tag:blogger.com,1999:blog-71317616774060254982024-03-06T15:02:49.569-05:00EconBlog ReviewIn Equity, Veritas"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.comBlogger1249125tag:blogger.com,1999:blog-7131761677406025498.post-73200029132799694592013-05-22T23:53:00.004-04:002013-05-23T00:08:29.584-04:00Dash from Cash to Trash a Mistake?Gold shorts smell blood per <a href="http://www.zerohedge.com/news/2013-05-22/they-better-pray-there-no-short-squeeze" target="_blank">BBG</a>:<br />
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<img height="319" sab="284" src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/05/20130522_gold_0.jpg" width="600" /><br />
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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.<br />
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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.<br />
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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.<br />
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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. <br />
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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.<br />
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The dash from cash into trash may soon prove misplaced. Sooner rather than later, all hail the long bond and King Dollar?"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com3tag:blogger.com,1999:blog-7131761677406025498.post-23976654717457539892013-05-16T01:00:00.001-04:002013-05-16T01:00:55.518-04:00Back 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.<br />
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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.<br />
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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.<br />
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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."DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com1tag:blogger.com,1999:blog-7131761677406025498.post-49652007228026316902013-04-26T21:53:00.003-04:002013-04-26T21:53:59.212-04:00Bond Speculators Jump On Board, May Even Bring Rates To New LowsThe 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.<br />
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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. <br />
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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.<br />
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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.<br />
<br />"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com1tag:blogger.com,1999:blog-7131761677406025498.post-16568759369980029782013-04-22T10:08:00.002-04:002013-04-22T10:08:33.011-04:00Stocks Continue on Thin Ice, Bonds Continue to Get Little RespectToday'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.<br />
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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.<br />
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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.<br />
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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. "DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com1tag:blogger.com,1999:blog-7131761677406025498.post-24853835668120239152013-04-18T18:30:00.000-04:002013-04-18T18:30:31.848-04:00Are Bonds Going to Be the Next Investment Fad?CNBC "reports" (<a href="http://www.cnbc.com/id/100653313" target="_blank">LINK</a>): <br />
<span class="Apple-style-span" style="color: #424858; font-family: Arial; font-size: 13px; line-height: 22px;"><blockquote class="tr_bq">
<b>Get Ready to Play the Coming Deflation Trade</b></blockquote>
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<span class="Apple-style-span" style="color: #424858; font-family: Arial; font-size: 13px; line-height: 22px;">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.</span>Investors have been fleeing assets normally linked with economic growth such as materials stocks, energy commodities and copper...<br /><span class="Apple-style-span" style="color: #424858; font-family: Arial; font-size: 13px; line-height: 22px;">And one prominent <a class="inline_asset" data-nodeid="43752521" href="http://www.cnbc.com/id/43752521" style="color: #2d648a; font-family: Arial; font-weight: bolder; outline-color: initial; outline-style: none; outline-width: initial; text-decoration: none;" target="_self">Federal Reserve</a> member this week openly discussed whether the U.S. central bank needs to accelerate, rather than pull back, its asset purchase program.</span></blockquote>
Meanwhile, the intellectual underpinnings for minimal price inflation have been updated by Lacy Hunt of Hoisington Management (<a href="http://hoisingtonmgt.com/pdf/Speech_by_Lacy_Hunt.pdf" target="_blank">LINK</a>) 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 <a href="http://hoisingtonmgt.com/pdf/Speech_by_Lacy_Hunt.pdf" target="_blank">(LINK</a>), 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.<br />
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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. <br />
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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 (<a href="http://www.zerohedge.com/news/2013-04-18/goldman-confirms-slowdown-accelerating" target="_blank">LINK</a>):<br />
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<span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px;"><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/04/20130418_swirl1.jpg" style="color: black; text-decoration: underline;"><img height="409" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/04/20130418_swirl1.jpg" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; height: auto; max-width: 100%;" width="485" /></a></span></blockquote>
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.<br />
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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.<br />
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When CNBC starts banging the deflation gong, it may just mean something.<br />
"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-67270057120289611882013-04-17T21:00:00.003-04:002013-04-17T21:00:46.608-04:00Jeremy Grantham Updates His Projections, Is Ultra-Bearish On US StocksMr Grantham, of GMO.com, 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.<br />
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This appears reasonable to me, from a <i>q</i> and CAPE perspective and from looking at balance sheets.<br />
Investors appear to have forgotten that financial asset value matters. It's not all about earnings.<br />
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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).<br />
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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.<br />
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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.<br />
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Stocks for the long run? Maybe the <i>very</i> long run..."DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com3tag:blogger.com,1999:blog-7131761677406025498.post-79263488712094026402013-04-15T15:32:00.001-04:002013-04-15T15:32:09.852-04:00Much More Than Gold Going DownPerhaps 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.<br />
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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.<br />
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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."DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com1tag:blogger.com,1999:blog-7131761677406025498.post-39830179494590051472013-04-12T08:34:00.001-04:002013-04-12T08:34:05.736-04:00A 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:<br />
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<blockquote class="tr_bq">
<label class="views-label-name">Posted by: </label><span class="field-content"><a href="http://www.zerohedge.com/users/ilene" style="color: #1e439a; text-decoration: none;" title="View user profile.">ilene</a></span><label class="views-label-created">Post date: </label><span class="field-content">04/12/2013 - 01:00</span><span class="field-content">Typically the public enters the market after a large run up, in time to buy at the top. Not there yet. </span></blockquote>
The actual article (<a href="http://www.zerohedge.com/contributed/2013-04-12/no-direction-home" target="_blank">LINK</a>) provides the conventional view:<br />
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<blockquote class="tr_bq">
<span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px;">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. </span></blockquote>
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. <br />
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Reluctant bulls, but bulls nonetheless, are everywhere. ECRI is one. A competitor, <a href="http://recessionalert.com/world-recession-update-apr-2013/" target="_blank">RecessionAlert</a>, 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:<br />
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<blockquote class="tr_bq">
<span class="Apple-style-span" style="color: #555555; font-family: Arial, sans-serif; font-size: 14px; line-height: 21px;"><a class="thickbox no_icon" href="http://recessionalert.com/wp-content/uploads/2013/04/REF_10Apr13g.gif" style="background-attachment: initial; background-clip: initial; background-color: transparent; background-image: initial; background-origin: initial; background-position: initial initial; background-repeat: initial initial; border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: red; font-size: 14px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: underline; vertical-align: baseline;" title="REF_10Apr13g"><img alt="REF_10Apr13g" class="alignnone size-full wp-image-2277" height="145" src="http://recessionalert.com/wp-content/uploads/2013/04/REF_10Apr13g.gif" style="background-attachment: initial; background-clip: initial; background-color: rgba(255, 255, 255, 0.699219); background-image: initial; background-origin: initial; border-bottom-style: none; border-bottom-width: 0px; border-color: initial; border-color: initial; border-left-style: none; border-left-width: 0px; border-right-style: none; border-right-width: 0px; border-style: initial; border-top-style: none; border-top-width: 0px; font-size: 14px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 5px; padding-left: 5px; padding-right: 5px; padding-top: 5px; vertical-align: baseline;" width="400" /></a></span></blockquote>
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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.<br />
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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.<br />
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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:<br />
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<blockquote>
<span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;">With the publication of the Flow of Funds data up to 31st December, 2012 (on 7th March, 2013) we have updated our calculations for</span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"> </span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"><em>q</em></span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"> </span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;">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%.</span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"> </span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"><br /></span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;">Both</span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"> </span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"><em>q</em></span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"> </span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;">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</span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"> </span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"><em>q</em></span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"> </span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;">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.)</span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"> </span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"><br /></span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;">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.</span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"> </span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"><br /></span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;">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.</span><span class="Apple-style-span" style="color: #666666; font-family: arial, verdana, geneva, sans-serif; font-size: 12px; line-height: 18px;"> </span></blockquote>
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.<br />
<br />
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. <br />
<br />
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.<br />
<br />
Cash may no longer be trash.<br />
"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com1tag:blogger.com,1999:blog-7131761677406025498.post-53183003915347547242013-04-09T08:26:00.002-04:002013-04-09T08:26:35.073-04:00NFIB Reports Disappointing March Survey ResultsFrom the NFIB report today on small business (<a href="http://www.nfib.com/research-foundation/surveys/small-business-economic-trends" target="_blank">LINK</a>):<br />
<br />
<br />
<blockquote class="tr_bq">
<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: 12px; line-height: 18px;"><img alt="Small business job creation plans" border="0" height="369" src="http://www.nfib.com/Portals/0/PDF/AllUsers/research/sbet/job-creation-data-201304.jpg" style="border-bottom-width: 0px; border-color: initial; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; border-width: initial; font-family: inherit; font-size: 12px; font-style: inherit; font-weight: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; position: static;" title="Small business job creation plans" width="596" /></span></blockquote>
<br />
And earnings trends (3-month average):<br />
<br />
<blockquote class="tr_bq">
<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: 12px; line-height: 18px;"><img alt="Small business earnings" border="0" height="326" src="http://www.nfib.com/Portals/0/PDF/AllUsers/research/sbet/small-business-earnings-nfib-201304.jpg" style="border-bottom-width: 0px; border-color: initial; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; border-width: initial; font-family: inherit; font-size: 12px; font-style: inherit; font-weight: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; position: static;" title="Small business earnings" width="510" /></span></blockquote>
<br />
<br />
And the overall picture:<br />
<br />
<blockquote class="tr_bq">
<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: 12px; line-height: 18px;"><img alt="Small business optimism report for April 2013" border="0" height="352" src="http://www.nfib.com/Portals/0/PDF/AllUsers/research/sbet/nfib-optimism-index-201304.jpg" style="border-bottom-width: 0px; border-color: initial; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; border-width: initial; font-family: inherit; font-size: 12px; font-style: inherit; font-weight: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; position: static;" width="533" /></span></blockquote>
<br />
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.<br />
<br />
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.<br />
<br />
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. <br />
<br />
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.<br />
<br />
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. <br />
<br />
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?<br />
<blockquote class="tr_bq">
<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif;"><span class="Apple-style-span" style="font-size: 12px; line-height: 18px;"><br /></span></span></blockquote>
"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-2548375285142272712013-04-05T07:41:00.001-04:002013-04-05T07:41:11.408-04:00The Counter-Attack on Irrational Exuberance May Be Beginning in Merrie Olde EnglandBack to basics from at least one part of the Bank of England? <a href="http://www.bloomberg.com/news/2013-04-05/boe-says-investors-may-be-taking-too-rosy-a-view-of-stresses.html" target="_blank">(LINK</a>):<br />
<blockquote class="tr_bq">
<br /><b>BOE Says Investors May Be Taking ‘Too Rosy’ a View of Stress</b> </blockquote>
<blockquote class="tr_bq">
<br />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. </blockquote>
<blockquote class="tr_bq">
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.”... </blockquote>
<blockquote class="tr_bq">
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. </blockquote>
<blockquote class="tr_bq">
“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.”...</blockquote>
<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', Times, serif; font-size: 14px; line-height: 22px;"></span><br />
<div style="background-attachment: initial; background-clip: initial; background-color: transparent; background-image: initial; background-origin: initial; background-position: initial initial; background-repeat: initial initial; border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: Arial; font-size: 15px; font-weight: normal; line-height: 1.6em; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 10px; padding-left: 0px; padding-right: 0px; padding-top: 10px; vertical-align: baseline;">
They focus on the US :</div>
<blockquote class="tr_bq">
<span class="Apple-style-span" style="font-family: Arial; font-size: 15px; line-height: 24px;">“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.”</span></blockquote>
<br />
<span class="Apple-style-span" style="font-family: Arial; font-size: 15px; line-height: 24px;">And on the UK. Fractionally-reserved banking remains risky under all current proposed capital regimes:</span><br />
<blockquote class="tr_bq">
<span class="Apple-style-span" style="font-family: Arial; font-size: 15px; line-height: 24px;">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.”</span></blockquote>
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. <br />
<br />
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."DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com1tag:blogger.com,1999:blog-7131761677406025498.post-30980810080644420462013-04-03T20:49:00.003-04:002013-04-03T20:49:48.775-04:00A Regional Fed Head Hints at Taking the Punch Bowl AwayForget Cyprus. The best sign that the current stock rally is in trouble came from SF Fed president John Williams today (<a href="http://finance.yahoo.com/news/feds-williams-may-start-tapering-193018125.html" target="_blank">LINK</a>):<br />
<br />
<blockquote class="tr_bq">
"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.</blockquote>
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.<br />
<br />
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. <br />
<br />
<blockquote class="tr_bq">
<br /></blockquote>
"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-77804982355181763772013-04-01T18:11:00.002-04:002013-04-01T18:11:28.551-04:00More 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.<br />
<br />
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 <i>The Great Gatsby</i>. 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:<br />
<br />
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.<br />
<br />
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.. <br />
<br />
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. <br />
<br />
This extends to Apple's problems in China and Europe. It includes all multinationals. Caterpillar has had problems in China, as well. <br />
<br />
Eventually, the Asian contagion came to America. Why should this time be different? (Though we can hope.)<br />
<br />
A possible template for US stock markets is as follows:<br />
<br />
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.<br />
<br />
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? <br />
<br />
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.<br />
<br />
I'm watching Mr. Bond and Dr. Copper closely."DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com3tag:blogger.com,1999:blog-7131761677406025498.post-32100269813466444362013-03-26T22:39:00.001-04:002013-03-26T22:39:57.971-04:00Even the Bears Are Bullish NowWith 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:<br />
<br />
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? (<a href="http://www.cnbc.com/id/100588012" target="_blank">LINK</a>)<br />
<br />
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. (<a href="http://www.zerohedge.com/news/2013-03-26/bob-janjuah-tactical-short-we-are-not-there-yet-big-one" target="_blank">LINK</a>)<br />
<br />
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 (<a href="http://ecri-prod.s3.amazonaws.com/downloads/ECRI_1303_US_Business_Cycle.pdf" target="_blank">LINK</a>).<br />
<br />
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 (<a href="http://www.bloomberg.com/news/2013-03-25/the-benefits-of-chronic-deflation.html" target="_blank">LINK</a>). It's called <i>The Benefits of Chronic Deflation</i>. But it's good deflation!<br />
<br />
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- <i>mirabile dictu</i>- so are the trannies. Thus, <i>res ipsa loquitur- </i>buy, baby, buy<i>. </i>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.<br />
<br />
These are just some examples. Rosie turned bullish a while ago. So did Tyler of ZH.<br />
<br />
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. <br />
<br />
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.<br />
<br />
So it goes.<br />
<br />
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.<br />
<br />
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."DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com5tag:blogger.com,1999:blog-7131761677406025498.post-88370957060626059032013-03-25T08:59:00.000-04:002013-03-25T08:59:10.857-04:00More Bubble Activity- Synthetic CDOs Are B"AAA"ckOnly 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 <a href="http://www.bloomberg.com/news/2013-03-20/synthetic-cdos-making-comeback-as-yields-juiced.html?cmpid=yhoo" target="_blank">Synthetic CDOs Making Comeback as Yields Juiced</a>:<br />
<br />
<blockquote>
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. </blockquote>
<blockquote>
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. </blockquote>
<blockquote>
“That’s a valid strategy for this part of the credit
cycle: Don’t stretch on <a density="full" href="http://topics.bloomberg.com/credit-quality/">credit quality</a>, but rather leverage your
exposure to better-quality credit,” <a density="sparse" href="http://topics.bloomberg.com/ashish-shah/">Ashish Shah</a>, the head of
global credit investment at New York-based AllianceBernstein LP,
which oversees $256 billion in fixed-income assets, said... </blockquote>
<blockquote>
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.<br /> <br />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. </blockquote>
<blockquote class="tr_bq">
“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.” </blockquote>
Nothing has changed. What "inning" is it? There is no reason to argue with Howard Marks, who said recently it was the 5th inning. <br />
<br />
If so, could the game be called because of rain at any time? Or, will it go into extra innings?<br />
<br />
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."DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-84282390893851430292013-03-25T07:57:00.003-04:002013-03-25T07:57:57.252-04:00Is 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 (<a href="http://www.bloomberg.com/news/2013-03-25/payrolls-growth-vault-to-higher-pace-at-u-s-companies.html" target="_blank">LINK</a>). It has anecdotes and some modest info. Here is a representative small section:<br />
<br />
<br />
<blockquote class="tr_bq">
Companies from <a density="full" href="http://www.bloomberg.com/quote/F:US" title="Get Quote">Ford Motor Co (F)</a>. to a California tortilla maker are stepping up hiring as the economy improves. The result, say <a density="full" href="http://topics.bloomberg.com/maury-harris/">Maury Harris</a> of UBS Securities LLC and <a density="sparse" href="http://topics.bloomberg.com/allen-sinai/">Allen Sinai</a>
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.<br /> <br />“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. </blockquote>
<blockquote class="tr_bq">
<a density="full" href="http://topics.bloomberg.com/russell-price/">Russell Price</a>, a senior economist at <a class="web_ticker" density="full" href="http://www.bloomberg.com/quote/AMP:US" ticker="AMP:US" title="Get Quote" topic_url="http://topics.bloomberg.com/ameriprise-financial-inc/">Ameriprise Financial Inc. (AMP)</a> in <a density="full" href="http://topics.bloomberg.com/detroit/">Detroit</a>, predicts employers will take on 2.5 million workers this year, after hiring 2.2 million last year. </blockquote>
<blockquote class="tr_bq">
“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.</blockquote>
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.<br />
<br />
These reports do not fit with the continued recessionary-level of hiring/not hiring seen by respondents to Gallup's daily survey (<a href="http://www.gallup.com/poll/151553/Gallup-Daily-Job-Creation-Index.aspx" target="_blank">LINK</a>). 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. <br />
<br />
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.<br />
<blockquote class="tr_bq">
</blockquote>
<br />
"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-8647527386854678662013-03-21T08:54:00.002-04:002013-03-21T08:54:56.984-04:00Thoughts on CyprusThe 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?<br />
<br />
Two articles in the Greek e-paper Kathemerini discuss the latest, with insights into dissension in Europe. <a href="http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_21/03/2013_489090" target="_blank">LINK</a>, <a href="http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_21/03/2013_489135" target="_blank">LINK</a>.<br />
<br />
The second of these is interesting. It shows substantial criticism within the European Parliament of how this situation was handled.<br />
<br />
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?<br />
<br />
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?<br />
<br />
There may be unintended consequences of this situation.<br />
<br />
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."DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-63027587045674291742013-03-18T16:53:00.000-04:002013-03-18T16:53:47.920-04:00European Events Support the Fortress America ThemeWhatever will be in Europe, will be...<br />
<br />
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.<br />
<br />
This theme continues. It also applies to China and Japan. <br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
So maybe there's no rush to commit more funds to gold if one already has a position in place.<br />
<br />
The rest of the world looks to be a bit more trouble than an American needs from an investment standpoint."DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com3tag:blogger.com,1999:blog-7131761677406025498.post-52694450016247902322013-03-17T20:52:00.002-04:002013-03-17T20:52:45.892-04:00Gold and Gold Stocks Could Be Ready to RockJim 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. <br />
<br />
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."DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-3176230702438281312013-03-15T10:28:00.000-04:002013-03-15T10:28:18.478-04:00Greenspan Bullish: Uh OhThis could be really, really bad. The man who warned against stocks with nearly four unbelievable full years of bull <b>bull BULL </b>lying ahead<b> </b>has perhaps rung the bell at the top (<a href="http://finance.yahoo.com/news/greenspan-no-irrational-exuberance-stocks-121659090.html" target="_blank">LINK</a>).<br />
<br />
<br />
<blockquote class="tr_bq">
<b><span class="Apple-style-span" style="font-size: large;">Greenspan: No 'Irrational Exuberance' in Stocks Now</span></b></blockquote>
<div>
That's a bad enough headline to stop here. But let's not...</div>
<div>
<br /></div>
<div>
<div id="yui-tmp-37">
</div>
<blockquote class="tr_bq">
Greenspan said in a "<strong><a href="http://us.lrd.yahoo.com/_ylt=AlSOrZmY33AmFXJsZ1v1jMWCuodG;_ylu=X3oDMTFqMDgxZXM0BG1pdANBcnRpY2xlIEJvZHkEcG9zAzEEc2VjA01lZGlhQXJ0aWNsZUJvZHlBc3NlbWJseQ--;_ylg=X3oDMTJuN284cWh0BGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDNDQ4NTA1OGMtZTJiMS0zMmY1LWFkZGUtZTBlZTg4YzRhNTdjBHBzdGNhdANjbmJjBHB0A3N0b3J5cGFnZQ--;_ylv=0/SIG=131hn6ofu/EXP=1364566536/**http%3A//www.cnbc.com/id/15838368%3F__source=yahoo%257Cinstory%257C%26par=yahoo"> Squawk Box </a></strong>"
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.</blockquote>
</div>
<div>
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. </div>
<div>
<br /></div>
<div>
Grantham has a better track record than the Maestro. But of course prior success doesn't guarantee future results, etc. So we shall see.</div>
"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-86234702563174713512013-03-13T10:05:00.001-04:002013-03-13T10:05:35.660-04:00Japan Plans To Use Sub-Sea Methane For FuelThis 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 (<a href="http://www.telegraph.co.uk/finance/newsbysector/energy/9924836/Japan-cracks-seabed-ice-gas-in-dramatic-leap-for-global-energy.html" target="_blank">LINK</a>):<br />
<br />
<br />
<blockquote>
<b>Japan cracks seabed 'ice gas' in dramatic leap for global energy</b> </blockquote>
<blockquote>
<br /> <i>
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. </i></blockquote>
Definitely worth a read.<br />
"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-49077246763726078312013-03-13T08:53:00.001-04:002013-03-13T08:53:23.195-04:00BofA lays off property appraisersPerhaps 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 (<a href="http://www.bloomberg.com/news/2013-03-13/bofa-said-to-cut-5-of-property-appraisers-amid-slowdown.html" target="_blank">LINK</a>, bold emphasis added):<br />
<br />
<br />
<blockquote class="tr_bq">
<a class="web_ticker" density="sparse" href="http://www.bloomberg.com/quote/BAC:US" title="Get Quote">Bank of America Corp.</a>, 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.<br /> <br />The job reductions at <a density="full" href="http://www.landsafe.com/landsafe/about/index.html#about" rel="external" title="Open Web Site">LandSafe</a>, 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.</blockquote>
<blockquote class="tr_bq">
“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 <a density="sparse" href="http://topics.bloomberg.com/bloomberg-news/">Bloomberg
News</a>. “<b>We were hopeful that our volume would return and
potentially reduce the number impacted</b>.”...</blockquote>
<blockquote class="tr_bq">
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.</blockquote>
<br />
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.<br />
<br />
This is not a disaster <i>per se</i>, 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.<br />
"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com3tag:blogger.com,1999:blog-7131761677406025498.post-53828238368229753492013-03-11T09:44:00.001-04:002013-03-11T09:44:19.025-04:00A Little More On the Very Complex Financial SystemI have finished a first reading of Nassim Taleb's latest book, <i>Antifragile</i>. 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.<br />
<br />
Bloomberg.com is running today an opinion piece that is more accessible than <i>Antifragile</i>, and is along the same lines. It argues for more transparency and simplicity in the financial "system". It's a good read (<a href="http://www.bloomberg.com/news/2013-03-10/to-understand-finance-embrace-complexity.html" target="_blank">LINK</a>). Hint: the title about embracing complexity is misleading. Here's a core paragraph:<br />
<br />
<blockquote class="tr_bq">
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. </blockquote>
We simply do not know what risks we are, or are not, taking with our investments these days.<br />
"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-81024948274234925932013-03-09T20:35:00.000-05:002013-03-09T20:35:16.610-05:00Stocks 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?<br />
<br />
ECRI is among the mainstream voices that has recently addressed this.<br />
<br />
The ECRI latest <a href="http://ecri-prod.s3.amazonaws.com/downloads/ECRI_1303_US_Business_Cycle.pdf" target="_blank">writeup</a> was followed by media appearances. In the second part of Lakshman Achuthan's <a href="http://www.businesscycle.com/ecri-news-events/news-details/economic-cycle-research-recession-update-4" target="_blank">Bloomberg TV appearance</a>, 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.<br />
<br />
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. <br />
<br />
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.<br />
<br />
We shall see. One worrisome sign comes from this from <a href="http://www.sentimentrader.com/" target="_blank">SentimenTrader</a>:<br />
<br />
<span style="font-family: Arial;"><table border="0" cellpadding="0" style="border-collapse: collapse; width: 100%px;"><tbody>
<tr><td width="163"><blockquote class="tr_bq">
<span style="font-family: Arial;"><img border="0" height="130" src="http://www.sentimentrader.com/subscriber/comments/2013/20130301_cashx.png" width="150" /></span></blockquote>
</td>
<td valign="top">
<span style="font-size: 15px; font-weight: 700; letter-spacing: normal;">March 1, 2013</span>
<span style="font-family: Arial;">
<span style="font-size: 11pt; letter-spacing: normal;">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.</span><span style="letter-spacing: normal;"><span style="font-size: 11pt;"></span></span></span></td></tr>
</tbody></table>
</span><br />
<span style="font-family: Arial;">(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.</span><br />
<span style="font-family: Arial;"><br /></span>
<span style="font-family: Arial;">One did not see the following stories in the media in 1986, 1995, and probably not in 2005 (<a href="http://finance.yahoo.com/news/middle-class-expenses-grow-faster-111900178.html" target="_blank">LINK</a>, <a href="http://www.latimes.com/business/money/la-fi-mo-retirement-401k-bills-20130307,0,5856839.story" target="_blank">LINK</a>):</span><br />
<span style="font-family: Arial;"><br /></span>
<span style="font-family: Arial;"></span><br />
<blockquote class="tr_bq">
<span style="font-family: Arial;"><b>For the middle class, expenses grow faster than paychecks</b><br /><span class="Apple-style-span" style="font-size: x-small;"><b></b></span></span></blockquote>
<span style="font-family: Arial;">and </span><br />
<blockquote class="tr_bq">
<span style="font-family: Arial;"><b>More than 25% of Americans raiding 401(k)s to pay bills<span class="Apple-style-span" style="font-size: x-small;"> </span></b></span></blockquote>
<span style="font-family: Arial;">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.</span><br />
<span style="font-family: Arial;"><br /></span>
<span style="font-family: Arial;">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.</span><br />
<span style="font-family: Arial;"><br /></span>
<span style="font-family: Arial;">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.</span><br />
<span style="font-family: Arial;"><br /></span>
<span style="font-family: Arial;">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%. </span><br />
<span style="font-family: Arial;"><br /></span>
<span style="font-family: Arial;">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.</span><br />
<br />
"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-15260853815831589792013-03-06T09:10:00.000-05:002013-03-06T09:10:07.756-05:00ECRI Updates, Remains Bearish On The EconomyI'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 <a href="http://ecri-prod.s3.amazonaws.com/downloads/ECRI_1303_US_Business_Cycle.pdf" target="_blank">LINK</a>. 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.<br />
<br />
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"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0tag:blogger.com,1999:blog-7131761677406025498.post-40866096841557753132013-03-03T20:14:00.000-05:002013-03-03T20:14:34.884-05:00Sunday Night PotpourriTwo 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 (<a href="http://www.bbc.co.uk/news/world-europe-21647937" target="_blank">LINK</a>):<br />
<br />
<br />
<blockquote class="tr_bq">
<b><span class="Apple-style-span" style="font-size: large;">Swiss referendum backs executive pay curbs</span></b><br /><a href="http://www.bbc.co.uk/news/world-europe-21647937#dna-comments"><span class="dna-comment-count-number"><br /></span></a><img alt="Daniel Vasella, chairman of Swiss drugmaker Novartis" height="171" src="http://news.bbcimg.co.uk/media/images/66174000/jpg/_66174438_66174433.jpg" width="304" />
<span style="width: 304px;">There was outrage in Switzerland over a $78m pay off, later scrapped, to the outgoing Novartis chairman.</span>Swiss
voters have overwhelmingly backed proposals to impose some of the
world's strictest controls on executive pay, final referendum results
show.</blockquote>
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<div class="introduction" id="story_continues_1">
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The other is that investors are getting more and more believing of the strength of the bull (<a href="http://www.bloomberg.com/news/2013-03-04/short-sales-fall-53-with-u-s-bull-market-starting-fifth-year.html" target="_blank">LINK</a>):</div>
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<div class="component with_related_categories" id="story">
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<blockquote class="tr_bq">
Short Sales Fall 53% With U.S. Bull Market Starting Fifth Year<br />Investors reduced <a class="web_ticker" density="full" href="http://www.bloomberg.com/quote/SPR:IND" title="Get Quote">bearish stock bets</a>
to the lowest level since at least 2007 as the <a density="sparse" href="http://topics.bloomberg.com/bull-market/">bull market</a> in
American equities begins its fifth year.<br /> 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. </blockquote>
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<br /></div>
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<br />
<br />
<img border="0" height="200" src="http://www.investorsintelligence.com/x/charts/iichart?id=32633&h=200&w=300&type=line&_cbox=3&_period=5y&_sample=d&_sendTo_=" style="border-bottom-style: none; border-color: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #424d59; float: right; font-family: Arial; font-size: 12px; line-height: 21px;" width="300" /><br />
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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.</div>
<div>
<br /></div>
<div>
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.</div>
<div>
<br /></div>
<div>
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.</div>
<div>
<br /></div>
<div>
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.</div>
<div>
<br /></div>
<div>
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.</div>
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<br /></div>
<div>
Thinking different.</div>
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<br />"DoctoRx"http://www.blogger.com/profile/07864962793726539567noreply@blogger.com0