Wednesday, May 22, 2013

Dash from Cash to Trash a Mistake?

Gold shorts smell blood per BBG:

When this occurs with the long-term chart of an asset breaking down but still up more than 5 times from its low, this is not a contrarian signal.  The shorts have been burned on the Japanese yen more than once in the past years, but recently they have been long and strong in their short position, and absolutely correct.  What's really going on with gold, IMHO, is that real interest rates have turned positive again, and gold leverages that trend in either direction.

Numerous price-deflationary and recessionary trends are now besetting the US.  The imploding Japanese yen means that there is less global competition for raw materials, such as oil.  That's a deflationary trend.  The lower price of imported oil is good, but the more effective competition from Japan Inc. may offset that.  Commodities indices such as DBC and GCC (stocks) are in clear downtrends.  Traders are suspicious that numerous Chinese pig farmers are going to soon disgorge zillions of pounds of copper.

Close to home, lumber has rapidly entered a bear market.  This too is deflationary.  Bond prices have dropped, raising costs for businesses and individuals alike.

The greatest peacetime deficit spender in US history, President Obama, is a lame duck and is on the defensive with the House and the media.  This is going to hurt his ability to resist the Tea Party's push for a balanced budget.  As old-fashioned fiscal prudence reasserts itself, the Fed will have no ability to engage in QE, with which it has been quasi-monetizing the deficit. 

As all the above occurs, nominal GDP has risen about 3.4% yoy.  Meanwhile the Fed is injecting 6% of GDP into the economy.  Quick and dirty calculation suggests that the underlying economy, net of fiscal and monetary stimulus, is contracting at about a 2-3% annual rate.

The dash from cash into trash may soon prove misplaced.  Sooner rather than later, all hail the long bond and King Dollar?

Thursday, May 16, 2013

Back to Blogger: Momo Stock Players May Be Reprising Recent Prior Ill-Fated Highs of Other Asset Classes

There's been a hiatus in posting due to a combo of travel and problems with accessing Blogger, as well as my interest in becoming more active on Seeking Alpha.  Plus, I haven't been at all sure what to say.  The financial sphere has become a bit confusing.

More and more it is looking to me as though the rise in share prices is unsupported by accelerating economic activity, which would be a great reason.  After all, stocks are very sensitive, at least much of the time, to changes in the economy, and their trend deserves respect. OTOH, it just may be that the dash from cash has led to a self-fulfilling prophecy that stocks are the best asset class-- but that once again they are destined to disappoint, at least to allow those with cash to enter the stock market at much better prices.

Simultaneously, almost all measures of price inflation I can see show declining trends.  This suggests that cash and bonds are now better buys than they recently were.

Thus it may be that, individual equity choices notwithstanding, stocks may be in a similar position to gold/silver in 2011 and AAPL in 2012:  momentum plays the fundamentals of which are eroding even as prices spike to records.

Friday, April 26, 2013

Bond Speculators Jump On Board, May Even Bring Rates To New Lows

The FINVIZ charts I follow finally show that the large and small traders combined have taken a very small net long position in the 30 year bond.  This follows increasing interest amongst traders in the 10 year bond, which has now spread to the 30 year.  This all got going in mid-March with the Cyprus banking mess.  With the Bundesbank taking a public hard line on money-printing, ongoing depression in Spain, and several weeks of disappointing macro news in the US including multiple April Fed mfg surveys being punk, plus seasonal factors, bond markets are set up to make new lows in the summer for the fourth year in a row.  I'm working on different models and will note them when that effort is complete.

This is beginning to resemble the 5-year stock run between the historic Republican takeover of Congress in the 1994 election, after which gridlock allowed both spending growth to be nominal and tax cuts to be made.  This goosed stocks and bonds, stocks more so.  Following the brief inventory restocking after the "Great Recession",  the ongoing global macroeconomic weakness has led to the lowest interest rates globally in history.  As with interest rates on the upside in the '70s into the early '80s, and stocks in the '90s into Y2K, so it may be with interest rates.  Stocks look tired, and speculators have been heavily long them for 6 months.  This is about how long a major upside explosion tends to last to mark the end of a trend.  This was the pattern with silver in 2011, for example.

In any case, the powerful bond bull really got going, as mentioned, in mid-March with an upside gap.  The stock rally really got going Jan. 2 with an upside gap.  That breakout lasted over 3 months.  If indeed something similar occurs with bonds, then stocks will do well to consolidate rather than sell off.

As a reminder, earnings are coming in at best as expected, with a good deal of downside guidance for Q2, and the quantitative Value Line estimate made at the end of 2012 for this year was for an average Dow of 13,440, though with a wide error range.  This has had a good track record.  My bias is therefore that downside risks exceed upside opportunity now.  Thus we may see something that looks like 2011.

Monday, April 22, 2013

Stocks Continue on Thin Ice, Bonds Continue to Get Little Respect

Today's market action continues the pretense that stocks provide any security of receiving one's nominal money back, valued in US dollars or gold.  CAT is an example.  Disastrous quarterly results and similarly disastrous projections can't drop the stock again. It already is exactly where is was in October 2010.  It no longer matters that it was over $100.  CAT sells well above book value and has made poor acquisitions of Bucyrus (as it now appears) and the Chinese company that it now claims had fraudulent accounting.  Meanwhile the nonsense of KO and PEP "beating expectations" but with yoy sales growth trailing price increases, leading to sharp markups of the share price is indicative of distribution of stock to anxious retail clients searching for the magic bullet.  This "bullet" is supposed to triangulate triumphantly between the Scylla of low bond yields and the Charybdis of inflation.  This will work until it doesn't.  I "like" a couple of special situations such as YHOO and BLK, but my stock allocation is near record lows, i.e. close to zero.  I'm not at zero as I think that gradually stocks are becoming more attractive than bonds, even on a risk-adjusted basis-- but the history of the US post-Depression and of Japan post-ZIRP suggests that relative valuations of stock dividends vs. bond yields has more to go before stocks really bottom.

Meanwhile, on another front, about last June I penned a post on TDC about the Fed(s) blowing Housing Bubble 2.0; yet I was skeptical about the housing stocks.  And indeed, the housing stocks promptly correct 5+% and then surged.  Yet they are sinking due to vast over-valuation.  The cream of the crop, NVR, is down big on a "miss" today.  TOL is wildly overvalued based on analyst's EPS projections for 2013 and 2014.

I continue to believe that most retail money is best off in tax-exempts of quality, duration, character to suit.  The closed-end funds such as Nuveen (where I shop for CEFs) are where my more aggressive and "for sale" tax-exempts are allocated, but individually-owned bonds, while much less liquid, are much safer.  After all, they expire, possibly when stocks will be cheap again (could that actually occur?), and possibly when interest rates will appear more attractive.

Finally, it's unclear how unattractive bonds actually are now.  The stock GCC tracks an overall commodities index.  It is sinking.  It parallels realized inflation.  Between China and the euro mess, another period of "deflation" might just be occurring, vs. disinflation.  The bond market may be the current equivalent of the NAZ in the late '90s:  over-valued but with prices amazingly just moving on up.

Thursday, April 18, 2013

Are Bonds Going to Be the Next Investment Fad?

CNBC "reports"  (LINK):
Get Ready to Play the Coming Deflation Trade
  What seemed like economic fantasy could soon become cold reality as the global economy wrestles with deflation despite hundreds of billions in central bank money creation.Investors have been fleeing assets normally linked with economic growth such as materials stocks, energy commodities and copper...
And one prominent Federal Reserve member this week openly discussed whether the U.S. central bank needs to accelerate, rather than pull back, its asset purchase program.
 Meanwhile, the intellectual underpinnings for minimal price inflation have been updated by Lacy Hunt of Hoisington Management (LINK) in a speech given last fall.  In it, he criticizes those who call themselves Keynesians, who simply want more and more government borrowing.  He raised the question of whether Keynes himself would have approved of this policy.  In any case, he makes the argument for the possibility of debt deflation.  In Hoisington's recent quarterly update (LINK), he and Van Hoisington reiterate a point they have made before.  They differentiate between base money at the Fed as a result of quantitative easing and M2.  They point to M2 acting very differently from base money and note that M2 has not been rising lately.  Both are good reads.

They are also relevant to the recent flap about Rogoff-Reinhart's 90% level for government debt.  They bring up other research that supports the concept.  It's really not the amount of debt that counts, it's how wisely it was lent and how well the borrowed funds were spent.  That said, it makes sense that there are usually only a certain percent of a country's wealth or yearly production that allow for sound investments.  The US clearly went beyond that point last decade, resulting in the multiple insolvencies and near-insolvencies.  Since 2008, some debts were written off, but most were not.  Numerous more debts have now been incurred.

With gold the yellow canary in the coal mine, and Dr. Copper the redbird acting the same way, and with Mr. Bond now singing a bearish song, the following economic portent from Goldman Sachs comes as no surprise (LINK):

Note this is global, not US.  But as the US shrinks its deficit spending as a share of GDP, its economy begins to revert to the mean.  The US does however have two identifiable tailwinds that many other countries lack.  One is the diminution in war-fighting from the Afghan stand-down.  The other is the well-publicized hydrocarbon output upsurge.  So it may be that the US will again outperform the global economy; but Europe could go from bad to worse post-Cyprus and this could be cold comfort.

If it pans out that Europe is finally the cause of a major global recession as the US was in 2008, then the US will be part of it, debt deflation will hit again, and bonds may actually become respected and even sought after.  If so, they will trade at undreamt of yields.

When CNBC starts banging the deflation gong, it may just mean something.

Wednesday, April 17, 2013

Jeremy Grantham Updates His Projections, Is Ultra-Bearish On US Stocks

Mr Grantham, of, yesterday provided his 7-year estimates for different asset classes based on data from the end of March.  He now gives US large cap and small cap stocks about a zero annual total return, including dividends, over this seven year span.  This brings him to where John Hussman has been for a while, using lower stock market averages.  But similar, indeed.

This appears reasonable to me, from a q and CAPE perspective and from looking at balance sheets.
Investors appear to have forgotten that financial asset value matters.  It's not all about earnings.

Where Grantham is mildly optimistic still is that he has an undefined category that he calls "High quality US stocks".  It's unclear which stocks these are.  Are they stocks of high quality companies, many of which are at very high valuations?  I'd be a bit skeptical that in a well-studied market, the average stock is poised to underperform a specified smallish group of equities by what comes out to 5% yearly (he assumes 2% price inflation).

His fundamental analysis thus is now in accord with my long-standing view that the average investor in taxable accounts should mostly just own tax-exempt bonds, which at least on a 7-year basis can return about the anticipated rate of CPI inflation.

In any case, with both interest rates and commodities in well-defined downtrends, and with gold's smash downward suggesting liquidity issues somewhere (eurozone/Cyprus?), the case for US stocks is weak perhaps for the next 6 months.

Stocks for the long run?  Maybe the very long run...

Monday, April 15, 2013

Much More Than Gold Going Down

Perhaps the amazing drop in gold relates to a forced seller or sellers.  And, perhaps the Cyprus bank closures are necessitating that.  Or course, that's a speculation.  In any case, platinum is plunging, and copper and oil are following the pattern of lower rally highs ever since their 2011 peaks.

The ECB has been a deflationary force.  It has not opened the monetary floodgates, instead forcing internal deflation on the improvident borrowing, debtor countries.  Those chickens may be coming home to roost now.  If so, look out below for US stocks.  A 20% haircut would be a gift if another deflationary recession comes now to America.  50% down is possible based on fair value around 100 on the SPY.  One of these days, history suggests that stocks will actually be undervalued again.  I went virtually out of stocks last week, mostly on Friday as I took gold's plunge as suggesting price deflation and/or illiquidity problems (they are similar problems).  So stocks, which have been discounting both lower interest rates and hedging inflation may have to be stuck with lower interest rates for a good reason-- i.e. 2008 all over again.  Though, this time the acute problem is palpably the eurozone.  Just as the US problems harmed the global economy in 2008, the eurozone and Europe as an entity could be doing something similar now.

Timing of events, and certainty, is impossible.  But as we are seeing with gold, things happen on a Friday and then a Monday, and poof.  This is what happened in the crash of 1987, BTW.

Friday, April 12, 2013

A Top Approaches?

Everything is relative in the markets.  A mediocre economic performance despite large fiscal deficits and gobs of new money creation by the central bank deserves a low P/E.  Yet we have very high Shiller P/E's now.  Probably the dominant view now is typified by ilene, posting on ZH today.  The capsule teaser reads:

ilene04/12/2013 - 01:00Typically the public enters the market after a large run up, in time to buy at the top. Not there yet. 
The actual article (LINK) provides the conventional view:

Typically the public enters the market only after a large run up, just in time to buy at the top. Investors might get luckier in today's situation if American stocks start behaving more like the Nikkei 225 index. US equities have plenty of room to run simply as hedges against massive money-printing by Chairman Bernanke. 
But this view is demonstrably incorrect.  If Fed actions require hedging, presumably because they are inflationary (by definition under Austrian economics), then soon enough interest rates will do what they did in the US in the 1960s and '70s and rise.  This will bring down P/E's and the inflation tends to lead to shrinking profit margins.  So all you can predict in that scenario is that stocks will outperform long-term bonds.  

Reluctant bulls, but bulls nonetheless, are everywhere.  ECRI is one.  A competitor, RecessionAlert, presents a variant of that stance.  While showing a long-term chart of its (back-tested) forecasting tools, it makes sure to denigrate any recession that the US might be in as "technical".  Sorry for the formatting of the next chart, see link:


The chart above shows the current "recovery" as the only one never to have the chance of the economy actually being in a recession go to zero.  (The economist estimates that the US actually has, or recently had, a 24% chance of being in a recession.  Do you think the stock market thinks so?)  Perhaps the 1930s had that pattern.  In any case, this economist's view is reassuring.  Sure, the US might be in a technical recession, but don't worry, his cyclical indicators show that it will be mild.

And then all shall be well forever?  Or will there just be another period of moderate growth, inventory replenishment, etc., as in the past 4 years, all fueled again by Fed largesse?  What P/E do those profits merit?  Recession Alert is probably giving you a similar message to ilene.  Yes, the economy isn't so good, but things will turn around.  Why lose ground to inflation in bonds or cash/trash?  (Note please that I'm guessing, as I'm not a subscriber.  But in general, whenever a stock-oriented economist tells you that his short and long leading indicators are looking up and that a recession will be technical (not even "mild", just "technical"), I assume that he's basically a bull.

In summary, the latest "hook" for the stock market as a whole is that it is so close to its old highs, and people aren't boasting over the dinner table about XYZ stock making them a lot of money, so it doesn't smell like a top.  Meanwhile, the old standby of Smithers et al looks like now a poor time to put money into the market from a longer-term perspective, though we might indeed by in a 1928/9 or 1998/9 era with yet higher highs for a period:

With the publication of the Flow of Funds data up to 31st December, 2012 (on 7th March, 2013) we have updated our calculations for q and CAPE. Over the past year net worth has risen by 7.6%, with the most significant rise being in the value ascribed to real estate (+ 5.9%). Interest-bearing assets have risen by 5.8% while interest-bearing liabilities have risen by 8.2%. 
Both q and CAPE include data for the year ending 31st December, 2012. At that date the S&P 500 was at 1426 and US non-financials were overvalued by 44% according to q and quoted shares, including financials, were overvalued by 52% according to CAPE. (It should be noted that we use geometric rather than arithmetic means in our calculations.) 
As at 12th March, 2013 with the S&P 500 at 1552 the overvaluation by the relevant measures was 57% for non-financials and 65% for quoted shares. 
Although the overvaluation of the stock market is well short of the extremes reached at the year ends of 1929 and 1999, it has reached the other previous peaks of 1906, 1936 and 1968. 
All we have standing behind this level of overvaluation and going to cash, or munis, is the fact that the Fed is "easy".  Given what's happened to Japanese stocks between 1995 and 2012, when the Bank of Japan was almost always "easy", that's a thin reed.

It must be said that there are some crash-callers out there.  But the media has to look hard to find them.  There were also housing crash-callers who got some publicity as the bubble got very large.  The problem with crash-callers is that they get excited too soon, then they get ignored.

The metals are collapsing, including both gold and copper.  That tells me a lot about the state of global liquidity (gold) and industrial vigor (copper).  This could be another 2011, at the least.

Cash may no longer be trash.

Tuesday, April 9, 2013

NFIB Reports Disappointing March Survey Results

From the NFIB report today on small business (LINK):

Small business job creation plans

And earnings trends (3-month average):

Small business earnings

And the overall picture:

Small business optimism report for April 2013

Starting from a lower baseline than the 2001-3 recessionary/depressed time, the 2008-9 very depressed period now shows a 4-year post-recession period that continues to look similar to the 2003-7 period.

Most small businesspeople are not seeing inflation, so to them, the Fed's ZIRP makes sense.  Many investors, however, refuse to believe that the pace of business may wax and wane on its own cycle.  They insist that substantial and sustained nominal sales and earnings growth is coming.

Ever since the Fed became operational in peacetime, say from 1920 on, or in the post-WW II period, a new recession has occurred about every 5 1/2 years.  It is now 5 1/3 years since the onset of the Great Recession.

Anything of course can occur.  The US can be Australia or Chile and go 20 years between recessions.  Or it can be more like Japan and have a recession while short-term interest rates are near zero.

The small business sector is seeing no price inflation.  Absent Federal deficits backed by QE from the Fed, I would think that it would be seeing price deflation.

Thus, the current interest rate structure has justification from what small businesses are experiencing.  The renewed downtrend in several parameters shown by the charts above are similar to what started to be seen in 2006, as the real economy turned down but a combination of bubble housing activities and exports buoyed the aggregates.  Is past prologue?

Friday, April 5, 2013

The Counter-Attack on Irrational Exuberance May Be Beginning in Merrie Olde England

Back to basics from at least one part of the Bank of England?  (LINK):

BOE Says Investors May Be Taking ‘Too Rosy’ a View of Stress 

The Bank of England said rising equity markets don’t reflect the underlying economic situation and warned that investors may be underestimating risks in the financial system. 
Gains by equities since mid-2012 “in part reflected exceptionally accommodative monetary policies by many central banks,” the BOE’s Financial Policy Committee said today in London in the minutes of its March 19 meeting. “It was also consistent with a perception among some contacts that the most significant downside risks had attenuated. But market sentiment may be taking too rosy a view of the underlying stresses.”... 
The FPC’s comments on the advance in equity markets echo remarks last month by UBS AG Chairman Axel Weber, who said the economy hasn’t kept up with investor sentiment. 
“I fear the recent rally in financial markets could be a misleading signal,” Weber, a former European Central Bank Governing Council member, said at an event in London with BOE Governor Mervyn King and Federal Reserve President Ben S. Bernanke. “We’re not really out of the woods yet.”...

They focus on the US :
“This was evident in the re-emergence of some elements of behavior in financial markets not seen since before the financial crisis, including a relaxation in some U.S. credit markets of non-price terms and increased issuance of synthetic products,” the committee said. “At this stage, they did not appear indicative of widespread exuberance in markets. But developments would need to be monitored closely.”

And on the UK.  Fractionally-reserved banking remains risky under all current proposed capital regimes:
The FPC also said that banks’ leverage ratios, a measure of their debt to equity level, would remain “very high” even after the new recommendations were met. It said there would be “little margin for error against a backdrop of low growth in the advanced economies.”
There's not a lot to argue with in the above.  Though one might quibble with Dr. Weber.  What stocks are doing is rational.  They are rising in price as the quantity of currency units in which corporations do business increases rapidly.  The major risk to this market view is that these currency units are debt-based.  Their underlying value is based on confidence, which can change.

Unfortunately, this statement out of the MPC comes in March 2013, not March 2009.  And it's a bit of a damp squib for any dreamer who thinks there's any near-term hope of a seriously sound, unleveraged financial system.  But better late that they say this than never.

Wednesday, April 3, 2013

A Regional Fed Head Hints at Taking the Punch Bowl Away

Forget Cyprus.  The best sign that the current stock rally is in trouble came from SF Fed president John Williams today (LINK):

 "Assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer," Williams said. "If that happens we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year," he added.
That's the beginning of the end for the speculators.  What do I know, I'm not an economist, but looking at the slow pace of both nominal and real GDP growth, to the extent they are measurable, I would guess that unfortunately the country is in recession or something close to it if one subtracts the Fed's bond-buying programs.

Currently, though the Fed is super-easy and the Federal government is stimulative, though the second derivative of the deficit has turned sharply negative.  However, once that adjustment is made, both the bank and the Fed are stimulating, which makes it difficult to have a major bear market in stocks.  Overvalued as stocks are by many traditional criteria, so are bonds, and stocks were vastly more overvalued than today between 1998 and 2001-2.  So, yes, they can go (much) higher.

Monday, April 1, 2013

More Stress in Global Markets As Interest Rates and Copper Continue to Break Down

I've been out of pocket for several days and am getting over an injury, so this will be the first post in a bit and will be brief.  I do hope that anyone interested in my thoughts is following me on Seeking Alpha.   A number of articles there are very good quality, and the comment section doesn't allow trolls through as Blogger's usual format does, and as was the case with The Daily Capitalist, the comments on my articles are often learning experiences for me.

In any case, as we begin to move away from the crisis events of 2008 and their aftermath, a lot is similar to the ending of The Great Gatsby.  In it, Fitzgerald describes himself (Nick Carraway) always being dragged back into the past.  We, he suggests, are boats trying to go upstream against the current (i.e., into the future), but we are "borne back ceaselessly into the past".  To wit:  one financial crisis is similar to another:

My long-standing analogy, which I discussed during the semi-crisis summer of 2011 and then several times last year, is that the European mess is similar in many ways to the US mess of 2006-9 in that the insolvencies never seemed to end.  Some people forget numerous small mortgage brokers going under in 2006 pursuant to the housing bubble bursting around the end of 2005.  And people forget the rumblings of trouble in finance-land when the auction rate securities mess began in the fall of 2007.  So the US crisis went on a good while, as is the eurozone mess.  After the Cyprus banking fiasco (which continues), stress in financial markets continues to intensify as the depression in so many European countries contines.

Dr. Copper is breaking support, Treasuries and gold are well-bid, but Treasuries are better-bid than gold.  These are signs of a deflationary bust..

US stock and bond markets are, meanwhile, following the script they followed during the Asian contagion, meaning they are being supported by chaos elsewhere in the globe.  There's nothing like being able to buy your own bonds and have all the economic and other advantages that the US has.  Thus I continue with a Fortress America investing outlook, as I introduced in the late summer or early fall in 2011.

This extends to Apple's problems in China and Europe.  It includes all multinationals.  Caterpillar has had problems in China, as well.

Eventually, the Asian contagion came to America.  Why should this time be different?  (Though we can hope.)

A possible template for US stock markets is as follows:

I can reasonably see the Russell 2000 (IWM is the major ETF) acting like the NAZ of 1998-2000 and having a blowoff top (it's toppy enough already on valuation) and peaking anywhere from last Friday (it was down today) to two years from now.  But let's say it's so overvalued already (it is) that it peaks this year.  In that case, I would expect the S&P 500 and the Dow 30 to peak or nearly peak some months later.  This was the pattern in Y2K as the NAZ peaked in March, crashed, half-recovered, and the SPY made a double top half a year after the NAZ topped.

This environment would continue to be, as they say on the Street, "constructive" for Treasuries.  I'm positioned heavily with bonds right now.  It's been an amazing bond rally since Y2K and again since 2007.  Can bonds three-peat?

My best answer for now is that speculators on the 30-year T-bond in the futures pits now show their longest/largest sustained net negative positioning since the first half of 2011:  the best time to own zero-coupon Treasuries since the fall of 2008.

I'm watching Mr. Bond and Dr. Copper closely.

Tuesday, March 26, 2013

Even the Bears Are Bullish Now

With Jeremy Grantham's valuation models suggesting that the average large cap and the average small cap US stock will underperform an A-rated 7-year non-callable tax-exempt bond, it strikes yours truly as the sign of a top or at least topping process when even the bears are bullish.  Here is a compendium:

Carter Worth of Oppenheimer is insistent that a correction is due-- but he expects it's onward and upward after that.  If so, how can he be sure that a correction is coming, and why should a client take the risk of missing the up-move just to catch what may be as little as a brief 6% decline that could be reversed in less than one bullish week?  (LINK)

More pertinent, Zero Hedge quotes Bob Janjuah- a well-known bear- as predicting new highs-- then the usual call for a crash.  But-- new highs!  So- stay in is the message, or at least buy the dip.  (LINK)

Perhaps most dramatic is the turnaround from the economic bears ECRI.  They have been talking recession since September 2011.  In their public commentary introducing their recession call back then, they referenced a dire state of affairs.  Something to the effect that if you thought the Great Recession was bad, just wait until you see how bad things will get soon.  Now they have changed their tune.  They allege that the US is still in a recession, but it's mild, and they point out that in 1945 and 1980, recessions were associated with bull markets in stocks.  But what the emphasize is the other modern recession with a bull, not bear stock market- 1927.  That's the one they highlight.  The message is clear:  buy stocks, a massive bull market may await (LINK).

The well-known bear Gary Shilling, who I believe was predicting a recession both in 2011 and definitely was predicting one for 2012, is out with a series of articles in BBG predicting deflation-- but now it's the "good" deflation.  It's the sunniest article, of many, I've ever seen out of him (LINK).  It's called The Benefits of Chronic Deflation.  But it's good deflation!

Richard Russell, who 1-3 years ago was calling our times a depression, worrying about his grandchildren, etc., and who a year-and-a-half ago was espying "gold fever" as gold got to its 2011 peak, is now-- what else-- bullish.  Why is he bullish?  Silly question.  Stocks are going up!  Gasp - the industrials are going up and- mirabile dictu- so are the trannies.  Thus, res ipsa loquitur- buy, baby, buy.  Did you evah-- they printed money, speculators speculated, they speculated in both industrials and transportation stocks-- so, many Dow points higher than when he was bearish, he is now bullish.

These are just some examples.  Rosie turned bullish a while ago.  So did Tyler of ZH.

The fly in the ointment is that the latest crutch to GDP, the newest potential bubble, is not housing and it is certainly not tech (that was so 20th century)-- it is Federalizing education by calling aid to students "loans".  The problem is that many of them can't pay the loans back.  This is turning into a decent-sized problem.  Then there is the issue that it was recently casually reported at the end of a (what else?) bullish BBG or Reuters article on the wonderful recovery in auto sales that something like 42% of new auto loans were subprime.

If interest rates were really too low, the ubiquitous "they" wouldn't have to resort to this sort of stuff to keep appearances up.  Students would get loans to go to school, then they would get jobs, and pay back or their loans.  Many of them would not want to waste time in school, because they would prefer just to be working and earning money rather than being bored in school at great  expense.  But from the standpoint of the current crop of politicians, getting these people in school means they are not counted as unemployed.

So it goes.

There are a few boring stocks I like, such as LNC, which trades way under book value with record and rising earnings and a low P/E.  But overall, there's lot of hopium.  The US economy- remember that- continues in its prescribed Reinhart-Rogoff pattern of moseying along with several more years of working through the horrible and spectacular collapse of the 2008 period; said collapse made a mockery of many years of financial statements and underlying assumptions about the economy.  Thus ZIRP and more ZIRP.

But overall, as Jim Rogers said very recently, those of us of a certain age just watch the bulls running.  We can't run fast enough anymore to run with them, and if you short a bull run, you're liable to get trampled, so you just go about your life and let the speculators go about theirs.

Monday, March 25, 2013

More Bubble Activity- Synthetic CDOs Are B"AAA"ck

Only they are not rated AAA anymore.  They don't get ratings, that's the lesson learned from the last decade.  If you don't rate them, you will still find buyers.  BBG explains in Synthetic CDOs Making Comeback as Yields Juiced:

Derivatives that pool credit- default swaps to make magnified bets on corporate debt, popularized in the last credit bubble, are making a comeback as investors search farther afield for alternatives to bonds at record-low yields. 
Synthetic credit, which amplified the financial crisis five years ago, is enticing investors after corporate-bond yields dropped to less than half the 20-year average. By betting on the degree to which a group of companies will default, a CDO may pay relative yields of more than 5 percentage points, four times that of a typical credit-swaps transaction on similar debt. 
“That’s a valid strategy for this part of the credit cycle: Don’t stretch on credit quality, but rather leverage your exposure to better-quality credit,” Ashish Shah, the head of global credit investment at New York-based AllianceBernstein LP, which oversees $256 billion in fixed-income assets, said... 
Unlike many of the synthetic deals created during the market’s peak before 2008, the transaction pitched by Citigroup wasn’t to be sold to investors in the form of securities and wasn’t graded by ratings companies.

About $2 billion notional of similar trades were created last year and between $500 million and $1 billion in 2013, Mickey Bhatia, the head of structured credit at Citigroup, said in an interview. The trades average between $10 million and $30 million, he said, declining to comment on any specific transactions. 
“Investors are in a desperate search for yield,” said David Knutson, a credit analyst at Legal & General Investment Management America. “CDO products offer incremental yield to plain-vanilla transactions.” 
Nothing has changed.  What "inning" is it?  There is no reason to argue with Howard Marks, who said recently it was the 5th inning.

If so, could the game be called because of rain at any time?  Or, will it go into extra innings?

Meanwhile, there are lots of cheap financial stocks to allow the reflation game to be played.  These range from GNW and LNC, both of which I am long, and MS and GS, either of which I may hold my nose on and buy.  All are below tangible book value, and the longer the game goes on, the more their assets will appear to be worth stated book.

Is Jobs Growth Reaching a Higher Level?

I want to highlight a divergence between sunny views of the labor market expressed in a Bloomberg article today with the ongoing Gallup survey of hiring/not hiring responses of American workers.  Bloomberg's story is more opinion than presentation of new data.  It is called (sic) Payrolls Growth Vault to Higher Pace at U.S. Companies (LINK).  It has anecdotes and some modest info.  Here is a representative small section:

 Companies from Ford Motor Co (F). to a California tortilla maker are stepping up hiring as the economy improves. The result, say Maury Harris of UBS Securities LLC and Allen Sinai of Decision Economics Inc.: Payroll growth is vaulting to a faster pace of about 200,000 a month, after averaging 167,000 in the second half of last year.

“The new normal is 200,000,” said Sinai, chief executive officer of the New York-based investment-research company. Payrolls may rise 216,000 this month after climbing 236,000 in February, the most since November, he estimates. 
Russell Price, a senior economist at Ameriprise Financial Inc. (AMP) in Detroit, predicts employers will take on 2.5 million workers this year, after hiring 2.2 million last year. 
“And that may be a little bit on the conservative side,” added Price, the top-ranked payrolls forecaster for the two years ended in January, according to data compiled by Bloomberg.
Anyone who remembers the robust jobs market of most of the '90s remembers that these are relatively modest expectations.  They are perhaps consistent with a continued Goldilocks scenario for financial markets- strong enough to allow continued moves toward fiscal balance and also to allow ultra-low interest rates to continue.

These reports do not fit with the continued recessionary-level of hiring/not hiring seen by respondents to Gallup's daily survey (LINK).  This is at a +15, the same level that it had dropped to in September, 2008 before Lehman went under and when jobs were being shed at a rapid pace, later analysis showed.  This metric is flat as a pancake for the past year.

My own sense is that businesses have been pushing a lot of workers quite hard the past few years, and it's time for them to accept lower profit margins.  Just as equipment does, people wear out.  Here's hoping for more people working shorter hours.

Thursday, March 21, 2013

Thoughts on Cyprus

The shenanigans with Cyprus have a passing similarity to Lehman in its last days, though many differences remain.  Lehman was shopped.  South Korea comes to mind.  Cyprus is being shopped.  Somehow I doubt that the West will let it "fall" to Russia.  Cyprus is too near to Syria, where the West and its Arab allies appear to slowly be squeezing the Assad regime, and with it Russia's naval base in the Mediterranean.  If so, though, will Russian interests still help to force a disorderly event in Cyprus?

Two articles in the Greek e-paper Kathemerini discuss the latest, with insights into dissension in Europe.  LINK, LINK.

The second of these is interesting.  It shows substantial criticism within the European Parliament of how this situation was handled.

It strikes an American who knows nothing special about Cyprus as quite odd that an insured depositor or a safe and sound bank in Cyprus would have to be assessed a "tax" on deposit to bail out a shareholder or bondholder of an unsound bank.  Why not force the uninsured, and if necessary, insured depositors of the insolvent banks, plus their senior or co-equal stakeholders, to take the losses?

Or else, why not place the burden on society at large, including citizens/residents would own other assets, such as real estate, stocks and bonds?

There may be unintended consequences of this situation.

In a stock market that per Value Line is "frothy" and per Jeremy Grantham is poised to underperform even moderate inflation on a 7-year basis, there's a lot to preserve by increasing cash and decreasing exposure to the continued Goldilocks scenario.

Monday, March 18, 2013

European Events Support the Fortress America Theme

Whatever will be in Europe, will be...

No matter.  In the summer and early fall of 2011, when it became clear that the US economy and markets were stronger than those of Europe, I went to and announced on The Daily Capitalist a "Fortress America" investment theme.  That applied to bonds, muni bonds being the low-hanging fruit as even AA and AAA-munis were then yielding more than Treasuries; then it applied to stocks when I invested/traded them-- AAPL being my #1 stock in 2012 and at times my only one- though it is international.

This theme continues.  It also applies to China and Japan.

Jeremy Grantham's latest valuation favors "high quality" US stocks over bonds or general stocks.  Only emerging markets rate a little better on his 7-year time frame, at the expense of greater expected error rates of what will occur versus what "should" occur.

Thus for an American, investing is easy.  Tax-exempts for income and stable asset value, Treasuries to hedge stocks, and research to find "high quality" stocks.

The Cyprus thing changes little from this side of the pond.  Will it be good for gold?  Could be, but per my latest Seeking Alpha piece, I'm concerned that the disinflationary aspects of the fiscal normalization, welcome though that direction is, resemble the trends of the later '90s, which depressed gold's price.

So maybe there's no rush to commit more funds to gold if one already has a position in place.

The rest of the world looks to be a bit more trouble than an American needs from an investment standpoint.

Sunday, March 17, 2013

Gold and Gold Stocks Could Be Ready to Rock

Jim Sinclair and his coterie may just be right.  $1600 could be in the rearview mirror now or soon.  The Cyprus mess could be a catalyst.  From a gold-bullish standpoint, I like the fact that the US media are almost ignoring it.  Also, the other thing I like is that oil is down and gold is up.  This is the one fundamental trend that actually increases the attractiveness of gold stocks.  We saw this after Lehman collapsed.

ABX has a new CEO who has stopped almost all exploration and is focusing on financial returns (he was the CFO under the prior CEO, Mr. Regent).  This could be a winner for a while.  Another very small company that is not a miner and has a high but fixed cost of gold production is a South African processor of old gold waste DRDGOLD, symbol DRD on the NYSE.

Friday, March 15, 2013

Greenspan Bullish: Uh Oh

This could be really, really bad.  The man who warned against stocks with nearly four unbelievable full years of bull bull BULL lying ahead has perhaps rung the bell at the top (LINK).

Greenspan: No 'Irrational Exuberance' in Stocks Now
That's a bad enough headline to stop here.  But let's not...

Greenspan said in a " Squawk Box " interview that stocks by historical standards are "significantly undervalued" even considering the recent moves higher. He added that the payroll tax increase didn't dent spending because of rising asset prices.
OK.  Meanwhile, at end-January prices, Jeremy Grantham's model had as its central tendency that US stocks were priced to slightly lag anticipated 2.2% annual price inflation every year (on average) for the next seven years.  But that was at lower prices.  

Grantham has a better track record than the Maestro.  But of course prior success doesn't guarantee future results, etc.  So we shall see.

Wednesday, March 13, 2013

Japan Plans To Use Sub-Sea Methane For Fuel

This is very interesting.  Who knew?  If anyone remembers Julian Simon, the optimist who debated the Club of Rome guys in the 1970s who said the world was running out of numerous natural resources, he  would have liked this one (LINK):

Japan cracks seabed 'ice gas' in dramatic leap for global energy 

Japan has extracted natural "ice" gas from methane hydrates beneath the sea off its coasts in a technological coup, opening up a super-resource that could meet the country's gas needs for the next century and radically change the world's energy outlook.  
Definitely worth a read.

BofA lays off property appraisers

Perhaps the property rebound, a la Housing Bubble 2.0, isn't so strong after all, given that interest rates have been rising and job growth is not booming yet.  Bloomberg reports (LINK, bold emphasis added):

Bank of America Corp., the second- largest U.S. lender, cut about 5 percent of staff in its appraisal unit last month as the firm rid itself of delinquent mortgages, said two people with knowledge of the move.

The job reductions at LandSafe, a business with more than 1,000 employees and acquired in the takeover of Countrywide Financial Corp., began Feb. 22, said the people, who requested anonymity because the dismissals were private. Appraisers, who estimate the market value of properties, and regional managers were cut, Tracy Sanderson, a LandSafe senior vice president, told staff in a Feb. 25 e-mail.
“While we have known we were overstaffed since the fall, we did everything we could to delay impacts as long as possible,” Sanderson said in the memo obtained by Bloomberg News. “We were hopeful that our volume would return and potentially reduce the number impacted.”...
About 70 percent of work done by LandSafe appraisers was related to transactions for soured loans, including the auction of bank-owned properties and short sales in which a borrower’s home is sold for less than the amount owed, said one of the people. The bank’s expected increase in originations this year isn’t enough to offset the drop in work resulting from having fewer delinquent loans to service, the person said.

The rest of the article discusses, among other things, declining mortgage volumes for the industry as a whole, which lately have mostly been refis rather than new loans.

This is not a disaster per se, but given the bullish action in bank and homebuilder stocks, it makes me wonder if the Street is not ahead of itself on this theme.

Monday, March 11, 2013

A Little More On the Very Complex Financial System

I have finished a first reading of Nassim Taleb's latest book, Antifragile.  It's not an easy read, and it does not tell me what to do in the world of investing, but it's quite thought-provoking. is running today an opinion piece that is more accessible than Antifragile, and is along the same lines.  It argues for more transparency and simplicity in the financial "system".  It's a good read (LINK).  Hint:  the title about embracing complexity is misleading.  Here's a core paragraph:

Complexity also helps financial institutions hide the risks they create. Despite the advertising of the International Swaps and Derivatives Association and others who create and sell derivatives, these products are only sometimes used for hedging and much more frequently for speculation. In the latter case, they are exceedingly useful in obscuring information that would be crucial to the proper judgment of values and risks. Consider the derivatives that helped Italy’s Banca Monte dei Paschi di Siena SpA hide hundreds of millions of dollars in losses as it sought a taxpayer bailout. Anyone making deals with a bank enmeshed in a largely invisible web of contracts with far-flung counterparties does so with a very incomplete view of the risks involved. 
We simply do not know what risks we are, or are not, taking with our investments these days.

Saturday, March 9, 2013

Stocks Accelerate Up As Economic Data Does Not; Crash Risk Rising?

Is the stock market responding traditionally, sniffing out economic acceleration when it rises, or it is manipulated?

ECRI is among the mainstream voices that has recently addressed this.

The ECRI latest writeup was followed by media appearances.  In the second part of Lakshman Achuthan's Bloomberg TV appearance, he comments that the economic data look recessionary both as reported by the government and the private sector, but that the only data that do not look that way are from market sources.  Thus he almost explicitly blames the Fed and the powers that be in distorting market signals.

He also highlights the 1926-7 recession in defending ECRI's recession call.  He points out that the stock market rose straight through that recession before going on to bubble until summer 1929.  

The implication is consistent with what one hears everywhere:  this stock market is going higher, and there is plenty of time to exit before a crash.

We shall see.  One worrisome sign comes from this from SentimenTrader:

March 1, 2013 Rising debt and receding cash have put investors' brokerage accounts in a deeply negative position - one of the worst in history.  January's change was the 2nd-most negative ever.

(Clicking on this does not enlarge it.)  If you look hard, you will see little red dots near the peaks in 2000, 2007 and 2011.  I think we are at a similar level.  One thing about Mr. Market-- he will inflict pain on weak hands harshly.  I am hearing the same silly theme everywhere, that a mere $85 B in monthly Fed bond buying can continue to levitate tens of trillions of dollars worth of assets.  Meanwhile, the rising bond yields are damaging the balance sheets of bondholders everywhere.  In the Japanese post-1995 experience and in the US ZIRP experience, this has within a year at most been followed by an economic downturn.

One did not see the following stories in the media in 1986, 1995, and probably not in 2005 (LINK, LINK):

For the middle class, expenses grow faster than paychecks
More than 25% of Americans raiding 401(k)s to pay bills 
One also sees continued flatlining from Gallup's hiring-not hiring metric.  Over the past few years, that flatlining has been associated with a quick drop in rising interest rates.    Gallup's estimate of the % of the population employed is unchanged from one year ago, the same as the household survey.

Thus I suspect that adjusting for government deficit spending funded in large measure by the Fed, the US would still be in recession.  Whether it actually is in recession as ECRI argues is not my argument.

My guess is that now that the deficit is shrinking as a % of (inflated) nominal GDP, we are at high risk of starting to see further deceleration of economic activity.  At the same time, the "bond vigilantes" who have made Jeff Gundlach happy by letting him buy 10-year  T-notes above 2% will have done their job.

I'm suspicious of a crash in stock prices and interest rates this year, possibly next.  This is March, and in March 1987, I was sensing during that rising rate environment underlying weakness in the stock market but not in the economy.  Now I am seeing something more like 1999.  Instead of the NAZ trading at some insane multiple of earnings, but where the leading stocks had rapid growth, now the new version of the NAZ is the Russell 2000 (IWM), where the iShares guys who run the IWM index find an average P/E well over 25 and a P/E/G of about 5:1 based on 5-year average growth of only 5%.  

People such as Stanley Druckenmiller are telling us not to worry, we have a few years.  So is  Lakshman Achuthan, though more subtly.  I'm watching gold, silver, oil and Dr. Copper.  Let's see if they either break down or melt up (They may do neither).  If the former, I'd expect stocks and bond yields to do the same.  If the latter, bonds are toast.

Wednesday, March 6, 2013

ECRI Updates, Remains Bearish On The Economy

I'll have more to say after I reread this, but ECRI has responded to the many critics of its 2011 and beyond recession call with a new and interesting position paper.  Here's the LINK.  I do think it's worth thinking about.  One of the facts they adduce is that non-exchange-tradable commodity prices have lagged those listed on exchanges.  There are indeed underlying deflationary pressures that are being held at bay by leveraged speculators.

They highlight the 1927 recession and hint that we may be in for a bubble surge in stocks such as was seen into summer 1929-- and as was seen in the late '90s.  My preference is to play it safe

Sunday, March 3, 2013

Sunday Night Potpourri

Two bits of potpourri.  One is that you may have already seen that per ZH, the BBC confirms that the Swiss people indeed are more "revolutionary" than the Socialist countries (LINK):

Swiss referendum backs executive pay curbs

Daniel Vasella, chairman of Swiss drugmaker Novartis There was outrage in Switzerland over a $78m pay off, later scrapped, to the outgoing Novartis chairman.Swiss voters have overwhelmingly backed proposals to impose some of the world's strictest controls on executive pay, final referendum results show.

The other is that investors are getting more and more believing of the strength of the bull (LINK):

Short Sales Fall 53% With U.S. Bull Market Starting Fifth Year
Investors reduced bearish stock bets to the lowest level since at least 2007 as the bull market in American equities begins its fifth year.
Short sales in the Standard & Poor’s Composite 1,500 Index fell to 5.6 percent of shares available for trading in February, down from a record 12 percent during the credit crisis and the lowest ever in data compiled by Bespoke Investment Group and Bloomberg starting six years ago. 

Investor's Intelligence shows a dangerous chart:  the NYSE bullish percentage has risen from a fairly low level in the past 18 months, and has begun to roll over.  The rollover is the danger sign, not the high bullish level.

The belief is that the US economy is a supertanker, and that the Fed's ministrations are either harmless or not really necessary.  Yet at 7% of GDP, the Fed's money-printing effort likely continue to cover up for the Reinhart-Rogoff continuing depressed state of the economy.

Given all the money-printing, underlying good economic dynamics should show much faster nominal growth than has been measured.  It appears that there is no nominal GDP recession, but it's hard for me to see such a high P/E when there is such widespread underlying weakness.

The best solution for Japanese investors during their prolonger ZIRP period was to purchase shares of Japanese multinationals at fair prices, such as Honda (HMC) on dips.  This might be a good strategy at home, along with shares of truly stellar domestic companies on dips.

Meanwhile, the gold bugs are making a more effective case than befiore that sentiment is washed out.  That doesn't mean  a new money buy should be made, but let's watch for a trigger.  I am also watching for a test below the reaction low around $1522, which would force lots and lots of liquidation.  Gold has cycled from massively in favor in summer 2011 to moderately out of favor, and stocks have gone the other way.

Thinking different.

Thursday, February 28, 2013

Fragile Economy, Fragile Markets

Evidence is growing that the insouciance about the US economy's ability to withstand the sequester is looking like a top in the economy.  Gas prices are near records for the date.  Charles Biderman of TrimTabs is so alarmed by the tax withholding data he is seeing that he is calling a recession as being underway (that may be beyond his capabilities.)  Investor's Intelligence shows a very high bullish consensus of advisers beginning to roll over.  It is that rollover that has preceded every serious stock market decline since the 2009 bottom.  Gallup's daily polling of consumers continues to show no growth in the key hiring/not hiring metric.  This has flat-lined or even trended slightly downward for the past year.  Europe is not fixed, China has recently instituted monetary tightening, Japan is not fixed, Brazil is not fixed, Canada is not fixed.  Australia is not fixed.  India and Russia may or may not be OK in their high-inflation ways, but they are too small to matter.

Yet the Russell 2000 sells close to 30X earnings when negative earnings are taken into account (IWM ETF's measurement), yet the 5-year annual earnings growth rate is only 5%.  That is, BTW, worse than the P/E/G of the SPY at the peak in 2000.  This is a small stock bubble as sure as the NAZ was in a bubble in 1999 and 2000.

Commodities look toppy, except for gold, which has been declining for 5 months in a row.  This is approximately how it acted last year, culminating in a stock market correction to the low of the year.  That correction was bailed out by Draghi's talking, leaks of QE 3, and Apple/Google.

The authorities are already on Internet bubble 2.0 and housing bubble 2.0.  There is a limit to the number of bubbles that can be blown.  Isn't there?

In addition, it may be in the President's political interest to see a stock market correction/crash here.  Then he could call the R's the party of Herbert Hoover.

Meanwhile, even though the sequester is fiscally responsible on its face, Treasuries are selling off overnight on the futures board.

The combination of rising bond rates, high gasoline prices, wild speculation in small stocks as well as bubble stocks such as AMZN, and a bear move in gold (a mark of global liquidity) argue for a correction.  There are also high levels of insider selling in many stocks.

The one "but" re stocks is that patient money may simply prefer stocks such as IBM and CVS, yielding about 1.9%, over a 10-year T-bond yielding 1.9%.  Ten years from now, assuming the Fed stays the money-printing course if "necessary", those stocks likely will see their dividends double; but said dividends could go much higher if each company ceased shrinking shares outstanding via buybacks.  Both CVS and IBM could easily be yielding 5% right now if they stopped buying back shares.

Strong free cash flow positive dominant companies are decent buy and hold vehicles now.  So is cash.  Exposure to Treasuries and gold makes sense.  All of the above assume no leverage and the ability to wait out a period of lower prices.

Powerful forces are at work in this period that is in the interior of Extremistan.

OK, back to the back end of Taleb's "Antifragility".

Let's see if we are moving back to a period resembling 2011 or even 2008 where you go to sleep with markets up a lot and by the next morning they have shifted to down a lot, or up a lot more; or vice versa.  Thus anything you think about the economy or markets is right and wrong almost simultaneously.

No one ever said things would always be simple.

OK, back to the back end of Taleb's "Antifragility".

Tuesday, February 26, 2013

Trend To Lower Global Interest Rates Revives is revealing amazing moves down in global interest rates that are already at or near record lows (LINK to UK rates, click around for those of other major countries).  Japanese JGB's have been collapsing, to 68 basis points on the 10-year and 186 bps on the 30-year.  This with the threat to create 2% inflation!  Just as happened when the US lost its AAA rating from S&P, now the UK has lost its AAA rating to Moody's and its interest rate structure has started to collapse.  Following the equivocal Italian election, German interest rates, which had been trending down anyway, moved sharply lower.

If governments were really "stimulating" anything much, interest rates would be rising in response.  This looks to me as though we need to watch out for an unwanted downturn in the global economy.

With taxes having risen beginning in January, and with about 1/2 of one percent of economic activity (annual rate) scheduled to be withdrawn from the US economy in a few days, can Treasury rates at home fail to drop in sympathy?  If rates in major countries drop, and ours stay up, that would not be good for the president's goal to double exports.

Meanwhile, I lost the link, but I saw an article on the 'Net today quoting a JPM exec that an awful lot of bad deals were being done in commercial real estate by the competition that had run out of many sound loans to make.  Of course, he (she?) said that JPM was only making good loans.

I have heard this from bankers before. The last time I personally heard this was from my Smith Barney broker, probably in 2007 (maybe in 2006), that BofA was making terrible loans, and was stealing business from Citigroup (which then owned Smith Barney).  Well, it turned out that we were near the peak of the economic cycle, and both BofA and Citi were making horrible loans by the boatload.

While I am not at all a deflationist, I still think that if the stars align as they may be doing, we could see much lower interest rates come to the US by the end of 2014.  After all, the trend is your friend until it ends.

Monday, February 25, 2013

Comments on the Selloff and the Sequester: Still Cautious After All These Years

Things are beginning to resemble 2011, though with tech and the Russell 2000 small stocks as the "rage" this year, rather than commodities in 2011.  If past is prologue, stocks will survive a scare and rally.  Then, later in the year, "the horror, the horror" that most of this "recovery" from the Great Recession was exactly as Reinhart/Rogoff expected.

If the above scenario comes true, and of course it's pure speculation, we will see what we will see.  If my long-held Japan scenario continues to play out this year, new lows in long-term T-bond rates loom before yearend.

The speculative way to play this is to buy EDV or ZROZ.  Somewhat less speculative is to directly purchase a zero coupon T-bond of the longest duration possible.  In either of the above cases, one is basically gambling on reversion of long-term bond yields to the Japanese mean, as it were.   I and some of the accounts I manage are long EDV (we are Vanguard clients, and EDV is commission-free to Vanguard clients) and zero-coupon T-bonds, plus the more sedate TLT.

Regular readers know that the last time I had anything really nice to say about the US stock market came in early August 2011 after the mark of the beast 6.66% down day on the Dow  Even then, my bullishness was tepid.  Unfortunately, the late September recession call by ECRI made me step away from stocks and focus on the muni market, which was seriously undervalued relative to Treasuries.  Oh well...

But it looks to me as if the Russell 2000 is this market cycle's equivalent of the NAZ in the later '90s.  It's for mo-mo players only.  A lot has to go right with the economy for it to be even a fairly good investment on a multi-year basis.

One final thought.  The media is downplaying the effect of the sequester on the economy.  How, the mouthpieces ask, could a mere $85 B spending cut by the Feds harm the "recovering" juggernaut of the  economy?  Doesn't the stock market predict a boom ahead?

Yours truly thinks that the Fed is all in and cannot "stimulate" more, and the second derivative of fiscal stimulus will turn definitely negative if the sequester takes hold as legislated.  If anyone thinks this is somewhat the opposite of the situation in early 2009, given the tax increases that took hold on Jan. 1, please join me in raising your hand.

I am all for less unbalanced budgets.  I just think that in the investment world, they tend to lead to stock market selloffs and renewed bull markets in Treasuries.

Saturday, February 23, 2013

Risk Off?

I have a new article up on Seeking Alpha.  The link is  Per the title, it presents growing evidence that Treasuries may be moving to being not just a portfolio diversifier to consider, but actually a decent speculative trading buy.  Please note that I do not try to time these sorts of investments too precisely; and of course, nothing I ever write is actual investment advice.

The futures markets are seeing a hint of waning momentum in the risk on trade.  The article presents charts from Finviz that suggest that this trade has gone to an extreme, and that the speculators have not made much progress.  The spec long interest in crude oil, copper and platinum has hit an extreme, but the price has not responded.  They may have been pushing on a string and may rush to exit.  If so, it will be important to watch what support these prices have.  (Of course, prices may surge; there's no way to be sure.)

Let's speculate on what might happen if the (highly leveraged) longs rush for the exit.  If this occurs and is accompanied by data suggesting a "deflationary" economic downturn a la 2008, even if it is not "great", gold and silver will not rally and silver, at least, "should" drop more.  Treasuries would reliably rally.  If it is accompanied by "crisis", such as Signore Berlusconi becoming PM again, then Treasuries would likely rally for a while, but gold and possibly silver would rally also, I would guess.

Thus a guess is that the greatest contrarian trade now is to buy a long-term T-bond ETF.  The conservative way is TLT or a shorter duration fund.  An aggressive way is to buy one of the zero-coupon bond funds.  I am aware of EDV and ZROZ.  (I am long both EDV and TLT.)

Acting-Man presents at the end of his post a chart from Mark Hulbert showing a recent new record of bullishness toward the NASDAQ amongst newsletter writers:

Hulbert Nasdaq

It appears that after extreme readings, when sustained for a few months, begin to turn down, a price drop is coming soon and that the NAZ is thus, per Jim Cramer, a "Don't buy! Don't buy!".   It takes bulls to make a bull market, though, so not buying does not imply a great opportunity to go short.  Thus I would note that NASDAQ selloffs tend to be good buying opportunities for risk off assets such as Treasuries.

Hyperinflationists note:  one suggestion that QE may cease led to a big selloff in commodities.  There is so much leverage in the system, merely putting another trillion bucks in the system need not create much visible price inflation.  One more recession could kill wages, which are by far the greatest input to costs.  How long this situation can go on is another matter.  Counter-intuitive though it is, the monetary inflation is going first and foremost into bonds.  Not fighting the Fed may involve investing or speculating along with it and joining it in ownership of T-bonds.

With the world solidly off the gold standard, at least for now, Treasuries underpin the global economy.

They will, my guess is, endure with that status for the foreseeable future and perhaps beyond.

The most powerful government and its central bank desire very low borrowing costs.  I don't see why they cannot continue to achieve this for a good while longer, no matter whether "real" interest rates are zero or worse.

Tuesday, February 19, 2013

Comment on Comments

Due to the heavy "bot" activity clogging up the comments section, I have (I think) put in registration requirement to comment.  Let's see how it works.

Gallup Daily Jobs Survey, Cass Freight Index, Rapidly-Rising Gasoline Prices Suggest More Economic Stagnation Ahead polls Americans every day except some holidays.  It makes the summary data available continuously on its website.  Because there are no revisions (I think), and because there are no seasonal adjustments, I go to it often.

One of the two data points that I track regularly is what it asks people about their employer's hiring pattern.  They ask if the company is more on a net hiring path, net firing, or neutral.  The result is expressed as net hiring minus net firing.  Even during the early months of the Great Recession, when unemployment rates were rising, the result was in the +20-+30 range.  Those dates are dropping off of the five-year chart, but can still be seen (LINK).

Because the linked graph has a cursor, I cannot figure out a way to cut and paste it.  Please click through to the site.  The hiring-not hiring (or, firing) is not weighted for company size.  Still, it appears to track with the vigor of the recovery, and before that with the force of the downturn.

From February last year through to Feb. this year, the number has stayed steady at about +15.  In 2008, that level was associated with a strengthening recession.  The trend is almost stable for the past two years, whereas from 2009 (trough) through 2011, there was a modest but definite improving trend.

Who knows, but my guess is that the Fed initiated QE3 in its various incarnations not because it is reckless per se, but because it looked at detailed employment data trends that suggested stagnation.  This of course despite (because?) massive Federal deficit spending and massive monetary stimulation as well.

Other data supports the idea of a real slowdown in the U.S. economy.  Cass Freight shipments reports (LINK):

January shipment volumes fell off 4.8 percent from December and were 2.5 percent lower than they were a year ago. For each of the last two years, freight shipment volumes ended the year at about the same place they began. This was the first year since the recession period that January shipments were actually lower than January of the previous year.

The entire text, at least the introductory part, is useful.  It beats the Dow Jones Transportation Index, I believe.

What I think is really happening is the classic one.  As gasoline prices increase, and they are increasing rapidly, economic activity decelerates and if already flat-lining, heads downward.  The problems noted as Wal-Mart recently, at least per leaked internal e-mails, may have substance behind them.  As the Cass discussion mentions, at least a mild degree of inventory liquidation may be going on.

The bond bull may not be finished yet.

Saturday, February 16, 2013

Switzerland May Severely Limit Executive Pay reports on an initiative in Switzerland addressing high executive compensation (LINK):

Swiss company chief executive officers, including Roche Holding AG’s Severin Schwan and Nestle SA’s Paul Bulcke, earn some of the world’s highest salaries. That may soon change.
With more than 100,000 Swiss citizens having signed a petition to limit “fat-cat” pay, voters will decide at a March 3 referendum whether top executives should have their compensation set by shareholders. While a poll shows a majority may vote yes, the industry’s lobby group warns that it will drive out tax-paying companies and is campaigning for a softer counter proposal.
Naturally they oppose this.  What they also fear is that this will pass, Switzerland will continue to prosper, and this idea will spread.

Common shareholders have been ignored by boards for too many decades.  Too many CEOs get too many unfair deals and get rewarded too well for failure.

Let's see what happens with this initiative.

Thursday, February 14, 2013

Some Contrarian Signs in the Treasury Market

First, a note.  I put up a "long-term bullish" article on CVS on Seeking Alpha (LINK).

Next, while I continue to be more bemused than anything else, I am noting the bubbly valuations on the Russell 2000 (25X trailing P/E) and even higher on the Russell "growth stock" indices, and wondering if and when it is 1998-9.  If so, Treasuries will come into fashion again.  But overvaluation along does not kill a bull market.  In those pre-QE days when money was acknowledged not to be free, the market top only occurred after the Fed tightened.  Will it be the same now, or as with Japan, stock corrections and recessions will occur with ZIRP going on?

ZH updated a chart I saw some months ago that show a strange correlation between very low volatility in the T-bond and future market corrections or worse, associated with sharp drops in interest rates (LINK
There are few data points, and both were followed by dramatic events:  the LTCM/Russian bankruptcy fiasco, and the 2006-7 period.  Note for those looking at the right-side numbers, the numbers have a zero cut off.  The top right number is 200, not 20, the next down is 180, not 18, etc.

Also, I was emailed the most recent copy of the McClellan Report, which has turned bullish on bonds.  It presents data from the Rydex Funds showing the following:  A) that money market fund balances are at multi-year lows; everyone is "in", and B) the market timer(s) in the long Treasury and short Treasury trading funds, who have been consistently wrong, is(are) heavily short them again.

Next, futures market positioning on the 30 year Treasury is at speculative short levels that have been associated with major peaks in yield the past two years, though the 10-year shows less negative sentiment, and negativity in both assets was even greater leading up to and during the Great Recession.

Last, I have observed that as a moderator of the Apple-oriented Braeburn Forum and as a contributor to SA, bullishness is rampant.  There are some skeptics, but few people even try to adjust P/E's for the fact that the U.S. is engaging in monetary financing of state deficits.  This would be sustainable only if there is still a crisis as in 2008-9, in which case P/E's should be low; or it will stop soon, and all this free money from Washington will no longer be free, in which case P/E's will tend to drop (though earnings of the "right" companies may continue to grow.

I continue to believe that if the Rogoff-Reinhart paradigm continues to follow historical precedent, more low-interest rate stagflation lies ahead for the United States.  The investing public, including fund managers, is not thinking this way.

Thus, there is an increased chance of a discontinuous market event within the next year or two.

Tuesday, February 12, 2013

Thoughts On the Long Bond, and Other Comments

A post went up on Seeking Alpha suggesting that even equity-oriented investors should consider diversifying their portfolios with Treasury bonds, such as with the widely-traded ETF TLT.
This is the LINK.

The theme is familiar; there is updated information here and there, so it may be of interest.

The US markets continue to follow the Reinhart-Rogoff pattern.  Economic data is coming in OK, but adjusted for Federal deficits paid for by Fed money rather than by borrowing out of real savings, it would, I think, probably still be seen to be recessionary or at best troughing.

Bill McBride of Calculated Risk is looking at yoy sales data in depressed markets such as Sacramento and noting that aggregate "used" home sales are sharply down in volume yoy.  Now that Obama has been re-elected, there is less need to cheerlead the economy.  In fairness to him, a year ago he was more cautious on housing for the next couple of years than he got more recently.  (I use him because he links almost exclusively to Paul Krugman and his ilk on his featured blogs and columns.)  Also,  Robert Shiller came on CNBC and expressed a distinct lack of enthusiasm about housing prices for the next several years.

Meanwhile, over-bullish signs regarding not just sentiment but also bullish behavior by the "dumb money" are being documented not just by the short-seller's favored blog (ZH), but by the unbiased subscription-only publication SentimenTrader (behind a firewall).  One can never know how long this condition persists, and it can taper off with little damage to stock prices.  However, the Russell 2000 (R2K) is trading around 25X trailing earnings, and that P/E excludes the contribution from companies such as biotechs that have negative earnings.  This index is wildly overvalued.  The trailing 5-year growth rate
from the R2K is 5%.  Meanwhile you can buy CVS at about an 8% free cash flow yield (12.5X projected free cash flow for the next 12 months), with a 20% growth rate the past 5 years and unending projected growth ahead as it begins to expand internationally.  Thus I see this as an overvalued stock market but also, as it was in the 1998-2002 period, one in which some sectors are too cheap but the average stock is too expensive.

Futures positioning in the R2K is at its most bullish as far as I can find data easily (LINK).  The speculators are heavily long in copper as well.  The last time they went quickly from moderately bearish to heavily long was coming out of the Great Recession.  Copper was $3.50 a pound when they bulled the price up.  As of December 2012, the price was $.350.  Copper went nowhere for 3 years.
Should this pattern recur, Treasury yields are getting near or have already seen their peak.

With the Fed loose and the Federal government loose but less lose than in 2009, I do not foresee a collapse in stocks.  The lack of good competing alternatives leads me to cover the bases with recession-resistant securities that pay dividends.  Stocks in that category generally are shrinking or holding steady the share count.  This includes Blackrock (BLK) and IBM (IBM).  Stocks are risky; bonds with any "decent" yield are risky.  Pick your risk.  I choose some from column A and some from column B.

Finally, per the name of this blog, there are two posts up recently worth reading and thinking about:
LINK and LINK.  Please check them out.  The second one is a Seeking Alpha article that improves part-way into the body.  I have not even finished it.  Both linked articles are interesting.

Futures are, not unusually, bright green again.  The inflationary 'boom" that the Fed and the Feds are engineering is going on apace.  This could be 2011 again.  Please don't chase hot stuff unless it's with a well-defined profit goal.