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.

Monday, February 11, 2013

Problems with Erb and Harvey's "The Golden Dilemma"

The current issue of Barron's carries a brief article by Mark Hulbert tited "5 Reasons Not to Buy Gold" (LINK).  It is a review of Claude Erb and Campbell Harvey's January 2-13 artcle titled "The Golden Dilemma".  This long study is downloadable for free (LINK).  I also came across a CBS writeup of what might have been an abstract of this study from last year (LINK).  Some of the comments to the CBS piece are interesting.

In any case, I am halfway through the Erb/Campbell study.  It is clear they miss the main point, and so does Mark Hulbert, who is a friend of gold, apparently. 

Gold is no longer able to brought cheaply out of the ground.  In this, it is like oil. 

When President Nixon de-linked gold from the dollar, the price had been fixed at $35/ounce.  A mainstream commentator, Eliot Janeway, asserted that because gold was being mined in South Africa at  very low cost, the price would plummet.

Similarly, it was reported during the Libyan intervention and civil war that oil from rich field in or just offshore Libya was being brought up from the ground at one dollar per barrel.  

Both gold and oil are being priced much closer to the marginal price of discovering, producing and refining the substance than Messrs. Erb and Campbell realize.  Oil was $3 in 1970; gold on the free market was about $42-44.  Each has risen similarly since then, about 35-40X.  Yet only gold is considered wildly overpriced.  Hmmm... 

The other major error in their study is their trust in the CPI.  They show the CPI over decades without appearing to care that it has repeatedly been redefined lower.

Finally, they appear to endorse the idea that gold, and essentially only gold, preserves wealth over multi-generational time frames.

Gold dropped a little over 1% today.  If it were because of the Hulbert piece, I will bet that once the Chinese get back from their New Year holiday, they will not care about the Hulbert piece in Barron's.


Saturday, February 9, 2013

Good-Bye to The Daily Capitalist, and Why the Stock Market Is Not Close to a New Real High

Now that The Daily Capitalist has unfortunately closed, I welcome any regular readers of that blog.  We will see what evolves here.  Jeff Harding set a high standard.  Perhaps it will make sense for some of his contributors to post here.  We shall see what technical or other consideration will be required.
"Working" at TDC made me a better writer and allowed me to learn more about economics and finance, and more important things as well.

Meanwhile, naturally the MSM is cheering the achievement of the major stock market averages equaling or exceeding their pre-crisis highs.

So, ever the realist, I wondered what deflator to put on today's averages.  The S&P 500 and DJIA are roughly where they were in mid-July, 2007.  So I went back and looked at what the two most "core" forms of wealth/money for the long run in America and the world are.  One is gold.  The other, with a shorter duration than gold but still long, is the 30-year Treasury bond.  In order to be comparable to gold and to eliminate the reinvestment problem, this should be a zero-coupon bond.

It turns out that, without fine-tuning the compound interest numbers, gold has returned roughly 18% per year since then, and the T-bond has returned about 16% per year.  Meanwhile, stocks have returned only their dividends.  This explains, at least teleologically, why the Russell 2000 has gone to a new high-- it has lower dividend payouts than the more mature Dow.

In other words, the stock market has dropped by about half relative to gold and T-bonds since July 2007, even including dividends.  Hold the applause.

The above said, I look at the stock-bond cycle as follows.  In Y2K, bonds yielded about 6.5%, with a flat yield curve.  Stock dividends were well under 2%.  Bonds were the overwhelmingly better choice.  Buy 2007, bonds were still better, yielding 5.25% at their high, also with a flat yield curve.  Stocks were less overvalued than in 2000, though.  Now, after the second stock crash, bonds and stocks finally have about equal yields/dividend payouts.  There is finally a level playing field.  Thus I am going to go back to my roots and focus more on stocks, believing that more than 30 years of generally successful individual stock-picking can provide insights that will allow a patient investor to actually beat the market.  I will have more to say on this.  Of course, all stock-pickers say they can beat the market, but then they/we become the market, LOL, and beating the market becomes impossible.  That said, until I left stocks between 2007 and 2009, and then went back only grudgingly, I regularly beat the market by 15% yearly, year after year, never with a down year.  That includes 2001 and 2002.  So we shall see.

I am going to submit articles on various matters to Seeking Alpha (SA).  Some have been published there.  I am going to comment periodically on matters I have been researching.

I mentioned RyanAir (RYAAY) in the last post.  In researching it, I see that it trades 15-20% higher in price in the U.S. ADR's than in Europe.  That's a red flag.  It's a great company but if bought, a correction would be the time.

The other company I have looked into and know from my combined experiences as a physician, pharmaceutical industry executive and entrepreneur, and consumer is CVS Caremark (CVS).  This stock is a clear long-term buy and hold.  They are really good- a free cash flow machine, almost all of which goes straight back to shareholders.  That's a much fairer strategy than Apple's cash-hoarding habit.  I will get a piece up on that company within the week, personal events permitting-- either here or on SA.

Over and out for now.

Thursday, February 7, 2013

Seeking Alpha Update

Readers have commented on how to find my Seeking Alpha posts.

It looks easy.  On signing in at, you should see a horizontal box on the right-hand side, near the top, that allows you to type in a keyword such as an author.  Typing in doctorx should bring up a list of my posts.  I'm able to do that; please let me know if you are not able to.

 I do not know if it is possible to obtain an RSS feed of my SA posts.

Thanks for following.

Seeking Alpha Follow-Up; Jim Rogers Shorts Treasuries

A second article, on gold/GLD, has been published on SA:

I picked GLD for a general readership.  My preference is either for physical or for a true physical fund, basically PHYS, the Sprott fund that allows Americans to get capital gains treatment; no other fund has this capability.  Thus gains in GLD etc. get treated as commodity gains.  In any case, the longer-term bull case on gold looks better to me than it has since mid-2011, though as restated below, times are unusually uncertain.  Gold has no short-term momentum behind it, so this is not a "wild bull" piece, more of a statement of a bullish bias toward the asset versus the USD and other USD-based investment choices.

I am in the process of getting links or notifications in place between SA and this site.  My daughter who lives down the street from us just had a C-section and a healthy baby, and I've been busy with other mission-critical things, so -- everything in its time.  It's gratifying to start that relationship.  I think that SA has potential and that it might be attracting a better class of writers; likely that's their goal.

I published a thematic article in which the message was "gold on hold, buy munis" piece at The Daily Capitalist in September, 2011 around the current gold price but at much higher muni bond yields.  This was a good call.  Gold has gone nowhere even though stocks have caught up and QE is now underway in a huge way.

I now reverse that muni call and think munis are at best a hold, or a sell-- the fear factor is finally gone from munis.  Though some California zero-coupon low-investment grade tax-exempt munis-- a very special niche, to be sure, yield much more than Treasuries and may still see some nice price appreciation faster than the yield implies.  And given how I feel about stocks "for the long run", I also took some spare cash and purchased a small odd lot of Illinois GO's maturing in 2016 at a pretty decent yield for the times we're in.  The reasoning was the the President is not, not, not going to let his home state default.  I think that Illinois GO's are money-good for a while.  It's sad that investors are reduced to scrounging for 100 basis points of yield, but as Charlie Munger said, we have to suck it up.

And actually, per today's topic, Treasuries are beginning to finally be looking like the tail end of a bear move, though perhaps they have some more upside potential in yield even if lower yields await (though the structural bull market may or may not be over).

One reason I say this is the following headline in BBG (LINK):
Jim Rogers Joins Bill Gross Warning on Treasuries
Much as I have enjoyed reading Jim Rogers' travel books and have followed him into investing in Russian ETFs (a modest exposure, to be sure), he has been the single best contrarian indicator on the movement of Treasuries I have seen over the past three years.  It seems to me that the time to short Tbonds is when stocks have been pummeled and the VIX is high.  Even Jim Rogers has to pay the broker its call money to short a security, and he is out the coupon.  So on an annualized basis, perhaps he's out 6% or more just to short the long bond.  Who needs it?  Why not just go long silver if he's so confident that price inflation is going to accelerate?

The other reason I'm sniffing at least a rally is that, finally, the speculators are shorting them on the futures board.  Now we will just have to see how the politicians handle things in DC, and how the real economy appears to perform, and whether Europe actually finally suffers an extreme event or actually starts healing for real.  These are unusually uncertain times, and thus I'm not trading much or initiating new positions.  Is the long-term secular bear market in stocks actually ending, or resting?  Could be, you never know.  Or are we due for a third crash?  Could be, you never know.

Bill Gross, OTOH, has not been much of an indicator either way.  Sometimes he's right on interest rates, sometimes he's wrong-- at least in his public pronouncements.  But sometimes he's talking his book, and sometimes perhaps he's trying to move markets a bit so he can trade against the market.

For want of a better valuation metric in today's very strange markets, I'm happy to use Value Line's time-tested and self-adjusting algorithm.  Based on that, and based on a mediocre Q4 earnings season and higher interest rates than at year-end (a negative for stock prices in their equation), stocks are ahead of themselves at best. (Their average projection for the Dow for 2013 was 13,440; that would be lower now given higher yields.  Thus a correction to 13,000 would make sense to their computer even in a non-recessionary situation.)

I am also researching RyanAir (RYAAY in the US), the Irish airline, which is the European version of LUV (Southwest Airlines).  Here is a LINK to the max timeframe chart.  To a nerd like me, this chart is a thing of beauty, not necessarily for a short-term trade, but on a longer-term basis.  The agreement with SA is that the articles are unique, so I won't say more now.  If any readers have personal experience with the airline or if you have thoughts on it as an investment, please comment.  I have not solidified my thinking on it.  It just announced a bang-up quarter and analysts raised out-year earnings estimates a lot, so it appears to be achieving strong operational results.

Over and out for now.


Tuesday, February 5, 2013

Joining the Seeking Alpha Team; Global Growth Steady and Positive in January

Yours truly has begun posting on Seeking Alpha.  An article I submitted last night was published today regarding my theme that a number of emerging stock markets have plenty of risk, but ultimately better risk-reward characteristics than does the U.S. equity market.  This article explored some of the reasons for investors to consider the major Russian ETFs such as RSX or ERUS, and the smaller-cap one, RSXJ.  This is the LINK.

In today's news, Markit reported strong global PMIs (LINK to list).  Here is the report from Russia:

“The Russian economy grew somewhat faster in January, theHSBC Russia Composite PMI survey revealed. Importantly, itfollows from the survey’s results that economic growth inJanuary was stronger than the average growth in both 2011and 2012. Translating Composite PMI Index values into GDPgrowth numbers using past correlation, we see clear signs offaster GDP growth over the recent months. Recent values ofComposite PMI Index are consistent with GDP growth of about4%, we estimate.“The PMI data show that growth engines rebalanced inJanuary: manufacturing has rebounded while the servicesector moderated its output growth that nevertheless remainedrobust. This rebalancing is healthy, we think, as it puts theeconomy on a more stable growth track. That said, somefurther moderation of business activity expansion in the servicesector is quite likely in the coming months due to the expectedslowdown of consumption demand growth.

Russia is performing well economically, it appears, regardless of its political situation.
Globally, the PMIs were positive, as well.  Russia's JPMorgan Mfg and Services PMI was reasonably strong at 53.3.  

Amongst the country services PMI, Brazil did well, with the HSBC Composite PMI accelerating to 54.9 from 53.2 in December.  I very recently went long the Brazilian real around today's price.  The USD-BRL ratio of 1.9860 has room on the charts to correct downward to 1.80 or so.  Given today's accelerating data from HSBC, I also went long the small-cap (domestically-oriented) Van Eck ETF, symbol BRF.  This ETF is well off its pre-crash highs.  It is not a value play but has good growth characteristics.  

A number of emerging countries have had stronger and steadier economic growth post financial crisis without having had to resort to massive overt monetization of the federal deficit.  This is where I want a good portion of my equity allocation to be while their stock markets have lower valuation metrics than those of the U.S.

Monday, February 4, 2013

A Quick Comment on Bund Yields, and Treasurys

One year ago, the 10 year bund yielded 1.93%.  After the recent furious back-up in rates, they are down 6 bps today to 1.62%.  Rates peaked at 1.71% on Jan. 30 (Thursday).  The precipitant appears to be more turmoil, but nothing major yet, in both Italy and Spain.

If rates can correct down so much so quickly with limited cause without coming close to year-ago rates, then I think the amazing bond bull market remains in force and will not be easy to overturn-- though of course it's quite possible.  I also think that ultimately, the U.S. rate structure can equal that of Germany on the downside, even if rates are negative when judged against current inflation.  After all, you can lose nominal capital in stocks, as well as losing ground to inflation.  This fact appears of little interest to today's stock traders, however.

The least-advertised fact the media has fed to John Q. Public is how many capital gains bond traders have made the last several years, and in fact in much of the past three+ decades.