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.
Showing posts with label TLT. Show all posts
Showing posts with label TLT. Show all posts
Tuesday, February 12, 2013
Wednesday, May 5, 2010
Turbulence is Here
The chart pattern on the TLT, a proxy for the long Treasury, looks marvelous. The angle of the ascent is much greater than the gentle slope of the downtrend, which on the descent from the high in price in December 2008 (low in yield) was much sharper.
Given that the Asian markets are collapsing and that risk assets such as silver and platinum are down while gold is up, it is easier and easier to look at the analogy of the dollar breakout against the Euro against general skepticism and project a counter-trend bull market in Treasuries.
Meanwhile, the S&) 500 volatility index (VIX) is nearly at 25, a level which a simple review of the long-term VIX chart suggests is average for turbulent periods. Much above 25 presents the intrepid stock picker a tradeable entry point.
The evils of too much debt and too much financial complexity are making themselves obvious. Gold continues to shine, dully, in this sort of environment.
Postings continue light due to travel and will resume normally in a week or less.
Copyright (C) Long Lake LLC 2010
Given that the Asian markets are collapsing and that risk assets such as silver and platinum are down while gold is up, it is easier and easier to look at the analogy of the dollar breakout against the Euro against general skepticism and project a counter-trend bull market in Treasuries.
Meanwhile, the S&) 500 volatility index (VIX) is nearly at 25, a level which a simple review of the long-term VIX chart suggests is average for turbulent periods. Much above 25 presents the intrepid stock picker a tradeable entry point.
The evils of too much debt and too much financial complexity are making themselves obvious. Gold continues to shine, dully, in this sort of environment.
Postings continue light due to travel and will resume normally in a week or less.
Copyright (C) Long Lake LLC 2010
Sunday, March 14, 2010
China Banking Crisis Coming?
Bloomberg.com is reporting that China May Face ‘Massive’ Bank Bailouts After Stimulus Program.
One year ago the L. A. Times reported on a raft of empty, "see-through" office buildings in Beijing, built for political reasons. This article suggests that just as the academic and Big Finance economists who warned that the U. S. housing market had levitated into a bubble were proven correct, foreigners who have no first-hand knowledge of what's going on in China are wise to be cautious about its real prospects. From the article:
China may be forced to bail out banks that made loans for local-government projects under the unprecedented stimulus program unleashed in 2008, according to Citigroup Inc. and Northwestern University’s Victor Shih.
In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.
“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said Shih, a professor who spent months researching borrowing by about 8,000 local government entities. . .
Shih was more pessimistic than Shen in an interview on Bloomberg Television in Hong Kong yesterday. He said that if the central government stops lending to the entities now, the cost of a bailout may already be “in the neighborhood” of 3 trillion yuan. . .
The article more briefly presents some other viewpoints and is worth reading by many investors, given China's role in the commodities market. If China cools off, all commodities price will tend to follow. If China actually experiences a bursting bubble, it's a look-out-below scenario at least for a while for a great many markets with the possible exception of gold, which one of these days may stop tracking the stock market.
The larger context of the above issues is that it is a fact that China went on a credit binge in the aftermath of the fall 2008 global financial crisis. The U. S. government has done the same with the collaboration of the Washington-based Federal Reserve Board (which for all practical purposes is a public-private entity with the emphasis on public and thus is currently best thought of as an arm of the Federal government and the privately-owned New York Federal Reserve Bank). Certainly Britain has moved almost in policy lockstep with America. The countries with better banking regulations such as Canada and Australia actually may have their own housing bubbles or at least significant booms. Japan has continued to print money.
In other words, major governments all over the world have responded to a crisis caused by too much debt by socializing the losses at the cost of new government borrowings. This means that the return of corporate profits is largely due to money-printing rather than corporate brilliance, the sudden implementation of major cost-saving measures (other than such examples as IBM slashing R&D expense), or organic growth.
Gallup.com's near-real time polling data show that hiring/not hiring remains mired where it was 16 months ago. The same % of people think the economy is poor as thought so 20 months ago.
The stock market has bounced and hiring has lagged, just as predicted by Reinhard and Rogoff's research into banking crises ("This Time Is Different" is their ironically-titled book on the subject).
Almost every economist, investor and day trader "knows" that we are in a sweet spot of the investing cycle, with the economy due to turn up while the Fed remains easy, valuations are (allegedly) cheap to reasonable, and that happy days will be here again so that there will be gullible investors to sell overpriced stock to. Even hard-headed Andrew Smithers has sounded a softer tone, despite his own research showing that historically, this is a miserable time to be in the general stock market.
While Bloomberg is reporting that only now has American investor optimism replaced pessimism, my own review of Value Line's stock charts shows no bargains. Whether or not they have been optimistic, stock prices are "too high" or at least too high for current profits, asset value and dividends in my view for most individual issues, with the "junk" the worst buys.
MCD is my current favorite of the quality stuff, based on various chart patterns, recent operational news, and other criteria. Of greatest importance is that while it has not quite traded above its all-time high of mid-2008, its 50-day and 200-day moving averages are both at all-time highs. So this recent move to $65 and above is well-supported. This thinking worked out well for gold last summer. Even if MCD doesn't go up in price, its yield beats cash and is close to that of a 10-year Treasury and is likely to rise steadiliy in the future.
A few working days ago, I spoke favorably of long Treasuries for a trade (TLT). I closed that trade out with a small profit Friday. TLT went up a little more after I sold it. Any government as powerful as the U. S. government can keep supplying enough bonds to the market to overwhelm the possibility of meaningful price appreciation. It appears as though this administration, with the support of Congress, means to do just that. Perhaps by November, China will be seen to have a bursting bubble, a Perot-like zeal to shrink our Federal deficit will have gained real power in the elections, and Treasuries can surge up in price (down in yield) as David Rosenberg has been forecasting for some time.
Thus a core holding in Treasuries is reasonable, but it should be in direct ownership of bonds, not in a perpetual fund that in theory could provide zero nominal return indefinitely. The Japan scenario remains a realistic possibility for the U. S., which would surprise almost everyone, perhaps even the Japanese.
Copyright (C) Long Lake LLC 2010
One year ago the L. A. Times reported on a raft of empty, "see-through" office buildings in Beijing, built for political reasons. This article suggests that just as the academic and Big Finance economists who warned that the U. S. housing market had levitated into a bubble were proven correct, foreigners who have no first-hand knowledge of what's going on in China are wise to be cautious about its real prospects. From the article:
China may be forced to bail out banks that made loans for local-government projects under the unprecedented stimulus program unleashed in 2008, according to Citigroup Inc. and Northwestern University’s Victor Shih.
In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.
“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said Shih, a professor who spent months researching borrowing by about 8,000 local government entities. . .
Shih was more pessimistic than Shen in an interview on Bloomberg Television in Hong Kong yesterday. He said that if the central government stops lending to the entities now, the cost of a bailout may already be “in the neighborhood” of 3 trillion yuan. . .
The article more briefly presents some other viewpoints and is worth reading by many investors, given China's role in the commodities market. If China cools off, all commodities price will tend to follow. If China actually experiences a bursting bubble, it's a look-out-below scenario at least for a while for a great many markets with the possible exception of gold, which one of these days may stop tracking the stock market.
The larger context of the above issues is that it is a fact that China went on a credit binge in the aftermath of the fall 2008 global financial crisis. The U. S. government has done the same with the collaboration of the Washington-based Federal Reserve Board (which for all practical purposes is a public-private entity with the emphasis on public and thus is currently best thought of as an arm of the Federal government and the privately-owned New York Federal Reserve Bank). Certainly Britain has moved almost in policy lockstep with America. The countries with better banking regulations such as Canada and Australia actually may have their own housing bubbles or at least significant booms. Japan has continued to print money.
In other words, major governments all over the world have responded to a crisis caused by too much debt by socializing the losses at the cost of new government borrowings. This means that the return of corporate profits is largely due to money-printing rather than corporate brilliance, the sudden implementation of major cost-saving measures (other than such examples as IBM slashing R&D expense), or organic growth.
Gallup.com's near-real time polling data show that hiring/not hiring remains mired where it was 16 months ago. The same % of people think the economy is poor as thought so 20 months ago.
The stock market has bounced and hiring has lagged, just as predicted by Reinhard and Rogoff's research into banking crises ("This Time Is Different" is their ironically-titled book on the subject).
Almost every economist, investor and day trader "knows" that we are in a sweet spot of the investing cycle, with the economy due to turn up while the Fed remains easy, valuations are (allegedly) cheap to reasonable, and that happy days will be here again so that there will be gullible investors to sell overpriced stock to. Even hard-headed Andrew Smithers has sounded a softer tone, despite his own research showing that historically, this is a miserable time to be in the general stock market.
While Bloomberg is reporting that only now has American investor optimism replaced pessimism, my own review of Value Line's stock charts shows no bargains. Whether or not they have been optimistic, stock prices are "too high" or at least too high for current profits, asset value and dividends in my view for most individual issues, with the "junk" the worst buys.
MCD is my current favorite of the quality stuff, based on various chart patterns, recent operational news, and other criteria. Of greatest importance is that while it has not quite traded above its all-time high of mid-2008, its 50-day and 200-day moving averages are both at all-time highs. So this recent move to $65 and above is well-supported. This thinking worked out well for gold last summer. Even if MCD doesn't go up in price, its yield beats cash and is close to that of a 10-year Treasury and is likely to rise steadiliy in the future.
A few working days ago, I spoke favorably of long Treasuries for a trade (TLT). I closed that trade out with a small profit Friday. TLT went up a little more after I sold it. Any government as powerful as the U. S. government can keep supplying enough bonds to the market to overwhelm the possibility of meaningful price appreciation. It appears as though this administration, with the support of Congress, means to do just that. Perhaps by November, China will be seen to have a bursting bubble, a Perot-like zeal to shrink our Federal deficit will have gained real power in the elections, and Treasuries can surge up in price (down in yield) as David Rosenberg has been forecasting for some time.
Thus a core holding in Treasuries is reasonable, but it should be in direct ownership of bonds, not in a perpetual fund that in theory could provide zero nominal return indefinitely. The Japan scenario remains a realistic possibility for the U. S., which would surprise almost everyone, perhaps even the Japanese.
Copyright (C) Long Lake LLC 2010
Tuesday, November 24, 2009
Tuesday Afternoon Update: Focus on VIX
As suggested yesterday could be in the offing, TLT is up a bit today, meaning that long Treasury rates are down a bit, besting the stock market, which is trading heavy and a bit to the downside. Gold is rising adjusted for the mildly stronger dollar.
The volatility index (VIX) is lower, which is the opposite of what one typically sees with the Dow off 40 points and the S&P 500 down. VIX is under 21. The past 2 years, 20 or slightly under that has been the lower bound; and in the 1998-2003 period, 20 was also the effective lower bound (a low VIX correlates with generally rising stock prices). The last time the VIX dropped while the stock market dropped, a brief but sharp correction ensued, and the VIX rose to over 30. Could this disparity be a sign of complacency?
Copyright (C) Long Lake LLC 2009
The volatility index (VIX) is lower, which is the opposite of what one typically sees with the Dow off 40 points and the S&P 500 down. VIX is under 21. The past 2 years, 20 or slightly under that has been the lower bound; and in the 1998-2003 period, 20 was also the effective lower bound (a low VIX correlates with generally rising stock prices). The last time the VIX dropped while the stock market dropped, a brief but sharp correction ensued, and the VIX rose to over 30. Could this disparity be a sign of complacency?
Copyright (C) Long Lake LLC 2009
Monday, November 23, 2009
The Long Bond: An Interesting Speculation
The single most surprising financial event that could occur soon might well be a significant drop in Treasury rates. A drop in rates would correlate with a rise in the ETF 'TLT', as TLT owns Treasury bonds in the 20+ year maturity range. The chart on TLT is actually promising. Click on it to enlarge; the red line is the simple 50 day moving average.
Since the early June low in price at longer-term support, we see a successful retest of that low in late July, then a pattern of higher highs and higher lows. In addition, the shape of the up and down moves looks reasonably promising, as well.
Meanwhile, stocks made new highs in some indices, but the VIX did not fall to a new low. Is it bottoming, implying a down move for stocks?
TLT opened down Monday but then worked its way higher, very quietly, as gold and stocks took the spotlight. Yours truly went long TLT on the open today. Now, this is in the context of holding lots and lots of gold, to be sure. Nonetheless, the structural bull market in Treasury prices (downtrend in yields) remains in force on the charts. And I believe that we are following the Japanese trajectory. So much lower lolng Treasury rates are possible, even if they make little sense on a total return after likely inflation.
Copyright (C) Long Lake LLC 2009
Tuesday, September 29, 2009
Nike A-Go-Go Though Results Not Even So-So
All the money-printing has produced a sameness to the financial news that is likely deceptive. The news continues to be almost relentlessly upbeat. I liked it much better in the winter and spring of 2003 when the obvious recovery from the recession of 2001 was loudly doubted on CNBC, with everyone waiting for another terrorist attack or some imminent disaster in Iraq. For example, Nike came out with news after the closing bell today that does not sound "so hot":
Revenue fell 12 percent to $4.8 billion -- narrowly missing analyst expectations of $4.9 billion.
OK; in a "normal" market, a miss on revenues is considered at least as important as a hit on earnings, as it is harder to game sales than earnings. How were earnings:
Nike Inc. on Tuesday reported its profit was practically unchanged in its fiscal first quarter while revenue fell sharply as consumers around the globe limited their spending.
Well, perhaps guidance was really good?
The company's future orders, a key measure for the company that indicates what retailers and other customers are planning to have delivered for the coming season -- fell 6 percent compared to last year.
OK then. Perhaps their Chinese operations are going great guns. Well, maybe not:
Nike's sales fell around the globe, with particular struggles in Europe and China.
Perhaps Nike has a truly new and exciting repositioning? This is what the company says about its revitalization:
Nike executives said while consumers remain cautious, the company is focused on long-term growth and it will push harder than ever for innovative products to help it grow.
"Nike is not a wait-and-see company," its CEO Mark Parker said.
Whatever that means.
Given the above, the ending of the article might be a bit surprising:
Investors were cheered by the company's ability to perform in the tough economy and sent Nike's shares up $2.70, or 4.5 percent, to $62.79 in after-hours trading Tuesday.
It's perhaps churlish to report that before this marvelous corporate report, Nike's stock traded at 20X trailing earnings with a dividend yield of 1.7% with a market value of 1.5X sales and 3.5X book value. The stock was already near all-time highs, only 10% off its 12-month high and over 50% up from its 12-month low.
While of course individuals are responsible for their actions, it is the Fed that is responsible for this manic speculative behavior. Just as most dieters cannot resist that piece of cake on the table, how can a trader resist the chance to "make" 4.5% overnight when that 4.5% equals 4.5 years of the 1% interest rate his/her bank is paying to borrow that speculator's money?
Nike's stock looks as if it is being moved by momentum players. Any remaining shorts are afraid, and the bulls are feeling their oats. Anyone who believes stocks are trading as if Armageddon were in the recent past or might be in the near future is mistaken. For many stocks, the go-go days are here.
Meanwhile, approximate 12-month total returns for gold, the S&P 500 and the long T-bond as judged by the 'TLT" ETF are:
Gold: 14%
S&P: -6%
TLT: 9%.
Remember this is after having lapped the Lehman Bros. collapse.
Copyright (C) Long Lake LLC 2009
Revenue fell 12 percent to $4.8 billion -- narrowly missing analyst expectations of $4.9 billion.
OK; in a "normal" market, a miss on revenues is considered at least as important as a hit on earnings, as it is harder to game sales than earnings. How were earnings:
Nike Inc. on Tuesday reported its profit was practically unchanged in its fiscal first quarter while revenue fell sharply as consumers around the globe limited their spending.
Well, perhaps guidance was really good?
The company's future orders, a key measure for the company that indicates what retailers and other customers are planning to have delivered for the coming season -- fell 6 percent compared to last year.
OK then. Perhaps their Chinese operations are going great guns. Well, maybe not:
Nike's sales fell around the globe, with particular struggles in Europe and China.
Perhaps Nike has a truly new and exciting repositioning? This is what the company says about its revitalization:
Nike executives said while consumers remain cautious, the company is focused on long-term growth and it will push harder than ever for innovative products to help it grow.
"Nike is not a wait-and-see company," its CEO Mark Parker said.
Whatever that means.
Given the above, the ending of the article might be a bit surprising:
Investors were cheered by the company's ability to perform in the tough economy and sent Nike's shares up $2.70, or 4.5 percent, to $62.79 in after-hours trading Tuesday.
It's perhaps churlish to report that before this marvelous corporate report, Nike's stock traded at 20X trailing earnings with a dividend yield of 1.7% with a market value of 1.5X sales and 3.5X book value. The stock was already near all-time highs, only 10% off its 12-month high and over 50% up from its 12-month low.
While of course individuals are responsible for their actions, it is the Fed that is responsible for this manic speculative behavior. Just as most dieters cannot resist that piece of cake on the table, how can a trader resist the chance to "make" 4.5% overnight when that 4.5% equals 4.5 years of the 1% interest rate his/her bank is paying to borrow that speculator's money?
Nike's stock looks as if it is being moved by momentum players. Any remaining shorts are afraid, and the bulls are feeling their oats. Anyone who believes stocks are trading as if Armageddon were in the recent past or might be in the near future is mistaken. For many stocks, the go-go days are here.
Meanwhile, approximate 12-month total returns for gold, the S&P 500 and the long T-bond as judged by the 'TLT" ETF are:
Gold: 14%
S&P: -6%
TLT: 9%.
Remember this is after having lapped the Lehman Bros. collapse.
Copyright (C) Long Lake LLC 2009
Wednesday, September 23, 2009
Treasury Long Bond Refuses to Die
Every time I get ready to toss in my optimism for the chart on the Treasury long bond's price, using the ETF 'TLT' as the proxy, it hands in there despite an allegedly booming recovery. The latest chart pattern is shown here. The green line represents the short-term, 10-day moving average. Coming off a low price/high yield 90 days ago at the left of the chart, what one sees is a strong move up in price , with a peak in the 10-day ma around 95. After a dip in price, the 10-day ma now peaked at 96, had a mild dip, and has begun to point upward.
It's early, but this is how bull moves can begin.
Fundamentally, such non-standard indicators as Gallup's daily polling continue to show miserable reports from real people of hiring/non-hiring at their employers. The Baltic Dry Index hit yet another reaction low, and the Chinese stock market has hit a small air pocket the past few days.
I'm no economist; but . . . If Gallup has it right, a 10% unemployment rate is imminent (barring the technicality of a major shrinkage of the labor force).
Copyright (C) Long Lake LLC 2009
Thursday, September 17, 2009
Bonds Versus Silver
Please see the chart of the ETF 'TLT', a proxy for the long T-bond, versus the ETF 'SLV', which tracks the price of silver. SLV began trading early in 2006. Bonds were in a bear market into Q3 the next year, and have been in a bear market the past 9 months; commodities were in a long-run bull market well into 2008 and again for almost a year.
Surprise! Bonds outperformed SLV simply on price. Add in a starting yield on TLT of (say) 4.5%, multiply by 3.5 years, and voila, you have massive bond outperformance of the bond over the commodity. This of course was achieved as well with less volatility.
It is GLD that clobbered the long bond, I would say because gold is a true monetary metal, whereas silver is at best a quasi-monetary metal.
Technically, SLV is about 30% above its 200-day moving average. It went higher than that in 2008, but this is a warning sign. TLT is "trying" to break through its downsloping 150-day moving average on the "strength" of a rising 50-day ma.
Fundamentally, employment continues to lag production; to the extent that transfer payments have been supporting the unemployed, so will a turn in the employment cycle not induce as much additional spending as would have occurred absent these transfer payments.
As the data show a clearly strengthening economy, with David Rosenberg admitting he has been too bearish on the economy this year, the yield gap between the 2-year and the 10-year Treasury issues has been narrowing. This is a negative for economic growth. The markets giveth, and one day they will taketh away.
Copyright (C) Long Lake LLC 2009
Tuesday, September 1, 2009
End-August Asset Class Review
Sometimes pictures tell the story better than words.
We can think and project all we want, but it is good to know objectively where we have been. You may click on all the charts to enlarge them.
The top chart represents the price of a long Treasury bond, per the ETF with the symbol TLT. It's basically in a 1-year trading range. Not shown is the multi-year chart, in the bull trend toward higher prices and lower yields is entirely intact. The reason it may well continue is that virtually no one believes the trend. Contrast that with the near-universal belief in the late 1990s in technology stocks. TLT did make a lower low in June than the recent ones in late July and early August, and has marginally exceeded the early July interim high. Substantial resistance awaits TLT around 100 if it can push that high.
Not shown is that of gold. You can get it at Kitco.com or chart the ETF GLD. Not only are these charts near-perfect, but the 150 day and 200 day moving averages for GLD have very recently gone to all-time records, exceeding those set around 8/6/08 and 10/10/08 respectively. The 50-day moving average is within about 60 cents of its record of around 4/21/08. At those times, the long-term moving averages were beginning to go convex upward rather than concave, indicating a loss of momentum; theyhave better shape today. The only overhead resistance gold now has is minor, which was the blow-off phase in early 2008 following an approximately $600 up-move from 2005-2008.
The other charts show the ETF for the S&P 500, SPY. From the end of August 2008 to the end of February 2009, SPY fell from 128 to 70. In the ensuing 6 months, it only rose from 70 to 102. What one likes to see is more energy on the upside than the downside; the chart shows the opposite.
Finally, the iconic stock GE shows a pitiful rebound over the last 6 months. GE is a fairly good proxy for the U.S. and to some degree the world economy. 60 days ago, consensus earnings estimates for GE for next year were 95 cents. Now they are 91 cents. No green shoots. GE stock is valued at over 11 times tangible book value and over 35X dividends (2.8% annual rate). It is thought here that GE is a truer gauge of matters than bank holding company stocks such as BAC because it is not a pure play and thus one would not speculate in GE if one wanted to speculate either on the financial sector or the industrial sector.
As I write this, the Shanghai Composite index is around 2700. It was established in 1990 at 100. That's about a 19% growth rate, not counting dividends. China just looks like a bubble floating in on top of a bathtub filled with dirty water. And China's stock market has, amazingly, led ours.
Received wisdom is that it's difficult to knock a stock market very far down once the economy turns; yet it happened in 2002.
Interesting times.
Copyright (C) Long Lake LLC 2009
Saturday, August 29, 2009
Words to the Wise
Bloomberg.com is running a lengthy piece on China and its stock market that is not a great read, but has a quote that leads the thoughtful observer to be wary of what's going on in the Great Reflation. From China Stocks Cheapest to Analyst Targets After Slump:
While banks can provide 300 billion yuan to 400 billion yuan of new loans a month, that “may not be enough for the market to be reassured that’s enough to keep pushing prices higher,” Green (an "analyst") said.
Scary. (Not to mention the title of the article, which in an almost insane manner justifies stock prices on the basis of what "analysts" project the stock to sell for in the future. Talk about self-fulfilling prophecies! This is NASDAQ 1999 stuff--the worst mispricing of securities I have ever heard of.)
We have seen a great orgy of both creation of new credit and government guarantees of existing credit. As with "cash for clunkers", this will pull consumption forward, but it creates no wealth. And the U. S. has explicitly gone the New Deal route of raising prices by destroying existing product; for every new car sold under "clunkers", one was destroyed; even the engine parts could have been reused.
Trying to re-blow a burst bubble is, as with chewing gum splattered over one's face, messy and difficult stuff.
Meanwhile, one week ago, EBR pointed out some interesting bullish historical technical patterns regarding the long Treasury bond and contrarian rationales for why it could be an asset poised for capital gains as well as income, focusing on a proxy for it, the ETF TLT. As if the gods of the market were reading this blog, TLT closed about 3 points up on the week (over a 3% gain). The 10-year is challenging resistance at 3.40-3.43%; no opinion about its chances of success, especially in the very slow week upcoming.
The ECRI Weekly Leading Index Growth Rate rose to its highest level since May 1971, attesting to the rationale for the massive stock rally since March. What happened then in the midst of that structural bear market for bonds? The stock market promptly fell 15% and was down adjusted for inflation one year later. The long bond was mostly stable to down in yield (up in price) for almost a year and half later (despite all the money printing, war action, etc.) Past could be prologue.
The frenzied interest and action in dividendless financial stocks such as AIG, C, Fannie/Freddie, Ambac, etc., and the poor action in high-quality dividend-paying companies such as MCD and Northern Trust (NTRS), is a divergence of which EBR disapproves. It correlates with the speculation going on in China and the quote at the top of this post explaining that speculation.
Longer term, quality will out, and uninformed speculation and excessive credit creation will reap what they have sown.
Copyright (C) Long Lake LLC 2009
While banks can provide 300 billion yuan to 400 billion yuan of new loans a month, that “may not be enough for the market to be reassured that’s enough to keep pushing prices higher,” Green (an "analyst") said.
Scary. (Not to mention the title of the article, which in an almost insane manner justifies stock prices on the basis of what "analysts" project the stock to sell for in the future. Talk about self-fulfilling prophecies! This is NASDAQ 1999 stuff--the worst mispricing of securities I have ever heard of.)
We have seen a great orgy of both creation of new credit and government guarantees of existing credit. As with "cash for clunkers", this will pull consumption forward, but it creates no wealth. And the U. S. has explicitly gone the New Deal route of raising prices by destroying existing product; for every new car sold under "clunkers", one was destroyed; even the engine parts could have been reused.
Trying to re-blow a burst bubble is, as with chewing gum splattered over one's face, messy and difficult stuff.
Meanwhile, one week ago, EBR pointed out some interesting bullish historical technical patterns regarding the long Treasury bond and contrarian rationales for why it could be an asset poised for capital gains as well as income, focusing on a proxy for it, the ETF TLT. As if the gods of the market were reading this blog, TLT closed about 3 points up on the week (over a 3% gain). The 10-year is challenging resistance at 3.40-3.43%; no opinion about its chances of success, especially in the very slow week upcoming.
The ECRI Weekly Leading Index Growth Rate rose to its highest level since May 1971, attesting to the rationale for the massive stock rally since March. What happened then in the midst of that structural bear market for bonds? The stock market promptly fell 15% and was down adjusted for inflation one year later. The long bond was mostly stable to down in yield (up in price) for almost a year and half later (despite all the money printing, war action, etc.) Past could be prologue.
The frenzied interest and action in dividendless financial stocks such as AIG, C, Fannie/Freddie, Ambac, etc., and the poor action in high-quality dividend-paying companies such as MCD and Northern Trust (NTRS), is a divergence of which EBR disapproves. It correlates with the speculation going on in China and the quote at the top of this post explaining that speculation.
Longer term, quality will out, and uninformed speculation and excessive credit creation will reap what they have sown.
Copyright (C) Long Lake LLC 2009
Wednesday, August 26, 2009
Who Are We Fighting For in Aghanistan?
An apparently objective journalist has filed a highly disturbing report about the recent election in Afghanistan. Titled How much are we expected to believe? and published in the journal Foreign Policy, it is not a long read and details the strong possibility of election fraud. You may wish to read it all; here is the gist of the report:
Consistent and credible reports from the south and the southeast have been coming in for days now: massive and blatant ballot stuffing; the removal or invalidation of votes for rival candidates; complete overhaul of ballot boxes; intimidation of witnesses and IEC staff; systematic removal of the publically displayed tally sheets. . .
While we have been busy with the number of incidents, the total turnout figure, and whether candidates and their supporters will decide to contest the outcome or not, there has been a major and systematic overhaul of the election outcome in the insecure parts of the country. If this is left unchecked the message will be unambiguous: there is no government, there is no law, and the internationals are fine with that. This means there is no real hope for improvement, which is a dangerous message to give in those areas.
Re the author: Martine van Bijlert is the co-director of the Afghanistan Analysts Network, where this post was originally published.
In the meantime, Military.com reports 2009 Now Deadliest Year of Afghan War:
August 25, 2009
Agence France-Presse
The number of foreign soldiers killed in Afghanistan this year surpassed that for all of 2008 on Tuesday with the deaths of four US military personnel in a bomb blast in the country's south.
The soldiers operating under NATO's International Security Assistance Force (ISAF) were killed by an improvised bomb, the Taliban's weapon of choice, in southern Afghanistan, the alliance force said.
The latest casualties bring to 63 the number of foreign soldiers who have died in Afghanistan this month and to 295 the death toll since January, making this the deadliest year for foreign troops since their 2001 arrival.
It's beginning to sound like Iraq-level casualty counts. We know that al Qaeda once had but now has no bases in Afghanistan. Who and what are we fighting for there?
If the answer is the same as in Viet Nam, the result is likely to be the same.
As predicted here many times, recessions/depressions/bananas end; this one may or may not have. On the other hand, wars may not end. The U. S. should emulate the fast growing countries of Brazil, India and China and get back to improving the lives of its people at home while abjuring foreign wars. At this point, the Afghan War is elective. Its winnability is increasing looking chancy while the financial and human costs look very dear.
After the markets closed last Friday, EBR posted The Case for Long Treasuries Gets Stronger Even as Leading Indicators Strengthen. From Friday's close till Tuesday's close, TLT (the proxy for the long T-bond discussed) is up 2.4% in price while the S&P 500 is up 0.1%. We shall see whether TLT, which could have been sold at the close today for over 6 month's worth of interest, has "legs"; what will destroy the long-term bull market in Treasuries, the end of which has been expected at the end of every economic cycle for years, is not prosperity. It is an expensive foreign war that the Government will then use to justify another ruinous inflation.
Copyright (C) Long Lake LLC 2009
Consistent and credible reports from the south and the southeast have been coming in for days now: massive and blatant ballot stuffing; the removal or invalidation of votes for rival candidates; complete overhaul of ballot boxes; intimidation of witnesses and IEC staff; systematic removal of the publically displayed tally sheets. . .
While we have been busy with the number of incidents, the total turnout figure, and whether candidates and their supporters will decide to contest the outcome or not, there has been a major and systematic overhaul of the election outcome in the insecure parts of the country. If this is left unchecked the message will be unambiguous: there is no government, there is no law, and the internationals are fine with that. This means there is no real hope for improvement, which is a dangerous message to give in those areas.
Re the author: Martine van Bijlert is the co-director of the Afghanistan Analysts Network, where this post was originally published.
In the meantime, Military.com reports 2009 Now Deadliest Year of Afghan War:
August 25, 2009
Agence France-Presse
The number of foreign soldiers killed in Afghanistan this year surpassed that for all of 2008 on Tuesday with the deaths of four US military personnel in a bomb blast in the country's south.
The soldiers operating under NATO's International Security Assistance Force (ISAF) were killed by an improvised bomb, the Taliban's weapon of choice, in southern Afghanistan, the alliance force said.
The latest casualties bring to 63 the number of foreign soldiers who have died in Afghanistan this month and to 295 the death toll since January, making this the deadliest year for foreign troops since their 2001 arrival.
It's beginning to sound like Iraq-level casualty counts. We know that al Qaeda once had but now has no bases in Afghanistan. Who and what are we fighting for there?
If the answer is the same as in Viet Nam, the result is likely to be the same.
As predicted here many times, recessions/depressions/bananas end; this one may or may not have. On the other hand, wars may not end. The U. S. should emulate the fast growing countries of Brazil, India and China and get back to improving the lives of its people at home while abjuring foreign wars. At this point, the Afghan War is elective. Its winnability is increasing looking chancy while the financial and human costs look very dear.
After the markets closed last Friday, EBR posted The Case for Long Treasuries Gets Stronger Even as Leading Indicators Strengthen. From Friday's close till Tuesday's close, TLT (the proxy for the long T-bond discussed) is up 2.4% in price while the S&P 500 is up 0.1%. We shall see whether TLT, which could have been sold at the close today for over 6 month's worth of interest, has "legs"; what will destroy the long-term bull market in Treasuries, the end of which has been expected at the end of every economic cycle for years, is not prosperity. It is an expensive foreign war that the Government will then use to justify another ruinous inflation.
Copyright (C) Long Lake LLC 2009
Friday, August 21, 2009
The Case for Long Treasuries Gets Stronger Even as Leading Indicators Strengthen
The above is a chart of "TLT" since its inception. This ETF is a proxy for the long Treasury bond (20+ year duration bonds). Click on the chart for greater detail.
Please ignore the fact that few Americans consider direct ownership of Federal debt in their asset allocation.
Just consider TLT as you would any common stock (or ETF), such as GLD, Amgen or AIG. TLT came public in 2002.
The blue line is the stock price. The red line is the smoothed 50-day moving average (ma). The green line is the 200-day ma.
Currently, TLT's 50 day ma has turned up. Every year since 2003 except 2005, TLT has moved down and then turned up above an upsloping 50 day ma while the 200 day ma was moving down. In every case, buying TLT at a point such as today allowed for a meaningful winning trade. In every case, TLT moved up above the 200 day ma.
The absolute price (yield) of TLT is below levels reached in 2003, 2005, 2007 and 2008, and is far below last December's manic-depressive high of 123. So, while "everyone" "knows" that Treasury yields are "too low", "everyone knew" that fact throughout this decade and were . . . wrong. It was dividend yields on stocks that were "too low" and in my humble opinion, they remain too low. The 5-year Treasury note yields more than the average S&P 500 stock. (More on this topic in a subsequent post.)
TLT is liquid, with tiny bid-ask spreads.
Trading aside, TLT pays you the interest on the bonds it owns with very low costs of 0.15% yearly taken out for administrative costs.
There are many reasons to buy or "rent" long Treasuries, though I would not put all my funds in them. Reasons to own them include, in addition to the pattern highlighted above:
1. No one you know owns them or has the slightest interest in doing so (poetic license taken);
1. No one you know owns them or has the slightest interest in doing so (poetic license taken);
2. Financial companies must buy and hold them to sell mortgages and life insurance;
3. Foreign countries are "locked in";
4. The Fed owns them and does not want to lose money on them;
5. Inflation typically declines after recessions end;
6. Everyone so knows the recession ended in Q2 or is ending;
7. Seasonal strength is beginning;
8. Deficit projections will shrink if the economy outperforms expectations;
9. The end of every post-war recession has been followed by new cycle lows in Treasury yields;
10. The U. S. has taken Japan's route in the quick fix of creating zombie banks following a burst bubble.
Copyright (C) Long Lake LLC 2009
Friday, July 24, 2009
Thursday Night Market Update: How Long Can Wage Weakness Be Ignored?
Per TrimTabs (subscription) tonight (July 23), the Treasury Department of the United States-- hardly a "bear" reporter--reports a worsening of a marvelous proxy for wages, namely wage withholdings. Click on picture to enlarge.
This is consistent with UPS, which said Thursday that July's business was not improved over June's. This after two full years of Fed easing!
Starting with Volcker's easing in 1980 (to elect his patron Jimmy Carter) and then in 1982 (after keeping tight money long enough to ruin Reagan in the 1982 midterm election), the macro financial game of leverage was easy. All the authorities had to do was just keep money flowing as long-term rates dropped and the underlying real economy weakened out of sight of the populace. This game began to end after the 2001 recession and has changed this cycle. Sweden has gone to negative interest rates for savers. The true lack of economic vigor--the "hollowing out of America"--is plain for all to see. Thus the increasingly jobless recoveries after the 1990-91 and then the 2001 recessions, and the horrible jobs performance in this decade's expansion and then the current economic downturn.
The sea of liquidity has pushed "investors" into all sorts of speculative "investments". The idea that Ford Motor Co. ("F") has a stock market value of $20 Billion with a tangible net worth of
negative $18 B, no prospect of operating profits any time soon, intense competition from the government-sponsored GM and Chrysler as well as the non-unionized Japanese and other transplants and imports, is ridiculous.
The flailing and failing "evil empire" known as Microsoft has collapsing sales and earnings, yet the stock has soared in the low-quality rally of the past several months. MSFT has about $210 billion of stock "value" embedded in its price over and above its cash and other tangible book value. It sells for more than 4X sales per share, 10X tangible book, and is in decline. Rather than paying a nominal dividend, it should rather be paying out 7%; should spin off its money-losing new ventures for whatever value the market will give it, and go into a semi-run-off mode.
But that would not suit management's interests, so it will not do that.
Meanwhile, Rasmussenreports.com and Gallup.com each document a sustained increase in "wrong track" sentiment from the populace, increasing fear of rising Federal deficits, some worsening in the views of the economy: these in the face of a stock market that has put the bears on the run.
Probably the worse stock news is that "sensible" consumer-oriented stocks that pay rising dividends, have rising earnings and reasonable P/E's and will certainly be around 10 years from now, MCD and WMT, and that were last year's only 2 Dow winners, are acting very poorly. Anyone who believes in the general stock market because of the "golden cross" of the 50 day moving average above the 200 day ma should look at the chart of MCD in that regard: so far, the golden cross has been a sell signal, not a buy signal; this despite a far better financial performance than the stock market's constituent companies.
Meanwhile, Bloomberg has reported that Swiss gold vaults are full to overflowing; gold may be over-owned, at least temporarily. Yours truly monetizes his "GLD" gold holdings by selling covered calls and is short puts. Income first, prospective capital gains last is the watchword for the future, so EBR believes.
On a global basis, the US economy and stock market are laggards this year. Let's see how our market responds should the gamblers who are gunning the Chinese stock market take a breather. Assuming TrimTabs is presenting the Treasury facts accurately, the risks are to the downside, as Nouriel Roubini has been saying. "Green shoots" may already have withered.
A gambler in the US might just want to buy "TLT", which is an ETF that provides ownership of the long T-bond. Talk about an out-of-favor asset, down 25% in price since December 2008!
Copyright (C) Long Lake LLC 2009
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