Monday, October 31, 2011

Selling Concepts

Sometimes I feel I've got to run away
I've got to get away
From the pain you drive into the heart of me
--Soft Cell

Nice piece by John Mauldin on the sketchy nature of last week's EU summit plan w.r.t. Greece. Long on hope, short on substance.

Two particularly salient points:

Guaranteeing 20% of a government bond is pointless. When sovereign debt goes south, it is usually for a whole lot more than 20%. Greece is starting at 50%.

Changing the CDS rules. Part of last week's accord was that Greek bondholders would agree to a 50% writedown. Because this was agreed to by the creditors, the contention is that this was not a formal default, thus it would not flip the 'credit event' switch on credit default swaps.

Those big banks who were short gobs of Greek sovereign CDS's thus got a big bailout.

Those long Greek sovereign CDSs basically learned that the rules governing CDS's could be changed midstream. If these folks were seeking to hedge Greek debt exposure or bet on a Greek default they have to a) find another vehicle, or b) no participate in this market.

As such, should it be at all surprising that we saw sovereign debt of other EU countries weaken over the past few days?

position in SPX

Sunday, October 30, 2011

Bagging Some Ags

"The Almanac says it's time to start plantin.'"
--Myra Fleener (Hoosiers)

Have been adding to my agricultural commodity position (RJA) over the past few days. From a technical standpoint, looks like a multi-month reverse head-and-shoulders to me w/ a gap directly above (gaps tend to be magnets for price).

From a fundamental/macro standpoint, we've waxed about the bullish set-up in commodities before (dollar heading to dust, capacity not keeping up w/ demand, gov't policies that favor famine).

As such, I'm digging this for the long side of my hedge book.

position in RJA

Saturday, October 29, 2011

Heil Lincoln

"This is your last chance. After this there is no turning back. You take the blue pill; the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill; you stay in Wonderland and I show you how deep the rabbit hole goes."
--Morpheus (The Matrix)

dictator - a person exercising absolute power, especially a ruler who has absolute, unrestricted control in a government without hereditary succession

I doubt that there is a history book in the school system that labels Abraham Lincoln as a dictator. Yet, it is difficult to look at the evidence and not conclude that Lincoln's actions place him among the world's most infamous dictators.

Historians, law professors, and other intellectuals have sometimes concluded that Lincoln's actions were indeed consistent with dictatorship but, astonishingly, applaud Lincoln's dictatorial behavior as justified (e.g., Fletcher, 2001; Rhodes, 1900; Rossiter, 1948).

A government that operates within the confines of the Constitution cannot foster dictatorship. Lincoln, of course, strayed far from Consitutional boundaries. Courtesty of DiLorenzo (2002), let's list a few of Lincoln's Constitutional excursions:

  • launching an invasion of the South without consulting Congress
  • declaring martial law
  • blockading Southern ports
  • suspending the writ of habeas corpus for the duration of his administration
  • imprisoning without trial thousands of Northern citizens
  • arresting and imprisoning newspaper publishers who were critical of Lincoln's actions
  • censoring telegraph communication
  • nationalizing the railroads
  • ordering Federal troops to interfere with elections in Northern states by intimidating Democratic voters
  • deporting a member of Congress who critized Lincoln's income tax proposal as unconstitutional
  • confiscating private property without due process
  • confiscating firearms

Central to most of these actions was Lincoln's refusal to permit people to throw off a government that those people believed was despotic. By not recognizing that right of secession, Lincoln presided over the death of at least half a million citizens of the United States. He altered the balance of power between the federal government and the states, with the central government assuming an authoritarian role.

Yet, there are those that praise Lincoln as a 'benevolent dictator' (e.g., Randall, 1926).

The mainstream treatment of Lincoln's character over the years certainly has a Matrix-like feel. Seems more people need to take the red pill...


DiLorenzo, T.J. 2002. The real Lincoln. New York: Three Rivers Press.

Fletcher, G.P. 2001. Our secret constitution: How Lincoln remade America. New York: Oxford University Press.

Randall, J.G. 1926. Constitutional problems under Lincoln. Urbana, IL: University of Illinois Press.

Rhodes, J.F. 1900. History of the United States from the compromise of 1850 to the final restoration of home rule at the South in 1877. New York: Macmillan.

Rossiter, C. 1948. Constitutional dictatorship. New York: Harcourt Brace.

Friday, October 28, 2011

Did Germany Capitulate?

It ain't no use, we're headed for disaster
Our minds say 'no!' but our hearts are talking faster
--Donnie Iris

Many view yesterday's EU agreement as a capitulation by Germany. Essentially, risk was re-syndicated from the balance sheets of banks lugging euro sovereign debt onto the backs of German taxpayers.

Germany has essentially signalled the loss of its individual sovereignty in for of the EU collective.

Peter Atwater cautions against this conclusion. Yesterday's events bring into ever greater focus Germany's continued willingness and capacity to support the rest of Europe.

Many view yesterday's events as Germany's willingness to write giant blank checks to the rest of the EU. Atwater disagrees, and suggests instead that Germany will likely make future funds contingent on specific and prehaps tortuous preconditions.

If Peter is correct, then markets are nowhere close to figuring this out.

position in SPX

Thursday, October 27, 2011

Fail and Bail

So forget all that you see
It's not reality
It's just a fantasy
--Aldo Nova

Equity markets screamed higher worldwide on news that EU nations and banks struck an agreement on a Greek debt writedown and containment fund bolstering. Still largely concept only but that's obviously not today's business for the markets.

Banks were really on fire, with many putting on 10% or more today. One reason: the language of the accord makes the 50% haircuts to be taken by some bondholder 'voluntary.' As such, this is not viewed as an outright 'credit event' (a.k.a. default), so banks who are short Greek credit default swaps cannot be tapped.

Nothing like a little wordsmithing to line banker pockets...

The current agreement solves nothing and is consistent w/ the approach that bureaucrats continue to elect. Paper over a problem with more money printing, debt, and leverage. Tears is where this will end, but again that's not today's issue.

On the domestic front, President Obama announced a bailout of his own. Those burdened w/ college loans will be able to limit their debt payments to 10% of income, with the balance of loans to be forgiven after 20 yrs.

This, of course, is nothing more than pure vote buying on the president's part. He is also once again sidestepping Congress and the inconvenience of the Constitution to issue an 'executive order' to enact this policy.

Does a bailout a day keep reality away?

position in SPX

Fire Sale

Don't you know we're playing with fire?
But we can't stop this burning desire
--Donnie Iris

Sold most of my Cisco (CSCO) position. Did some yesterday and then lion's share this am into the EU bailout euphoria. Will keep a small 'core' position bought at much lower levels. I do think that the stock reflects decent value here but I also think chances of buying it much cheaper in the next few months are good given the macro set-up.

After the sale, my overall risk position is pretty much hedged. My remaining position in CSCO coupled with some commodity exposure (GLD, SLV, RJA) is offset nearly one for one by an index equity short (SH).

If prices continue to rip higher from here, then I might sell of bit of commodity exposure or add a bit to my index short. If prices reverse lower from here, then I might add some more precious metal exposure or shed some of my short position.

Meanwhile I wanna sit back and observe for a while.

position in CSCO, GLD, SLV, RJA, SH

Wednesday, October 26, 2011

Tax Fraud

Don't ask me what I want it for (ah-ah, Mr Wilson)
If you don't won't to pay some more (ah-ah, Mr Heath)
--The Beatles

Doubt he took a cue from yesterday's missive, but Judge N lends additional historical context on the Sixteenth amendment during his monologue last night.

Prior to the Sixteenth Amendment, the federal government did not directly confiscate individual property (with the exception of Lincoln, who enacted an income tax to help pay for his war). As the judge notes, confiscationo of property without a jury trial was not permitted by the Constitution, specifically by the Fifth Amendment.

The judge provides some historical color around the Sixteenth Amendment ratification, which confirms some of the tidbits we extracted from the newspaper article sample. According to the judge, the Wilson administration was promising that the income tax would apply only to those earning $10,000/yr (the article said $5K) and that the rate of taxation would never exceed 3% (the article said 1%).

What this suggests is that politicians were telling US citizens that the income tax law would minimally impact them, if at all. Indeed, judge, Americans were sold a fraudulent bill of goods.

When the Eighteenth Amendment was enacted, few thought it possible that the constitutional amendment process could ever be reversed to repeal it. But it happened.

Hard not to imagine a repeal of the Sixteenth Amendment, and what it would take to get it done.

Tuesday, October 25, 2011

Headline 1913

"And so it begins."
--Charles Grimes (High Crimes)

While chewing thru the Ken Burns miniseries Prohibition, I was browsing the photo gallery on the PBS site and found an old newpaper excerpt of interest (click the Atlanta Constitution image here). It is a clipping from the 4 Feb 1913 Atlanta Constitution discussing the Sixteenth Amendment, which had recently been ratified by the requisite 3/4 of the states.

As previously noted, Ken Burns makes the case that the passage of the Sixteenth Amendment (income tax law) was necessary in order to make way for what became the Eighteenth Amendment (prohibition law) six years later.

I found several passages from the article informative/amusing. Here are a few:

" is believed [that the income tax law] will exempt all incomes below $4,000 or $5,000, and will provide a tax of 1 percent upon the majority of personal incomes that do not run to an excessive figure."

A dollar in 1913 is worth about 3 cents today, meaning that $5,000 earned in 1913 equals an annual income of about $170,000 today. This passage helps explain how the income tax bill was able to pass a supermajority of states. Simply, people did not believe that they would be subject to the take. Only 'the rich' would be soaked (vuja de).

"One feature, which it is believed will be included in the law, will be provision for 'collecting at the source' of income. This feature, now in operation in England, would require firms to certify the amounts they pay in salaries or fees or pay the tax direct to the government. It is believed that this would remove much complaint that might be made if the government had to investigate every citizen's income and would prevent evasion of the law."

We now know that any promotion of the Sixteenth Amendment under the banner that it would not require government intrusiveness into individual matters of income was a complete farce.

"One of the important results of the income tax," said Representative Hull [that would be Cordell Hull, Democrat TN and future FDR crony], "will be the curbing of unnecessary federal expenditures. When a great part of the government's income is derived by a direct tax upon the citizens of the nation, they will scrutinize more carefully the appropriations made by congress."

If people truly believed that rationale, then perhaps we deserved what we subsequently got.

Hull continued, "Thus the law will enable congress to equalize tax burdens, requiring every citizen to contribute to the government in proportion to his ability to pay...This is the fairest of all taxes, and the cheapest and easiest of collection. Those who shirk their taxes say it is inquisitorial, but no one can deny that a modernized income tax is less inquisitorial than any of our existing taxes, federal, state, or local. No tax is desirable, but it is always best for the people to know something as to the amount of taxes that they pay. They then keep a close eye on the expenditure of moneys."

Do you suppose that Jefferson, Madison, et al knew that their founding framework was finished then and there?

Monday, October 24, 2011

Overdrive vs Overhead

Headin' into twilight
Spreading out her wings tonight
She got you jumpin' off the deck
And shovin' into overdrive
--Kenny Loggins

Markets continue to gear higher. The SPX is now up 17% from the early Oct lows. Can it continue? Sure, markets can do anything they want, cookie.

The technicals suggest some stiff resistance dead ahead in the 1260ish area. Many of the stochastic oscillators are starting to 'pretzel' in overbought zones on a daily basis.

I for one have resumed hedging mode, adding some index shorts (SH) against my equity (CSCO) longs. I have trimmed a bit of CSCO but hope to do much more into any further strength.

Have also been adding some GLD and ultimately would like that to represent the lion's share of my long side exposure here.

Right now I'm 7-8% net long. I hope to be 'delta neutral' in the near future. Long some CSCO and GLD paired against an index short.

position in CSCO, GLD, SH

Student Loan Mountain

There's a place where the light won't find you
Holding hands while the walls come tumbling down
When they do
I'll be right behind you
--Tears for Fears

Follow on to recent post on higher ed bubble. Student loan debt amounts to just under $1 trillion, and exceeds credit card debt category. This is a deflationary set up.

Sunday, October 23, 2011

Ninety Nine Percent Off

So glad we almost made it
So sad they had to fade it
Everybody wants to rule the world
--Tears for Fears

In the scrabble of extant protest rhetoric, the words 'ninety nine percent' are increasingly observed. Ninety nine percent is a metaphor that reflects the great majority. This majority is portrayed as increasingly impoverished. The ninety nine percent are the protagonists.

The antagonists are the remaining one percent, the 'rich.' The one percent are the villians because they have gotten rich at the expense of the other 99%, so the story goes.

Things have gotten so bad that the ninety nine percenters are not going to take it anymore. Instead, they are hitting the streets in protest. They are demanding, well, what they are demand is not precisely clear. But it is easy to infer that the ninety nine percent would like some of the one percent's property, and that they are amenable to the use of force (a.k.a. government) is a means for obtaining that wealth.

This story line is not a new one, of course, as it is straight out of Marx and Engels.

But let's set aside the absurdity of the story for a moment. Data estimate that the top 1% of US wage earners hold 35% of the wealth. The 'other ninety 'percent' therefore hold 65%--the majority of the wealth.

The ninety nine percenters would naturally like to improve their standard of living. They have two basic options. They can produce among themselves and voluntarily engage in trade with each others or even with the one percent. Or they can recruit a subgroup to act as their agents to forcibly take some of the one percent's wealth.

From a moral standpoint, the proper choice is obvious.

But let us set aside the question of morality, and consider the question from an solely from economic standpoint: Which choice produces a more desirable economic outcome (e.g., reduction of conditions of scarcity) over time?

Once again, the answer is obvious.

Friday, October 21, 2011

The Higher Ed Bubble

Well we got no choice
All the girls and boys
Makin' all that noise
'Cause they found new toys
--Alice Cooper

Spot on commentary by Walt Williams on the glut of college grads. As he notes, a signficant portion of college grads are 'underemployed.' Their jobs may never generate enough income to pay back the economic resources that went into their college educations.

The 1/3 number that Williams cites is consistent with the fraction of students in my classrooms that, in my estimation, have no business being in a college classroom.

What WEW leaves out is a discussion of the government controlled student loan market and its role in creating this oversupply. Government offers college loans at rates and terms below the market. As a result, many students who would not have attended college otherwise find the cheap borrowing rates irresistable. Thus, they lever up with loans to attend school.

This off course jacks prices higher as credit artificially stimulates demand. Universities, in turn, spend lavishly on facilities to handle more capacity. And then jack tuitions higher again to pay for the build outs.

Welcome to the higher ed bubble. Like all others, this bubble will surely pop.

So, not only do are we producing a large fraction of college grads that are underemployed, but students who routinely graduate with five or six figure liabilities. Large numbers of defaults seem certain. As does a large contraction in future enrollments. Which means campuses will be lugging too much capacity.

Bottom line: scarce economic resources are being squandered on a large scale.

Just one more example of the folly of central planning. In this case, it is based on the flawed belief by planners that people have a 'right' to a college education. That flawed belief drags down general standard of living.

Taxes Reduce Income

Let me tell you how it will be
There's one for you, nineteen for me
--The Beatles

This essay by Rothbard is well timed as Republican candidates salvo back and forth about what is the proper type of tax--i.e., income versus consumption, et al.

Rothbard argues that type of tax is largely moot, as all taxes ultimately come out of the hides of individual incomes. Take for instance a general sales tax. It is often claimed that producers shift the costs of sales taxes forward to the consumer. But Rothbard observes that producers set prices at all times to maximize net revenue. A producer cannot simply pass along a 10% increase in cost from a sales tax along to the consumer as prices are already set at highest net income levels for the firm.

In the near term the stock (supply) of goods has already been produced and won't change. Consumer demand has not changed either and has no reason to. As such, supply and demand do not change, and neither will price.

In the longer run (which won't be long), retail firms will not be able to absorb the cost of the tax. As firms on the downstream end of the supply chain pay sales taxes and lose income, their demand curves for intermediate goods and all factors of production, including labor, will shift downward. Wage rates and employment will decline.

Instead of shifting costs of a sales tax forward, the costs will be shifted backward, painfully, on incomes. Thus, the alleged tax on consumption is transfered by market processes to a tax on income.

Thursday, October 20, 2011

Seeding Prohibition

"If you're afraid of getting a rotten apple, don't go the barrel. Get it off the tree."
--Jim Malone (The Untouchables)

Have been slowly chewing thru Ken Burns' Prohibition series. It's hard not to shake one's head at the futility of it all, and how little we seem to have learned. Declaring a market illegal will not make it go away. If people want to trade, they will find a way to do so regardless of the 'rules.'

It had always baffled me how the Eighteenth Amendment, an amendment so glaringly out of place in the limited government context of the Constitution, could have ever made its way thru the Article 5 requirements. At the time, the federal government was collecting the majority of its revenue from excise taxes on alchohol. Why would the feds be willing to give this up? Even if the amendment got past a 2/3 vote in Congress, it would have to be ratified by 3/4 of the states.

Yes, there was the temperance movement. But this movement was on and off since before the Civil War. The fits-and-starts nature of the temperance movement suggested that it was unable to harness enough social energy by itself to obtain super-majority type support.

Enter the Progressive Movement. While its origins are often associated with the commencement of the Wilson administration, the Progressive Movement was underway in the Roosevelt and Taft administrations. In fact, it was under the Taft administration that the most anti-freedom amendment of all was passed--the Sixteenth Amendment. The Sixteenth Amendment granted the federal government the power to tax income, a power that the Constitution as originally written prohibitied. The Sixteenth Amendment passed Congress in July 1909 and was ratified in February 1913.

Part 1 of the Burns series cogently argues that ratification of the Eighteenth Amendment (which passed Congress in December 1917 and was ratified in January 1919) would have been much less likely if the Sixteenth Amendment did not precede it. You see, the Sixteenth Amendment gave the federal government an alternative source of revenue in the event of a shutdown of the liquor industry.

That was an 'a-ha' for me. Those in favor of national prohibition joined those favoring more government sponsored programs to throw their weight behind a federal income tax law to supplant the federal revenue stream that would be lost if alcohol was banned.

Prohibitionists and Progressives in a quid pro quo.

The Sixteenth Amendment helps explain how the Eighteenth Amendment came to life. And the prospects for the Eighteenth Amendment helps explain how the Sixteenth Amendment came to life.

Social power subsequently tore down the Eighteenth Amendment. We can only hope that history once again will provide some parallel form with the Sixteenth Amendment.

Real Ignorance

The cracks between the paving stones
Look like rivers of flowing veins
Strange people who know me
Peeping from behind every window pane
--The Who

Ron Paul offers a basic lesson in interventionism and its consequences. Markets can never be free when bureaucrats seek to fix the price of money and credit. Insert central banks into economic systems, and watch debt explode higher, and watch economic ups and downs amplify into tremendous cycles of boom and bust.

The folly of it all is that the purported role of central banks is to be a stabilizing force. (Hard to type that without LOL.)

The ignorance is palpable. And the charade persists.

Wednesday, October 19, 2011

Wrong Address

"You're going the wrong way!"
--Screaming driver (Planes, Trains, and Automobiles)

Once the initial segment on Moneyball is done, most of the remaining discussion between Charlie Rose and Michael Lewis concerns the US and EU credit crises. Some interesting points, but one issue totally ignored is where the leverage and credit is coming from.

The most aggressive speculator in the world cannot get levered 30x or more unless there exists a massive supply of credit upstream in the supply chain.

'Lack of regulation' does not answer the question of where all the credit comes from.

Not surprising, however, considering the discussion is between two from the intellectual set...

Tuesday, October 18, 2011

Bound and Gagged

You're so condescending
Your gall is never ending
We don't want nothing
Not a thing from you
--Twisted Sister

The judge rightly observes that government is not a creator of wealth. Government is a consumer of wealth. When wealth is confiscated by government, capital is consumed rather than invested. Capital consumption means less to invest in productivity improving technology. Standard of living goes down over time.

Perhaps the dots are so obvious that people cannot connect them. Government has been spending more and more. We've been borrowing more and more. Savings have been going down and down.

People are concerned that their standards of living are falling.

And to improve the situation, this administration wants to...spend and borrow more.

Hard to even label it twisted logic. The logic in this case seems bound and gagged.

Imagine being a kid trying to reason it out.

Another Close Encounter

"I know this sounds crazy, but ever since yesterday on the road, I've been seeing this shape. Shaving cream, pillows...Dammit, I know this! I know what this is! This means something. This is important."
--Roy Neary (Close Encounters of the Third Kind)

Once again, it was close but no cigar as the SPX once again challenged the 1225 level but could not decisively break through.

Today's challenge was largely mounted on the back of a late day surge on news that the EU was getting set to ban naked CDSs.

Since last weekend, I've been visualizing a 'pop-and-drop' scenario that would mirror the 'drop-and-pop' event from a couple of weeks ago. A sort of poetic symmetry that would appropriately reflect this fakakta market.

Was thinking that a driver of the 'pop' could have been Apple (AAPL) who reported earnings tonite after the bell. Alas, it looks like AAPL's results did not measure up, and there is selling pressure in after hours trading.

We'll see what tomorrow brings.

Should we happen to get some strength, I plan to shave some more CSCO long and put on some more SH short to hedge my current stance.

position in CSCO, SH

Reaping Dividends

All our times have come
Here, but now there, gone
--Blue Oyster Cult

Borrowed the chart below from this article. The graph suggests the dominant influence of dividends on stock performance over time.

Since 1871, dividends account for more than half the nominal gains in the S&P 500 Index. Today many folks shun dividends in search of capital gains. Over time, however, capital gains have accounted for less than 2% of the 8.8% annual return.

Parenthetically, note that there was no inflation prior to the mid 1910's. The Federal Reserve Act was passed in 1913.

Before running out and loading up on dividend paying stocks right here, keep in mind that average dividend yields rest at the low end of historical benchmarks. Current yield on the SPX is about 2%. Historical buying opportunities in stocks have typically corresponded to aggregate yields in the 5-6% range or higher.

While there may be special situations here or there that are paying outsized dividends, I'm trying to remain patient for much higher dividend yields in aggregate before 'buying the list.'

position in SPX

Monday, October 17, 2011

Charade of Independence

"Everyone's trying to get out of Washington, and we're the only schmucks trying to get in."
--Julius Levinson (Independence Day)

John Mauldin opines that we likely won't see Weimar-style hyperinflation in the US because the 'independence' of the Federal Reserve from government reduces the chance that bureaucrats will be willing to destroy the currency in order to pay down debt.

Fed governors have families and communities like the rest of us, JM, reasons. Thus they will be reluctant to turn the dollar to confetti for political gain.

Perhaps we will not get Weimar-like hyperinflation. But if we don't, it will not be because of the Fed's celebrated independence.

It is a charade to view the Fed as an independant agency. The Fed chair is appointed by the president and routinely meets with and reports to politicians in Washington. Moreover, the Fed reflects a type of government structure that is the enemy of a republic, one shared by most of the agencies that report to the president. These people are appointed rather than elected, yet have direct responsibility for developing and implementing policy.

No matter how poorly these bureaucrats do their job, voters cannot 'vote the rascals out. This amounts to oligarchy rather than republic.

Ask youself this question. If the Fed was a truly an indepedent agency, then who does this agency work for? Precisely whose interests do the actions of the Fed protect? Where do the Fed's resources come from? Who is the Fed accountable to?

Check the evidence. Since the Fed's creation, the dollar has lost about 98% of its purchasing power (in the 100 yrs prior to the Fed's creation, the dollar actually strengthened). Easy credit offered by the Fed has driven massive debt and leveraged speculation.

Now, as the artificially inflated mountain of credit begins tumbling down, the Fed's actions get more extreme. Short rates effectively at zero. Monetizing debt by buying $trillions in govt and private debt securities.

If things don't turn around, is it reasonable to believe that the Fed will pack their toolbox and go home? Or, given the trajectory toward increasingly extreme action, will the Fed dig deep into the box for tools of desperation (a la Weimar)?

Were the US Treasury in charge of monetary policy, it is difficult to imagine that Treasury would be acting any more recklessly that the Federal Reserve.

position in USD, SPX

Sunday, October 16, 2011

The Folly of Partial Freedom

All for freedom and of pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

Judge N suggests that while the Occupy Wall Street types seem to espouse some types of freedom such as freedom of speech, they appear ignore others, such as freedom of contract.

This raises broader questions. Can a person live in a state of partial freedom? Where do those freedoms deemed valid come from? Who grants them? Who takes them away?

There are many who espouse so called 'social freedoms' but not 'economic freedoms.' I have yet to hear a reasonable defense of why some freedoms but not others. And why one should reasonable expect that a set of partial freedoms to endure--as opposed to them being constantly eroded by government force.

Any state of partial freedom seems a ruse.

Friday, October 14, 2011

Minding the Gap

Should I stay or should I go now?
If I go there will be trouble
If I stay there will be double
--The Clash

Bought some DBC early last week when prices were falling into the abyss. My thought was that if markets reversed higher, then this might be good for a trade up to about $28.

Why $28? Because once prices broke below that level last month, $28 defines a formidable resistance level. In the context of technical analysis, resistance defines a price level likely to retard further price advances due to the presence of latent supply--such as all those people who bought around $28 early last month and are now trying to get out at a price that lets them come close to break even. Short sellers may also lean on this level and sell come shares short with tight defined risk (i.e., if prices go north of $28, then shorts consider that as an indicator that this was a bad trade, and subsequently stop themselves out).

Moreover, gaps similar to the one that reflected the price breakdown in mid Sept often serve as magnets if/when prices retrace. Indeed, there's a saying among technicians that 'all gaps are meant to be filled.'

To add one more tidbit of rationale to my DBC sale, short term stochastics (e.g., the MACD shown above) were looking pretty toppy, suggesting an 'overbought' condition in the near term. Markets tend to ebb and flow between optimism and pessimism on multiple time frames; presently we may be approaching an excess of optimism in the near term.

As such, when DBC lifted into the gap area today, it was time for me to go.

no positions

Rothbard's Eye Opener

I sit by and watch the river flow
I sit by and watch the traffic go
Imagine something of your very own
Something you can have and hold
I'd build a road in gold

Anyone who studies the 1920s and 1930s with open eyes will reach similar conclusions to those reached here. The Great Depression was not caused by 'capitalism' but by a credit bubble--a bubble that was induced by a hyperactive State. And by not letting markets clear, that same hyperactive State prolonged the Depression.

Parallels to today are almost stunning--right down to presidential succession. In both cases, we have an interventionary, borrow-and-spend Republican president followed by a Democrat whose liberal policies redefine what intervention, spending, and borrowing mean.

Rothbard's (1963) work was one of the first to challenge conventional wisdom on the causes of the Great Depression. Anyone seeking wisdom about this period is well advised to crack it open.

Personally, am indebted to MR for opening my eyes here.


Rothbard, M.N. 1963. America's Great Depression. Princeton: D Van Nostrand & Co.

Thursday, October 13, 2011

The Coup D'etat of the Democratic Party

"You leave public opinion to me. Now, Joe, I think you better go back into the Senate and keep those senators lined up."
--James Taylor (Mr Smith Goes to Washington)

One of the notable ironies in United States political history is the transformation of the Democratic Party. Founded as the Democratic Republican Party by Jefferson and Madison from Antifederalist roots, the party was grounded in a natural distrust of big government. 'That government is best that governs least,' said Jefferson. Democrats preferred politics at the local level were people could remain more engaged and politicians could be monitored.

By the mid 1800s, the primary opposing party was the Republican Party. Combining Whig political philosophies with pietist belief that government was a valid instrument in saving mankind, Republicans pushed for ever larger government to enact the party platform. Democrats were thus engaged in a near continuous struggle to keep Republican initiatives within the confines of the Constitution.

Republicans liked to label themselves 'the party of great moral ideas' while Democrats declared themselves 'the party of personal liberty.'

As Rothbard observes, the libertarian heart of the Democratic party was extracted in the late 1800s. The factors that drove the transformation included the following:

Recognition by high level Republicans in the 1890s that current trends were likely to reduce Republican Party membership to a durable minority.

Movement toward pietism in Southern and Mountain state Democratic circles.

Many blamed the Grover Cleveland administration for the Panic of 1893, which subsequently led to a 2010esque rout in the 1894 elections.

Many sectors with strong Democratic Party ties, such as farmers, were drowning in debt inside in the midst of the economic slump that followed the 1893 panic. Replacing the gold standard w/ silver (the late 1800s equivalent of the monetary printing press), a proposal that was getting loud among some Democratic factions such as 1896 presidential hopeful William Jennings Bryan, was music to the ears of debtors.

Although Rothbard does not mention it, we should also note the influence of Lincoln, the first notable Republican president, in shifting the balance of power from the states to the federal government during his administration in a durable manner.

Sensing opportunity, Republican leadership approached influential Democrats who remained firmly committed to a gold standard with this proposal: If you support the Republican presidential nominee in 1896 (McKinley), then we will guarantee you that the gold standard will be preserved.

A goodly number of hard money Democrats took the bait and switched sides. This left a power vacuum in in the Democratic Party that was filled by Big Government populists led by Bryant at the Democratic National Convention in 1896.

Presto, the hard money, small government core of the Democratic Party was no more. Divide and conquer. An American coup d'etat.

Thus, for over one hundred years, the political ideals of the Party of Jefferson have been relegated to the backwaters of American politicals.

Efforts of the Tea Party are perhaps changing that.

Wednesday, October 12, 2011

Holding the Line

It's not in the way you've been treating my friends
It's not in the way that you've stayed till the end

The steep rally that we've been experiencing was repelled in an assualt of SPX 1220ish today. This resistance has been a line of serious upside contention over the past 2-3 months (just as 1120 had been on the downside).

Best case for the bulls would be to do work underneath resistance for a few days--both to work off overbought conditions and to chew through latent supply.

I for one have started building a short side hedge again and added to it near 1220. I plan to increase this hedge as well as make some sales in CSCO should the stock continue to trade higher. Would prefer to get more balanced here.

Gun to head has me thinking they go higher from here, but given the macro state of the world, the opposite would not surprise me.

position in CSCO, SPX

Out of Place

"Some of your fingers are out of place. I have to push them back. If I do not do this, there's a chance that you may never use them again."
--Arthur Castus (King Arthur)

A protest group collectively labeled Occupy Wall Street has been gathering in lower Manhattan over the past few weeks. The headlines suggest that the theme of the protest relates to 'greedy bankers' and to a lesser extent to the bankers' government ties.

As with any gathering of this type, however, the true message of the group is difficult to discern. It appears that nearly all political and economic viewpoints are represented--from Communists to Libertarians.

Let's assume for a moment that the headlines are correct, and that the primary complaint of the protesters relates to Wall Street's cozy relationship with government. Such a relationship can be filed under the heading of corporatism.

Corporatism involves the division of people in society into groups based on common interests, and the actions of those groups to employ government to satisfy those interests by political means.

The corporatism label seems somewhat unfortunate as it implies that the groups in question are limited to large, for-profit corporations (which seems to be the focus of many OWS protesters). But in its general sense corporate groups consist of any group seeking to tilt government influence in their direction. In addition to for-profit corporations, SIGs include non-profit organizations, unions, environmentalists,...any group seeking a distribution of resources from the State.

Corporatism, therefore, reflects the world of special interest groups (SIGs). SIGs trade in the market for political favor. They get special privileges from politicians in exchange for votes, campaign contributions, etc.

Protesting the actions a particular SIG seems akin to the doctor who treats the symptom of an illness rather than the cause. A general axiom of human behavior is that people prefer leisure to labor, and that they seek to satisfy needs with minimal effort.

As such, when the scope of government is broadened to include the power to redistribute resources by force, then a market for political favor is established. Like night follows day, SIGs will materialize to employ government to redistribute resources in their direction--to acquire resources by political rather than by economic means. Bankers will do this as will unions, etc because it is human nature to do so.

Stopping SIG activity means limiting government's scope to the protection of property (broadly construed to mean life, liberty, and property). This was the intent of the founders as expressed by the Constitution. Of course, government stepped past its Constitutional boundaries long ago.

The Occupy Wall Street gathering therefore seems misplaced. If the OWS crowd is truly for a return to limited government, then they should be surrounding the US Capitol.

Tuesday, October 11, 2011

Resistance Movement

Been a long time since I rock and rolled
Been a long time since I did the stroll
--Led Zepellin

Since last Tuesday's late day reversal, stock markets have been on fire, with the SPX rallying about 120 handles from last week's lows.

Cisco (CSCO) has been showing good relative strength during the rally. It is now facing an importantly level technically as it is challenging the intermediate downtrend line. A break out here suggests a measured move into the $18-19 area.

A bullish factor in CSCO's favor is the reverse head and shoulders pattern that has been tracing out over the past few months. Price is currently trying to puncture the neckline at $17ish which, ironically, defines the downtrend resistance as well.

Next few days should provide some insight on whether CSCO can power over the hump.

position in CSCO, SPX

Friday, October 7, 2011

Tax Facts

Should five percent appear too small
Be thankful I don't take it all
--The Beatles

Tax data can be sliced and diced in myriad ways, and sometimes its hard to fact from misinformation. This article presents data from 2008 tax info that support some generalizations when it comes to tax payments.

AGI / %AGI paid in income tax
$1+ million / 23.3%
$100K- $200K / 12.7%
$30K - $50K / 7.2%

This is the essence of a 'progressive' tax code. In 2008, those earning $30-50K (such as Warren Buffet's infamous 'secretary') paid taxes at less than one third of the rate paid by millionaires.

As the data suggest, generalizations proposed by Buffet and subsequently President Obama that lower income brackets pay higher tax rates than rich people is just plain nonsense.

Parenthetically, Buffet's argument leads a reasoned person to conclude that the solution to any differential tax rate paid is a flat tax system where all pay the same rate.

Buffet's analysis would have been more transparent if he had more explicitly dealt with the taxation of capital gains and dividends, from which the wealth derive the bulk of their income. Benefits from capital gains and dividends depend on corporate profits, which are taxed at the corporate levels before they are further taxed when reported on individual 1040s. The double taxing of incomes here means that total taxes paid on capital gains and dividends is much higher than Buffet's analysis suggests.

Finally, let's look at the overall share of federal income tax revenues:

top 1% of income earners / 38% of total federal income tax paid
top 10% of earners / 70% of taxes paid
top 50% of earners / 97% of taxes paid

By inference, the bottom 50% pay 3% of total federal taxes on individual income.

Higher standard of living demands increased productivity. Increased productivity requires capital investment. Capital investment requires savings. Savings requires putting aside some income rather than consuming it.

In a country where savingsa are already scarce, these tax policies paint a sober picture of tomorrow.

The EU's Circularity Problem

Into the blue again, after the money's gone
Once in a lifetime, water flowing underground
--Talking Heads

Kyle Bass thinks that the EU is engaged in a game of chicken with Greece right now. Greece is broke and running deficits, and they are certain to default. A nice point here that countries that commit more to bailout facilities jeopardize their own sovereign debt ratings, since they are now on the hook for more liabilities.

Bass concludes that the math simply doesn't work. Even Germany is a debtor nation. No matter how one looks at the magical faclities being erected to contain/bailout EU members, the bottom line is the 'solution' being offered is adding more debt to a sovereign debt problem. More leverage.

KB suspects that many people have yet to think the circular nature of this plan thru.

I think he's right. Right now, markets seem relieved that 'something' is being done. Once the euphoria lifts, however, they will likely see the same old problem staring at them.

What solves a debt crisis? Paying the debt down or restructuring (a.k.a. default). Either way, standard of living will go down.

What brings this 'solution' about faster? Germany decides not to participate. Bass thinks this to be likely, based on his firm's analysis, which includes on-the-ground polling of influential Germans.

no positions

Thursday, October 6, 2011

The Swedish Illusion

"Do you hear that Mr Anderson? That is the sound of inevitability."
--Agent Smith (The Matrix)

During a class discussion yesterday, a student noted that she worked for a Swedish company, and that her visits to Sweden suggest to her that a high tax, redistribution of wealth model is effective. Everything is clean, she said, and healthcare is 'covered.' It works, she concluded.

It is tempting to draw such conclusions from anecdotal observations, but the picture is rarely that simple. A bigger picture assessment is necessary.

With a land mass about the size of California, Sweden's GDP officially clocks in at about $450 billion, which ranks it 22nd in the world. The eye popping stat right out of the gate is that the country's population is 9.2 million--just a bit larger than NYC. This puts nominal GDP/capita at $50,000 (estimates of real per capita income range from $30-35K). This suggests one of three things: a super productive people, econometric book cooking (e.g., GDP much lower than reported), or some 'special situations.'

Superproductive seems unlikely, as Swedes characteristically work fewer hrs than workers elsewhere. And issues w/ govt sponsored metrics are always an issue...

Let's look at some of the special situations. Non participants in the World Wars, historically high saving rates, and rich natural resource base that has has led to strong exports during the commodity price boom (exports account for more than 1/3 of total output). Wisely, Sweden did not drink the EU kool-aid, thus it maintains sovereign control of fiscal and monetary policy--certainly a comparative advantage over its neighbors drowning in Continental collectivism.

One hundred yrs ago Sweden was home to a near textbook free market structure. Over the last 50-70 yrs, however, the economic structure tilted toward the socialist end of the spectrum. The original socialist model collapsed in the wake of a banking crisis in the early 1990s. Since then, structural reforms such as privatizing former state owned companies and reducing government regulation has made the private sector more vibrant.

However, a large public component remains. Tax rates are high across the board, and total tax intake amounts to over 50% of GDP. Parenthetically, it is difficult to grasp how Heritage can assign Sweden a property rights rating of 90 when over half of all measured output is appropriated by the government. This large redistribution of wealth has resulted in a burgeoning welfare system that, while reformed somewhat since the early 1990s meltdown, remains central to the economic structure. Healthcare (10% of GDP), retirement, unemployment, large public sector workforce (1/3 of total), strong union/rigid workrules (80% of workforce unionized), et al.

One would 'think' this setup disastrous. Thus far, however, it has been workable--and perhaps offers the illusion of socialist utopia. Many on the Left indeed hold up Sweden as the benchmark for planning.

There are various plausible explanations as to why this model has yet to cave in. First off, this socialist system DID come apart in the early 1990s, and arguably it has been structural reform toward the free market end of the spectrum that has driven real productivity gains-essentially offsetting the drag of the welfare system. It also seems likely that real living standards are lower than the large per capita income would suggest. Data suggest that Swedes save about 10% of income. If that's true, then that means citizens have only about 40% of their income for private consumption (the other 60% is taxes and savings). 40% of 35,000 is about $14,000 in personal income available for consumption purposes. Pretty spartan, it seems to me.

As in all socialist systems, the marquee labels such as universal healthcare ignore the problems under the hood. There are few things easier to forecast that the outcomes of government sponsored healthcare for all. Costs go up from the bureaucracy and lack of competition. If government puts a lid on how much providers get reimbursed, then there will be shortages as supply leaves the system. Talent looks elsewhere. Quality goes down. Rationing (famously labelled 'deathpanels' during the domestic healthcare debate) is inevitable.

I did not do too much digging, but accounts of Swedish health care system dysfunctionality are certainly available to inquiring minds (ex here).

From where I sit, Sweden's mixed economy model is no triumph of central planning. Instead, a historic free market basis, less war-related loss, and recent market-oriented reforms are offsetting the dead weight of the social welfare system. If more market-oriented reforms are implemented, then Sweden may continue to prosper.

My sense is that things are likely to head in the other direction, however. The public sector becomes a black hole, draining productive resources from the economy. Savings rates fall and government will either borrow more (national debt right now is a relatively small 40% of GDP) or the Riksbank will print Krona to try to cover the standard of living shortfall. Chaos, just as we are observing elsewhere.

Currently, however, Sweden's special situations appear to have slowed its trip down the Road to Serfdom.

Expect the pace to quicken...

Tuesday, October 4, 2011

Hard Cross

Every day I walk in shadows
I know not what it is
I'm heading for
--Tarney Spencer Band

Markets continued to sink on the opening bell this am. An hour or two into the day, I felt a tinge of remorse after unloading my short position yesterday.

Weakness continued until late in the day, when chatter surfaced that the European officials were creating a 'bad bank' entity to dump troubled securities tied to the sovereign debt crisis in the EU. In the final 45 minutes of the trading day, markets went from being down 1.5% to being up 2%. The SPX recaptured the 1120 level and had nearly a 50 handle intra day range.

Naturally, any remorse still pulsing thru my veins suddenly vanished.

Coupled with reclaiming previous support, the long tail pattern on the charts suggests a 'flush' and perhaps a near term low. Add to that my growing sense that sentiment was getting pretty ugly (e.g., I got a call last night from a distraught friend who was down big and wanted to sell all of his stocks), and perhaps we have the makings of a durable rally.

I do know that I'm in no hurry to re-engage on the short side right now. Would rather sit back and observe for a bit.

Did nibble on some DBC this am as commodities have been getting hammered and many are sitting on technincal support.

position in DBC

The Luddite Fallacy

Standing in line marking time
Waiting for the welfare dime
'Cause they can't buy a job
--Bruce Hornsby & the Range

This post is meant to collect a few notes ahead of a forum that we will hold in class tomorrow. The forum topic is whether technological improvments that improve productivity (e.g., automation) create permanently high levels of unemployment.

This issue is typically referred to as 'technological unemployment.' It is also known as the 'Luddite Fallacy' after a group of English textile workers who revolted against the implementation of sewing machines in the 1800s.

Mises (2008, Ch 7, p 136-137). High levels of unemployment can only persist when all material factors of production are fully utilized such that there is no opportunity to employ people who are ready to work. In such a world labor would be abundant. If the world was socialist, additional people would mean additional mouths to feed. If the world was capitalist, then wages paid would not be enough to prevent starvation.

But that world is not the present one. Labor is more scarce than other factors of production. There are material factors of production that remain unused because the labor required to work on them is employed in satisfying more urgent needs. There is no abundance of manpower; there is a shortage.

The substitution of equipment and other more efficient methods of production does not render labor more abundant, provided that there are still other material factors of production whose utilization can increase human well being. Enhanced productivity thru use of better technology increases output, thereby reducing want. This does not bring about 'technological unemployment.'

Mises (2008, Ch 30, p. 768-769). The confusion starts with the misinterpretation of the statement that machinery is 'substituted' for labor. What happens is that labor is rendered more efficient by the aid of machinery. The same input of labor leads to greater quantity or better quality of output. The employment of machinery itself does not directly reduce the number of people employed in the production of the article concerned...The technological improvement in the production of A makes it possible to realize certain projects which could not be executed before because the workers required were employed for the production of A for which consumers' demand was more urgent. The reduction of the number of workers in the A industry is caused by the increased demand of these other branches to which the opportunity to expand is offered...

Tools and machinery are primarily not labor saving devices, but means to increase output per unit of input. They appear as labor saving devices if looked upon exclusively from the point of view of the individual branch of business concerned. Seen from the point of view of the consumers and the whole of society, they appear as instruments that raise productivity of human effort. They increase supply and make it possible to consume more material goods and to enjoy more leisure. Which goods will be consumed in greater quantity and to what extent people will prefer to enjoy more leisure depends on people's value judgments.

Hazlitt (1946, Ch 7 The Curse of Machinery). This is perhaps the best treatment of the subject in everday language. He brings up the Technocrats, those people who during the 1930s got loud with the technological unemployment message. He notes that every individual as well as every employer is trying to save his own labor, to economize the means required to achieve the ends. The thought process of the Technocrats implies that this is wrong. That we would be better off if freight were carried on people's backs rather than by truck or rail.

Hazlitt observes that in many if not most cases, efficiencies gained thru the use of machinery happen over the long run since it may take many years for machines to 'pay for themselves.' If/when this occurs, the capitalist now has more profit, and labor may have suffered a loss. But it is out of these excess profits that social gains must come. These profits must be used to either 1) expand operations, 2) invest the capital in some other manner, 3) consumer more. Whichever the approach, employment will increase.

In competitive markets, efficiencies realized by one operator will prompt others to imitate. Thereby the gains discussed above are multiplied by competitive forces. Profits will begin to drop and in highly competitive markets, there may be little or no profit at all. The efficiencies in such a case are passed onto consumers in the form of lower prices. This increases the purchasing power of buyers and drives either more consumption or more saving which, once again, increases employment.

Hazlitt astutely observes that where full employment already exists, the result of increased productivity is more voluntary unemployment, because people can work less time and still satisfy their wants.

What machines do is increase production and increase standard of living. They do it by making goods cheaper for consumers and by increasing the real wages of workers (higher salary and/or increased purchasing power).

The focus of media and other intellectual groups is often on the immediate effects on certain groups. Keep your eye on Joe Smith, who just got thrown out of a job. What these observers often fail to do is to also keep an eye on Tom Jones, who just got a job making productive machines, or Sue Brown, who just got a job operating one, or Sarah Miller, who can now buy a coat for half the previous cost.

The problem for Tom Jones arises if he is too rigid to adapt to what is needed in the Market for Talent. In free markets, the process of creative destruction is likely to render skill sets obsolete, meaning that workers need to have the flexibility to re-invent themselves.

Therein lies the heart of the problem that makes the headlines.


Hazlitt, H. 1946 then 1979. Economics in one lesson. New York: Three Rivers Press.

Mises, L. 1949 then 2008. Human action. Auburn, AL: Ludwig von Mises Institute.

Modern Day Star Chamber

"These people can make us disappear."
--Nina Chance (Murder at 1600)

Last Friday, Anwar al-Awlaki and three other people suspected of engaging in terrorist-like activities were killed by a missile fired from a US Predator drone in northern Yemen. This was a sanctioned assassination, as al-Awlaki had been on the 'targeted killing list' maintained by the US government.

Uniquely, al-Awlaki was a US citizen. What this means is that the federal government executed a US citizen without due process, a right that is guaranteed by the Fifth Amendment.

The Fifth Amendment was written to ensure that people would be treated fairly by the government, even those people whom the government or the public might dislike.

The Judge observes that this is the first time in recorded history since the Civil War under Lincoln that the president has used the military to kill a US citizen without due process.

Simply put, the Obama administration decided to take this person out. Once again, this administration has placed itself above the law.

Who will this president target for killing next?

Monday, October 3, 2011

Hedge Off

Should I stay or should I go now?
If I go there will be trouble
If I stay it will be double
--The Clash

The battleground support level that was SPX 1120 finally gave way today in a significant way, with the index spilling lower to about 1100 by day's end. Technically, the 1025-1050 provides the next substantial layer of support.

I unwound my short position into this move. Covered about half into the initial break into the 1115 area and the remainder into the thrust toward 1100.

Why cover it all here? First, for me shortin's hard mon, even when I'm using it as a hedge. Was starting to worry over the position a bit too much and, after this thrust lower, felt prudent to take the position off and look at the situation with fresh eyes tomorrow.

Moreover, some measures of sentiment point toward extreme near term bearishness. It would not take much news to ignite a pretty strong short covering rally.

Should stock melt lower from here, I'll be looking to put on some long side risk for a trade. Should we rally, I'll likely look to re-engage the short side to some degree.

With my hedge off, I'm currently at ~15% risky assets (CSCO, scattered commodities) with the remainder in cash. Yes, I feel a bit 'naked.' But something tells me that this feeling won't last long.

position in CSCO, GLD, SLV, RJA


"The mother of all evils is speculation--leveraged debt."
Gordon Gekko (Wall Street 2: Money Never Sleeps)

Few cookies are sharper than John Hussman. The UMich PhD offers some great macro insight as well as one of the best frameworks for aggregate equity valuation that I've encountered. His weekly commentary is on my Must Read list.

However, some of his remarks/ideas in the policy arena leave me cold. For example, this week he reiterates a thought that he's discussed in the past related to troubled banks and their restructuring. He proposes that the liabilities of institutions facing insolvency should be divided into two buckets. One bucket would contain investor liabilities and one would contain depositor liabilities.

Dr J proposes that, when a bank faces insolvency, then what the bank owes to investors should head toward zero. So far, so good, as that is how capitalism is supposed to work. Investors must balance potential for gains (reward) against potential for loss (risk). Bad decisions means risk gets realized.

Of course, this is not how the system has worked over the past 2-3 yrs. Rather than going bust, investors have been bailed out under the auspices of 'too big to fail'.

However, Dr J proposes that the other bucket, the one full of depositor liabilities, goes into government receivership, and sold to new ownership, thereby 'protecting' the assets of depositors from the meltdown of deleveraging. John argues that this is necessary to protect the 'system' from meltdown. Depositors, he argues, should not have to think twice about where they deposit their funds, and they would be spared a "huge 'information problem'" that require consumers to have all the facts to avoid making bad depositing decisions.

But this is the same too-big-to-fail argument that the corporatists make. Dr J is merely couching it in a more populist slant.

Capitalism only works when buyers vet their purchasing decisions in their own best interests. This can only occur in financial services purchasing decisions if depositors face risk. Otherwise, we face a moral hazard problem as consumers turn off their brains and uncaringly place funds with inefficient operators. Depositors do this already because because they figure that the FDIC has their back in case of probs.

Moreover, Dr J fails to acknowledge that, like bondholders, depositors are creditors. Why should someone placing funds in a bank on deposit be treated differently than someone placing funds in the bonds that a bank sells?

John actually spells out the fundamental problem in the second paragraph of his 'Failure and Restructuring' section:

"The problem for banks, of course, is that they are leveraged, so even a drop of a few percent in their assets wipes out much of their own capital and threatens to make them insolvent." [emphasis mine]

Exactomundo. Leverage is the central problem. As long as the system maintains its current degree of leverage, then instability and crashes are the order of the day. Market forces want to delever this system. All interventionary actions, including Dr J's proposals, serve to keep leverage in the system artifically high.

The only way this occurs is to get government out of the way and let the 'equilibrium' that John waxes so poetically about actually come into being.

position in SPX

Recession Transgression

"Circular error probability zero. Impact with high order detonation. Have a nice day."
--Clark (Clear and Present Danger)

Of all the recession forecasting entities out there, the Economic Cycle Research Institute (ECRI) has the best track record by far. Not only that, but ECRI recession calls tend to lead mainstream calls by months.

Last week ECRI told its clients that, based on current levels and trends of its proprietary Weekly Leading Index indicator, the US economy is slipping back into recession.

Sunday, October 2, 2011

Greenback Mountain

You don't want to hurt me
But see how deep the bullet lies
Unaware, I'm tearing you asunder
Ooh, there is thunder in our hearts
--Kate Bush

While few can be more bearish than me about the US Dollar in the long term, I picked up some UUP calls last summer because of the extreme technical and sentiment picture in the near term.

The dollar began rallying as markets tanked in August as dollar carry traders became risk averse and began unwinding leveraged trades funded w/ borrowed dollars.

As problem continue in Europe, folks have been selling Euros which has added more strength to the dollar.

UUP is currently 'doing work' right aroud the 22.25 resistance level. Should it break thru decisively, the technicals suggest 23.25ish as the next challenge.

Observe that back in late 2008 the dollar really moved when deleveraging kicked in. Another move like that can't be dismissed out of hand. The global macro picture continues to darken. And technical oscillators do not suggest a seriously overbought situation--i.e., they have yet to 'pretzel' on the upper end of the scales.

So, although I think the dollar could very well turn to dust over time, right now traders may view it as the best house in a bad neighborhood.

position in UUP

Saturday, October 1, 2011

Edge of Night

Ain't nothing gonna save you
From a love that's blind
Slip to the dark side
Across that line
--John Cafferty & the Beaver Brown Band

Late week action, including a -2.5% day for quarter end on Friday for the SPX, left weekly chart with a bearish looking 'inverted hammer' bar. The Fri close was a few handles above the 1120 level that has been challenged multiple times over the past couple of months.

Am having an increasingly difficult time visualizing the 1120 support level holding. Technically, we know that support tends to weaken a bit more each time it is challenged (as another layer of demand is stripped away). Combine this with rich aggregate valuations and an increasingly ugly macro picture and you have the recipe for lower prices.

Chart gazing suggests the 1025-1050 area as the next layer of support below. After that, 950.

I did kick some incremental short side trading exposure added early in the week in the Fri after hrs session (indexes drifted a bit lower after the regular session closed).

How they trade early next week will dictate next move...

position in SPX