China announced today that it will maintain its macroenocomic policies in 2010, according to President Ju Jintao in his New Year's eve message. China will keep its relatively loose monetary policy.
He afirmed that 2009 was an important year in Chinese history, having been successful in enduring growth and social stability.
Thursday, December 31, 2009
China announced today that it will maintain its macroenocomic policies in 2010, according to President Ju Jintao in his New Year's eve message. China will keep its relatively loose monetary policy.
Among others findings, banks have little incentive to control their excesses as any gains as private, but losses are socialized. That is the sad truth and now is know to all. Banks will never be what they were in the eyes of many.
The first lesson is that markets are not self-correcting. Indeed, without adequate regulation, they are prone to excess. In 2009, we again saw why Adam Smith's invisible hand often appeared invisible: it is not there. The bankers' pursuit of self-interest (greed) did not lead to the well-being of society; it did not even serve their shareholders and bondholders well. It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks.
Under the threat of a collapse of the entire system, the safety net - intended to help unfortunate individuals meet the exigencies of life - was generously extended to commercial banks, then to investment banks, insurance firms, auto companies, even car-loan companies. Never has so much money been transferred from so many to so few.
We are accustomed to thinking of government transferring money from the well off to the poor. Here it was the poor and average transferring money to the rich. Already heavily burdened taxpayers saw their money - intended to help banks lend so that the economy could be revived - go to pay outsized bonuses and dividends. Dividends are supposed to be a share of profits; here it was simply a share of government largesse.
The bailout exposed deep hypocrisy all around. Those who had preached fiscal restraint when it came to small welfare programs for the poor now clamored for the world's largest welfare program. Those who had argued for free market's virtue of "transparency" ended up creating financial systems so opaque that banks could not make sense of their own balance sheets. And then the government, too, was induced to engage in decreasingly transparent forms of bailout to cover up its largesse to the banks. Those who had argued for "accountability" and "responsibility" now sought debt forgiveness for the financial sector.
The third lesson is that Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster. Other countries succumbed to the old orthodoxy pushed by the financial wizards who got us into this mess in the first place.
The fourth lesson is that there is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets. The costs of mild inflation are miniscule compared to the costs imposed on economies when central banks allow asset bubbles to grow unchecked.
Indeed, financial engineering did not create products that would help ordinary citizens manage the simple risk of home ownership - with the consequence that millions have lost their homes, and millions more are likely to do so. Instead, innovation was directed at perfecting the exploitation of those who are less educated, and at circumventing the regulations and accounting standards that were designed to make markets more efficient and stable. As a result, financial markets, which are supposed to manage risk and allocate capital efficiently, created risk and misallocated wildly.
Regrettably, unless the United States and other advanced industrial countries make much greater progress on financial-sector reforms in 2010 we may find ourselves faced with another opportunity to learn them".
Business Week reported on December 28 that if all the idle, but full, oil tankers were lined up, the length of the line would strectch for 43Km (26 miles), a fact which could signal a 25% drop in freight rates next year.
"The ships will unload 26 percent of the crude and oil products they are storing in six months, adding to vessel supply and pushing rates for supertankers down to an average of $30,000 a day next year, compared with $40,212 now, according to the median estimate in a Bloomberg News survey of 15 analysts, traders and shipbrokers".
The New York Post says that traders booked a record number of ships for storage in 2009, hoping to profit from longer-dated futures trading at a premium to contracts for immediate delivery. Phil Davis (the options guru who maintains a great real-time chat for traders) wrote an article yesterday that explains that buying oil and storing it in tankers "is the best way to influence oil prices as it creates a false demand for product (you buy it) and then creates a false impression of demand (you do not deliver it) by causing drawdowns in crude DESPITE steady production numbers".
We know that JPM was one of the companies buying the oil in the tankers. He calls what is going on extorsion.
"The tanker market has been defying gravity," said Martin Stopford, a London-based director at Clarkson Plc, the world's largest shipbroker. More than 50% of the ships are in European waters, with the rest spread out across Asia, the U.S. and West Africa.
"If tanker rates go up, everybody will get rid of ships," said Andreas Vergottis, Hong Kong-based research director at Tufton Oceanic Ltd., which manages the world's largest shipping hedge fund. "It's going to be a market that's worse than 2009."
Wednesday, December 30, 2009
The very cold weather lately may cause a big drawdown to be reported in natural gas tomorrow at 10:30AM. Below are UNG straddles for tomorrow:
These were computed with our StraddlesCalc tool, which indicates the number of call and puts for each desired dollar of investment and the maximum moves required profitability of the position.
Options are dangerous and may cause 100% loss. Please do your own due diligence. This is not advice!
Colin Cieszynski, an analyst with CMC Markets Canada says that the current stock market rally is running out of steam and will be followed by years of stagnant trading:
Mr. Cieszynski followed previous bear-market rallies as well as stock performance during long periods of equity stagnation to illustrate that North American equity markets in years ahead are likely to be constrained.
For example, in 2003, the most recent year a major bear market came to an end, the Dow Jones index rallied in the spring and continued to climb through the end of the year. But after the initial big rally, the index traded between 10,000 and 12,000 for the next two years.
The same could happen in 2010 and beyond. Stocks may rally a little more, but afterward they are likely to face extended consolidation, including equity values getting ahead of earnings and bumps on the road to recovery like sovereign debt bombs (e.g., Dubai), as well as interest-rate hikes.
"Cieszynski also sees parallels between the decade gone by and 1966-1982, the last major period in which stocks were stuck in a tight trading range. For all of its drama – two major bull and bear markets over the last dozen years – the most recent decade was such a period, during which the Dow ended 4.9 per cent lower than it started.
Both periods follow similar patterns, hitting their major bottom in their eighth year. In the earlier case, beginning in 1974, markets recovered for seven months, then consolidated for five and had one last rally, rolling into 1976.
If this time is similar, we have now entered a consolidation period that could be followed by a rally to lift the Dow to 11,000 in the spring. But if the parallels hold, for the next several years investors could also be facing the same range-bound trading that prevailed from 1976 to 1982, when stock traded in a range of 800 to 1,000, Cieszynski said.
Not least, after finally breaking out of their range in 1982, stocks have had significant sell-offs every four years or so afterward. The 2007-2009 bear market appears to be the 2006 sell-off delayed, suggesting 2010 may be a period of weakness". (Financial Post)
Here is a great follow-up on our article on sovereign debt risk. The Wall Street Journal has a map of the risks in Europe:
Says the WSJ article: "After two years of crashing banking systems and economic recession, the euro zone enters 2010 with a full-blown debt crisis. The European Commission warns that public finances in half of the 16 euro-zone nations are at high risk of becoming unsustainable".
"Half of the 16 euro-zone countries are deemed to be at "high risk" in terms of the sustainability of their public finances. See an overview of each country's economic data. Governments will spend the next year and beyond balancing the urgent need to fix public-sector debt and deficits -- without imperiling what appears to be a feeble economic recovery. Even the staunchest optimists in Brussels and Frankfurt see a rocky process, with rating firms poised for more downgrades and bond markets meting out daily judgment over how governments are doing".
Business Week reports that Eric Sprott's Hedge Fund claimed ROI was 496% over the past 9 years. In the same period, the S&P 500 lost 32%. In an interview, Mr. Sprott now says that investors are misinterpreting economic data and is predicting the SPX to drop 40%, which would put it below 676.53, the 12-year low reached on March 9 2009.
If this were to happen, the U.S. Dollar will likely rally again. However, Sprott is also very favourable on gold. Gold and the U.S. Dollar do not traditionally go together, so perhaps they are implying this inverse relatonship will be broken. Either that, or they will be mightily wrong on one or both calls.
Some of his comments are below.
On the state of the market:
“We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,”
On the faith in the U.S. currency:
“If they announce another quantitative easing, trust me, the gold price will go up another 50 bucks that day,”
“We don’t have employment gains,” “We have less of a decline. That’s a sign of weakness. The data is weak.”
“If you get into this thing where you’ve got to keep printing more and more and more, who knows about the price of gold?” he said. “It will be the new currency in due course.”
Sprott however, has a very interesting research on who is buying U.S. Treasuries (coming up)
Tuesday, December 29, 2009
Dear readers, as you know, I use INO's stock alerts tools quite a bit here and regularly report on backtesting results using their alerts.
INO contacted me today offering a special 2-months bonus access exclusive for Shocked Investor readers. For anyone interested, to get the 2 months offer, please click here.
Here are the monthly buy and sell alerts generated today, there is a big high tech name there:
(please click to enlarge)
A week ago we posted the list of countries at risk of default or with very poor credit ratings. It turns out that concerns are seriously growing worldwide about sovereign debt.
The Financial Times reports today that following the disasters in Greece and Dubai indeed sovereign debt risk is emerging as a serious concern for senior bankers, risk consultants and auditors: "Bankers at some large institutions are discussing whether they need to make provisions for sovereign risks in the same way they now set aside reserves to cover losses from corporate or emerging market risks".
This all has to do not only with the seemingly isolated financial disasters (Greece, Dubai, although one can add Hungary, Ireland, Iceland, Japan, the U.K, and even the U.S, and several others - are these really isolated?), but with the loose monetary policy employed by some countries. Moody's has warned that debt could be sold off in 2010 if central banks do not implement successful exit strategies from these loose monetary policies.
"Control Risks, a risk consultancy, has seen a big increase in mandates from insurance companies and other financial institutions seeking to understand the part politics plays in sovereign default risk".
A survey showed lower risks for eurozone countries given the likelihood of support by other member states, however, countries such as Kazakhstan, Ukraine, the Seychelles and Eritrea – are vulnerable to downgrades and default.
So we have money printing pushing markets up, and debts and disasters in the making. This is why I like straddes so much. Anything can happen.
Monday, December 28, 2009
The US Dollar has recovered quite a bit in December. It is possible that this is due to fund repatriation by US companies doing business abroad as they convert their gains in foreign currency back into US Dollars. If this is the case, then the appreciation of the US Dollar would be temporary and the fall would resume in January. This would include the recent fall in gold (plus the fact the Paulson is launching a huge gold fund in January, thus prices needed to be lower).
This is the chart of UUP. Trend is marked in blue, buy/sell signals (triangles) are indicated by the drawn red circles.
This is the same for USDX:
And this is the same for GLD, which follows the inverse of the USD:
The buy-sell alerts (green or red triangles) are weekly signals generated by INO's MarketClub Tool. Please do see the signals above. You can use this link to get free access to the tool (it's a risk-free trial, no questions asked if you are not happy), and please see the numerous backtesting tests I have done with them.
NOTE: INO is providing a special 2 bonus months to Shocked Investor users through this link
You can also see the trading videos and course (totally free).
Re, the current chaos in global currencies, where everyone is sick and tired of the US Dollar losing its value (see Freddie and Fannie's unlimited license to print money now), I posted this on another site that was suggesting the creation of three regional central baks: Americas, Euro/Middle East/Africa, and Asia-Pacific.
Re. creation of regional central banks.
This could be quite difficult too. For example, the regional bank of the Americas: While Canada and the US are aligned, many countries in Latin America are moving to opposite economic and political sides. Brazil now does most of its trade now with China, not with the U.S. Brazil owns hundreds of billions of US debt (unless they were swapped for IMF FDRs, the ones India swapped for gold, but we digress). Who knows, they might cut their losses soon but they desperately need a new currency benchmark as the USD collapsed 40% this year alone.
US/Canada are better aligned with some Euro countries, but then we'd would be back at dividing into developed nations versus the rest of the world. If there is a universal solution for currencies I just have a hard time seeing it. Countries might be better off developing their own partnerships (e.g., Brazil/China), which is the way it seems to be going already.
As for Canada, after snubbing China in recent years it has no ready solution to its currency woes it seems. Canada is stuck with the U.S.
The U.S. Treasury Department is removing the $200B cap on backstop aid to Fannie Mae (FNM) and Freddie Mac (FRE) for the next three years, in theory to allay investor concerns that the companies will exhaust the available government assistance. Under a new agreement just announced, the limits can rise "as needed to cover net worth losses through 2012".
Since when is the US Treasury constitutionally allowed to issue mortgages in the U.S. (or insure them through an infinite supply of cash, is there a difference?)
(Bloomberg) Julian Mann, vice president at First Pacific Advisors LLC in Los Angeles says the government is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”
Is this not a license to inject money to prop up the economy? Bears may want to rethink their strategies if this is the case. An unlimited supply of money will not make prices go down. The new buying power of this money, howver, may be a lot more less, a fact that will be proven one day in the future, but there will be plenty of this cash around to prevent prices for falling (nominally)
This still does not directly encourage job creation though. Markets may remain nominally up, but tens of millions of people will remain on the sidelines.
Ilene, from Phil's Stock World, has kindly sent me this very interesting article about 2010 written by Phil Davis. He discusses his thoughts on 2009-2010 and the general economy and the stock market and world economy. Phil is the options guru that maintains a very entertaining and lively chat room where people discuss trading on an intra-day basis. During these sessions, Phil shares his knowledge and ideas, as well as timely news that affect the stocks and the markets. I don't know where he gets his news, but he seems to know everything. Phil was also on BNN a couple of months ago.
As I am a member, you can use this custom link to get access to his lively chat (free trial, no CC required). Enjoy!
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way–in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.” – Charles Dickens, 1859
Dickens famous novel (which was originally written as a weekly series in 31 installments) depicts life in the time of the French revolution but was also a parable, meant to warn the British aristocracy that they should not ignore the parallels to the social inequities that existed at the time in England. Dickens warned the nobles that the seeds of revolution were planted through unjust acts and surely there would be a time of reaping yet to come.
It is said that the French Revolution was sparked by outrage over a statement by the Queen Mary Antoinette who, when told that the peasants had no bread to eat, supposedly replied (she never actually said this) “Qu’ils mangent de la brioche” or “Then let them eat cake.” It’s hard for us to imagine the impact of this statement in modern times but “peasants” were 90% of the population at the time and bread was 90% of what they ate, consuming 50% of the average family’s income (people weren’t silly enough to pay for housing back then – they just found a bit of land, bought some wood and nails and built their own homes). Brioche was a luxury combination of bread enriched with flour and butter so the statement ”Qu’ils mangent de la brioche” implies both lack of caring and cluelessness on the part of the Queen.
The United States had what passes for a revolution between 2006 and 2008 as we threw out the Republicans and went with a Democrat-controlled government. While the Bush administration, the Republican Congress and Fox News may have been as clueless as a French Queen to the plight of the people – the fact of the matter is that the base pay of top management rose 78% from 2002-2007 while the pay for workers went up just 24%. The top 10% of executives and professional workers drew 33% of all income paid in the US ($2.1Tn) and that does not take into account stock options and bonuses that more than doubled that figure.
At the same time as the income gap was widening to historic levels, commodity prices doubled, taking the cost of food and fuel from 12% to 20% of household income. Add in skyrocketing health care costs and you can see where the seeds of revolution had been sown long before the 2008 election. Disposable income has fallen from 8% in 2000 to actual negative numbers in 2009 (families must borrow just to survive). Is it any wonder that people in America were hungry for change as the decade, and their incomes, wound down?
Despite the change in leadership, 2009 has not been kind to the American proletariat. There has been a $539Bn decrease in real income and, since 2006, Americans have lost $3.7Tn housing value (15%). Homes represent 42% of the average family’s total net worth but it’s worse than that because home mortgage debt is at $10.4Tn, which is 57% of total home worth. US home equity has dropped from 58% in 2003 to 43% this year, a loss of over 25% in 6 years. This is reality for American peasants, the 300M people who aren’t in the top 10% and don’t read the Wall Street Journal (as they have nothing to invest) and don’t shop at WSM or TIF or SKS or JWN – all stocks that have been off to the races in the second half of 2009 as the rich grow far, far richer.
How much richer, you may ask? Well the chart on the right says it all. In the past quarter century, the inflation-adjusted household income for the top 3% of Americans has tripled while the other 97% have gained about 50%, roughly 2% per year over inflation. Since 1979, 80% of the vast GDP growth in the United States has been diverted to less than 10M of its citizens, while the other 295M people struggle to maintain their lifestyles. Forcing the vast majority of Americans into a life of wage slavery has, of course, been an economic renaissance for those of us fortunate enough to be at the top of the economic pyramid.
Since 1979, the hourly earnings for 80% of American workers (those in private-sector, nonsupervisory jobs) have risen by just 1 percent, after inflation. The average hourly wage was $17.71 at the end of 2007. For male workers, the average wage has actually slid by 5 percent since 1979. Worker productivity, meanwhile, has climbed 60 percent. If wages had kept pace with productivity, the average full-time worker would be earning $58,000 a year; $36,000 was the average in 2007. The nation’s economic pie is growing, but corporations by and large have not given their workers a bigger piece but have instead, kept that 60% gain almost entirely for themselves.
The typical American worker toils 1,804 hours a year, 135 hours more per year than the typical British worker (3.5 weeks), 240 hours more than the average French worker (6 weeks), and 370 hours (or nine full-time weeks) more than the average German worker. No one in the world’s advanced economies works more for less. A 2007 report by the Congressional Budget Office found that the top 1 percent of households had pre-tax income in 2005 that was 140% larger than that of the bottom 40 percent so let’s not kid ourselves, America, we have effectively re-created a slave-driven economy but we’ve wrapped it in the flag and keep the slaves in line by providing them with cheap beer, happy meals and 200 channels of corporate entertainment while drumming into their heads that all they need is a dollar and a dream and they too can step right over the fallen bodies of their fellow workers to join us at the top of the pyramid.
With the fall of Communism, the global economy has become more and more like us. One of the great accomplishments of capitalism is that we have made the rich into heroic figures while the working man or the soldier is just the anonymous cog in the great machine. 2,000 years ago, the masses were kept in line with tales of Hector an Achilles as any man with a sword that was strong enough could gain immortality. A thousand years later ordinary men could aspire to be knights or saints but, after the dark ages, that mythos was lost as the noble class tightened their grip and denied upward mobility to the masses which, of course, led to revolution. America, France, Russia, China – all went through revolutions and England even had one in the mid 1600s and many small revolutions swept through Europe in the mid 1800s (around the time of Dicken’s writings).
The cure for all this revolutionary nonsense in the Western World was Capitalism, which was embodied by another writer in the late 1800s called Horatio Alger, who became famous for writing over 100 books along the lines of “rags to riches” stories. By leading exemplary lives, struggling valiantly against poverty and adversity, Alger’s protagonists gain both wealth and honor, ultimately realizing the American Dream. The characters in his formulaic stories sometimes improved their social position through auspicious accidents instead of hard work and denial but the bottom line is the myth of upward mobility that lets us all aspire to be modern economic heroes like Rockefeller, Hughes, Buffett, Gates, Oprah, Soros and Pickens – sure there’s only 1,000 of those guys on the planet but we all like to believe it could be us too, right?
Capitalism is so good at keeping the masses in line that even China and Russia have now adopted our model as it turns out you can effectively squeeze much more out of your workers with carrots than with sticks. The dream of modern capitalism also has the added benefit of relieving the wealthy of the burden of guilt by envisioning a level playing field in which they have triumphed through their own hard work and perseverance making it poor people’s own damn fault if they can’t be motivated enough to improve their lot in life. It is necessary to engender this feeling amongst the rich lest the conscience of some may lead them to “overpay” their workers, which makes their fellow entrepreneurs look bad so we have devised a system (the stock market) in which only the most ruthless practices of capitalism are rewarded over time.
OK, liberal rant over now – I feel better having indulged my Dickensian side and identifying with the plight of the workers but workers don’t buy stock market newsletters so f*ck them, right? We are investors and we shouldn’t be worried about if it’s FAIR or RIGHT that we have established an economic engine that funnels the wealth of the nation to the top – if you are reading this article, then chances are you are on or near the top and our job is to figure out how to maintain or improve our position and my biggest failing of 2009 has probably been worrying about the long-term repercussions of impoverishing 295M people when really it’s just us (me and my 9,999,9999 economically close friends) that we need to worry about and we have jobs and money and assets and stocks so, once again – F*ck those people!
Now that we have Russia and China on board with this Capitalism thing, we are more efficient at exploiting the global labor force than ever. Corporate profits, other than 2008, have climbed an average of 13% a year without increasing wages a single cent over that same time period. Corporate profits have climbed to their highest share of national income in sixty-four years, while the share going to wages has sunk to its lowest level since 1929 – Perhaps there has never been a better time to invest in Corporate America than right now. Our global GDP has climbed to about $55Tn, up 100% in 20 years and, the best news of all is that we’ve made sure that over $21.5Tn (71%) of that growth went to the top 10% of the population. By keeping the money amongst ourselves, we can be sure that it goes where we WANT it to.
What does it matter if the capital allocation to the great, unwashed masses barely keeps up with their population growth when our cut grows by leaps and bounds? We only need them to have just enough to eat and to be able to dress and transport themselves to a place where we can get that 1,800 hours of highly-productive work out of them. This makes good, economic sense. If we give money to the world’s 6Bn poor people, they’re only going to go and buy bread (or dare I say cake) and maybe shoes or clean shirt and mostly they will buy them at Wal-Mart or, even worse, make it themselves and there’s little profit for us in that. By keeping the vast global wealth “in the family,” so to speak, we can sell IPods and Hummers and luxury homes and diamonds and gold and other high-margin, unnecessary items to each other that allow the corporations we invest in to make obscene profits which, in turn, makes us EVEN RICHER! Isn’t that fantastic?
So let’s not kid ourselves that anything in this country is being done for the benefit of the 90% who serve us. We provide the basics and there are even many fine companies who can make money selling those basics like KO, MCD, JNJ, WMT… that we can invest in. One of the big issues we had been facing the past few years is that the damned poor people kept dying because they didn’t have adequate health care as they squandered their meager wages on cheap Chinese treats from the dollar store or whatever it is poor people do when you let them have money. Now we have taken a great step towards mandating that a portion of their meager wages goes towards health care and, in doing so, we have created 40M new patients for our wonderful medical industry to exploit.
Back on August 10th, we had discussed IHI (medical equipment) as a great growth ETF to play in this space and they have done well[...] GE is also big on medical devices and also infrastructure plays that should do well next year. Big Pharma (MRK, PFE) should do well with 40M new patients coming on line and we always like Biotech like CELG and AMGN and let’s not forget the actual hospitals like UHS and THC, who have millions of new patients to take care of. It’s hard to get a grip on how big the impact of national health care without understanding that the bottom 90% of this country have no disposable income at all and now, through a government mandate, we have now enabled them to buy hundreds of Billions of dollars in medical care – what a country!
We’ll be doing a lot of these articles in the coming year as health care looks to be the most exciting sector for long-term growth, especially with the aging baby boomers lining up to join the poor to be diagnosed and medicated in the 2nd decade of the century.
The 295,000,000 that share 28% of this nation’s wealth in 95M households are normally supported by about 140M non-farm jobs but that was down to just 120M jobs as of Nov 17th so, as a group, we’re sure not going to be counting on the poor to be splurging next year as even record job growth (6M) would only replace about 1/3 of all jobs lost. What do the poor do when times are hard? Mainly they shift their spending so we can expect more money spent at MCD and BKC with less money spent on “casual dining.“ We can expect pasta and bread to do well and meat to do worse because those items depend on large numbers of buyers.
The disposable income of the poor this year will depend very much on the price of oil and other commodities and that’s going to be one of the year’s trickier issues. To some extent, the price of oil is based on consumption but, since speculators took over the market, it’s been fairly disconnected from reality and speculation is a rich man’s game so it’s really a question of how much pain can be inflicted on the working classes before they change their habits so much that it spurs actual price competition among the oil producers - something that is also avoided through the formation of cartels. Consumption of oil fell 5% this year yet the price of oil is up nearly 100% from last winter – go figure.
While the commodity pushers can charge us (the top 10%) whatever they wish for oil, gold, copper, food and lumber – it seems they have already squeezed the bottom 90% to the breaking point. The $3.5Tn that was overcharged for commodities in the last few years was withdrawn from household wealth and without an expansion of household values, increases in lending or (gasp) higher wages – I just don’t see that they have any room to push the commodity train. Even inflation and dollar devaluation doesn’t work until you get those dollars into the hands of the bottom 90% so they can trade them for gas or bread. That’s the great joke about the inflation pundits – they seem to think it can magically appear just because the banks are hoarding our increased money supply. Unless the banks start buying a few million barrels of oil per week, we’re going to have to wait for the citizens to catch up.
And keep in mind that our poor people are the richest poor people in the world. Over 4Bn people in this world get by on less than $2,000 a year while our welfare recipients get a whopping $12,000 a year – enough to be considered upper class in many of the World’s nations. So our nation’s poor can actually afford to eat cake, as well as many other foods loaded with delicious and relatively inexpensive polyunsaturated fats (that are leading to those health problems that are killing them). Keep in mind that, in the above chart, you are looking at the percentage of the AVERAGE US household but imagine how that changes for households on the bottom half of that $48,000 average income, especially for the 34M homes that make less than $20,000 a year yet still need to eat as much as the average family of 4 and probably still want things like heat, clothing and maybe a bed to sleep in – it simply doesn’t leave a lot of room for “other.”
So forget those people – they are simply not going to be customers of much next year. Let’s concentrate on the people who have money – us! With 71% of the nation’s net worth and 66% of it’s annual income, the top 10% are the real customers for US business. Unfortunately, it’s just 10M households with 30M people so we need to focus on things that can be sold to relatively few people at high margins. That’s going to rule out cars (other than Porsche or BMW), mid-priced homes (but look for luxury home sales to come back) and mid-priced merchandise as the middle class is a vanishing myth, which is going to leave the merchants who try to service them out in the cold.
Financial services will do well as we shuffle our money around through various investments but don’t look for banks who rely on lending to the masses as they are all tied too tightly together to separate the good from the bad and that makes the whole sector a bit too dodgy although we continue to like XLF and UYG as the sector in general should recover over time.
Another problem with the banking sector is the probable end to the free money train that’s been supporting them since last November. While there are 30M of us who are ready, willing and able to borrow money for our various endeavors, banks need volume and it’s not very likely the other 275M Americans will be filling out successful loan applications in 2010. That limits the amounts of homes that can be bought and the total volume of credit that can be extended and also runs up the risk of default as we are now spreading our risk over a smaller borrowing pool.
With global debt piling up at a rate of over $10Bn a day, we are rapidly reaching the end of the game where we pretend interest rates can stay this low (especially if the economy really does heat up and creates a demand for money) and that brings us back to our favorite ETF: TBT, the ultra-short on the value of a 20-year treasury note. The higher rates go, the lower the value of the fixed-rate notes that suckers have been buying for less than 3% interest this past year. We’ve been in TBT since the low 40s but we are very confident rates have only one way to go in 2010, good for another 20% from the current 50 at least.
Travel should do well next year as many of us put off vacations while waiting to see how the economy shakes out. As we get more confident the world is not ending in 2010. PCLN is out of control but I still like OWW as a value play and CCL should perform well long-term as high fuel prices are not likely to return as fast as passengers. CAL is still an airline stock I like and MAR is the place to stay as business travelers once again venture out of the office. IHG is also a good pick in the luxury travel area.
GE should do well on infrastructure building. My big concern with them remains Commercial Real Estate but no one else seems worried about that sector. GE is also big on solar projects, which should do well and my favorite pure play on Solar remains SPWRA, who are the quality leader but I also like STP and, of course, WFR on the chip side. Also in the chip space is AMAT and INTC while GLW should have a great year supplying glass for all the new electronic devices us top 10%’ers love to buy.
I wouldn’t go so far as to stick my neck out on luxury retail as some of that is affected by aspirational buyers, of which there are far fewer these days as aspirations have been crushed into dust by the latest downturn. My main concern for the US and the global economy is that rising rates and other credit risks, reflected in various CDS rates, will begin to bring down some of the marginal global economies like Spain, Greece and anything ending in “stan” or “ia.” Also, 20M unemployed in the US and 400M globally is nothing to sneeze at. Will we, the top 10%, bear the cost of taking care of them or shall we, like old Scrooge, wish them to die quickly and help decrease the surplus population?
2010 is going to be an interesting year and it seems the majority of investors believe that we can keep living on this harshly divided planet and keep squeezing productivity gains out of the working masses even as we continue to hold wages down and drive the cost of their basic necessities higher. Even the slave owners had to provide food, clothing, shelter and medical care to their workers although I suppose we can feel good about the fact that slave owners outlawed education while we simply provide a very poor quality one – not enough for true upward mobility but certainly enough to hammer home the message that all they need is a dollar and that great American dream.
As long as we can keep the peasants from revolting we can keep partying like it’s 1999 but I do have reservations (obviously) and we will continue to exercise a degree of caution in our investing but history has taught us that the rich can indeed get richer and we have plenty of good places to focus our bullish attention as we begin this century’s second decade.
Saturday, December 26, 2009
What else can be said...
And this actually exists, but when it was issued it was worth a LOT more:
And looks like you could swap it for gold (what a concept!): "The largest currency ever printed by the United States was the $100,000 Gold Certificate, Series 1934. Printed from December, 1934 through January 9, 1935 and issued by the Treasurer of the United States to Federal Reserve Banks only against an equal amount of gold bullion held by the Treasury".
Thursday, December 24, 2009
Above is one of my Christmas creations this year which I give to friends and neighbors, a strawberry-blackberry chocolate volcanoes.
Merry Christmas and Happy Holidays to all my readers!
Wednesday, December 23, 2009
An article on Naked Capitalism today says that the collapse of the CDO bonds and the collapse of AIG were "a deliberate strategy by Goldman". "To realize on their bet against the housing market, Goldman needed the CDO bonds to collapse in value, which would cause AIG to be downgraded and lead to AIG posting collateral and Goldman getting paid for their bet".
Diversifying From the US Dollar: Best Commodities to Buy and To Sell for the Short-Term and Long Term
We computed the RSI values for all commodity ETFs and ETNs on the market. Here they are, sorted for the short term and long term:
Short term, ordered from most oversold to most overbought:
(please click to enlarge)
The most oversold are JJG and GRU, both grains-oriented. The most overbought is sugar.
Long term, ordered from most oversold to most overbought:
Most oversold here are COW and DYY, livestock. Most overbought are UCD and UCI. UCD is a double long on the Dow Jones—UBS Commodity Index (a highly liquid and diversified benchmark that allows investors to track 19 commodities futures market). UCI is an Etracks linked to CMCI Total Return Index
Here are their names, in alphabetical order:
We track all commodity ETFs live here.
You may receive technical analysis and alerts of these ETFs and ETNs, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).
Tuesday, December 22, 2009
The U.S. GDP was revised down, again. The Commerce Department reported its third estimate for third-quarter GDP at a 2.2% annual rate, below the 2.7% rate economists had expected the number to be revised to.
It was the second downward revision to the figure, which was cut to 2.8% last month from an originally reported amazing 3.5%.
That 3.5% led to significant stock market gains. Today, with the downward revision, the markets are... up again.
The same type of problem happens with unemployment rates, which are based on expected death model and other such estimates, often profoundly incorrect.
Why anyone would choose to believe or pay attention to these numbers is amazing.
Chile and Brazil are the best performing economies in Latin-America (some may even say the Americas). A relatively small country hidden between mountains, sea, desert, and ice, but well known for its wines, fruits, and copper, Chile is often overlooked as a financially solid powerhouse.
There is a great article on Chile at topgunfp that explains why and how a small country manages to escape the worst of the global recession, by simply using their brains and planning for the worst case scenarios.
With an economy substantially dependent on copper prices, Chile in the past rode the boom and bust commodity cycles. Its current finance minister made a point of avoiding such cycles, by preparing for bad times and setting up a rainy day fund which would allow the government to keep investing.
We track chilean ADRs here:
The average ROI YTD is 88.65%. Top performer is a financial, PVD, a private pension fund administrator.
SQM is a great chemical and fertilizer company one we have written about before.The ECH ETF tracks Chilean stocks.
Here are excerpts from the topgunfp article.
"While the US economy stagnates, an economic miracle continues in the unlikeliest of places: Chile. Now ranked as the 6th most free economy in the world (the US is tied for 8th), Chile has quietly experienced steady economic growth for the last 30 years. [....]
As the Minister of Labor and Social Security from 1978-1980 and the Minister of Mining from 1980 to 1981, Pinera and his team of Chicago Boys undertook a radical restructuring of the Chilean economy. They privatized the nation’s social security system, created a private health insurance program, reestablished democratic trade unions and established constitutional property rights in the mining industry. Chile’s privatized Social Security system is the envy of the world, fully funded in private accounts and amounting to more than $120 billion, about 80% of Chile’s GDP. As a result, after a 0.9% annualized per capita growth rate from 1810 to 1983, Chile’s growth rate has surged to 4.3% for the last 20 years. [...]
In 2006, [Andres] Velasco returned to a booming Chilean economy, the result of surging copper prices. Chile is the world’s leading copper producer and state owned Codelco, the world’s largest copper producer, was raking in profits. Government coffers were fat and the people demanded social programs and other goodies.
Velasco, however, insisted that the annual budget be set based on a more conservative estimate of the price of copper, not the current price. The resulting surpluses would be invested in a rainy day fund. Tens of thousands of students protested in the streets in mid-2006, seeking free school transportation and education reforms. In August 2007, Chile’s top union leader called a national strike, accusing Mr. Velasco of “declaring war” on workers by resisting wage demands. The protests ended in street fights and the arrest of hundreds. In September of last year, protestors broke into a presentation by Velasco carrying an effigy of him and shouting “The copper money is for the poor people.”
But Velasco had experienced at first hand the economic catastrophe of the 1970s and prior boom and bust cycles based on commodity prices. “This is a movie that may be novel to some Americans, but this is a movie that people in other places of the world, Chile included, know we have seen. This is a cycle that needs to be ended. We have been out to show that a Latin American country can manage properly, and not mismanage, a commodity cycle. You save in times of abundance, and you invest in lean times.” Velasco was steadfast in his principles.
Last year, the copper market started to crash along with the global economy. The Chilean economy ground to a halt. But because of the rainy day fund accumulated during the fat years, the Chilean government has been able to invest in the economy and stimulate it. As a result, Chile’s economy is expected to experience only the mildest of recessions. Velasco, who set out as a youth on a quest “to understand how did this happen [to Chile] and how do we make sure it will not happen again”, was vindicated. After being much maligned, Velasco and Chilean President Michelle Bachelet have seen their popularity surge in the last year.
If only California and The United States were more like….. Chile. Who ever thought anybody would say that? The principles of sound economics have been around for hundreds of years now. The logic is rigorous and the historical evidence convincing. Really, it’s nothing more than common sense. At least we can be encouraged by Chile’s example".
Economist Nouriel Roubini is predicting the Us Dollar has 6 more months as the carry-trade currency. While he maintains that global markets have rallied "too much, too soon, too fast", a correction will not happen right away because the cheap dollar will still encourage investors to seek higher-yielding assets for a few more months.
"A correction might occur, but the risk of a correction is more in the medium term than in the short term," The U.S. economic recovery will be anemic, subpar and U-shaped, which should translate into worse-than-expected corporate earnings and macroeconomic indicators, eventually forcing asset prices down.
"I see this kind of tension due to the fact that I think that the real economy will surprise on the downside, especially when the stimulus fizzles out, but on the other side you have these effects of policies, especially monetary and liquidity, that keep asset prices levitating,"
Emerging Markets and Brazil
(We track latin-american ADRS live here and global ETFs here)
Commenting on the effects of their rising currencies, he says emerging markets will be challenged toto implement effective policies to curb excessive capital inflows that have led to "overvalued" currencies.
"The solution is probably along the lines of capital controls," he said, noting that the measures such as as the 2% IOF (tax) adopted by the Brazilian government so far were not "tight enough" to curb short-term dollar inflows. He remains positive about the Brazilian economy, in spite of "froth and euphoria" in the domestic markets. Humm, we commented in this before.
Monday, December 21, 2009
We ran the RSI numbers on all currency ETFs on the market. This identifies those are that are oversold and overbought and may then be used as indicators for the top ETFs to buy and to sell.
(please click to enlarge)
In the short term, some ETFs are extremely oversold: URR, EU, ERO, FXE, all related to long Euro positions. The overbought ETFs are DRR and EUO, both double short Euro.
Using longer timeframes, there are no oversold currencies, although EUO is getting close (interestingly, this one is overbought in the short term, as above). The Japanese Yen and Australian dollar are the most overbought ones.
Names and volumes
Note that we track these ETFs live as one of our Tracking Live sites.
You may receive alerts of these currency ETFs sent automatically to you by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).
Please do your own due dilligence.
Saturday, December 19, 2009
Brazilian newspaper O Estado de Sao Paulo reports today that Brazilian oil production will surpass that of Mexico and Venezuela by 2011.
"A change in the hierarchy of the oil in Latin America is underway, as the production in Brazil is close near to surpassing energy powers Mexico and Venezuela. While these two countries have seen their production drop dramatically in recent years, Brazil's has been following a steady rise, and it will only accelerate as oil fields in deep-sea begin to produce in the coming months.
Current trends indicate that Brazil may rise to the top of the list until 2011. Traditionally, high oil production caused state-owned enterprises in Mexico and Venezuela to become complacent in the search for new sources of energy, said David Shields, an independent energy analyst in Mexico City. "Basically, the reason is that Brazil had to deal with a crisis and Venezuela and Mexico have never had," he said.
The Brazilian company Petrobras has also received a harsh lesson in the free market economy, which forced the company to improve its efficiency. Petrobras had to adapt when the former President of Brazil Fernando Henrique Cardoso opened the oil sector of Brazil, traditionally a monopoly of Petrobras, to competition from private companies in the mid-1990s. The result was a wave of exploration, which made the production rise by about 50% since 2000. Petrobras, which accounts for more than 95% of the country's production, or just over 2 million barrels of oil per day in October this year. If combined natural gas and the company's operations outside of Brazil, Petrobras's daily production was about 2.6 million barrels of oil equivalent per day, up 5.5% compared to October 2008.
The trend is that the crude oil production in Brazil continues to rise, as fields in the pre-salt regions begin to produce. Petrobras is targeting a domestic production of 2.25 million barrels of oil per day in 2010, expected to grow to 2.43 million in 2011 and 2.58 million in 2012.
Yesterday, the U.S. Anadarko Petroleum and Devon Energy said that their joint projects in Brazil found oil for the second time in the pre-salt region of the Campos Basin. Brazil has also highlighted the Tupi field, which is the largest oil discovery in the Western Hemisphere since the Cantarell field in Mexico in 1976. It is estimated that Tupi has between 5 billion and 8 billion of oil equivalent. The pilot production will yield about 120,000 barrels per day in just over a year. "
Petrobras trades as symbol PBR on the NYSE. It has risen 79% this year:
Here are INO's tool trade signal on PBR:
(please click to enlarge)
You can access a trial of the tool here (which works for any stock), or you may receive technical analysis and alerts on PBR by entering the symbol in the Technical Trend Analysis Tool.
Here is a compilation of all the countries at risk, with updated ratings by S&P, Moody's and Fitch.
The tables also show the GDP change for 2008 and forecats for 2009 and 2010, as well as the percentage debt/GDP. Some of these numbers are very scary.
Iceland is the worse and the problems there are well known, they hit the fan this year. Next worse in term of debt/gdp ratio are the Greece, U.K, Portugal, Hungary, and Iceland.
The worst drops in GDP are for Ireland, Hungary, Bulgary, Taiwan.
You can view all global/country ETFs on the market live here.
Friday, December 18, 2009
"The banks and dealers "did not take adequate steps to ensure that its Approved
Persons understood the complexities of the third-party asset-backed commercial
paper product made available for purchase to its retail clients."
Today there was another chapter on the Canadian $32B ABCP saga. If my readers remember, that was the reason this blog started back in Agust 2007. The quote above was the reason for the settlement.
The Canadian big banks have agreed to settlements of $130M. This includes CIBC, Bank of Nova Scotia, HSBC, Cannacord, Credential. I was wondering where was National Bank in this as it was one of the worst parties. It turns out that they have been dealing with Quebec's securities regulator and apparently have a settlement approved but it won't be announced until the other banks' deals have been approved in Monday's hearings. National Bank will pay the highest fine of all.
Coventree and DB are still fighting in court.
Remember that small and medium investors where forced to accept their short term investments transformed into long term loans. The banks appear to be walking away with a tiny fine, which was not really unexpected, unfortunately.
The Globe & Mail reports:
"A group of Canada's biggest banks and investment dealers have struck regulatory settlements expected to total more than $130 million related to their role in the $32-billion meltdown of the country's asset-based commercial paper market in 2007.
Canadian Imperial Bank of Commerce and its CIBC World Markets unit, Bank of Nova Scotia's Scotia Capital, HSBC Bank Canada, Canaccord Financial and Credential Securities are all scheduled to appear before Ontario-based regulators Monday to approve the penalties, which were finalized this week. The tallies are expected to range from less than $1 million for Credential to as much as about $30 million for Scotia, said people familiar with the negotiations.
National Bank of Canada, which has been dealing with Quebec's securities regulator, has already had its settlement approved. However, the deal won't be announced until the other banks' deals have been approved in Monday's hearings. National will pay the biggest fine of about $70 million, reflecting its role as the biggest player in the ABCP market, sources said.
These sanctions are well below the $300-million-plus in penalties that regulators initially sought from the investment banks. Market watchdogs opened negotiations by asking for much higher amounts, and as the numbers came down the banks became more willing to settle to put the ABCP affair behind them.
All of the settlements are on the same theme, that the banks and dealers "did not take adequate steps to ensure that its Approved Persons understood the complexities of the third-party asset-backed commercial paper product made available for purchase to its retail clients," to quote from the press release early Friday that explained Credential Securities' date with the Investment Industry Regulatory Organization of Canada. The Ontario Securities Commission is also holding settlement hearings Monday.
Firms that refused to settle will have to fight the regulators in court. Market watchdogs are taking that route as they push for sanctions against Coventree Capital Group Inc. and the local unit of Deutsche Bank AG, a seller of the paper.
CIBC World Markets is expected to pay about $20 million. HSBC between $5 million and $10 million, Canaccord Capital $3-million hit, and Credential Securities about $200,000, sources said.
Former Bank of Canada governor David Dodge said Friday Canada still has some lessons to learn from the ABCP situation. "It was a very bad chapter in our history that I think points to a very important thing going forward, and that is the need to think very hard about what the mandate for [securities] commissions is going to be, because fundamentally every basic principle of good securities was violated in those contracts," he said in an interview, noting that the commercial paper was opaque and investors were unable to determine what the underlying assets were.
The complexity of the product "violates every first principle of what the [securities] commissions should be doing, and points to a need for a rethink of the mandate we're going to give to the [securities] commissions going forward," Dodge said.
It's not only Canada that needs to take action on this front, he added. Regulators and bodies such as the Financial Stability Board have been more focused on reforming banks than they have on reforming capital markets, he said. The recent announcement that the Bank of Canada and securities industry in this country are taking action to support so-called repo or repurchase agreements is a step in the right direction, but many other markets are still not operating in a transparent manner, he said".
The Brazilian unemployment rate in November calculated by the Brazilian Institute of Geography and Statistics (IBGE) in the six main metropolitan regions of the country was 7.4% in November, the lowest on record since the series began in 2002. This is a drop from 7.5% in October.
In November 2008, the rate was 7.6%.
According to Cimar Azeredo, the IBGE manager that evaluates the monthly survey, "the trend in increasing occupancy and falling unemployment."
Chart of unemployment rates:
EWZ and BRF (small cap) are the ETFs that follow Brazilian stocks:
BZF tracks the Brazilian a real (currency):
Here is the performance of all Brazilian ADRS this year (last column), from our Tracking Live site. Gafisa, a builder continues to lead with an ROI of +234%, followed very closely by GOL (airline) and Braskem (chemicals), two companies we have discussed in this blog in the past):
(please click to enlarge)
Thursday, December 17, 2009
Update from yesterday. Here is the status on the December and January options.
Quite interestingly, there are more calls than puts open, and for January there were far more calls than puts traded:
December 2009, 2.1M calls open, 1.8M puts open:
(please click to enlarge)
January 2010 3.1M calls open, 1.6M puts:
Today I doubled down on the C Jan 4 calls and kept the 2.50 puts.
I am lucky that my cable line-up does not include Jim Cramer, who recommended to buy C on December 14 (humm, 3 days ago?):
Jim Cramer: "tonight I am urging you to take a look at an individual stock right at the top of the show, and I never do that. ... An opportunity too good to miss ... I think you should buy buy buy.... CITIGROUP!... Mooooooh ":
Wednesday, December 16, 2009
Following up on yesterday's post on huge number of Citibank puts, today C announced a new share offering at $3.15/share. The stock plummeted promptly to $3.20 in after-market hours:
Obviously somebody knew something and was buying those puts, and will have extreme profits. Perhaps Abu Dhabi Investments? ;-) My Jan 2,.50 puts bought at $0.02 doubled in price today, tomorrow promises to be another great day.
The number of puts continues to be staggering (3.1M), but interestingly, today there were more Jan calls traded than puts (227k vs 107k). This included 198k Jan 4 calls. Very interesting. This is why straddles are so useful. Tomorrow the intent is to sell some of the puts and increase the number of calls with the profits.
The news released today (Reuters):
"Citigroup Inc. announced the pricing of 5.4 billion common shares and 35 million tangible equity units as part of its agreement with the U.S. government and its regulators to repay U.S. taxpayers for the $20 billion the government holds in TARP trust preferred securities and to terminate the loss-sharing agreement with the government. The common stock priced at $3.15 per share, generating net proceeds of approximately $17 billion. The tangible equity units priced at $100 each, generating net proceeds of approximately $3.5 billion (about $2.8 billion counted as equity.) Upon completion of the offerings and the repayment of the $20 billion of the TARP trust preferred securities and the termination of the loss-sharing agreement, Citi will no longer be deemed to be a recipient of exceptional financial assistance under TARP. The U.S. Treasury (UST) announced it would extend its lock-up period on the sale of its 7.7 billion share common equity stake to 90 days from 45 days after the completion of this offering. The UST decided not to sell any of its shares in connection with Citi`s sale of common stock and tangible equity units. The tangible equity units are comprised of a prepaid stock purchase contract and junior subordinated amortizing note. Each stock purchase contract has settlement date of December 22, 2012 and will settle for between 889 million and 1.1 billion shares of Citi common stock, subject to adjustment as described in final prospectus relating to the offering. "
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