Thursday, May 31, 2012

ISM Comment Leads to an 'Aha' Moment

Sometimes little things make the difference.  For example, early in 2009, I saw a comment on a blog that was arguing with the blogger and most of the commenters.  This comment went as follows:  forget about the injustices you perceive about the bailouts of the banks and bankers.  They have won.  It shows in Jamie Dimon's swagger.  Get over it.

This commenter was right, and thinking about the real-world wisdom it embodied it helped me switch from the bearish posture I had had ever since the summer of 2007-- and uber-bearish after a recession (mild, at the time) was confirmed by the spring of 2008.

In any case, a similar comment from the Chicago PMI report released this morning struck me as also bringing me to a clearer understanding of the markets, this time in a negative way.  Here is part of the intro to this report:

The short term trend of the Chicago Business Barometer, and all seven Business Activity indexes, declined in May.  The Production index fell to neutral while, inexplicably, measures of Business Policy advanced.

This was an 'aha' read for me (note emphasis was added above).

Inexplicably, the purchasing managers' companies were bullish.

A problem that has vexed me a great deal has now been answered.  That problem is that the futures markets show that commercial hedgers have gotten much less bearish as prices have declined.  This is seen in general summary data available on the Web, and please note I'm an amateur at this and don't look at detailed COT reports and the like.  But publicly available data indicate that the commercials in important markets such as copper and less important ones such as palladium are acting as they have during routine price corrections.  However, in 2008, we saw similar activity from the commercials, and it merely presaged a much deeper depression.  In other words, so far as they knew in 2008, the U.S. was undergoing a mild recession, the world was reacting in sympathy to temporarily decreased demand, and normal inventory policies were appropriate.  And indeed, eventually, prices were higher than where they went bullish, but it took a major downtrend and many, many months for them to rise enough off of a much lower bottom for that to occur.

So we have it:  if the fringe views of the ECRI and a few economists such as John Hussman and Gary Shilling (and Econophile Jeff Harding at The Daily Capitalist) are correct, then the U.S. is in or is soon to be in a recession.  In that situation, China will lose even more demand for its exports, and we can expect more economic turmoil globally. 

This fits together an additional way.  A few weeks ago, Dr. Achuthan of ECRI went on TV and said his own 'aha'- he said that what had been going against his forecast of recession (which he had held to steadily since he first made that call around Sept. 20 of last year) was employment.  He pointed to the nascent uptrend in new unemployment claims as evidence that finally, all the diagnostic evidence was in his favor. 

So what did we see today?  Another set of bad numbers on the employment front, both in new claims and in the ADP flash employment number.  The ECRI case for recession not only remains on track, but just this week it put out a report for paying subscribers with the ominous title "More Signs of Global Economic Stress".

So, while the consensus on the Street has to be treating the current stock sell-off as a response to European turmoil, ECRI is doubling down- and it does have a strong track record. 

A mild U.S. recession can be expected to have disproportionate effects on business behavior, and if so, currently "cheap" stocks may get a lot cheaper.

I am not an economist or a professional forecaster, but I do have a knowledge of advanced statistics.  Thus I understand the message of simple statistics well.  In this case, it is that for many years, there has been a strong correlation between recessions in the U.K. and other important European countries and recessions in the U.S.  While correlation is not causation, I do respect it.  Thus, putting all the above points together, my "central tendency" is for greater caution on risk assets than I think the markets are pricing in.  So, again, in murky times when legitimately major events are occurring in the world's largest economic zone, the EU, I like a lot of cash.  Buying into an established uptrend at higher prices only has an opportunity cost, not a real economic cost.

We are, indeed, skating on thin investment ice.

Knowing and saying all this, I now feel I should add that none of this is of any value for short-term market action.  This is intermediate-term stuff.

(P.S. Due to the above, I took advantage of the late-day surge in AAPL to reverse most of my purchases yesterday.  Still long, still love the fundos there, and look for it to get to its now-declining 50 day sma, but I like to prepare for intermediate-term stuff in advance.)

Wednesday, May 30, 2012

Apple Turnover: Wednesday Trading Notes

I first blogged positively about Apple in the spring of 2010 (also was positive about gold in that same post and in follow-up posts).  I have ridden AAPL up from about $200 early in 2010 to over $630, though I confess I missed some of the ride largely due to A) market fears (which were correct) and B) SJ fears (which were medically correct but so far irrelevant to the stock price).

In any case, let me segue to Treasuries.  I began "pounding the table" for them about a year ago.  At that time I went to an approximate 30% weighting in my accounts for 10-30 year maturities, heavily weighted to both the ultra-long maturities and to zero coupon bonds.  After yields collapsed, I lowered that to about 10% and held it there as "insurance".  With the latest collapse in yields, I have now lowered that to about 2% just this week.  These funds have been recycled into stocks.  These are not ordinary stocks.

The main stock is AAPL as a long-term holding, though of course I may trade it at any time.  I am bearish on the stock market over the weeks and months ahead, but I "think different" about what's safe and what's not.  As I've alluded to indirectly more than once, I think that the mega-cap "blue chips" with trailing twelve month P/E's of 15-20 but no organic growth and generally little, none or negative tangible book value are much riskier than Mr. Market thinks.  They are less volatile on a day-to-day basis, but riskier.  I'll leave it at that for now as trading awaits.

The secondary stocks are Con Ed (ED), which I can foresee rising in price to yield 3% as time grinds on; and further additions to my already significant holdings in leveraged closed end muni bond funds.

Finally, I want to add that I think that numerous measures of fair value for the Dow that are used widely on the Street are itching to buy the Dow here.

Monday, May 28, 2012

Caution in Defense of Capital Preservation Is a Virtue As European Economic Imbalances Roil Murky Waters

I am beginning to more seriously fear a liquidation event arising from the events in Europe.  This is not a prediction, as matters may muddle through, but those of us who manage money, either our own or OPM, must think of downside risks unless we happen to be portfolio managers for a Bill Gates and handle just a small part of his wealth.  But here's the updated set-up that I'm seeing based on today's headlines, and again, this is not a prediction, just a growing sense that the odds of a discontinuous downside event have increased to a level with which I am uncomfortable. 

First, I have a similar sense that Greece has a failed economy that I had by midyeaer 2008 that the U.S.housing bust could not be contained.  As evidence I present this article from eKathimerini titled General payments freeze takes hold.  Please consider reading in full and then coming back to this blog.


Before going on to the second, let's remember that Greece has as many people as Illinois and had an economy the size of Wisconsin.  It has about as many people as Sweden.  A Greek national bankrupty has not been reserved for.  Again, my fear from a continent away is that Greece appears to have passed a similar tipping point as the U.S. housing market passed in 2008 once it became clear that the American national economy was in recession.  Shortly after that realization dawned, Fannie/Freddie were forced into conservatorship and the jig was up.  The banks could no longer pretend that their assets were worth anything close to what they were carrying them on their books at, all foreign investors closed their checkbooks, and the meltdown began.  Europe is now in recession, and there are no excess funds anymore readily available to absorb losses from Greek debt.

Second, the Spanish situation is unraveling due to recession.  The news today is that having rapidly increased the estimate of their bad bank Bankia's losses from a few billion euros to about 20 billion euros, the government is making more news:
Spain is considering using debt issued by the government or its bank-rescue fund instead of cash into the Bankia group, using a mechanism that would free it from raising the money from investors.
The government hasn’t made a decision on whether to use its debt to recapitalize the nationalized lender and will decide in two or three months, a spokesman for the Economy Ministry, who asked not to be named in line with its policy, said in a phone interview today.

This both appears to be a sign of weakness as well as dilatory.  No decision for 2-3 months?

Other news from Spain is also negative.  Spain is approaching or is on a knife's edge.  Again, my point is that general recessionary conditions turn a manageable situation into a crisis, as occurred in the U.S. in 2008.  Capital that would have been provided to tide matters over suddenly withdraws.

Now, let's turn to the U.S. stock market, which simply by approaching its 2007 highs has been about the best performer of any major global stock market on a 5-year basis.  My take is that the FaceBook IPO really does add to the public's disillusionment with the financial establishment.  It is more "in your face" (pun intended) perceived abuse of the public than something seemingly esoteric and relatively unpublicized such as the loss of customer money in the MF Global bankruptcy.

It is not only the quick collapse of the share price back to the level that the IPO was planned to have been done at, namely the low $30s per share.  It is not that the insiders increased the number of shares they sold at the $38 price.  These things happen.  I am thinking that the tipping point for the FB IPO is the credible charge that there was selective disclosure to institutional investors after the S-1 was published that FB's current pace of business was not looking as good as expected makes it difficult for the usual parties to say, well, markets and stocks go up and down.  Those who chose to buy at $38 did so.  Even assuming, as I do, that nothing illegal occurred, then even so, the charge of selective disclosure makes the FB IPO an easy target for those who want to advise the public that Wall Street exists primarily for its own good and those of its clients.  That can easily translate into:  sell stocks, who really knows what they are worth?

Major regional recessions tend to force balance sheet readjustments.  Those readjustments may be sudden, as I believe occurred after the U.S. government signaled exactly that when it acknowledged that Fannie and Freddie's assets were seriously overstated on their books.  Now the problem is centered in Europe.  European banks issue letters of credit for a large percentage of world trade.  Europe is a larger economic entity than the U.S. plus Canada.  China exports more to Europe than to the U.S.  China is already selectively canceling certain import orders.  If European economic output takes another lurch downward, look out below in China.  It will have its planned property correction going on simultaneous with an unexpected large drop in demand from Europe.

U.S. investors are relatively sanguine.  The VIX is marginally above 20.  As 2008 moved along, I identified 25 as the cutoff point between true stock market panic and relative complacency.  Until Lehman sent the VIX sky-high, that worked well. I'm back to that pre-Lehman way of thinking, thus I'm cautious about stocks, though a strong kickback rally would (as previously stated) be completely unsurprising even if lower lows await.  Even after the recent stock market decline, quants such as Jeremy Grantham and John Hussman peg the U.S. stock market as highly unattractive.  Grantham gives the 7-year prospective return from U.S. stocks as roughly prices to yield total returns only equal to inflation.  And that's with a wide standard deviation.  Meanwhile, tax-free bonds yield about as much, with much greater certainty.  So when people ask, where else can money go expect stocks, I answer three ways:  cash, tax-frees, and beaten-down emerging markets stocks, where structurally their economies are in the higher-growth phase of development.  (Plus gold and U.S. homes.)

These periods where economic output is decelerating in most of the world and declining in absolute terms in a major part of it-- are the most dangerous times for stock investors.  The European situation has brought matters to this point.  When the Russian bankruptcy roiled markets in 1998, non-Asian stock markets were in sharp secular uptrends.  The ensuing selloff was but a blip in the ongoing stock market party.  Today's charts are different.  Every major market is seeing failed rallies off the 2007-8 highs.  Another general bear market will create yet uglier charts.  Chartists who are now comforted by the SPY may then say "sell". 

In other words, 2011 may have been a softening-up year, frightening though it was- perhaps something analogous to 2007 in the U.S.  There were no recessions then other than in small European countries.  Now the U.K. and Italy have entered at least mild recessions.  France's GDP was flat the past two quarters.  Not only are these very large economies, but please remember that they help drive China's economy.  Both through that mechanism and directly, then they also drive the economies of raw materials exporters such as those of Brazil, Canada, Australia, the Gulf States, etc.
Such a possible downward economic cascade will wreak havoc on President Obama's stated goal that the U.S. would/should double exports in a five-year time frame.

In other words, Europe's economic and financial issues are large enough to drive an economic and financial markets reset similar to those that occurred when the mild U.S. recession as of summer 2008 morphed into something much worse as the balance sheet holes of the large financial institutions were revealed to be irreparable (absent the extraordinary government action that ensured).

Thus these appear to be legitimately perilous times.  Investment discipline is paramount in these times.  Reacting to the latest headline or market moves is something I am going to try hard to resist.
As Chance the Gardener said, "I like to watch".  Whether this real-life movie has a happy ending is unknown; it is like Casablanca; even the scriptwriters have not determined the final scenes.

Friday, May 25, 2012

Can U.S. Interest Rates Drop Much Further? With Comments on Implications If They Do

Yes, they can.  My lodestars in this regard are two-fold.  One is Japan's experience with ZIRP.  Japan first ZIRPed in 1999.  In 2003, their 10-year yield collapsed as low as 0.5%.  We are now in our fourth year of ZIRP.  Respecting the charts kept me in the NAZ bubble into Y2K.  Respecting the charts is keeping me long bonds.  It worked in Japan, it's working here.  (But I'm not betting the farm on it.)

The second lodestar is Germany in the here and now.  I take the POV that Germany is a defanged country.  On the most major issues, it does what it's told (and that's a good thing).  But there's only country that can pull rank on Germany, and that's the U.S.   So one way or another, I take what I think is a realpolitik POV and say that if investors can bid German 10-year yields down to yet another record today of 1.37%, the U.S. can sustain those yields as well.

No one said it's logical.  No one said that when the NAZ hit (say) 2500 in 1999, that that was fair valuation.  It was insanely high.  But it doubled in about a year, and went a tad higher than a double.
That, BTW, was Japan's experience.  Here's an interesting link to a history of Japan's interest rates covering most of its ZIRP era.  Lots of volatility.  The same could happen here.

Putting it in my favored analogy, I think of ZIRP as a fisherman hauling in a fish that has taken the hook but good.  The fish is doomed, but from time to time the fisherman lets it run to exhaust itself.  The fish in this analogy is the 10-year, the boat where the fisherman is stationed is the zero interest rate bound.  That's sort of how it's been in Japan and sort of how it's been here.  Wild and crazy stuff, with the only other precedent "sort of" being the U.S. post-Great Depression period.

One way or another, the continuous nature of ZIRP makes any positive yield better than nothing year after year.  As investors despair of ZIRP ever ending, they go through Kubler-Ross stages of anger toward acceptance and give in to lower and lower rates as better than nothing.

Of course, rational expectations keep investors from wanting to accept that ZIRP historically is something like the quicksand or flypaper it has been in Japan.  Dr. Bernanke apparently has a whole thought construct of how ZIRP can be permanent, or nearly so.  Can this really happen?  Well, he's only the most important banker in the world.  Think what you will of his policies, he is Dr. Big.  So I give his thoughts deep consideration.

I would add that semi-permanent ZIRP almost guarantees poor stock market returns in the aggregate.
The best Japanese stocks since its bubble collapsed have been those that competed internationally.  It's something I always keep in mind now, given the major differences between Japan and the United States.  As I discussed in a post or two around September/October last year, I went to a U.S.-centric investment posture around then, focusing on muni bonds given their high yield relative to Treasuries.  That was a good decision, but it's looking played out for new money (though I like the NIOs of the world - for now).

If the stock market takes a major tumble in the months ahead (I am not expecting a crash imminently and perhaps not at all), I want to think long and hard about whether the Japanese stock paradigm will be operative for U.S. investors going forward.

So my current posture remains to treat stock market rallies as sell opportunities and interest rate up-moves as trading buy opportunities. 

Is It 2008 Again, with Europe Instead of the U.S. Leading the Economic Way Downward?

People who have been following my trading, on which I last posted two days ago, know that I went bullish and then neutral-bearish on palladium, one of the precious metals, on the same day.  That was due to the failure of economically-sensitive risk assets to rise when oil fell on positive news out of Iran's discussion with the IAEA.  In any case, commodities promptly took a big tumble.

I am reading worse and worse news about China's economy, which is tied more closely to export demand from Europe than to the U.S.  I think that what's happening is that as in 2008, the sharpness of the European recession has taken business by surprise.  This has led to Chinese cancellation of all sorts of orders from exporters to China.  These categories are reported by mainstream sources such as Reuters and the Financial Times (of London) to range from iron ore and thermal coal to soft commodities.

This is beginning to smell more like 2008 than 2011. 

Now, I am an American.  The collapse in 2008 came as no surprise to me.  I had been in the majority of Americans who by the summer of 2007 felt the country was effectively in recession.  (The economists got around by the end of 2008 to dating the onset as being December 2007.  (What do they know LOL?))

Now, much of the rest of the world did not enter recession until mid-2008.

The U.S. might be in the situation of the rest of the world then.  Europe is confirmed to be, in the aggregate, in a deepening business recession.  Germany's not known to be in one yet, nor is France, but Italy, Spain, the U.K., etc. are, so that's good enough for me.  Not to mention Greece.

Remember, it did not take the famed Lehman moment for the rest of the world to begin to have a declining economic status.  That came sooner.  Lehman et al caused the virtual depression. 

Now, on a trading basis, strong charts such as the U.S. stock market and AAPL enter bear markets with lots of belief in the bull argument.  When the 150 and 200 day sma's are still moving up and the 50 day sma begins to curl down, as are the situations with AAPL and SPY, and then the actual price pierces the 50 day sma and spikes down, the most common response is for the bulls to push the price back to and usually slightly above the 50 day sma.  If a bear market is on the way, that proves to have been just the wrong thing to have done, and the downward cascade starts. 

That in a nutshell is my central tendency right now, if I may be allowed some Fedspeak.

In this scenario, U.S. interest rates will set new lows, incredible though today's rates already are.

We shall just have to see what the economic data shows, how governments, businesses, workers and consumers act, and how the financial markets act.  We continue moving farther and farther into Talebian financial Extremistan.

Very strange days, to say the least.  The world has never been here before.  Precedents continue to be set.  Maybe that gives the little guy a chance.  Perhaps no one knows the new rules of the game... at least no one who is talking.

Tuesday, May 22, 2012

Update on Today's Commodities Turnaround: What's Going On?

Brief update from prior post.  The apparently pending deal announced today between the IAEA and Iran on nuclear cooperation/inspections and concomitant turnaround intra-day and drop in the price of oil "should" make traders think that more growth is coming.  It's understandable that gold and silver would drop on a diminution of tensions, but "Doctor Copper" and platinum "should" be up, not down hard.  As suggested, palladium has held up the best of the four precious metals I focus on, but this is a surprise in the tape action.  Thus I've gotten out of the trade at a minimal loss because, as stated multiple times, my major thesis is in line with the general trend of ECRI and John Hussman that U.S. growth is truly challenged.  I'm not an economic forecaster, so I don't make or "approve of" (or disagree with) recession calls, but I continue to be perplexed (and more) at the complacency within the U.S. that a recession just won't happen this year.

For some reason, the ag commodities have turned sharply lower intra-day as well.  Their price "should" be boosted if the cost of fuel falls.  But Treasuries haven't traded up.  So when things that should correlate do not, then I don't want to be the guy at the poker table who's the sucker b/c he's the only one who doesn't know who the sucker is. 

Note I'm still positive on palladium, but I also don't want to be distracted from my major investing themes.  The fundamental problem with all these ETFs is that the investor/speculator ends up paying the storage costs that should accrue within the industry.  To that extent the entire industry is skewed toward the industry and against investors.  (What's new?)

More broadly, since I'm a fan of ECRI, my investment posture is to fear more economic weakness than I think the average investor expects in the U.S., which broadly leads to a pro-bond/anti-commodity set of longer-term positions for now.  This is the opposite of what I described was my posture in the summer of 2010 into spring 2011, for those who haven't followed me over the months.  Everything changes.  Anyone interested in that history can look at my post Changing On a Paradigm from early May, last year.  This article also has links back to my pro-inflation hedge articles from about September 2010.

Tuesday Trading Thoughts

A quick trading note or two. 

The expected reversal in bond prices has occurred.  I got lucky yesterday, selling a large piece of a zero coupon very long-term Treasury just off the recent low yields (high price) that I had bought months ago when ECRI had insisted a U.S. recession was just around the corner or had started.  Then we had some strong jobs numbers and the sell-off occurred.  So I held on and got out with a small profit.  Still beat stocks and cash for the period.  I am guessing that more talk about money-printing is going to send yields higher for a while.  But I remain "constructive" on bonds, especially the 10-year Treasury.

Europe is talking "growth" (easier discussed than achieved, but the illusion of growth is easiest when money gets "printed").  Reports from Reuters and the Financial Times show gluts of commodities building up in Chinese ports.  Thus I bought PALL today favoring the view that said glut is old news but the Europe growth/inflation push is newer news (PALL is the palladium ETF.  Palladium is rarer than platinum but not as good a catalyst.  Of the four major precious metals, it is the least investor-driven.  It's shown the best relative strength of all of them lately, and my (amateur) read of palladium on the futures board is bullish.  This is a conscious trade thinking it moves at least to the lows of April.  This is not an investment, just a trade-- but I can sit with it if it drops in price. 

I continue to look with skepticism about stocks broadly.  Mostly this is because the media focuses on them, and uses the almost irrelevant price-earnings ratio as if that were the only way to value stocks.  That said, the valuation formulae much of the Street uses suggests the current rally probably has legs.  However, now that ECRI has, sort of, done a victory dance by saying that the recent back-up in unemployment claims and deterioration in the monthly BLS employment surveys gives them the fourth "leg" of the "chair" for their recession call has made me swing from thinking/hoping that 2011 was our cyclical equivalent of 2008-- a durable price bottom for risk assets-- to thinking/fearing that worse is yet to come.  So I'm waiting with cash, lots of trading profits already banked for the year, and mostly waiting for a fat pitch in the stock market.

For what it's worth, my research suggests that most people's investments that are not in tax-deferred accounts should be in tax-free bonds, in one form or another.

Sunday, May 20, 2012

China Said to Be: "Hand to Mouth"; No, That's Not an Old Chinese Saying, It Means the Commodities Bears Are Feeling Their Oats (If Bears Eat Oats)

Sometimes it just seems as though Groundhog Day got it right.  Almost exactly one year ago, I wrote the following blog post, which soon enough proved highly accurate:  Goldman Wrong on Rates, Zero Hedge Wrong on Oil As Deflationary Side of Biflation Begins Its Ascendancy (June 8).  Well, Zero Hedge might be correct that 2011 is being repeated this year... but it's possible that presidential election years could be starting a new pattern.  Heavens forfend, it could be more like 2008.

Here's a new reason why:

Today (May 21) we see this breaking article from the Financial Times.  Its  focus is on raw materials but it also contains bearish commentary about China’s overall economy.  Here are excerpts:

Singapore/London: Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.
The deferrals and defaults have only emerged in the last few days, traders said…

“China is hand to mouth at the moment.”...

Other key economic indicators followed by Chinese policy makers, including electricity consumption, rail cargo volumes and disbursement of bank loans, point to a sharper slowdown, suggesting the risk of a hard landing.

Soft commodities such as soyabeans and cotton have also seen Chinese customers default in the past two weeks, a trader at a third global trading house said…

Highlighting a “worrying” weakness in consumer spending inside China, Kim Youngha, the head of Samsung’s China operations, said he expected the domestic market for technology goods to grow 7 per cent this year in China, down from 10 per cent last year.
Yu Song, analyst at Goldman Sachs, told clients last week that Chinese economic activity was “exceedingly weak”. 

A number of the individual commodities that I follow on the futures boards look technically poised for a relief rally.  The biggie, oil, does not look as promising-similar to last spring.  And, gold is trading at a massive premium to platinum- that should be bearish for gold.  It is indeed possible that since gold trades as a currency and platinum is an industrial metal with important jewelry and investment uses, the traditional discount that gold has carried to platinum ever since catalytic converters came into use may be fading away.  Nonetheless, I'm not brave enough to be favorable to gold prices unless I were even more bullish on platinum.  And all I'm willing to say about platinum is that it's had a huge price drop recently, so short-term it probably a good trade, but given the above news out of China (which echoes the thrust of a NYT article published within the past week), I'm wary that we're going to face a 2008-style commodities liquidation event.  So I'm basically waiting until I see the whites of the oil market's eyes before arguing with the FT per the above report. 

It's the nature of markets to condition investors/traders to one pattern, then do something different.  The resilience of the markets the past three years may simply be failing as real European economic activity continues to surprise to the downside.

Not to overdo the bearishness, but I've been in the markets well over three decades, handled my portfolio well in the 1987 crash and got completely out of stocks in 2000 and again in summer 2007.  So for the many mistakes I've made, I've been lucky re crashes and want to post this from this week's Hussman Market Comment which I just noticed before posting the above:

As John Kenneth Galbraith wrote in 1955, "Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid ... Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it."

When the Financial Times publishes the above article on a Sunday, it's my opinion that this news has not made its way into speculative commodities prices.  "Deflation" might be afoot.  Keeping dry investment powder, and being patient with it, is my major current strategy.  To paraphrase Louise Yamada reminds investors (she said it before Jim Cramer):  there's always a bull market somewhere during a decent tape and decent economy.  In other words, prices can rise, and it's OK to be in cash at that time.  I just don't like to lose the most precious financial asset of all:  capital.   

Saturday, May 19, 2012

Markets May Keep Trending Until the London Whale Dies

The WSJ is out with a JPM update.  It reports on its public site:

J.P. Morgan Struggles to Unwind Huge Bets

By Gregory Zuckerman and Scott Patterson

J.P. Morgan Chase & Co. is struggling to extricate itself from disastrous wagers by traders such as the "London whale," in a sign that the size of its bets could bog down the bank's unwinding of the trades and deepen its losses by billions of dollars.

The nation's largest bank has said publicly that its losses on the trades have surpassed $2 billion, and people familiar with the matter have said they could over time reach $5 billion.

But the losses could be even bigger if the company sells its positions into a market that has turned against its positions, ...

I was going to make other comments.  Absent dramatic words/action from an actor such as the ECB supervenes, I am going to treat the macro markets as if a whale is being eaten alive.  I did dip a toe in the stock water again Friday, buying a little of Deere (DE).  Deere had a "beat and raise" quarter.  It is at 10X TTM earnings and yields 2.5%.  I have been chasing it down for a couple of months now and think it goes much higher over time.  Even my tiny remaining AAPL stock yields more than a 10-year Treasury.  What has happened is that stock yields have finally begun exceeding Treasury yields (10 year bond, not the 30-year yet) as they always had before 1960 or so because of the "wrong thing", namely rising Treasury prices rather than rapidly rising dividends or more attractive (much lower) share prices.  Oh well.  The Japanese endgame, till now, was for the 10-year to yield 1%, the 30 year and stocks to yield 2%.  Of course, stocks sporting rising dividends likely did the best.

In any case, my working hypothesis is that so long as the sharks are eating away at the whale, the good values that are appearing in the stock market will get better (LOL), and incredibly we could see yet more upside in the favored government bond prices.

Of course, no one necessarily rings a bell for the benefit of us outsiders when the whale is fully eaten, but sometimes inferences can be drawn.

Wednesday, May 16, 2012

More Evidence that the Bottom Is Probably Not In

In addition to what you know of today's action, which was driven by Europe, the Markit CMBX index, which is 100% U.S.-based, is crashing.  LINK

For whatever reason, I have followed AA.4 the most closely.  It has now dropped below the November 2011 low.  One reason I follow this index is that it has been given to long intermediate trends.  Thus to date it has had predictive value.  This then brings me to thinking that continues to be bearish.  Leaving aside the trading strategies of JPM and its London Whale, and other int'l financial groups, the U.S.-based banks ranging from certain microcaps and much larger co's I follow such as NTRS and UMBF are at or near multi-month/multi-year highs.  Yet their credit quality should correlate with CRE credit quality, of which the CMBX indices are one way to view that metric.  (Not the only one...)

If the ongoing drop in Treasury yields were due to Fed action with the strengthening economy that so many foresee here, then I'd expect to see European money flee Europe and bid our shortest-term rates down.  Instead they are holding steady, thus the spread between the 10-year and the short rates has been narrowing--another recessionary sign, and entirely consistent with the message I take from the CMBX indices.

That is that there is growing empirical evidence to support the "recession 2012" view.

Even a mild recession could be associated with a disproportionate drop in stocks relative to drop in economic activity.

Uh Oh

See commentary on The Daily Capitalist from tonight.