Friday, July 30, 2010

Pruning The Late Bloomers

"Here in 2010, a few late bloomers are making new all-time highs. I never thought the long term inflationary topping process would take this long, but it has. At each of these peaks, investors have focused on one area or another. Every time it’s happened, the area of focus has reversed trend, plummeting in price by 50% or more.  This latest credit reflation is the weakest yet, so it hardly inspires confidence that today’s isolated bull markets will end any differently. Each time a bull market matures, investors are sure it can’t reverse. They said that about technology and internet stocks; they said it about real estate; they said it about oil. Now that a couple of markets are at all-time highs, we hear the same argument about them. This is natural, because investors always want to own markets that are way up. But investors in those previous booms are never going to get back to breakeven. Many of them were ruined."
Robert Prechter, Elliott Wave International

Wednesday, July 28, 2010

Gold & Kahunas

Gold took a major dive yesterday dropping $20/ounce.  More importantly, the Gold ETF (GLD) broke through the base of the "handle" at $115/share that was presented in my post of June 29.  Chart techies would say that the trend is likely to be down in the short term.  For those with large kahunas, it might be a great buying opportunity!

Bernanke's 2012 Surprise

New Jersey Congressman Scott Garrett of the House Financial Services Committee asks Ben Bernanke some great questions. Start preparing for 2012 my friends.!

SCOTT GARRETT: You bought over a trillion dollars of GSE debt, and to that point, under normal circumstances, on the Fed’s balance sheet what you have on there are Treasuries, or if you had anything else on there, I assume you would have a repurchase agreement for those securities on your balance sheet. Now of course around two-thirds of that are in GSE debt.

GARRETT: So right now, those are guaranteed – whether they’re sovereign debt or not, we don’t know – but they’re guaranteed by the U.S. government. But they’re only guaranteed to when? 2012, right? After that, Congress may in its wisdom make another decision, and at that point in time, you may be holding on your balance sheet – two thirds of your balance sheet – something that is not guaranteed by the Federal government. First of all, you don’t have a … do you have a repurchase agreement on those with anyone? No.
BERNANKE: I don’t know what you mean by a repurchase agreement. We own those securities.
GARRETT: You own those securities. Right. So there is no repurchase agreement outside to buy them back. You own them.
GARRETT: So after 2012, if they’re no longer guaranteed, is it fair to say that you may at that point in time actually engage in fiscal policy, because you basically are creating money at that time? And I know that you’d agree that it would be an unconstitutional role for the Fed to engage in fiscal policy – so where will you be at 2012 if they had to take a haircut on those because they’re no longer guaranteed?
BERNANKE: Well, first from the government’s perspective, I, uh, such an act would, uh, there would, the Federal Reserve would lose money which the Treasury would gain. There would be no overall change to the position of the U.S. government. Secondly, the Federal Reserve act explicitly gives.
GARRETT: How would we be gaining? How is the Treasury gaining?
BERNANKE: Well, if there’s a bad mortgage and the Treasury.. it requires $10 to make it good, if the Treasury refuses to do that then the Fed loses $10, so one way or another the government’s going to lose $10. But I would just say two things, one is that I think, uh…
GARRETT: But if you didn’t purchase them in the first place, it would just be a total – then what would have occurred? There would not have been the creation of that $10. Now that you’ve purchased them, and in essence if we don’t back them up, then you will have created that additional $10.
BERNANKE: Well, I hope that doesn’t happen, because I think it’s very important for financial stability and confidence that we, that we guarantee…
GARRETT: Let’s play out that hypothetical that it does happen.
BERNANKE: Well, then the Fed would lose money there. But let me just point out that the Federal Reserve Act, that we did not invoke any emergency or unusual powers to buy those agencies. It is explicitly in the Federal Reserve Act that we can buy Treasuries or agency securities and so we did not do anything unusual there.
GARRETT: In what status were they when you bought them? Were they in conservatorship at that point?
BERNANKE: Um, yes.
GARRETT: Is it normal practice for the Fed to buy agency securities when they’re in conservatorship? Was that ever done before?
BERNANKE: It’s never been in conservatorship before.
GARRETT: Well, there you go. So the normal practice is not what was followed here. It just seems to me that we may have gone down a different road than we’ve ever gone down in U.S. history, where the Federal Reserve has engaged in buying a security, it’s not Treasury, it’s not guaranteed by the full faith and credit of the United States for its lifetime, nor is there any repurchase agreement from any other entity that you purchased – that you have a trade with an agreement with – and that the Fed in essence could have created money if the government does not guarantee them. At least, that could be the situation we could find ourselves in 2012.

Tuesday, July 27, 2010

Deflationary Politics

My bro-in-law turned me onto this one. The day of the "drunken politicians" might be over for a long time. Deflationary politics is in full gear.

"City council members in the small California town of Bell -- where outrage over high salaries forced three officials to resign last week -- voted Monday night to slash their pay. And the mayor, who last week defended the salaries, said he would forgo a salary altogether and would not seek reelection. But the move was not enough to appease angry residents who demanded that the council members step down. 'You all need to go to jail,' a self-described underpaid teacher said at a contentious meeting Monday night. 'Shame on you. All of you.' When Councilwoman Teresa Jacobo said she will slash her salary but hold on to office, the crowd booed loudly and repeatedly. 'If you don't want to resign, we'll recall you,' said one man. The city council voted to reduce its pay to that of what one councilman, Lorenzo Veles, was being paid: $8,076 a year. Most of the other council members made nearly 10 times as much. The Bell salaries have provoked statewide anger at a time when California is grappling with a near $20 billion budget deficit. The median annual income of Bell -- which counted about 36,000 residents in the 2000 census -- is less than $35,000. Like Mayor Oscar Hernandez, another councilman George Mirabal said he will not seek reelection. Said the mayor in a statement: 'We must restore Bell's pride in our city and that requires a full, transparent, and deliberate review of the city's actions.' Last week, the city council accepted the resignations of City Manager Robert Rizzo, Assistant City Manager Angela Spaccia, and Police Chief Randy Adams, who reportedly had a combined salary of more than $1.6 million. Also on Monday, California Attorney General Jerry Brown, who is running for governor, said he subpoenaed hundreds of records from Bell as part of an investigation to determine whether civil or criminal action should be taken against any city leaders."
Source: CNN

The angry mob continues the lynchings.
Mass Social Mood Model

Monday, July 26, 2010

Burglars Catching The Trend

It appears that the "bad guys" are catching the trend.
"A New York man, who is facing a federal conspiracy charge for allegedly committing 37 gold-related burglaries in Northern Virginia last year, was sentenced Thursday to a year in jail for an incident in which he broke into a house, was confronted by a resident, fled and took nothing.  Dagoberto Soto Ramirez, 27, was arrested along with his wife, Melinda Soto, 34, and a third New Yorker, Francisco Gray, 39, last November, and charged with a string of burglaries in Fairfax and Loudoun counties, all targeting Indian and South Asian residents who kept gold in their houses."
Source: Washington Post

Sunday, July 25, 2010

Calculating Machines

"Clearly, markets are not rational calculating machines as some professors would have us believe, but a herd of emotional participants."
Paul J Lamont, Lamont Trading Advisors, Inc.

Friday, July 23, 2010

The Great Falacy

"Investors should know that the market can render the central bank powerless. For instance, since 1999 Japan’s central bank has been purchasing financial assets with printed money to attempt to pump up their economy. But for ten years this quantitative easing policy has failed to lift Japan’s economy off the mat. Instead central banks’ power is derived from theatrics and sophistry."
Paul J Lamont, Lamont Trading Advisors, Inc

Thursday, July 22, 2010

China's Oil Plan

While we continue to squabble in our country, China is on a "full court press" with their energy strategic plan.

"It’s a pretty safe bet that, as one of the world’s fastest growing economies, China needs a lot of energy. And with an oil appetite that grows by 7.5% each year, seven times faster than the U.S., the country’s reserves don’t even begin to compare to the consumption.  But fuelling the blistering pace of its economy is China’s number one priority, and it is on a mission to lock down its energy interests all around the world. The emerging powerhouse has often felt that it was the last one onto the energy playing field with a lot of catching up to do.  Today, Chinese national oil companies (NOCs) are setting up shop everywhere from the Middle East all the way to the oil sands of Canada, and they’re open for business. The three NOCs – CNPC/PetroChina, Sinopec and CNOOC Ltd – are slated to produce a record breaking one million barrels daily. That’s Australia’s daily fuel consumption!  It isn’t just their oil production that’s going through the roof. Since 2009, China has committed nearly US$25 billion into corporate and asset acquisitions. China isn’t going it alone either, and fully realizes the importance of forging partnerships with other international oil companies to develop oil fields.  And with Beijing firmly behind them, they’re only doubling their efforts this year. Chinese NOCs accounted for nearly 20% of all global deal values in the first quarter of 2010. This share will only get bigger as the year carries on and energy security continues to dominate the agenda.  Armed with strong finances, an aggressive approach, and implicit government backing, Chinese companies are well placed to spearhead the nation’s mission of diversifying its international energy portfolio. The latest thing to catch their attention: the mysterious oil elephants of East Africa."
Marin Katusa

Tuesday, July 20, 2010

Vaulting Past The Red Flags

"Actually, investors vaulted past the red flags in 2007-2008.  What they ignore now is the train wreck itself."
Steve Hochberg, Elliott Wave International

Monday, July 19, 2010

A Twist On The Spill

I thought that this "larger view" perspective on the BP oil spill was interesting.

"The specifics of the disasters are, of course, unpredictable.  But it's reasonable to expect an increasingly negative social mood to bring about a daisy chain of incompetent decision making, corner cutting and the willingness to assume bad risks which will result in tragic accidents.  What may turn out to be the 'biggest environmental disaster the country has ever faced' fits perfectly with the resumption of the bear market that will end as the biggest in the lives of all who survive it."
Steve Hochberg, Elliott Wave International

Sunday, July 18, 2010

Overconsumption and Debt

"After a period of overconsumption, Americans now see debt as the primary threat to their well-being."
NY Times

Saturday, July 17, 2010

A Worldwide Spatial View of Debt

Casey Research just published this map.  It brings new meaning to "being in the red"! Check out our friends in Japan.  They're almost as high as Zimbabwe.
Add caption

Friday, July 16, 2010

A Shift Toward The Big "D"

"In my October 2008 post, Four Potential Outcomes, I presented what I believed to be the four potential outcomes in the near future. Outcome #1, deflation, appears to have already swiftly occurred devasting asset prices in all sectors including commodities. The "missing piece" is that from an Austrian economics perspective, credit and money expansion need to deflate also. As we know, the opposite is occurring on a staggering level."
Random Roving, March 26, 2009

Well the chart below provides the "missing piece".  Money supply is tanking rapidly.  An Austrian economist would declare that deflation is here.  That would mean a decline in the value of everything. 


Wednesday, July 14, 2010

Battling The Bands

It will be a telling next few days for the financial markets.  An aggressive rally has brought the DJIA back bumping up against the upper band.  Is it time for the next leg down?  I think so.
Dow Jones Industrial Average (Last 6 months)

"Here's a potential outcome (Dow peaking in the 10000-10500 range)."
Random Roving, September 16, 2009

Worse Than We Thought......Again

“The oil spill’s much worse than we ever thought,” Mr. Landrieu said. “The budget’s much worse, the dysfunction is much worse, the N.O.P.D. is much worse. But, you know, that’s why I signed up.”

Newly Elected New Orleans Mayor, Mitch Landrieu
Source: NY Times, July 13, 2010

"Headlines for two recent mega-events, BP's oil spill and Greece's meltdown, caught my eye. Initial reports both used the phrase "worse than we thought". I believe that this phrase will be used and over-used a lot in the coming years."
Random Roving, May 11, 2010

Tuesday, July 13, 2010

Bubble Amnesia

"The collapse of a Wall Street institution like Lehman Brothers looks nothing like the threatened closing of a branch library.  But this unfolding economic disaster is in fact a series of variations of a single theme.  When times were good and the future seemed bulletproof, all sorts of grand ventures were floated on waves of debt.  Everyone planned to be richer when the bills came due.  Only if the bubble burst would the bills become unpayable. How did so many people forget all at once that the bubble always bursts?"
Source: Time Magazine

Monday, July 12, 2010

Fundamentals, Waves, and Social Mood

"The true fundamentals are the waves of social mood that are patterned according to the Elliott wave model.  As wave 3 down unfolds, corporate profits will fade and Wall Street strategists and investment officers will come to lament the weak "fundamentals".  This is the way social mood works."
Steve Hochberg, Elliott Wave International

Sunday, July 11, 2010

4th and 15, Where We Are, Where We've Been

In "The Last Call For Alcohol", I tried to provide a historical perspective via "bar parable" on the Super Size Me Era and the beginning of the contraction that begin in 1999.  James Quinn from "The Burning Platform" has assembled an incredibly detailed historical summary from 1980 with much data to support.  Some excerpts:

"Americans are slowly coming to the realization that unbridled greed is not the same as capitalism. Excessively low interest rates punish savers and senior citizens, while benefitting borrowers, risk takers and Wall Street. Savings leads to investment, while borrowing leads to impoverishment. The actions taken thus far by politicians, government bureaucrats, and the Federal Reserve are the exact opposite of what was required. The next leg down in this Greater Depression will thoroughly discredit those who have promoted a money culture over those virtues that will benefit society in the long run. The current Crisis will require personal sacrifice, renewed community spirit, public consensus, and truth. Failure could prove fatal for our nation. The best of human nature must win out over greed, ignorance, and love of power. Our future hangs in the balance."

"The United States has experienced a three decade long “expenditure cascade”. An expenditure cascade occurs when the rapid income growth of top earners fuels additional spending by the lower earners. The cascade begins among top earners, which encourages the middle class to spend more which, in turn, encourages the lower class to spend more. Ultimately, these expenditure cascades reduce the amount that each family saves, as there is less money available to save due to extra spending. Expenditure cascades are triggered by consumption. The consumption of the wealthy triggers increased spending in the class directly below them and the chain continues down to the bottom. This is a dangerous reaction for those at the bottom who have little disposable income originally and even less after they attempt to keep up with others spending habits. The personal savings rate was 12% in the early 1980s and declined to negative 1% by 2005. The expenditure cascade couldn’t have occurred without easy access to debt. The question that must be asked is, who benefits from debt and who pays?"

"The delusion of the American populace cannot be underestimated. Their worshipping at the altar of materialism and adoration of Hollywood created pop culture was crucial to the societal delusion. Without the corporate consumerism marketing machine, an unlimited amount of credit provided by bankers, and ultra-low interest rates supplied by the Federal Reserve, the delusions of grandeur could not have been realized."

"We have taken the acquisition of material belongings so seriously that it became what we worked for. Material possessions defined who we are. When we lose these possessions we no longer have the identity that we have blindly created by collecting “things”. My God, what have we done?"

I highly recommend that everyone read this entire article.  Long, but full of important details defining where we've been and where we are.

Saturday, July 10, 2010

Dubya Stats

I continue to be perplexed on how the angry mob fails to post-analyze Dubya's eight year performance.  James Quinn from "The Burning Platform" summarized it like this:

•Total US credit market debt increased from 275% of GDP in 2000 to 365% of GDP in 2009.
•The National Debt increased from $5.7 trillion in 2000 to $13 trillion today. It is projected to reach $20 trillion by 2015.
•Consumer debt has increased from $1.5 trillion in 2000 to $2.4 trillion today.
•The U.S. has spent $1 trillion since 2003 on wars of choice in Iraq and Afghanistan.
•Annual defense spending has risen from $359 billion in 2000 to $896 billion in 2010.
•Unfunded liabilities for Social Security, Medicare, and Medicaid total $106 trillion
•In 2008, Wall Street lost $42.6 billion and required middle class taxpayers to bail them out. Total compensation on Wall Street in 2009 totaled $55 billion, three times the previous high.

Friday, July 9, 2010

The Great Maestro On Derivatives

This one will be a "keeper" for a long time:

“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions …. Derivatives have permitted the unbundling of financial risks.”
Alan Greenspan, May 2005

Thursday, July 8, 2010

The Afghan Hot Potato

"Republican National Committee chairman Michael Steele suggested at a Connecticut fundraiser that Afghanistan is 'a war of Obama's choosing' despite the fact that it began years before the president took office."   Source: ABC News


"Obama has a bright future. I hope for his sake that he loses, because he will be the “fall guy” and historically during “inflection points” those presidents have been the recipients of bullets (Lincoln, McKinley, Kennedy, Reagan). The “mob” has emerged and they’re seeking someone to lynch (ask Martha Stewart, George Bush, Jeff Emmelt, Ben Bernanke, and Brittany Spears)."
Random Roving, March 24, 2009 (June 30, 2008 email)

"As predicted on election day, President Obama will be the fall guy. A 28 year cycle has come to an end and someone has to hold the 'hot potato'."
Random Roving, March 26, 2010

"As predicted, President Obama now owns the economic contraction. A cycle that commenced in 1982, rolled over in 1999/2000, now is owned by the current president, his administration, and his party. The mob wants the "hot potato" to land in someone's hands."
Random Roving, March 16, 2010

Wednesday, July 7, 2010

A Perspective From Margaritaville

"We’re kind of a fraidy cat society today.”
Jimmy Buffet, CNN, July 5, 2010

Airborne Consumption

This cool video presents worldwide airline traffic over 24 hours.  Note the northern hemisphere "fuel consumption" versus that of the southern hemisphere.

Tuesday, July 6, 2010

The Bubble Composite

"As Mark Twain said, 'history does not repeat itself, but it does rhyme' There is a certain rhythm to secular bear markets in that they often take a similar shape in magnitude and duration. Secular bear markets can last anywhere from 10-15 years and I have created a bubble composite based on three well known bubbles and secular bull market tops. The bubbles I used were the Dow Jones from the 1929 peak (Great Depression), gold’s 1980 top (beginning of The Great Moderation), and the Nikkei’s 1989 top (Japan’s Lost Decade). Taking the average path of the three bubbles and overlaying the data with the NASDAQ’s 2000 market top showed that there was a likelihood that 2010 would contain the next major market peak and that we would then have a long slide into the next low in 2013. The bubble composite has been uncannily accurate and projected a market peak in the first half of 2010 followed by a short snap back rally before plunging back to the 2009 lows. Given the bubble composite is an average of three paths the day to day noise is a bit filtered out though the declining trend for the next few years is as clear as day and is not the least bit encouraging."
Chris Pupluva

A very intriguing analysis:

My intrigue with fractals is well known.

Monday, July 5, 2010

Casey's Case For A Gold Run

Casey Research makes a nice historical case for the future gold boom.

Sunday, July 4, 2010

Happy 4th Of July

Happy 4th of July to all.  May today be a great day for family and friend time!

For the irony, I'll provide a quote from a famous Irishmen about independence.
"In just a couple of years, the scenes of soldiers playing soccer with local youths or sharing ice creams and flirting with the colleens had been replaced by slammed doors on house-to-house raids ... the protectors had become the enemy ... it was that quick in Derry. In fact, it can be that quick everywhere. If there are any lessons for the world from this piece of Irish history ... for Baghdad ... for Kandahar ... it’s this: things are quick to change for the worse and slow to change for the better, but they can. They really can. It takes years of false starts, heartbreaks and backslides and, most tragically, more killings. But visionaries and risk-takers and, let’s just say it, heroes on all sides can bring us back to the point where change becomes not only possible again, but inevitable."
Bono, NY Time Op-Ed

The entire article:

Saturday, July 3, 2010

The Derivative Monster

The "derivative monster" still lurks in these financial waters.  I just finished Michael Lewis' latest bestseller, "The Big Short", which chronicles the details behind the mortgage meltdown.  At the core of the crisis were collateralized debt obligations (CDOs) a form of derivatives.  I still think that derivatives will be the core of the major meltdown that still lies ahead.  The reason is that a small "bet" can control a significant amount of dollars.  It has been reported that $700 TRILLION of derivatives exist worldwide. These options have way too much leverage.

I'm confident on the "what", but the "when" is very unknown.  This financial casino can only keep the gamblers at the table for so much longer.

Weiss Research's team just released this in a report:
-Fact: The U.S. derivatives that helped cause the last debt crisis are merely being shifted around like deck chairs on the Titanic.
-Fact: Nothing whatsoever is being done about the derivatives monster overseas, which is more than TWICE as big.
-Fact: Most important, despite months of debate and thousands of pages of legislation, the two biggest risk-mongers of all — the Treasury and the Fed — didn't even get a slap on the wrist. They got more power.

Every contraction cycle needs a culprit.  Derivatives will be the blame for this one.

"Jim Puplava posted a great article on the banks last year...especially focused on those with large derivative positions. JPM Chase has an incredible derivative position."
Random Roving, August 18, 2002 (pre-blog email days)

The wild ride continues!!
"In February this year he ranted every week on his radio show about 'naked short selling', 'credit default swaps', and 'derivatives'. I was originally unfamiliar with these terms and was amazed last week when they became front page news."
Random Roving, September 30, 2008

"We've just seen the beginning of the derivative implosion. Remember, Warren called them 'weapons of mass destruction'."
Random Roving, January 1, 2010

Friday, July 2, 2010

My Big Short

"Short-selling is as legitimate of a stance as going long and it helps you with an absolute return portfolio. You do the work on a stock or sector, you find out that it is overvalued, you wait for the catalyst that lets the market begin to realize and discount your investment thesis, and you pull the trigger. Uneducated investors deride short-sellers as "evil" as they make money as those very same uneducated investors lose money. That is a silly way to look at the matter."
Robert Hsu

I made my first "short" investments yesterday. Using "ultra short" ETF's, several options exist. I compared several short ETF's and reviewed their performance from 6/6/08 to 3/6/09 (Tremor #1). During this period, the Dow was down 46%. The ETF's I acquired did the following during the same period:
-ProShares UltraShort Financials ETF (SKF) +126%

-ProShares UltraShort Nasdaq ETF (QID) +82%

-ProShares UltraShort Materials ETF (SMN) +84%

Check them out.

The Third Depression

"Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31. Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.  We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense."
Paul Krugman
Source: The New York Times

The entire article:

Thursday, July 1, 2010

A Case Shiller Housing Index Update

The charts below present the status of U.S. housing through March, 2010.