending and building debt at a never-seen-before rate. This will result in inflation. The Fed can create fiat money - any quantity at will, but it cannot direct where that money will go. So far, the money is not going into the economy, banks remain reluctant to lend and consumers are reluctant to spend.

The newly-created money has been going into bank reserves and into the stock market. Stocks have been rising on an ocean of liquidity. The sinking dollar has been a huge help to the big Dow-type stocks which benefit from their ability to export. This is resulting in world-wide central bank inflation as the banks seek to devalue their money in an effort to keep the dollar strong.

(3) The world’s central banks are now seeking to protect themselves from a falling dollar by buying gold. After years of selling gold, ironically, the central banks are now buying gold. In today’s Wall Street Journal we see the headline, ‘Central Banks Join A New Gold Rush’. This is indeed ironic. In swapping their own paper for gold, many central banks are admitting that gold is superior to the very paper they are creating out of thin air.

(4) Many nations are now seeking to boost the ratio of gold to paper in their reserves. The US has the largest ratio of gold to junk fiat paper, 77.4%. But the US stupidly only places the value of our gold at $42.22 an ounce. If the US marked our gold to market, it would be a tremendous help to our government’s balance sheet. But the US prefers to live in a fantasy world where gold is worth less than $50 an ounce!

Germany has 69.2% of its reserves in gold.
Italy has 66.6%.
France has 70.6%.
UK has 17.6% (after idiotically selling most of its gold near the low below $300 an ounce).

Japan has 2.3% of its reserves in gold.

India has 4.0%.
Russia has 4.3%.
China has 1.9%.

It’s easy to see that Russia, India and China are low on gold. All three would like to at least double the percentage of gold in their reserves. The race is on for these central banks to accumulate gold without running the price of gold sky-high.

(5) In the US, literally no one owns gold. Rather, US citizens are selling their gold (jewelry) to companies who are advertising that they’ll buy ‘your overpriced’ gold for cash.

(6) A few nations are actively promoting the ownership of gold. China, the world’s biggest miner of gold, has been encouraging its people to buy gold. In London, Harrod’s department store is now selling gold coins and bars to anyone who has the paper to buy gold. Within a year or so, I expect public buying of gold to reach a crescendo. Interestingly, most Americans have never seen a gold coin.”

Sold TZA added this morning for Small Profit

2009-11-13T14:15:00.003-05:00

S&P 1094.68

Weekend Beer

Edit: Sold additional TZA at 1091

Hoping to add on move higher

Move below 108.75 on SPY will make me reevaluate my analysis

Confluence of Resistance

2009-11-13T14:01:00.001-05:00

Three way confluence of resistance - trend line, time and retrace along with pattern completion of ABC pattern from March lows - dare I say that we are finally close to being done with the sharpest rally of the century?

Again, fighting the trend is not a wise move, therefore I am leaving plenty of ammo should I be wrong to average / manage my trade.

But if these indicators hold, then we're looking at a top sometime in the next few days.

LongTZA, Short EDZ - Short the Market

2009-11-13T12:21:00.005-05:00

S&P 1096.79
Could be short term trade

Edit: Clarification: Long TZA Long EDZ, short the market - 1:47 pm

Financials Down, Russell Underperforming Dow, Dollar Down, Oil Down?

2009-11-13T11:25:00.003-05:00

Financials are a good leading indicator and are negative for the day.

Russell is underperforming, the money is hiding in the large caps, believing the dollar weakness is going to help international earnings. But the dollar could easily be poised for a snapback rally over the short term if market weakness is headed our way.

What's interesting is that oil is down and the dollar is down. Usually the reverse relationship has been working. Will be something to watch going forward to see if this is the first sign of a breakdown in the U.S. dollar linkages to all asset classes.

Edit: Entered a very small Short Position in Financials

Last Move Up Underway - 1121 Target One Likely Scenario

2009-11-13T11:13:00.001-05:00

The market is on its last move upwards, ignoring a turd like consumer sentiment reading, a rise in natural gas inventory this morning.

Time
Right now, November 19th looks like a good time target as a 50% retrace in terms of the final move upwards. But it could extended to early December. So much as I'd like to get back in, I'm going to twiddle my thumbs for a while this as this hopefully final move higher works its way through and start rebuilding short positions on strength.

Price
1121 is roughly the 50% retrace of the entire move down. We are right now close to resistance on a down trend line from Oct 07. A breakout through the trend line freaking technicians out and a fall back under looks to me to be one scenario to watch for.

Pattern
We are completing a 5 wave move up, the trend looks to be completing.

Consumer Sentiment One of the Few Accurate Econ Stats Is SkyDiving

2009-11-13T10:48:00.001-05:00

Consumer Sentiment - Huge Miss

Released on 11/13/2009 9:55:00 AM For November, 2009

	Prior	Consensus	Consensus Range	Actual
Sentiment Index - Level	70.6	71.0	69.0 to 72.0	66.0

Highlights
Consumer confidence is having a fainting spell. The Reuters/University of Michigan's reading on confidence, the consumer sentiment index, fell back a very steep 4.6 points to a very weak 66.0. Weakness is split between current conditions and the outlook. Inflation expectations remain subdued. Consumer confidence is declining even as manufacturing, housing and even retail report concrete improvement. The weakness is rooted in the still contracting jobs market. But note that movements in consumer confidence data don't always track movements in retail spending. The retail trade report for October, where the outlook is good, will be Monday's highlight.

Selling 50% Position at 1088

2009-11-12T15:21:00.002-05:00

Will look to reenter on bounce

China Riverboat Gambler - Part II

2009-11-11T23:30:00.003-05:00

Seems that rational people are arriving at a similar conclusion about China:

“China has embarked on a capital-spending bubble the likes of which the world has never seen,” famed short seller Jim Chanos claimed recently. “Buildings are going up with no tenants, roads are built with no traffic, shopping centers are built with no tenants or customers, yet they continue to be built and they continue to be planned.”
Heh, here comes the money shot:“China is Dubai times 1,000, if not a million,” he said. “At some point, all of this (ill-advised) investment will come home to roost.”

Adding to Shorts

2009-11-11T14:18:00.000-05:00

Adding to Technology, Real Estate, Small Cap shorts
S&P 1097

Gradually increasing short exposure as we continue to get overbought
If I am right, these are going to be intermediate term longs.

Short Term Sentiment Extreme

2009-11-09T21:36:00.004-05:00

This level of optimism has usually marked short term tops in the past. Looking for a correction and a final spike higher.

SPX:1093.77

Revising Upside Targets to 1123.15

2009-11-09T15:18:00.001-05:00

Significant resistance exists at S&P 1123. Any and all bears have been beaten to a pulp exactly what you would expect as the market reaches a topping point for this bear rally. The Fed and free money will fix everything.

The poorest consumers get hosed. Americans will struggle mightly - all but the richest anyways - to take a trip outside the U.S.

At the rate the government is going, Walmart will become Whole Foods.

I am going to stay bearish until 1123. Fortunately I took profits at 1046 and anticipated a ramp up to 1066. At that point, if the market continues to demonstrate strength, I will take my lumps and move to the sidelines.

Momentum following idiots are making hay. Any thoughtful analysis of the future impacts can be discarded. One only need to look to the Fed and see that the money printing is out in the open. Nothing else matters.

If the U.S. can extricate itself out of this by inflating their way, it will kill the field of economics as we know it and we can call the new science Bernankism, the science of inflating to prosperity.

Treasuries Not Confirming

2009-11-09T12:18:00.000-05:00

This pretty much sums up my views at this point, coming back to the key question of inflation or deflation. What will win in both scenarios is Gold. I agree with Rosenberg below. The finance mafia are going to inflate stock prices and destroy the dollar which in turn will unleash inflation on the masses. This is exactly what the Fed wants. Higher oil ditto. A low US dollar makes Americans poorer. While the U.S. wants to see inflation take hold, in the end, the U.S. consumer is unwilling to reflate. Reference the consumer credit report last Friday. Easy money is chasing assets.

But treasuries are still signalling deflation. And like Rosenberg, I still believe the deflationary forces in wages, consumer fear, layoffs, a weak consumer balance sheet, rising inflation in commodities and imports, are going to exert strong forces nearer term on consumers. The Fed's linkage intended to come through housing and asset reflation will be offset by continued bankruptcies, option arm defaults etc.

Via ZeroHedge & Rosenberg: Another reason to be bullish on gold is the recurring trade spats. Indeed, this is good news for the commodity complex as security of supply resurfaces — see China Attacks U.S. in Fresh Trade Spat” on page 2 of the weekend FT. If it’s not Chinese-made tires fingered by an increasingly protectionist U.S.A. one day, it’s steel pipe the next. This latest anti-dumping measure by the United States is facing a severe rebuke, as per the press reports, in China.

In addition to these trade protectionist actions, there is also the matter of more stimulus measures being undertaken in a mid-term election year at a time when the Treasury is expanding its debt issuance to new records right across the maturity spectrum. All anyone needs to do is have a look at the article Congress’s Blank Check For Housing in the weekend WSJ — to see this happening at a time of 10% budget deficit-to-GDP ratios, had indeed become a bottom-less fiscal pit.

Since the USA will not default, not raise taxes nor cut spending, the only logical recourse will be to print vast sums of U.S. dollars to fund this surreal foray into deficit finance. In other words, reflate. As we keep on saying, under Dr. Bernanke’s tenure, the monetary base has risen twice as much as nominal GDP has and the two lines continue to diverge. At the same time, gold production peaked a decade ago. It’s all about scarcity of supply, and as Sri Lanka’s central bank just reminded us, and India before that, there are buyers with deep pockets lining up to diversify into bullion. Here are the ‘what if’ realities stack up:
If India were to lift is gold share of FX reserves from 6% to 20%, where it was during the strong U.S. dollar policy days of 15 years ago, we estimate that gold would go to $1300/ounce.
If China were merely to copy what India just did and raise its share to 6%, then gold would go to $1,400/ounce, based on our in-house analysis.
If the USA were to go back to a 40% ratio of gold reserves to money supply (using the monetary base), where it was a century ago when the Fed was first created, from 17% currently, that would equate to three years’ supply of bullion, and alone take the gold price up to $2,750/ounce, based again on our research on price sensitivities to central bank buying activity.
Now gold is in a secular bull market and by no means are we suggesting that everyone line up at the vaults right this second — for the time being, it is too much front page news and a crowded trade, so it won’t hurt to wait for a pullback and get in at better prices (as an example, see Inside the Global Gold Frenzy on the front page of the Sunday NYT business section).

You see, when Bob Farrell wrote “The 10 Market Rules to Remember” he made sure that they were interesting reading and in doing so, some people get a laugh out of Rule Number 9 (“When all the experts and forecasts agree, something else is going to happen”) and Rule Number 10 “Bull markets are more fun than bear markets”). Nevertheless, they are just as important as the other eight rules. The obvious reason why Rule 5 is important (“The public buys most at the top and least at the bottom”) is that it also captures the inverse relationship between sentiment and the position of the market (ie, bullish sentiment peaks when the market tops and turns down and bearish sentiment peaks when the market bottoms and turns up). All that “agreement” adds enormous credibility to conventional opinion, just when it is most important to envision and prepare for the contrary. Lately, (you) have been experiencing shock at the policy responses by the U.S. government relative to the credit crisis and economic slowdown. Policies that encourage increased indebtedness by households and businesses are combined with massive deficit spending and Federal Reserve balance sheet expansion and the latter particularly, has enormous inflationary implications while exerting downward pressure on the value of the U.S. dollar. The problem with this understanding is that most everyone agrees.

To wit: According to Consensus Inc., bulls on the U.S. dollar are currently at 28%. Bulls on Treasury bonds are currently at 59% after hitting a low of 21% in early June when rates peaked in this cycle. Bulls on gold are at 78%. Bulls on the stock market are at 74% and they haven’t been that high since October 2007. It has become a crowded trade, and something very contrary to the expected outcome is likely to occur, at least over the near term.

Walter Murphy, our favourite technical analyst, expects a substantial rally in the U.S. dollar and a decline in gold over the medium term, even if those moves are counter-trend. He thinks that the war is on inflation, but the battle is deflation and this is a bear market rally in stocks. We have said repeatedly that it seems too early to call for an economic expansion with so much unfinished business in the process of household balance sheet repair. And, keep in mind that the deflationary forces emanating from the household are much greater than the inflationary forces associated with government stimulus, at least so far.

Sold All Gold Miners Today

2009-11-06T21:14:00.001-05:00

With the euphoria around Gold and Gold Miners and the market nearing a top, I think Gold is going to underperform over the short term. Either way, taking 20%+ profits and moving to the sidelines is a wise move.

The Psychology of Investing & the Road Less Traveled

2009-11-06T20:17:00.001-05:00

The news is relatively benign. The ISM looks good. The market held up well today despite a horrible unemployment number. The economy could pick up steam as further stimulus makes its way through the system.

These are some of the thoughts going through the mind of most institutional and retail investors. See, if you invest with an institution, there is a portfolio manager managing your money. I used to be a portfolio manager at a large institution no longer in existence. No it wasn't Bear Stearns. I walked away from the rat race many years back.

The portfolio manager in his heart of hearts knows we are screwed. But it is heresy to have a divergent view in an organization. Particularly if you are a mutual fund manager, how can you not be bullish now?

I recently attended a Deutsche Bank institutional conference. Amazing how bullish the crowd was and the one hedge fund manager that was bearish was apologetically so.

These are the sentiments that tops are made from. There was 2% bullishness at the bottom in March. There was 92% bullishness recently. The majority of investors are wrong at the turns. Success in investing requires taking the road less travelled.

What's Ailing the Financials

2009-11-06T14:50:00.001-05:00

Wondering what's been ailing the Financials?

First we had Citibank Raising Credit Card Interest Rates to 29.99% for Good Credit Customers
Sound desperate, right? It sounds like a gamble to me. They're basically giving consumers two choices, pay a loan shark / mafia interest rate or default. Think about what that does to consumer spending, foreclosures and default rates. Citibank despite receiving billions in bailouts has decided to throw a hail mary and hope that enough cash strapped consumers will have no choice but to pay the huge interest rates giving the bank a chance at surviving.

Then Wells Fargo with this nugget Wells Fargo Modifying Option ARMs into Interest Only

To solve that conundrum, Wells Fargo is taking a gamble: The bank is issuing thousands of interest-only loans that will defer borrowers' balances for as long as six to 10 years. Wells Fargo is wagering that an eventual rise in housing prices in the country's worst-hit regions, along with a rise in consumers' income, will eventually combine to cover the bank's billions in underwater Pick-A-Pay debt.

Now anyone that understands option arm mortgages knows that a majority of these buyers make the minimum payment. Normally the difference between the minimum payment and the interest only payment is substantial and my guesstimate is an increase at minimum of roughly 30-40% over the existing negative amortizing payment.

We think this only incents homebuyers to walk away from their homes and enter strategic defaults. What in heaven's sake would compel Wells to make this type of a drastic move?

Let me guess, they're thinking that the economy is recovering and consumers should be able to make the interest only payment. Or could it be that by converting to interest only mortgages, it stops the balance from rising thereby helping Wells earnings? Not an expert on financial earnings. But whatever the reasons, the end result is more foreclosures.

Add in to the mosaic, John Mack is looking to leave, Jaime Dimon is looking to leave and BAC's CEO just announced his retirement. The picture isn't pretty. The CEOs are bailing out, seeing no future potential for hundreds of billions in bonuses.

Sure, the recovery is going to be strong. I can hear the printing presses already running into overdrive. Only a matter of time before the Treasury Bailouts are back.

Transports Topping & Weakening

2009-11-06T13:26:00.002-05:00

Volume can often speak far louder than patterns. Notice the declining volume on subsequent peaks, classic signal that buyers are abandoning this rally, precisely the opposite of what you would want to see in a true recovery. Meanwhile sellers are getting more confident and downside volume is rising.

Head & Shoulders Again. Will This Be the Real Thing?

2009-11-06T13:14:00.001-05:00

The entire media was obsessed with the previous H&S we got in August that turned out to be a head fake. Now everyone sees the pattern but no one is willing to give any weight to it.

Also the volume has markedly picked up on the declines and volume on the uptrends is anemic. Despite what feels to most observers as a raging bull market, these are not the characteristics of a recovery rally.

Yet another data point in the mosaic that tells me that this rally is a mirage.

What Is Being Missed By the Unemployment Report & Structural Issues

2009-11-06T11:57:00.000-05:00

One of the items that no one refers to that is different this time around is that over the past decade, businesses figured out a way to hire employees without having to take on the burden of payroll taxes, insurance etc on behalf of these employees. For instance

All real estate companies hire real estate agents as independent contractors
All mortgage brokers hire mortgage agents as independent contractors
Recently, I have become aware that even small hedge funds are now involved in the practice of hiring employees as independent contractors
A huge number of freelancers in advertising, legal and other services industries are hired as independent contractors
and so on..

This is yet another way that businesses figured out to screw workers out of benefits, reduce costs, reduce legal benefits. The practice is pervasive across a large number of industries.

My question is what happens to U6 when we add in all the brokers, mortgage agents, construction workers, graphic designers, legal associates etc that have quit. Remember as an independent worker, the company that hires you has no costs incurred for keeping you on as an employee. I don't need to remind you what a shamble real estate has been the past few years with a pickup only occurring in the past few months.

The real unemployment numbers, whether you look at U6 or the reported unemployment rate, is far worse that what is being reported.

Structural Destruction
As a bull, there really is nothing in this data, nor in the initial claims data that supports the optimism of the bulls. Consumers continue to lose over 500,000 jobs a month. We are now close to a point where the structural impacts become damaging. Companies are thriving by laying off workers and reporting no top line growth but bottom line earnings. But earnings are driven by consumer spending. The feedback effects have been muted to date as a result of massive stimulus spending.

What's Coming
Over the coming months, option arms will reset, commercial real estate is about to collapse, the states are in financial shambles and the consumer is dying. Valuations are at ridiculous levels.

Enjoy the optimism. Unfortunately, in coming months, the reality is about to hit and we will not get back to this level of confidence for many quarters.

Possible Upside Targets

2009-11-05T20:49:00.002-05:00

Typical targets for this upmove : 1074.04 - 1076.59

But I always remind myself that the market never does the obvious thing (hat tip Atilla) and always has something up its sleeve.

There Is Usually A Simple Explanation

2009-11-05T19:54:00.001-05:00

Trader involved in insider trading worked at SAC Capital

I was at a large bank on Wall Street back in the Nasdaq heyday. The internet analyst at our firm was Holly Becker and she was an axe on Internet stocks along with some others, Meeker, Blodget etc.

It was found out back then that Holly Becker had been feeding her calls pre-release to her husband, who happened to work at SAC Capital. Holly resigned, no prosecutions were made. I found it unbelievable. Such is the world that is Wall Street.

The point I want to make is that in the vast majority of cases of significant outperformance, there is usually a very simple explanation. Our culture has no moral hazard. Sports, Business, Politics. Fame, fortune and power trump morals. Period.

Market at Price, Time & Moving Average Resistances, But Pattern Not Yet There

2009-11-05T15:40:00.005-05:00

Markets are now in an interesting setup. We are approaching the 38% time retrace on the move down at the same time that unemployment is due. Further, the market's progress today was halted at the 50% retrace.

Fundamentally a significant amount of optimistic expectations about the jobs report are embedded in the market. Any disappointment would see a selloff. On the other hand, given the optimistic move the past few days, a better than expected number would see a small rally and a sell the news type of event.

This is not a projection, I don't make short term daily market forecasts, leave that to the traders.

But this does offer a juicy setup. We're at an 50% retrace on the up move, a 38% time retrace, and also butting up the under side of the uptrend line.

Further, we are approaching the 20 day moving average. And if the market manages to get past all this resistance, we have the mother of all trend lines sitting in the 1080s that repelled the market recently.

Edit: 4pm: Pattern is now nearing completion and we are in the last stages of the rally in my opinion.

Taking Profits In Gold Miners

2009-11-05T14:12:00.002-05:00

While Gold certainly has a long way to go upwards, the bullishness for the yellow metal has gotten out of control. Following my contrarian investment philosophy, we got into Gold a few months ago when market participants were still high on equities and rode this smooth wave up for over 20% gains. Now that the masses are joining in the trade, I think it's time to step away from this trade for a while and wait for a correction.

Specifically, this call also ties in with my expectation that the dollar may rally, leading to a drop in commodities, and a correction in stocks. I'm not going to short this metal but step to the sidelines.

Rising Productivity, Euro Sales, Falling Wages - Consumer Is Getting Squeezed

2009-11-05T12:44:00.002-05:00

Three pieces of news out today and while we all know the take that the media will take on these is wildly optimistic, bringing buyers into the market, my take is all three are actually a commentary on a European/U.S. consumer that is being squeezed at work, spending less, feeling less confident and making less money. None of these are good signs for the bulls.

Some sobering data about the recovery: Retail sales post surprise fall
As the recovery gets underway, the key component - the consumer - is missing. This is primarily the result of the policies pursued both sides of the Atlantic - namely preserving the status quo structure, implementing policies that only benefit the few while increasing the debt burdens of the many.

LONDON -- Retail sales in the 16 countries that use the euro fell for the third straight month in September, indicating that, with unemployment on the rise, consumer spending has yet to provide a support for growth.

The European Union's statistics agency Eurostat said Thursday that sales volumes in the euro zone fell by 0.7% in September from August and declined 3.6% from September 2008. The decline was unexpected, with economists surveyed by Dow Jones Newswires last week estimating that sales grew 0.1% on a month-to-month basis.

The August data were revised to show a 0.1% fall on the month, having previously recorded a 0.2% drop.

Consumer confidence has rebounded from its collapse early in the year, but rising unemployment will likely be a drag on spending for many months to come. Sales of food and drink fell 0.9% on the month and 2.3% on the year, while nonfood sales declined 0.6% on the month and 4.1% on the year. In the 27 EU member countries, sales fell 0.4% on the month and fell 2.5% on the year.

Productivity Surge Signals Job Growth to Follow was the headline.

The Labor Department said on Thursday that productivity surged at a 9.5 percent annual rate, the quickest pace since the third quarter of 2003, as companies squeezed more output from a smaller pool of labor to hold the line on costs.

Isn't this a different way of saying that there is no topline growth in the economy and companies are squeezing profits by cutting costs.

Meanwhile, deflationary pressures continue to filter through wages.

Unit labor costs fell 5.2 percent last quarter after declining 6.1 percent the previous period. Analysts had forecast a drop of only 4 percent.

Adding to Shorts S&P 1062

2009-11-05T11:20:00.003-05:00

Sold 50% at 1046 of Position In Anticipation of Final Move Higher

2009-11-04T16:24:00.001-05:00

Building Short Positions at S&P 1060

2009-11-04T11:21:00.001-05:00

Shorting Small Caps & Emerging Markets
Usually the direction into the Fed is reversed post Fed so this rally this morning is welcome.

Why Would Mike Bloomberg spend $100 million to run for Office for $1 wages?

2009-11-03T23:08:00.002-05:00

I don't understand the economics of this... jus sayin'
Is anyone wondering the same question?

Hey Floridians, Las Vegans, Californians.... Sound Familiar?

2009-11-03T21:37:00.001-05:00

It is not my intent to bring back past wounds or pour salt on them, but you have to read this to believe it...

Surging demand for residential units has in recent months seen potential buyers queue for hours before new house openings and anecdotally many have left blank checks with their property agents to fill out to secure their spots in new projects.

Private sector developers in July launched an all-time high of 2,878 new flats and an astounding 2,767 of those units were sold out within a month. That sales figure smashed by 52% the record of 1,825 units sold set the previous month

In case you haven't figured out where, this is Now, in Singapore
New heights for Singapore property

http://www.atimes.com/atimes/Southeast_Asia/KK04Ae01.html

The China Bubble

2009-11-03T21:22:00.000-05:00

The press is starting to warm up to our view that the Chinese situation resembles Japan in the 1980s.

I'm not going to call it a bubble because the growth positioning of India is enviable, but the prices of property in Mumbai, Gurgaon and other parts of the country relative to income are astounding, humbling and shocking to me.

China rushes towards a Japan-style bubble
By Peter Tasker

Emerging markets, it seems, have had a good crisis. In contrast to the debt-ridden G7 economies, they have quickly resumed their growth trajectory. No surprise, then, that US emerging market mutual funds are experiencing record inflows. The stellar performance of the Brics markets - Brazil, Russia, Indian and China - is due to continue into the distant future.
Such is the narrative now forming among investors. To anyone who has lived through the rise and fall of the Japanese bubble economy, it should set off alarm bells.

Remember that it was in the years following the 1987 "Black Monday" crash that Japanese assets went from being expensive to absurdly overvalued and the Nikkei's dizzy rise to 39,000 forced the bears to throw in the towel.

Then, as now, the logic seemed unassailable. While the western world was stuck in the post-crash doldrums, the Japanese economy had got back on track with apparent ease. Japanese corporations were using their high market capitalisations to finance acquisitions of foreign trophy assets. Japanese banks boasted the world's strongest credit ratings.
But what you saw was decidedly not what you got. The crisis, far from leaving Japan unscathed, exacerbated its structural problems and laid the groundwork for a far greater disaster. And it was the weak western economies, not Japan, that produced healthy investment returns over the next decade.

In reality, 1980s Japan was never going to be terminally damaged by weakness in export markets. Its current account surplus and strong fiscal position provided the macro policy leeway to make any slowdown strictly temporary. The Bank of Japan duly put the pedal to the metal and the recently deregulated banks went on a patriotic lending spree. High-end consumption boomed but the real action was in the asset markets and capital investment, which soared as a proportion of gross domestic product.

Sound familiar? It should, because the same dynamic is evident today in China and some other emerging economies.

At the 2008 peak, the price-to-book ratio of the Shanghai stock exchange was over seven times, well above the five times achieved by Japanese stocks in 1989. After the turbulence of the past 18 months, the ratio has fallen to 3.3 times, still the world's second highest after India, and residential real estate trades at multiples of income that make the US housing boom look tame.

Why would China's rulers embark on a such a disastrous course? Because the alternative - unleashing deflationary forces stored up over years of mercantilist policies - would be too painful to contemplate. That was the choice made by Japanese policymakers, who had 100 years' experience of managing a quasi-capitalist economy.

While we can call these bubbles, based on anecdotal evidence emerging markets investors are convinced that they have survived and are immune to what ails the first world. Time will tell, but a nagging feeling tells me I've seen this story before.

Cheap Option Strategies

2009-11-03T13:36:00.002-05:00

I have started building a position in TZA DG, the option premium is around $1.50 per option on three times the small caps index. That premium can be made up by the index on one good down day. The option is good till April. It is a good risk reward. I plan to hold this for a while.

Edit : Added 20% position on Thursday Nov 12th

Gold Target 1250 to 1300

2009-11-03T13:32:00.002-05:00

A classic inverse head and shoulders pattern projects the Gold price to 1250 to 1300. Strong technical support, strong central banker emerging interest, strong public sentiment, strong Chinese demand. Good luck to the two major institutions that are rumored to be short this currency.

Gold & the Indians

2009-11-03T13:25:00.001-05:00

We've been fortunate to be long this rally in Gold entering GLD at 920 and building positions in the Gold Miner Smallcaps which are rocketing higher today. Favorite: New Gold NGD among the small miners.

Today marks a further confirmation. The bull market in Gold for central bankers just got started today. The forces of demand are gathering steam.

I have a 26% sector allocation to Gold in my portfolio, mostly in the miners and small caps which are really option plays on Gold. The emerging market central bankers are now realizing that they need to be long this commodity.

Much has been made about Gold's move higher by those that don't get it. Gold is not necessarily an inflation play, nor a deflation play, although I believe the miners are both, given deflationary trends in production costs and inflationary trends in pricing.

What Gold is simply, is a holding that gains in value when government policies erode the value of paper money. Secondly it is a store of value and the only currency that has survived over 5000 years. In an era where every major currency is a questionable value, Gold is the rock.

Out at S&P 1041

2009-11-03T11:30:00.000-05:00

Investors Business Daily Sentiment - Bearish

2009-11-02T22:29:00.001-05:00

Another respectable indicator moves over to the dark side.

Investors Business Daily’s Big Picture market tracker has been a remarkably prescient indicator over the course of the last year. Following this indicator kept investors out of the major losses last year and got you back in the market early enough to capture the majority of the gains off the March bottom.
They’ve been bullish throughout the massive rally and just changed their outlook to negative for the first time since the rally began. They note the high volume of the recent sell-off, loss of leadership, and high number of distribution days as the reasons for their move to a bearish stance. They now recommend avoiding new stock purchases altogether until the market begins to exhibit some signs of strength

Source: PragCap

Covered More Shorts, Long Small S&P 500 Position at 1035

2009-11-02T13:08:00.001-05:00

Breaking Down the Bull Argument from David Dreman

2009-11-01T23:33:00.001-05:00

This Month in Forbes by David Dreman :

Is Recession Normal? No
David Dreman, 11.16.09, 12:00 AM ET

Let's look more closely at the bear case. While it's true the market has had an enormous rally since early March, it is important to remember that it had fallen more precipitously than at any time since the Great Depression. The financial sector of the S&P 500, for example, fell 83% between June 1, 2007 and Mar. 6, 2009. This sector's decline was steeper than the overall market's decline between September 1929 and the 1932 low. So yes, this rally is strong and sharp, but remember that it comes off the worst stock market drop since the 1930s. It still hasn't really come close to recovering the ground it has lost. The Financial Select Sector SPDR Fund (XLF) is trading at 60% below its 2007 high.
So please don't judge the current rally in the context of typical market cycles. Remember, about a year ago our global financial markets were in a state of panic. If you check market history, you will see that the rallies following such panic attacks tend to be sharper and swifter.

As I point out in one of my previous posts, we agree that rallies are sharp and vicious off severe selloffs. No arguments there. But neither has the case for a new bull market been made yet by Mr. Dreman.

And please don't fixate on trailing price/earnings ratios. Multiples are inflated because earnings are depressed. It's that simple. We are in a severe recession, and hundreds of companies have ailing income statements.

Stock market investors aim to see around corners, and they should be doing that now. Corporate earnings will be down sharply this year (particularly if you include writeoffs), but they will rebound over the next three years. I can't tell you how quickly the recovery in earnings will come, but I am sure it will come. Go back to that market of 1932, when the Dow Jones industrial average bottomed out at 41.22. The Dow almost tripled within the next three years, even though it took earnings almost five years to catch up to where they were before the crash. In short, it's normal for stocks to rebound ahead of earnings.

Mr. Dreman is comparing the current cycle against the Depression. Fine. It took the market three years to bottom and during that time there was in fact a 50% rally. But the market fell another 80% after that. Further, the market did not get back to the levels of that initial 50% rally of roughly 300 on the Dow until 1954! That is 22 years later Mr. Dreman. Not a convincing argument that we are to look blindly into the abyss and trust that earnings will recover, debts will be repaid, valuations will catch up to the market.

I'd be more inclined to be receptive if the market exhibited characteristics of a bottom. The market was overvalued compared to historical metrics at bottoms on Price / Sales, Price / Earnings, Dividend Yield. Bottoms are also usually accompanied by hatred, revulsion. Markets tend to die a slow death and then are born anew when no one is watching. Granted we got revulsion from a section of the market, but market participants were frothing at the bottom. That by definition is not a true bottom. I am not convinced by a long short.

The bears have a different view. They think the economic malaise will last for years or even decades, as in post-1989 Japan. Get used to a new normal in our economy, they say, one in which growth is sluggish or nonexistent for a whole generation. I say rubbish.

The great global investor John Templeton (1912--2008) said that the four most dangerous words in investing are "This time it's different." In more than 30 years of managing money I have witnessed many a shift in market sentiment. It lurches from irrational exuberance (as with tech stocks a decade ago) to irrational gloom (bank stocks in March). I just don't accept today's gloomy view.

In fact Mr. Dreman you're the one asking for blind faith and telling us this time is different, that the market can avoid historical characteristics of stock market bottoms, that we can issue mountains of debt to work off a debt crisis, that there is a fundamental loss of moral hazard, that the consumer is tapped, that Japan is in a debt and demographic crisis and will not assist in this recovery, ditto U.K.

Finally you Mr. Dreman are another child of the bubble in U.S. prosperity of the past 30 years and your automatic assumption, similar to Washington Politicians, is that the U.S. will revive because it has always done so in the past 30 years.

I would point you to this weeks Barrons article on the Depression. Everyone underestimated the depth of the correction because there hadn't been a severe correction in over 20 years. Ignore history at your own peril, Mr. Dreman.

History Lesson From the 'Twenties

2009-11-01T22:01:00.001-05:00

Courtesy Barrons

Most of the article blames the government for policy mistakes. Fair enough, policy mistakes were made. But at a fundamental level, it was the misguided, misinformed opinion of the politicians - probably in connection with big corporations - that they are more potent than the business cycle and possess the tools to create immediate, ongoing prosperity.

In many ways, the approach we are taking today reminds me of the same sort of thinking, that QE, bailing out the banks, creating huge amounts of debt will leave us better off. Somehow, history suggests that this time will not be any different. My core principle "you cannot fight your way out of a debt crisis by issuing more debt".

EIGHTY YEARS AGO THIS WEEK, THE U.S. economy took its first step into the abyss. Variety magazine headlined it as "Wall Street Lays an Egg." Barron's headlined with "Severe Liquidation on Thursday Stemmed by Banking Support; Subsequent Rally Followed by Orderly Decline at End of Week."

The severe liquidation of Black Thursday, Oct. 24, 1929, continued into the next week. By the issue of Monday, Nov. 4, Barron's was reporting "one of the most cyclonic breaks in the history of Wall Street." From the peak of Sept. 3, when the Dow Jones Industrial Average reached 381.17, the decline totaled 151.1 points on Nov. 4. "In barely seven weeks, the price gains of more than a year were swept away."

In neither Variety nor Barron's was there any apprehension that the Great Depression would follow the stock market.

In November 1929, Hoover took an active role in protecting the economy. He met with industrialists and union leaders and pushed them into a deal: Industry would not cut wages. Unions would not strike. If there wasn't enough work, jobs would be shared rather than prompting layoffs.

Hoover believed high wages were the key to prosperity. For employers, he created policies that allowed firms to cooperate in order to avoid "cut-throat competition" for labor.

On the labor side, Hoover signed the Davis-Bacon Act forcing local governments to pay union wages on public works and the Norris-LaGuardia Act outlawing injunctions against strikes and picketing.

Hoover's policies did what they were supposed to do: By late 1931, real hourly earnings in manufacturing had increased by more than 10% (adjusted for deflation of prices). Yet manufacturing hours worked had declined by more than 40%, even more than total output, which fell about 20%. By the end of 1931, the general unemployment rate was 15.9%, and it would get still worse for two more years.

Ohanian calculates that under Hoover's wage-support program, which trickled down from large businesses to small, the prevailing industrial wage rate was as much as 40% higher than the wages job-seekers would accept. Too many workers chased too few jobs that paid too much, and the result was men lined up around city blocks to apply for jobs.

The Hoover policy was more cooperative and voluntary than the mandates of the New Deal's National Industrial Recovery Act, but they were the same anticompetitive, price-fixing policies.

While generations of Americans have blamed Hoover for relying on the free market instead of government intervention, some of the workers' misery in the Great Depression should be attributed to Hoover's mistaken high-wage policy.

Japanese Demand for U.S. Debt Is Bound to Weaken Dramatically

2009-11-01T20:18:00.001-05:00

By way of the always dramatic and usually accurate Ambrose Evans comes this piece that ties in with my view that markets are not recognizing the severity of the Japanese situation and how this will impact future purchases of U.S. Treasury securities.

It is Japan we should be worrying about, not America

Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return.
The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany (21), France (22), the US (22), and even Britain (47).

Implications: The Japanese carry trade is likely to continue losing favor, leading to a strengthening impact on the Yen and weakness for the Dollar.

Secondly, the rapidly deteriorating situation makes it increasingly a fait accompli that the Japanese will not be able to continue their Treasury purchases at a time the U.S. desperately needs their support in the wake of the Fed's completion of their $330 billion purchase program.

Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default".

The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.

"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.

The savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate. Japan's $1.5 trillion state pension fund (the world's biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.
The pillars of the government debt market are crumbling. If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.

Japan is descending into a debt situation where it is only a matter of when not if.

No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

"This is incredibly dangerous," said Russell Jones from the RBC Capital Markets. "The rate of deflation is shocking. The debt dynamics are horrible and there is the risk of a downward spiral."

And some particularly ominous conclusions that portend where we think U.S. strategy is headed:

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

China : When the Driver of the World Economy Is A Speculative, Drunk, Riverboat Gambler

2009-11-01T00:21:00.002-04:00

It is our opinion that China today is circa Japan in the late 1980s when it was a manufacturing powerhouse and seemed poise to continue its rise to superpower and world domination.

Jim Grant, Grants Interest Rate Observer:

“China today is where Japan was in the late ’80s, except with the greater political instability that comes with a semi-controlled economy and the lack of a social safety net (read: jobless, hungry people don’t write angry letters, they riot)…Today China projects to the world a similar image as Japan did in the 1980s… “

Richard Bernstein, former chief investment strategist at Merrill Lynch, says China’s economy is overheating and that investors should avoid its stock market. “China is an immense credit bubble that's going on right now,” he tells CNBC. "They have massive overcapacity and their solution to that problem was to build more capacity over that," says Bernstein, now CEO of Bernstein Capital Management.

“A superb primer on the risks of

China

’s go-for-broke lending drive was published by Fitch Ratings on May 20. Is it not passing strange, the agency asks, that Chinese lending is accelerating even as Chinese corporate profits are shrinking? ‘Ordinarily, falling corporate earnings are met with tightened lending, but in China, precisely the reverse is evident. . . .’ You would expect—and Fitch does anticipate—that the borrowers of these trillions of renminbi are not so profitable as they were in the boom, and some will therefore struggle to service their debts.”

Lately, the Chinese economy has been impressing us with its growth…But Chinese economic structure is not is not superior to the West’s; the Chinese can just cook GDP numbers better and control their economy more effectively through forced lending and spending.
However, these short-term advantages come with long-term consequences – there will be a steep price to pay for them; there always is.

“Examining, first, the track of Chinese bank lending and, second, the trend in Chinese nonperforming loans, the seasoned reader will remember … Drexel Burnham Lambert. In the mid-to-late 1980s, the American junk bond market combined breakneck growth with muted default rates. The secret, fully revealed during the subsequent bear market, was that the default rates were a direct product of the issuance rates. Borrowers didn’t default because of—to adapt the Fitch formulation to that earlier time—the ‘pervasive rolling over and maturity extension of bonds as they fell due.’ Drexel failed when the junk market did.

“Since 2005, China has generated 73% of the global growth in oil consumption and 77% of the global growth in coal consumption.”

Today, Chinese economic growth is the force pushing the global economy and stock markets. The quality of this growth, however, is low as it is predicated on massive (forced) lending and is unsustainable. As and when Chinese growth finally slows, the impact will be felt in many, often unsuspected places.

We believe that China’s pulling in the reins will impact commodity markets, commodity producers and commodity exporting nations. Combined with our expectation of deflation in the intermediate term, this will severely impact commodities. Let’s take oil, for instance. As incremental demand from China slows, oil prices will suffer and impact the Russian economy in particular. China accounts for 15% of Brazil’s exports (up from 1.5% a decade ago), significantly impacting the economy of that South American nation.

Finally, we are bearish on China because of the enormous amount of overcapacity that currently exists in the country. China’s manufacturing capacity was structured for a leveraged

U.S.

consumer and a leveraged world. As the world delevers,

China

as the exporting nation faces a difficult transition given it’s excess capacity. Like the U.S., it is desperately attempting to reflate its economy and continue growth is because it sees the difficult adjustment that lies ahead.

Performance - Trades

2009-10-31T15:11:00.001-04:00

Type	Date/Time	Symbol	Price	Shares/Ctrts	Net Profit
Type	Date/Time	Symbol	Price	Profit	Cum Net Profit
Buy	10/23/09 15:32	DIW WJ	$2.85	10	$150.00
Sell	10/26/09 11:40	DIW WJ	$3.00	150	$150.00
Buy	10/26/09 11:14	TZA	$11.60	1000	$510.00
Sell	10/26/09 11:55	TZA	$12.11	510	$660.00
Buy	10/23/09 13:49	ERY	$11.20	1000	$170.00
Sell	10/26/09 12:00	ERY	$11.37	170	$830.00
Buy	10/26/09 11:16	TZA	$11.66	1000	$600.00
Sell	10/26/09 12:00	TZA	$12.26	600	$1,430.00
Buy	10/26/09 11:37	TZA	$12.10	1000	$150.00
Sell	10/26/09 12:02	TZA	$12.25	150	$1,580.00
Buy	10/26/09 11:37	TZA	$12.10	1000	$150.00
Sell	10/26/09 12:02	TZA	$12.25	150	$1,730.00
Buy	10/23/09 15:32	DIW WJ	$2.85	10	$350.00
Sell	10/26/09 12:02	DIW WJ	$3.20	350	$2,080.00
Buy	10/26/09 11:20	DIW WJ	$2.50	10	$700.00
Sell	10/26/09 12:02	DIW WJ	$3.20	700	$2,780.00
Buy	10/26/09 12:22	TZA	$12.27	1000	$50.00
Sell	10/26/09 13:21	TZA	$12.32	50	$2,830.00
Buy	10/26/09 15:53	ERY	$11.65	1000	$120.00
Sell	10/26/09 18:55	ERY	$11.77	120	$2,950.00
Buy	10/26/09 15:50	TZA	$12.30	1000	$190.00
Sell	10/27/09 13:00	TZA	$12.49	190	$3,140.00
Buy	10/26/09 15:56	DIW WJ	$3.35	10	$200.00
Sell	10/27/09 13:44	DIW WJ	$3.55	200	$3,340.00
Buy	10/27/09 10:51	DIW WJ	$3.30	10	$250.00
Sell	10/27/09 13:44	DIW WJ	$3.55	250	$3,590.00
Buy	10/27/09 11:16	DIW WJ	$3.40	30	$450.00
Sell	10/27/09 13:44	DIW WJ	$3.55	450	$4,040.00
Buy	10/27/09 13:05	GFA	$33.04	250	($147.50)
Sell	10/27/09 14:00	GFA	$32.45	-147.5	$3,892.50
Buy	10/27/09 10:52	TZA	$12.39	500	$190.00
Sell	10/27/09 15:53	TZA	$12.77	190	$4,082.50
Buy	10/27/09 11:04	TWM	$29.13	500	$295.00
Sell	10/27/09 15:54	TWM	$29.72	295	$4,377.50
Sell Short	10/27/09 10:54	IRE	$13.11	150	$441.00
Buy to Cover	10/28/09 11:41	IRE	$10.17	441	$4,818.50
Buy	10/27/09 17:28	EDZ	$6.49	500	$320.00
Sell	10/28/09 11:43	EDZ	$7.13	320	$5,138.50
Buy	10/27/09 10:52	TZA	$12.39	500	$530.00
Sell	10/28/09 11:43	TZA	$13.45	530	$5,668.50
Buy	10/26/09 15:59	FAZ	$20.70	500	$765.00
Sell	10/28/09 11:43	FAZ	$22.23	765	$6,433.50
Buy	10/27/09 15:50	SMN	$10.56	500	$300.00
Sell	10/28/09 11:43	SMN	$11.22	300	$6,733.50
Buy	10/27/09 10:35	ERY	$11.41	500	$295.00
Sell	10/28/09 11:44	ERY	$12.00	295	$7,028.50
Buy	10/27/09 15:49	SRS	$10.06	500	$240.00
Sell	10/28/09 11:44	SRS	$10.54	240	$7,268.50
Buy	10/21/09 12:54	QID	$21.50	250	$447.50
Sell	10/28/09 11:45	QID	$23.29	447.5	$7,716.00
Buy	10/27/09 10:35	ERY	$11.41	500	$315.00
Sell	10/28/09 12:01	ERY	$12.04	315	$8,031.00
Buy	10/27/09 17:28	EDZ	$6.49	500	$350.00
Sell	10/28/09 13:24	EDZ	$7.19	350	$8,381.00
Buy	10/27/09 14:11	TZA DF	$5.70	10	$700.00
Sell	10/28/09 14:26	TZA DF	$6.40	700	$9,081.00
Buy	10/28/09 15:40	TZA	$14.17	1000	($90.00)
Sell	10/28/09 15:46	TZA	$14.08	-90	$8,991.00
Buy	10/28/09 11:55	GFA	$29.49	100	$141.00
Sell	10/29/09 11:05	GFA	$30.90	141	$9,132.00
Buy	10/27/09 16:06	NFLX	$54.29	100	$890.00
Sell	10/29/09 11:05	NFLX	$55.18	890	$10,022.00
Buy	10/27/09 17:20	PZG	$1.28	1000	($60.00)
Sell	10/29/09 11:06	PZG	$1.22	-60	$9,962.00
Buy	10/20/09 12:53	NGD	$4.17	500	($220.00)
Sell	10/29/09 11:07	NGD	$3.73	-220	$9,742.00
Buy	10/21/09 11:45	NGD	$4.28	500	($275.00)
Sell	10/29/09 11:07	NGD	$3.73	-275	$9,467.00
Buy	10/28/09 13:28	V	$77.33	100	($10.00)
Sell	10/29/09 11:17	V	$77.23	-10	$9,457.00
Buy	10/28/09 13:20	GFA	$29.89	50	$70.50
Sell	10/29/09 11:17	GFA	$31.30	70.5	$9,527.50
Buy	10/29/09 13:04	SPY	$106.23	250	$0.00
Sell	10/29/09 13:04	SPY	$106.23	0	$9,527.50
Buy	10/29/09 11:03	TWM	$30.44	250	$15.00
Sell	10/29/09 13:05	TWM	$30.50	15	$9,542.50
Buy	10/28/09 13:31	ENTR	$2.85	1000	($60.00)
Sell	10/29/09 13:27	ENTR	$2.79	-60	$9,482.50
Buy	10/21/09 11:45	NGD	$4.28	1000	($490.00)
Sell	10/29/09 15:51	NGD	$3.79	-490	$8,992.50
Buy	10/29/09 11:01	FAZ	$21.57	500	$50.00
Sell	10/30/09 11:36	FAZ	$21.67	50	$9,042.50
Buy	10/29/09 13:45	FAZ	$20.83	250	$252.50
Sell	10/30/09 11:37	FAZ	$21.84	252.5	$9,295.00
Buy	10/29/09 11:00	EDZ	$6.70	1000	$400.00
Sell	10/30/09 11:39	EDZ	$7.10	400	$9,695.00
Buy	10/29/09 10:58	TZA	$13.36	500	$245.00
Sell	10/30/09 11:39	TZA	$13.85	245	$9,940.00
Buy	10/29/09 11:24	KRE XE	$4.40	10	$100.00
Sell	10/30/09 11:40	KRE XE	$4.50	100	$10,040.00
Buy	10/29/09 11:00	EDZ	$6.70	500	$210.00
Sell	10/30/09 12:11	EDZ	$7.12	210	$10,250.00
Buy	10/29/09 10:58	TZA	$13.36	500	$235.00
Sell	10/30/09 12:11	TZA	$13.83	235	$10,485.00
Buy	10/30/09 12:17	SPXU	$45.29	500	$180.70
Sell	10/30/09 12:37	SPXU	$45.65	180.7	$10,665.70
Buy	10/29/09 11:00	EDZ	$6.70	500	$280.00
Sell	10/30/09 12:37	EDZ	$7.26	280	$10,945.70
Buy	10/29/09 12:56	EDZ	$6.52	500	$370.00
Sell	10/30/09 12:37	EDZ	$7.26	370	$11,315.70
Buy	10/29/09 11:03	TWM	$30.44	50	$610.00
Sell	10/30/09 12:37	TWM	$31.66	610	$11,925.70
Buy	10/29/09 13:05	TWM	$30.51	250	$287.50
Sell	10/30/09 12:37	TWM	$31.66	287.5	$12,213.20
Sell Short	10/27/09 11:21	WYNN	$57.51	100	$326.00
Buy to Cover	10/30/09 12:37	WYNN	$54.25	326	$12,539.20
Buy	10/29/09 12:56	TZA	$13.18	500	$420.00
Sell	10/30/09 12:37	TZA	$14.02	420	$12,959.20
Sell Short	10/27/09 10:54	IRE	$13.11	100	$275.00
Buy to Cover	10/30/09 12:38	IRE	$10.36	275	$13,234.20
Sell Short	10/29/09 11:08	IRE	$10.81	50	$22.50
Buy to Cover	10/30/09 12:38	IRE	$10.36	22.5	$13,256.70
Buy	10/29/09 12:56	TZA	$13.18	500	$525.00
Sell	10/30/09 13:16	TZA	$14.23	525	$13,781.70
Buy	10/29/09 12:56	EDZ	$6.52	500	$395.00
Sell	10/30/09 13:16	EDZ	$7.31	395	$14,176.70
Buy	10/29/09 13:59	EDZ	$6.48	500	$415.00
Sell	10/30/09 13:16	EDZ	$7.31	415	$14,591.70
Sell Short	10/29/09 11:08	WYNN	$56.93	50	$158.00
Buy to Cover	10/30/09 13:16	WYNN	$53.77	158	$14,749.70
Buy	10/30/09 13:53	QQQ KP	$0.70	10	($40.00)
Sell	10/30/09 15:48	QQQ KP	$0.66	-40	$14,709.70

Reasons For Bearishness Continue - Oct 31, 2009

2009-10-31T13:45:00.002-04:00

1. Technical Breakdown The S&P 500 is riding a four-day losing streak. And while we have seen these corrections turn around before during this massive bear market rally that started last March, the difference this time is that the uptrend line from the lows has been violated across a fairly broad front, including the S&P 500, Nasdaq and the Russell 2000. When trend lines get violated, and when this happens on high volume, it usually, though not always, signals something big.

2. Valuation In terms of valuation, we said yesterday that the P/E ratio on the S&P 500 on a normalized 10-year basis is 22x and the long-turn norm is 16x. Just to go back to the norm, let alone compress to a level commensurate with an unusually high level of economic and financial uncertainty, would suggest that we would see the S&P correct down towards 860.

3. Fannie Mae: Delinquencies Increase Sharply in August
Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 4.45% in August, up from 4.17% in July - and up from 1.57% in August 2008.

We are back in the bubble years offering zero down payment homes, 125% LTV loans to unsuspecting first time home buyers. Yet another case of trying to create a bubble to solve our problems.

4. Courtesy ZeroHedge - CRE Crash & Implied Lack of Fed Support Will Hurt Bank Balance Sheets
In what could have been the biggest piece of news today, yet making little headway into the media, the Fed announced that it is adopting a policy statement supporting "prudent commercial real estate loan workouts."

The Fed seems to now be encouraging active loan workouts as a matter of policy. The other implication is that firms with CRE exposure can no longer rely on the Fed as a perpetual guarantor of risky exposure. Not only that, but in adopting a new policy strategy, the Fed is acknowledging the major problem that CRE writedowns will represent for banks, yet is telling banks to resolve problems on their own, while subsequently they will "not be subject to criticism for engaging in these efforts."

The implications of this Fed action for the economy could be staggering as the $3.5 b,quadr,trillion CRE market will likely not receive the same largesse that residential real estate has been the recipient of ever since the conservatorship of the GSEs. And the biggest loser in all of this will be banks that still have not used the massive risk rally to offload whole loan and CMBS CRE holdings, and moreover, still have these marked at par or close thereby.

As Wilbur Ross and George Soros pointed out earlier, the trouble for CRE is just starting. If the Fed is unwilling to recreate QE for CRE, in the same way that it continues to bail out residential exposure, then look for a major double dip in the economy. The only wild card is why the Fed is letting this happen, although if the political backlash against just QE 1 is any indication, then it likely would not have been able to pass additional liquidity measures regardless.

5. And out of the Economist, America’s debt crisis will be chronic, not acute

AS AMERICA’S financial crisis recedes, the rumblings of its next crisis can be heard. The federal government has wrapped its guarantees around banks and the housing market. It has borrowed hundreds of billions of dollars to stimulate the enfeebled economy, while tax revenues crumble. And in the years to come the cost of retirees’ benefits will explode. “There is every reason to worry that the banking crisis has simply morphed into a long-term government-debt crisis,” says Kenneth Rogoff of Harvard University.

The Treasury’s ravenous borrowing needs also leave lots of opportunities for something to go wrong. In the past two years the portion of its debt maturing in less than a year has jumped from 30% to over 40%, the most since the early 1980s

In the fiscal year that ended on September 30th the Treasury held an auction on average more than once a day to finance nearly $7 trillion of new and maturing debt. A failure to raise as much money at an auction as planned—as occurred in Britain earlier this year—could send a shudder through global financial markets. “Other countries can afford a failed auction; we can’t,” says Lou Crandall, chief economist at Wrightson ICAP, a financial-research firm. “What do you do when there is a confidence shock to your flight-to-safety asset?”

6. Number of Vacant Homes Rising Again
The US Census Bureau has released its Third Quarter report on Residential Vacancies and Homeownership. As can be seen from the attached chart, the number of vacant homes in Q3 has started increasing once again after posting moderate improvements over the prior two quarters, and is now at 18.8 million units, rising from 18.4 million in the prior year. With new home sales surprising to the downside, look for this number to continue increasing into the fourth quarter. Notable is that the rental vacancy rate stood at an all time high of 11.1%. As James Lockhart, former director of the FHFA which he singlehandedly managed to destroy said: "We are bumping along the bottom of the housing market. There is the potential for another swing down." Don't tell that to the GDP numbers.

Are You A Child of the Bubble?

2009-10-31T13:09:00.002-04:00

Many investors – as well those in charge - have grown up without knowing or experiencing anything but a bull market in the U.S. Since the 1950s America has been dominant and the expectation is that this dominance will continue. As a result our leaders have made and continue to make choices that assume the continuation of trends of the past years. Sadly, this is a reason why this recession and its consequences will last with us for a long time.

Let’s review some of the economic challenges that still lie ahead of us.

Option ARMs are a disaster – 30 day + delinquincies are reaching close to 50% of all outstanding option ARMs. The St. Louis Fed has stated that they were concerned about Option Arm and Alt-A loan delinquency rates. Delinquencies have moved steadily higher with the 30 day + delinquency now reaching close to 50% of all outstanding Option Arms.

The thing about these products is that the minimum payment is at times less than half what a fully amortizing normal payment would be and the borrowers that chose these did so in the past few years and are now sitting on negative equity. Loan modifications are not feasible in almost any scenario and the incentive is to walk away. Housing has not bottomed by a long shot.

Sentiment Is Dipping .. came out of Gallup yesterday

Sentiment about the economy is starting to backslide, after a brief tip up.

Fifty-eight percent of those polled say the economic slide still has a ways to go, up from 52% in September and back to the level of pessimism expressed in July. Only 29% said the economy had "pretty much hit bottom," down from 35% last month.

64% said the rise of the Dow Jones Industrial Average didn't have much impact on their views of the economy. Just 42% said the economy will get better in the next 12 months, down from 47% in September. In contrast, 22% said things would get worse, up from 20%.

Bottom line, consumers are not feeling more confident about the recovery because they have not participated in the recovery. The recovery has been driven by stimulus money which is finding its way into the banks and bonuses. Does a 30%+ jump in Hamptons sales tell you where the money is headed? It also explains why New York city has held up relatively well compared to the rest of the country. But New York and Wall Street are not the economy.

We Just Had the 3rd lowest sales for September since the Census Bureau started tracking sales in 1963

Calculated Risk reports on New Home Sales. The Census Bureau reports New Home Sales in September were at a seasonally adjusted annual rate (SAAR) of 402 thousand. This is a decrease from the revised rate of 417 thousand in August (revised from 429 thousand).

Even uber-bearish housing analyst Mark Hanson was taken aback by the shortfall in home sales this morning. Even he thought that the remaining homebuyer tax credit, plus all the other stimulus out there, would produce a rise in new home sales.

But no. September was the worst month since 1981.

Permanent Bailouts for the Top 20 Banks?

Paul Volcker and senior Harvard economist Jeffrey Miron both testified to Congress this week that the government is trying to make bailouts for the giant banks permanent.

Writing Wednesday in The Hill, Congressman Brad Sherman pointed out that :

In my opinion, Geithner’s proposal is “TARP on steroids.” Section 1204 of the proposal [the proposal being the "Resolution Authority for Large, Interconnected Financial Companies Act of 2009"] allows the executive branch to use taxpayer money to make loans to, or invest in, the largest financial institutions to avoid a systemic risk to the economy.

TARP was limited to two years, and to a maximum of $700 billion. Section 1204 is unlimited in dollar amount and is a permanent grant of power to the executive branch.

When I asked Geithner whether he would accept a $1 trillion limit on the new bailout authority (if the executive branch wanted to spend more, it would have to come back to Congress), he rejected a $1 trillion limit, insisting that the executive branch be able to respond without coming back to Congress.

That is a huge gravy train to the top 20 [financial institutions] because it allows them to borrow money at a lower rate. Think of what this does to moral hazard.

A sustainable recovery with 530,000 weekly claims?

That’s what we seem to be expecting based on the huge uptick in equities since March. While stock markets have long since moved it up a gear, the employment market is stuck in neutral. The latest seasonally-adjusted jobless claims numbers came in at 530,000. The widely-followed four week average is still 526,250 and is not coming down.

Global Economies Are Not Doing Any Better – Greece Downgraded

Last week, Fitch downgraded Greece's foreign and local currency ratings from A to A- due to a ballooning deficit that has spiraled out of control.

Now, Moody's is also considering a cut for Greece. It's an understandable move, considering that Greece's increasing deficit is already 12.5% of its GDP.

Moody's: "The deterioration of the fiscal position raises serious questions about the sustainability of Greek public finances and the problem will be compounded by a less favourable global economic environment going forward," says Arnaud Marès, a Senior Vice President in Moody's Sovereign Risk Group.

Covered 80% Profits at S&P 1043

2009-10-30T12:46:00.000-04:00

Taking Partial Profits at 1051

2009-10-30T11:42:00.000-04:00

Core Principles

2009-10-29T22:06:00.002-04:00

You Cannot Borrow Yourself Out Of A Debt Crisis
You cannot borrow your way out of a debt crisis. Yes, you may be able to destroy the value of the currency by being more reckless than a drunken sailor, but you cannot create prosperity by borrowing from Dick to pay Harry and then borrowing from Jane to pay Dick, etc. We are creating another tower of debt in the public sector to replace the collapsing tower of debt in the private sector.

No Fiat Money System Has Ever Survived Temptation
In the history of fiat or government-produced paper money, no fiat money in history has ever survived, all are now museum pieces. The reason is that fiat money is produced (without the discipline of gold) in any quantities a government desires. When an economy slows (as now) or when a nation goes to war (which is always wildly expensive, as now) the temptation to print the needed "wealth" becomes overwhelming.

Eventually, the world distrusts man-made "money." In the end, each new issue of fiat money dies. The fate of the US dollar will be no different. Which is the real reason why we hold gold for the long-term.

Gold & Treasury Bubbles

2009-10-29T18:24:00.002-04:00

We are in the midst of yet another bubble yet it's very difficult to recognize bubbles until they burst. No, the bubble isn't Gold, it's U.S. Treasuries.

John Paulson presented a simple, but compelling case for Gold. First, the monetary base has exploded in a way we've never seen before. The monetary base is essentially the Federal Reserve Bank's currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.

As Paulson explained, that's because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, "almost 1-to-1 between the two," Paulson said.

That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)

If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming.

The U.S. is not alone in its money-printing exercise. The supply of most currencies is expanding rapidly – even the normally tame Swiss franc. In the race of paper currencies, they are all dogs. Hence Paulson's interest in gold, which no government can make on a whim.

Therefore, in the context of the exploding monetary base, gold seems relatively cheap. In other words, as the money supply rises, so does the price of gold, eventually. As a result, says Paulson, "gold has been a perfect hedge against inflation."

There is some slippage over time. The gold price can change faster or slower than the money supply. But when the market gets worried about inflation, the gold price usually changes much faster – as happened in the 1970s. In 1973 – to pick a typical year – inflation was 9% and gold rose 67%. That was a pattern common in the 1970s.

The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold could do much better this time around, reaching "$3,000 or $4,000, or $5,000 per ounce" as Paulson said.

Future historians will look back at the present day and see clearly how this unfolded. They will see the litany of news items that pointed to the dollar losing its top perch: China and Brazil are settling up trade in their own currencies. The Russians and others are openly calling for a new monetary standard. Even mainstream outlets are discussing alternatives to a dollar-based standard, a province once solely occupied by cranks and gold bugs. Not a week goes by without these kinds of stories.

The gold supply, too, is limited against the vast pool of dollars. As Paulson points out, global money supply is 72 times the value of gold. I'm betting that gap will narrow. It only has to narrow a smidgen and the gold price flies.

As Grant eloquently put it: "Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency." Gold stocks, too, are a speculation. But they are a speculation on an inevitably higher gold price.

A leveraged play on Gold are the small cap Gold Miners. Miners benefit from the inflationary pricing trends in the price of Gold while also benefiting from the deflationary trends in the production and mining of Gold.

Currently I'm Long New Gold NGD, Aurizon Mines & Newmont Mining, as well as the GDX.

Short S&P Small Cap, Financials, Russell 2000

2009-10-29T11:21:00.000-04:00

Re-entering Shorts post GDP bounce, there may be stability into the month end, rebuilding short positions in Financials, Russell 2000 and Small Caps.

1982 Vs 2009: Recovery Statistics

2009-10-29T02:13:00.001-04:00

Is the current rally the onset of a sustainable secular bull market as we had coming off the fundamental lows of prior bear phases, such as August 1982, when:

• Dividend yields were 6%, not sub-2%.
• Price-to-earnings multiples were 8x, not 26x.
• The market traded at book value, not over two times book.
• Inflation and bond yields were in double digits and headed down in the future, not near-zero and only headed higher.
• The stock market competed with 18% cash rates, not zero, and as such had a much higher hurdle to clear.
• Sentiment was universally bearish; hardly the case today.
• Global trade flows were in the process of accelerating as barriers were taken down; today, we are seeing trade flows recede as frictions, disputes and tariffs become the order of the day.
• A Reagan-led movement was afoot to reduce the role of government with attendant productivity gains in the future; as opposed to the infiltration by the public sector into the capital markets, union sector, economy and of course, the realm of CEO compensation

Indian Stock Market : Oswal Cautions Indian Investors

2009-10-29T01:54:00.001-04:00

Interesting to see some high profile investors are starting to issue warning signals on the Indian markets. Local Indian participants are blaming this on the RBI's decision to start tightening, but regardless of what the majority of Indian investors may believe, the Indian market remains a leveraged play on U.S. equities. The selloff in global markets originated in the U.S. and made it's way over to Asian markets. Despite conventional wisdom, Indian equity markets continue to be coupled with the global economy.

Indian equity markets may see a sharp fall any time soon as corporate earnings fail to match up to the investors' expectations, making shares increasingly expensive for buyers, Motilal Oswal, Chairman and Managing Director of Motilal Oswal Financial Services Ltd, said.

Oswal said two of the biggest concerns for inventors in Indian stock market are the government's fiscal deficit and a likely flare-up in wholesale price inflation.

Fiscal deficit, the difference between the government's total spending and revenues, is expected at 6.8% of the gross domestic product for the current year. The government was committed to bringing down its fiscal deficit to 3% of GDP by 2008-09, but ended the year with a deficit of 6%. Aggressive spending to their economies, even as revenues plummeted, has led to yawning fiscal gap in most countries.

A high fiscal deficit would mean that the government makes greater provisioning in budget for debt servicing, instead of spending on physical and social infrastructure. Increased market borrowings by the government to bridge the deficit can lead to credit squeeze and put pressure on interest rates.

"Inflation is a big concern for the market. We think it (wholesale price inflation) will cross 5-6% by early 2010. Whenever inflation sustains at these levels, market usually tanks," Oswal said. "That will be the time when the government may start rolling back the stimulus," he said. The government has said the economic and fiscal stimulus given in the past year will continue at least until the end of the current year.

Ten Reasons This Market Has Peaked Or Close to Peaking

2009-10-28T17:50:00.002-04:00

Even though I'm not a technician by trade, I must begin with technicals because fundamentals have not driven this market rally. In my opinion, this has been a speculative, technical bounce similar to past rallies off severely oversold conditions especially involving the Fed and loose monetary policy.

Technicals - Time Price & Pattern Coinciding Suggest A Major Trend Change Is Imminent

The prevailing consensus is that Elliott Wave Theory is for crackpots and cannot be used profitably. Most analysts would agree with that opinion.

However, Elliot Wave (EW) was one of the few technical analyses to predict that the market would have a tremendous rally from the lows. Not only that we were able to exit the market at 682 based on a clearly identifiable pattern completion. While the consensus on EW is that it's a tough strategy to make money with, I'd point out that EW was used by legendary investors like Paul Tudor Jones to forecast and profit from the 1987 crash. More recently, Robert Prechter gained fame with an 800 point forecast shorting the S&P at the top and exiting at 720.

Most particularly, EW is at its most reliable when three factors - time, price and pattern - coincide. At these times, trend change is inevitable. Time will tell obviously as these are interesting times we live in.

1. Time - From October 2007, the S&P has completed a 38% time retrace and will complete a 50% time retrace on November 17th
2. Price - From Octoer 2007, the S&P has completed a 38% price retrace from the March lows and is nearing a 50% price retrace at 1117
3. Pattern - Since the March Lows, the S&P has completed an ABC corrective pattern

In our opinion, EW is forecasting that we are near completion of a multi month trend and an imminent change in direction is coming.

4. October 2007 Trendline Rejection & 5. March 2009 Trendline Break

As you can hopefully see from the chart above, the March 2009 trendline was convincingly broken today. In addition, the S&P 500 was repelled convincingly from a major trend line (Oct 07 to Apr 08) and the volume on the selloff has been larger than in recent weeks. The selloff has also been impulsive, again a strong indicator that we could be in for a change in market character. We remain bearish until the market can convincingly pierce through the major trendline.

Fundamentals
6. Valuation - Analyst estimates for 2010 are overly optimistic

Q3 Earnings for the S&P are currently estimated by Standard & Poors to be around $14.78. This translates to a negative year over year growth of -7.41% versus Q3 of 2008. Now do I need to remind you of where we were in Q3 2008? Does the collapse of Lehman serve as an appropriate benchmark? And even after all the handouts, bailouts, tarp buybacks, and a 50% rally, the S&P 500 hasn't been able to show year over year growth versus a very "easy comparable".

But Wall Street's prescient analysts are forecasting the S&P will grow earnings by 34% in 2010, Consumer Discretionary will grow 58%, Energy 89%, Financials 137%, Tech 30% and Materials by 94%!

We've seen this same story since March 2008. Analysts are overly optimistic. On trailing earnings, using the generous operating earnings measure, the S&P is still at a very pricey 26 times earnings.

7. The Debt Piper Will Need to Be Paid - Julian Robertson, Tiger Capital

What most Wall Street investors are conveniently forgetting is that the U.S. government's bandaid approach to handling crises has created debts that will stay with us at best for a long long time and at worst send us the way that Japan is headed. David Einhorn of Greenlight Capital illustrates it far better than I could:

Japan appears vulnerable, because it is even more indebted and its poor demographics are a decade ahead of ours. Japan may already be past the point of no return. When a country cannot reduce its ratio of debt to GDP over any time horizon, it means it can only refinance, but can never repay its debts. Japan has about 190% debt-to-GDP financed at an average cost of less than 2%. Even with the benefit of cheap financing the Japanese deficit is expected to be 10% of GDP this year. At some point, as American homeowners with teaser interest rates have learned, when the market refuses to refinance at cheap rates, problems quickly emerge. Imagine the fiscal impact of the market resetting Japanese borrowing costs to 5%.

Over the last few years, Japanese savers have been willing to finance their government deficit. However, with Japan’s population aging, it’s likely that the domestic savers will begin using those savings to fund their retirements. The newly elected DPJ party that favors domestic consumption might speed up this development. Should the market re-price Japanese credit risk, it is hard to see how Japan could avoid a government default or hyperinflationary currency death spiral...

For years, the discussion has been that U.S. deficit spending will pass the costs onto “our grandchildren.” I believe that this is no longer the case and that the consequences will be seen during the lifetime of the leaders who have pursued short-term popularity over our solvency. The recent economic crisis and our response has brought forward the eventual reconciliation into a window that is near enough that it makes sense for investors to buy some insurance to protect themselves from a possible systemic event. To slightly modify Alexis de Tocqueville: Events can move from the impossible to the inevitable without ever stopping at the probable. As investors, we can’t change the course of events, but we can attempt to protect capital in the face of foreseeable risks.

8. The Economic Landscape Has Not Confirmed the Market's Rally

I won't bore you with the details but there is hardly any evidence of an economic recovery. Most of the earnings beats have been due to cost cutting and playing the Wall Street game of earnings beating "forecasts".

Declining & downright scary Consumer Confidence numbers the past two months
Cost cutting to generate earnings today will have impacts in future quarters
While unemployment is a lagging indicator, jobless claims are coincident and the continued stubborn plus 500k levels of jobless claims each month the past few months are going to have structural impacts in the coming months

9. This rally is more likely a dead cat bounce similar to 1929-30

Source: GMO

The idea of significant rallies off severely oversold bear markets is not new. After the sharp decline in the fall of 1929, the S&P 500 rallied 46% from its low in November to the rally high of April 12, 1930. Economic commentary from those days suggested that participants were convinced a new bull market was underway. What followed to the horror of overly optimistic participants was a gut wrenching 80% decline.

10. The Option ARM crisis is real (2010), Commercial Real Estate is real (Capmark), the States Crises is real & the Consumer Is Spent

Stock markets usually lead the economy by 6 to 9 months. It's usually around this time that the economy starts delivering solid economic data. But when you see news items like Citibank raising credit card rates to 29.9% for all clients, you know that all is not well, not with the banks and not with the consumer.

We have yet to see significant improvements to justify the 56% market rebound that we have seen off the lows, so in our view the risks are now clearly to the downside. Market participants are starting to recognize this and stocks that are beating estimates are selling off.

One obvious caveat to our forecast is the Fed. The Fed, the Treasury and US government are committed to pulling out all stops to pull the US out of the Great Recession. But unless new programs are used to address the underlying problems that ail the economy, they are likely to be short term fixes. Further, the action in the dollar and other market action is sending signals that the U.S. will need to be very careful in announcing new programs.

Why Japan Is In Worse Shape Than the U.S.

2009-10-28T13:42:00.002-04:00

Another on target analysis and the reason why it makes sense for all investors to protect themselves from an inflationary spiral in the U.S. Secondly, many investors are looking to diversify out of dollars, are Yen really that better a choice? What about the pound or the euro? lots of issues there as well.

Japan appears vulnerable, because it is even more indebted and its poor demographics are a decade ahead of ours. Japan may already be past the point of no return. When a country cannot reduce its ratio of debt to GDP over any time horizon, it means it can only refinance, but can never repay its debts. Japan has about 190% debt-to-GDP financed at an average cost of less than 2%. Even with the benefit of cheap financing the Japanese deficit is expected to be 10% of GDP this year. At some point, as American homeowners with teaser interest rates have learned, when the market refuses to refinance at cheap rates, problems quickly emerge. Imagine the fiscal impact of the market resetting Japanese borrowing costs to 5%.

Over the last few years, Japanese savers have been willing to finance their government deficit. However, with Japan’s population aging, it’s likely that the domestic savers will begin using those savings to fund their retirements. The newly elected DPJ party that favors domestic consumption might speed up this development. Should the market re-price Japanese credit risk, it is hard to see how Japan could avoid a government default or hyperinflationary currency death spiral.

For years, the discussion has been that our deficit spending will pass the costs onto “our grandchildren.” I believe that this is no longer the case and that the consequences will be seen during the lifetime of the leaders who have pursued short-term popularity over our solvency. The recent economic crisis and our response has brought forward the eventual reconciliation into a window that is near enough that it makes sense for investors to buy some insurance to protect themselves from a possible systemic event. To slightly modify Alexis de
Tocqueville: Events can move from the impossible to the inevitable without ever stopping at
the probable. As investors, we can’t change the course of events, but we can attempt to protect
capital in the face of foreseeable risks.

Love 'Em At the Highs, Hate 'Em At the Lows

2009-10-28T12:54:00.001-04:00

These were my thoughts from last week. The tells were in the Transports, the Semiconductor index, and eventually Financials started leading the market lower. Tech was the last to break down and the market tanked only after the 4 horsement were shot down (google, apple, goldman, ibm).

Short the SMH $26.07, Short the Russell IWM $62.35

Taking Profits at S&P 1053

2009-10-28T12:18:00.001-04:00

That's a solid 40 point move and time to take profits. Elliott patterns indicate a 3 wave selloff is complete.

Moreover, this is the first time in months that the market has not rallied after piercing below the 20 day moving average. Looks like this time the trend is different and my plan is to short all rallies going forward.

Fundamentally the new home sales number was surprisingly weak, but the more important news was yesterday's consumer confidence series, one of the less manipulated economic series out there.

Looking to build positions in Netflix, Vonage, and Gafisa GFA and adding very small
Letting profits ride on Bank of Ireland IRE

S&P 500 1053