Tuesday, August 30, 2011

Compulsion, Not Compassion

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

Have picked up on more people claiming that their fondness for welfarism, i.e., government sponsored welfare and relief programs, demonstrates their 'compassion' for others. Welfarists also claim that those people who do not share their support for welfarism are 'cold-hearted.'

Those who promote this perspective shower themselves with misguided praise.

Compassion is empathy for the suffering of others coupled with a desire to relieve that suffering. It drives acts of altruism or charity--behaving in a manner that is helpful to others with no expectation of material benefit in return. There is still a trade involved, however, as the compassionate actor is likely to realize psychic income from helping others.

Acts of compassion are therefore voluntary exchanges. They cannot be forced.

Yet, that is precisely what proponents of government sponsored welfare programs attempt to do. Instead of engaging in direct voluntary exchange with those who need help, welfarists prefer to employ government as strong armed agents to force others to part with life, liberty, or property in the name of 'helping' others.

Stated differently, welfarists expropriate then trade the property of others to gain psychic for themselves.

And by doing this, welfarists credit themselves with 'compassion?'

This is authoritarianism. Compulsion rather than compassion. By forcing others to do something that they do not want to do, welfarists engender the coldness that they fault in others.

Monday, August 29, 2011

Fade Trade

So glad we've almost made it
So sad they had to fade it
--Tears for Fears

Stocks have tacked on close to 5% off Friday's lows on the back of Fed chair Bernanke's Jackson Hole speech. We're now coming up on the SPX 1225 level that led the spill once breached nearly a month ago.

Will be interesting to see how things behave at these levels, as that 1225 now serves as resistance.

Personally, I've been fading (read: selling) this rally--unloading longs and adding to shorts. Have worked my net long stock exposure (longs minus shorts) down from about 22% to 13% of liquid assets.

Still sense that we have a date below w/ SPX 1025 in the not too distant future. As such, I want to use strength to reduce my net long position.

position in SPX

Valuation with Open Eyes

But did you know
That when it snows
My eyes become large
And the light that you shine can be seen

Fine weekly note by John Hussman. Particularly noteworthy was the 'Valuation Review' section. I continue to view John's work on general market valuation as among the best.

Note the graph that plots projected 10 year projected annual return of the SPX versus current SPX price level. Today's level of about 1200 projects to about 5 1/2% annualized.

To achieve projected returns corresponding to the oft cited 10% historical returns of stocks would require the SPX to be at about 800.

As Dr J observes, those rare secular buying opportunities (e.g., circa 1982), those that correspond to single digit P/Es and 6-8% dividend yields correspond to an SPX of 400.

John notes that while this may seem 'utterly ridiculous,' historical evidence suggests otherwise.

position in SPX

Sunday, August 28, 2011

Robber Barons

I'm at the car park, the airport, the baggage carousel
The people keep on grabbing, ain't wishing I was well

A man walking down the street is stopped by five people. The five people tell the man to hand over his wallet or else they will forcibly take it from him.


Five people vote in favor of acquiring wealth from a man who is better off than the rest. The five people tell the man to hand over his wealth or they will forcibly take it from him.


Is this not robbery in both cases?

Saturday, August 27, 2011

Correlation Station

Ain't got no regrets
And I ain't losing track
Of which way I'm going
Ain't gonna double back
--Lou Gramm

Have been running across claims that the correlation among stocks has been declining.

Data suggest otherwise...

position in SPX

Friday, August 26, 2011

Fed the Risk Addict

Nothing's so loud
As hearing when we lie
The truth is not kind
And you said neither am I
--Toad the Wet Sprocket

A year ago at Jackson Hole, Fed chair Bernanke signaled a major policy initiative aimed at stimulating the stock market, er, the economy, that became known as QE2. That policy lit a fire under the equity markets and they ripped higher--only to come tumbling down over the last month or so coincident with the end of QE2.

Markets were looking for some deja vu today as Bernanke took the podium this year's summer shrimpfest this morning. His speech did not detail a new stimulus program, although he did indicate that he has extended the length of the Sept FOMC meeting to two days so that the committee can amply discuss the various 'tools' at the Fed's disposal for stimulating growth.

That 'potential' for future Fed intervention was perhaps all markets needed today, as early market losses were quickly reversed as Bernanke spoke and the indexes sprinted higher for gains of 1% or so.

Hope springs eternal for the addict.

position in SPX

Thursday, August 25, 2011

Gold and Blackball

"You just sit there in your office. A scholarship here, no scholarship there. He goes. He stays. Who in the hell gave you that power?"
--Stefen Djordjevic (All the Right Moves)

Previously we noted the media's general avoidance of Ron Paul's presidential campaign despite his success. Peter Schiff does similar here while pulling in this laughable article from Barron's profiling Ron Paul's home run investments in gold.

The article seems to want to discredit RP's investment success. At times the article's tone paints Paul as reckless (portfolio full of gold stocks that would be a 'financial planner's nightmare), negative or unpatriotic (portfolio constitutes a 'massive bearish bet on the economy'), or, and it's hard to write this without LOL, wrong (RP has been predicting 'disastrous inflation' since Nixon closed the gold window in '71--plus gold might still go down and hammer his portfolio).

Sheer child-like thought process...

The other implied message, as Schiff notes, is that Ron Paul's investment positions imply that he his using his political position to do things to tank the economy and push gold higher. We've actually discussed media claims like this before--that there is a conflict of interest between Paul's investments and his job as a Congressman.

An ounce of reasoning dismisses these claims as misguided (or worse). Investments in gold are bets on disorder (monetary, social, etc). Disorder has been increasing and gold prices have been rising in kind. Ron Paul's voting record demonstrates that he has consistently opposed the policy trends enacted as disorder has increased.

More suspicious would be politicians who happen to be long lots of gold while favoring the stimulus programs, bank bailouts, Federal Reserve easy money policy, et al that continue to be rolled out. It would be reasonable to conclude that such people were front running their own policies that are bringing the system down.

Instead, Ron Paul is fading (read: going against) his investment positions. He is trying to make the system better, while preparing for the worst.

position in gold  

Wednesday, August 24, 2011

Democratic Tyranny

With one foot in the past
Now just how long will it last
No, no, no, have you no ambition?
--Tears for Fears

Many people like to say that democracy is a necessary component of a free society. I'm not sure where the broad adherence to such a wrongful association originated.

Surely it could not have come from study of America's founding documents. While the Declaration and Constitution are chock full of references to liberty, there is not one mention of the word 'democracy.'

However, enough people espouse the freedom-democracy link to make me think it was brainwashed into their heads as part of schooling. Of course, mainstream media play a role as well.

Liberty is the freedom to pursue one's destiny without forceful interference from others. Democracy is a group decision-making rule whereby the alternative supported by the largest number of people is pursued.

The reasoning mind quickly concludes that democracy impairs, rather than supports, liberty. Unless the vote is unanimous, any decision made by democratic process discriminates against those in the minority as they are forced to succumb to the desires of those in the majority group.

Democracy's common label as the 'majority rule' could not be more accurate. The majority rules the minority.

The framers understood that tyranny by the majority was just as detrimental to liberty as tyranny by some small group. Which is why they designed a republic grounded in rule of law rather than discretionary rule by any person or group.

Democracy and freedom have little in common.

Tuesday, August 23, 2011

Capital Myths

In a couple years they have built a home sweet home
With a couple kids running in the yard
Of Desmond and Molly Jones
--The Beatles

Rare these days to find a market-grounded economist at Harvard. But Prof Jeff Miron goes against the grain here to falsify three myths about capitalism.

Pro capitalism is the same as pro big business. Capitalism is defined as ownership and control of productive assets in private hands. There is no government intervention. Consumers benefit and standard of living increases when producers compete to satisfy market needs. Large businesses often seek anti-capitalist remedies to reduce competition and protect profits. These remedies generally come from government e.g., trade barriers, subsidies, and, yes, regulation. Regulation raise barriers to entry, thereby squelching competition. Big business and big government are good friends.

Capitalism generates an 'unfair' distribution of wealth. Capitalism rewards productive effort. Those who successfully meet market needs of the market are rewarded by buyers via trade. Those who are less successful get less. Attempting to redistribute wealth more evenly reduces incentive to satisfy consumers, and general standard of living falls.

Capitalism was responsible for the recent financial crisis. Many times on these pages we've observed that current markets are not free but hampered. In fact, they have been trending toward the other end of the spectrum, socialism, for some time. As Dr Miron observes, no one who is being intellectually honest can truly think that we had capitalism anywhere close to its pure sense prior to the meltdown. Given the extent to which government was (and is) intervening across the board, it is more reasonable to conclude that interfering with capitalism generates crises and recessions.

Monday, August 22, 2011

The Folly of Income Equality

When the walls come tumblin' down
When the walls come crumblin' crumblin'
When the walls come tumblin' tumblin' down
--John Mellencamp

Keen insight, as always, from Mises on wealth and income inequality. The phenomenon of unequal distribution of wealth and income is as old as civilization itself, although formal study is often considered to have commenced with Pareto's work in the 1800s.

Mises sagely observes that inequality is an essential feature of a market economy. In a market economy, consumers, not producers, are supreme. Inequality empowers consumers to motivate those engaged in production to comply with their demands. Producers maintain possession of productive assets as long as they successfully satisfy consumers. If they are unsuccessful, then profits fall and producers cede control of productive assets to those more capable.

If there was no inequality of income permitted in society, then producers would not be driven to improve productivity and innovate to better satisfy buyer needs. Inequality of income drives higher standard of living for all, including those at the bottom of the social pyramid. This relationship is something that socialists fail or refuse to understand.

Were it possible to to evenly distribute income (a debateable thing, as we've never seen it on a large scale in the history of the world), then society is destined for squalor. There is no incentive for producers to innovate. Moreover, investment capital necessary for improving productivity would not exist it is typically accumulated by those with high incomes. Indeed, those who control production, which in a socialistic system are the central planners, reign supreme. Consumers are forced to take what the planners mandate. Productivity declines; standard of living falls.

Mises notes that contemporary socialists often claim that they don't to do away with inequality altogether. Instead, they espouse a 'lesser degree' of inequality. Of course, determining that lesser degree is an exercise in subjectivity that leads down the slippery slope. Mises correctly notes that once a society undertakes a policy of equalization, it is unlikely that there will be a future point where that policy can be checked. Quoting the master:

"Under the sway of the doctrines taught by contemporary pseudoeconomists, all but a few reasonable men believe that they are injured by the mere fact that their own income is smaller than that of other people and that it is not a bad policy to confiscate the difference." [emphasis mine]

So progressives clamor for ever more 'social justice' from their government agents of force...as the walls crumble around them.

Sunday, August 21, 2011

Antecedents of the Civil War Part II

"That wouldn't have been necessary if that secesh woman hadn't started it. They never learn. You see secesh has to be cleared away by the hand of God like the Jews of old. Now I will have to burn this town."
--Col James Montgomery (Glory)

Previously, we discussed the advent of the American System and its influence on politics in the first half of the 1800s. While central banking and internal improvements were operationalized with some success, it was the third plank of the American System, protectionism via tariffs, that made the most headway during this period.

The first tariffs motivated by the American System were enacted in the mid 1810s and imposed taxes of 20-25% on manufactured imports. Tariffs make a market for political favor, and Northern manufacturers and their interests exchanged votes and other 'political capital' for special treatment in the form of being shielded from competition. Northern stakeholders also saw federal funds, primarily sourced from tariffs collected at Southern ports, disproportionately flow their way for internal improvement projects.

The South, on the other hand, generally opposed tariffs. Because most US exports came from the South and because the South's economy was primarily an agrarian one, high tariffs meant that Southerners would have to pay more for manufactured goods--whether they came from abroad or from the North.

By the 1820s, Southern politicians ritually condemned tariffs as unconstitutional tools of plunder on Southern states. The South was paying a tax in the form of artificially high priced manufactured goods to finance spending and wealth building in the North. Essentially, the South was paying the lion's share of all federal taxes (there was no federal income tax at the time) and getting the short end of the stick in this wealth transfer scheme.

In 1824, American System founder Henry Clay proposed a sharp increase in tariff rates because the previous rates were falling short of what his special interests desired (Remini, 1991). The South immediately opposed it, calling it the 'Tariff of Abominations.' Many Southern states considered secession. South Carolina voted to nullify the tariff by refusing to collect the tax at Charleston harbor. Stiff Southern resistance forced the federal government to back down and reduce the tariff.

The South's stand against the Tariff of Abominations infuriated proponents of the American System--particularly those of the Whig Party from which the system had originated. Henry Clay personally vowed to "defy the South, the president, and the devil" if necessary to get rates back up to Tariff of Abomination levels (Remini, 1991).

The American System was dealt a further blow in the early 1830s when Andrew Jackson and a primarily Southern-led political force struck down the charter of Second Bank of the United States--which essentially shattered the American System's national banking plank.

By the end of the 1830s, the American System, to the extent that it was enacted, clearly favored interests in the North. This increasingly spawned animosity in the South. And when the South pushed back to block the system's implemention, primarily through Constitutional channels, this increased the determination of American System proponents to fully implement the system, come hell or high water.

Or war.


Remini, R.V. 1991. Henry Clay:Stateman for the Union. New York: Norton.

Saturday, August 20, 2011

German Tracers

Burn it up let's go for broke
Watch the night go up in smoke
--Def Leppard

The SPX has now retraced about 38% of its move from the March 2009 lows to the summer 2011 highs. If we don't hold here, a 50% retracement equates to, interestingly enough, about 1025. A 61% retracement works to 940ish.

The 'canary in the coalmine' DAX has already broken thru the 50% retracement barrier.

Why should the German market serve as the canary in the coalmine? Because Germany holds the keys to any resolution of the EU situation. Essentially, Germans must figure out whether they're willing to bail out the rest of Europe.

Given the recent century of Continental history, it appears that investors are increasingly having trouble seeing that happening.

position in SPX

Friday, August 19, 2011

Measuring Treasuries

Just a little more time is all we're askin' for
Cause just a little more time could open closing doors
Just a little uncertainty can bring you down
--Corey Hart

Yesterday, 10 yr Treasury yields dipped below 2% for the first time. Investors want out of risk, and are currently seeking perceived safety of longer dated Treasuries (despite the recent US credit downgrade).

In a vaccum, this is deflationary action.

Technically, hard not to wonder whether we're putting in a double bottom here.

Seemingly, if we knife decisively below 2%, then it's a brave new world...

no positions

Bubble Bath

"The mother of all evils is speculation--leveraged debt."
--Gordon Gekko (Wall Street II)

People have slapped the 'bubble' label on a number of markets over the past decade. The internet bubble, the housing bubble, the credit bubble.

All bubbles have a common factor--government intevention. This intervention primarily takes the form of cheap credit, which allows risk takers to lever up. When risk appetite reverses, prices collapse as people deleverage.

Seems to me the world's largest bubble is government spending. We can see the leverage in the form of debt:GDP ratios.

Market forces are pushing against this bubble, seeking to pop it.

Thursday, August 18, 2011

Downside Picture

Jean-Claude: You can't just run around tearing down Paris.
Bryan Mills: Jean-Claude, I'll tear down the Eiffel Tower if I have to!

My sense is that the chances of a major wipeout our growing. Domestic markets today down 4% with some European markets (e.g., DAX down 6%).

Europe may be coming apart right here. The size of the debt problem is immense and it seems doubtful that Germany will shoulder the entire burden. Many euro banks down 10% today. US markets are a stone's throw from contagion.

Gold closed at another record high of $1827/oz. Investors are connecting the dots as the two options among sovereigns are boiling down to a) default, b) print money. The price of gold suggest folks doing the math are choosing b).

I've been rebuilding my short SPX position over the past few days and want to do more, but the volatility suggests prudence in spreading things out. Will likely use price to my advantage on rallies. The SPX seems to have room lower toward 1025ish.

Have once more started a GLD position although very hard to get large right here given the moonshot in price.

Frankly, silver looks more interesting to me right here compared to gold. Silver has not gone ballistic over the past two weeks like gold. Moreover, the charts suggest a bullish cup-and-handle pattern nearing completion.

A decisive move above 41 would be bullish.

positions in SPX, GLD, SLV 

Wednesday, August 17, 2011

Ignoring the Obvious

"What god desires is here (points to head) and here (points to heart), and what you decide to do every day, you will be a good man...or not."
--Hospitaler (Kingdom of Heaven)

The judge observes that even Jon Stewart commented that Ron Paul is being ignored as a serious presidential contender by mainstream media outlets (including Fox) despite his stellar performance in the polls thus far.

Ron Paul is a threat to Big Government, which means that he is a threat to both the Left and the Right, and to the venues that pander to them.

Stewart notes that Paul is "an ideologically consistent twelve term Congressman." Of course, the notion of consistency among politicians is in and of itself rare.

Rarer still is that Ron Paul 'ideology' involves protecting and upholding the Constitution. His consistency in this regard is unparalleled among his contemporaries in Washington.

This is despite the fact that every member of Congress (and the president and the supremes) takes an oath to do the same.

Tuesday, August 16, 2011

Recipe for Squalor

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

First, create a centralized government.

Second, grant the centralized government unlimited capacity for forcefully confiscating economic resources (thru taxation and money printing).

Third, give all people, including those who have little or no resources, an equal vote in how government should redistribute those confiscated resources, and couple with democratic (majority wins) decision rule.

Now, forecast the subsequent general trend (up or down) for each of the following:

government size
special interest groups seeking to influence politicians
national debt
budget deficits

Yep. Now what about these:

voluntary cooperation
general standard of living

An easier forecasting problem you'll never find.

Reversing the trends is straightforward as well. Removing condition two above should be sufficient, although removing condition three reduces the chance of recurrence.

Monday, August 15, 2011

Segmenting Financial Markets

Lilly Rains: If I'm here to court the feminist vote, what demographic do you represent?
Frank Horrigan: Let's see...white, piano playing heterosexuals over the age of 50.
--In the Line of Fire

Marketing managers learn early about the value of segmenting their markets. Segmenting involves identifying categories of buyers so that markets can be better understood.

I've often wondered why investment managers don't make a habit of segmenting. In his letter last week, John Hussman takes a shot at it. Dr J proposes four categories of investors and their influence on supply and demand in the current market dynamic.

Fundamentally oriented long term investors are value conscious investors with time horizons of a decade or more. They prefer to buy stocks when valuations are at secular lows. At secular bear market troughs, P/Es have historically fallen to the 4-6 range and dividend yields rise to 5-6% or higher. While stock prices are off 10% from their highs, aggregate valuations are still far from the levels that suggest deep value. As such, fundamentally oriented long term investors are not likely to be a major source of buying demand at current levels since prices do not yet look intriguing to this group. If markets continue to fall, then this group is likely to scale bids as prices suggest compelling value.

Fundamentally oriented short term investors are value-conscious, but in what Hussman calls in an 'erroneous and myopic' way. This group often takes cues from forward P/E multiples which often provide deceptive signals of value. Forward multiples tend to be overly optimistic and cause this group to buy much higher than the long term group discussed above. They are likely to see recent price declines from last month's highs as a buying opportunity. Thus, this group surely constitutes one source of demand currently.

Technically oriented long term investors look at long term chart patterns and other technical indicators to assess secular bullish and bearish trends. Currently, this group is undoubtedly quite concerned over multi-year breakdowns in index and individual stock uptrends. In fact, as prices broke through major support levels, this group was more likely to be a source of supply as sell stops were elected below these support levels. Currently this group is trying to assess direction of the next multi-year trend. After the major damage that has occured in many technical indicators, technically oriented long term investors may be prone to see the next multi-year trend as being lower. Thus, this group may be a persistent source of supply from these levels.

Technically oriented short term investors are also chart watchers, but their time horizon is measured in hours, days, or weeks rather than in years. After the meltdown in prices over the past week or so, many in this group saw markets as oversold in the near term and due for a bounce. This group has likely been a major source of demand over the past few sessions.

I find this a useful framework for determining who may be on either side of the trade currently.

Which of the four 'buckets' do I fall into? Well, under this scheme I participate in multiple categories. While I my strength and interest is primarily as a fundamentally oriented long term investor, there has been little for there to do from the long side. As such, I have been attracted to shorter term fundamental and technical opportunities. For example, I was buying them in the hole a week ago into what appeared to be an oversold market in the near term (technically oriented short term investor category).

Of course, that source of demand has already become a source of supply as I have been piecing out inventory as prices have moved higher...

Personally, I'm trying to once again elongate my horizon as the short term space seems pretty crowded.

position in SPX

Sunday, August 14, 2011

One Honest Man

Col Nathan Jessup: You want answers?
Lt Daniel Kaffee: I want the truth.
Col Nathan Jessup: You can't handle the truth!
--A Few Good Men

Politicians resemble chameleons, changing political colors to better suit the environment. Whatever it takes to win votes in their MO.

In the US, this means that Washington politicians are apt to eventually stray from the Constitution that they promise to uphold.

In the current field of presidential candidates, there is only one non-chameleon among them. Ron Paul. As observed here, what you see is what you get. No handlers developing his positions on issues. His positions have not wavered in his decades in Washington. His fidelity to the Constitution is unmatched by other presidential contenders.

Diogenes understood that virtue was better revealed in action than in words. Were he to have seen Ron Paul in action, Diogenes' quest for honesty may have ended.

Saturday, August 13, 2011

Riots, Socialism, and Chaos

And in the battle on the streets
You fight computers and receipts
And when a man is trying to change
But only causes further pain
You realize that all along
Something in us going wrong
--The Who

Riots. They're increasing in freequency and intensity worldwide. From EU basket cases like Greece, to Middle Eastern streits where food prices are being inflated out of reach, and now to London where people are feeling 'left behind.'

The worldwide experiment in socialism over the past one hundred years may be hitting the wall right here. Massive capital misallocation by central planners who lack accurate pricing mechanisms, complemented by a debt driven ponzi to keep the illusion in motion.

Mises understood the socialistic endpoint well: chaos.

Friday, August 12, 2011

Decline and Disbelief

"The first shot sounded like a firecracker. I looked over and saw him. I could tell that he was hit. I don't know why I didn't react. I should have reacted. I just couldn't believe it."
--Frank Horrigan (In the Line of Fire)

While visiting my old stomping grounds last year, I penned a series of missives to capture the decline of the area over the past decade or so. A couple were retrospecitve (here, here), one more or less descriptive of present conditions as seen thru my eyes via drivebys, and another theorized about key causes behind the decline.

My return this year finds further decay. I just drove by one of the mills managed by my former roommate that was shutdown a few months back. No cars in the lot, not smoke/steam from the stacks, gates padlocked, grounds overgrown. Ghostly.

Once the mill shut, my roomie left the company in search of greener pastures. In fact, over the past six months, three other friends at the division manager level or higher have jumped ship.

I count more empty storefronts this year, and more lots where stores once stood. Today, while dining at a local restaurant that basically fed me for years during my tenure, I learned that the mini-mall building that housed the establishment is to be demolished. The restaurant owners hope to relocate but have no firm plans.

While jogging this morning I saw houses for sale that had been for sale last year. Plus more for sale signs. Parks, streets, and other infrastructure are rough around the edges. Lots of weeds.

Population is certainly lower. Just roughing it using data picked quickly off the web, 2008 pop for Stevens Point was 25,327, 2010 pop = 24,160 (altho again may not be apples to apples). When I left in the mid 1990s I believe Point's pop was about 30,000.

The younger and working age demographic has to be sliding in synch w/ declining economic opportunity.

My brain continues to have trouble processing what is compared to what once was. I am convinced more than ever that this situation didn't have to happen.

No Shorts Allowed

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

As anticipated, various EU countries have banned short selling. France, Spain, Italy, and Belgium have thus far thrown their hats in the ring.

Short selling bans are a common interventionary tactic during market declines. The rationale is usually along the line that short sellers are 'unfairly' driving prices 'artificially' lower, perhaps by spreading false rumors or information. This is a subjective judgment, of course. It presumes that bureaucrats can judge the 'correct' price level or the accuracy of information.

In reality, markets are always better evaluators of price and information quality. Good judgments are rewarded and bad judgments are punished.

When short sales are removed from a market, the market actually becomes less liquid during periods of decline. This is because short sellers provide an important source of demand when they buy back securities to cover their position. Absent that layer of demand, markets are likely to fall harder.

We saw precisely this back in Fall 2008 when short selling was selectively banned in US markets. After an initially short covering rally on the announcement of the ban, markets resumed their decline with increased intensity. Less liquidity, deeper elevator shaft.

European markets are seeing similar short covering today. In a vacuum, this is decidedly bearish. Think it thru: What is likely to occur if longs still want to get out of positions and there are no short sellers to buy?

position in SPX

Thursday, August 11, 2011

The Cisco Disco

Take your baby by the hand
And make her do a high hand stand
Take your baby by the heel
And do the next thing that you feel
--Wang Chun

After being up a percent then down more than a percent in the premarket, futes turned around and went green, thereby facilitating a gap higher at the open. The indexes pretty much never looked back and once again we saw a 5%ish range. Close: Dow +423.

I believe that makes 5 consecutive days where major indexes have ranged 5% or more.

Lots of folks suggesting that yesterday's melt constituted a successful retest of Monday's low--meaning that the worst of the selling is past.

Perhaps. My sense is that there is big leverage that wants to leave the system. As such, I want to sell rallies.

Consistent w/ yesterday's plan, I nibbled in some SPX short into today's rally. Also but a little SLV.

The big gainer today was Cisco (CSCO) that bolted about 15% higher on a better than expected earnings report.

While other stocks have been retracing some of their gains off the 2009 lows, CSCO has made a round trip. With the selling earlier this week, CSCO has basically given it all back during its recent decline.

Now, with today's big move, it appears that CSCO may have put in a classic double bottom. As always with technical analysis, it will look 'obvious' with hindsight.

position in CSCO, SPX, SLV

Wednesday, August 10, 2011

Golden Rocket

Precious and few are the moments
We two can share
--Climax Blues Band

Need to record the gold move for reference purposes.

As noted previously, gold can essentially be viewed as a bet on social disorder (monetary, social, etc.).

Gold is above $1800/oz in the after market.

position in gold

Another Tricky Day

You can't always get it
When you really want it
You can't always get it at all
--The Who

Just another 500 or so pt range day in the Dow today--all of it to the downside. Premarket futes starting heading south on chatter that one or more French banks were in trouble. After the opening bell, markets lost 300-400 Dow points before an afternoon rally closed the gap to about -100.

But then that rally totally fell apart, such that markets knifed thru the intraday lows on their way down in the last hour. Closing bell: Dow -519.

The market's dynamic is readily felt when assuming a trading mindset. Stocks are generally going down easier than they are going up. The temptation is to short 'em, but not only are we deeply oversold but there is also intervention risk, such as a local or worldwide ban on naked CDS sales.

Bottom fishers keep buying stocks at what seems to be 'low prices' only to get their heads handed to them when the indexes break lower in monolithic fashion.

This keeps the shorts out and the longs trapped in declining positions--a wholly bearish situation.

Also, let's keep in mind the background macro picture which portrays a massive deleveraging event underway.

As such, my inclination is to look for short side entries. The first situation I'll consider is if we happen to open green tomorrow. The risk, of course, is that we scream higher and don't look back. That's acceptable to me here given that I'm still long some stock (e.g., CSCO, MSFT).

At any rate, my general game plan as it stands is to sell rallies.

I'm also interested in adding to my SLV position. There has been a big disconnect between gold (moonshot) and silver (sold but trades relatively firm) during the past week. Clearly, market participants are wondering whether any paper currency will be worth anything--and until they do that they're piling into gold (as they have for thousands of years). My sense is that silver may play some catch-up here.

position in gold, CSCO, MSFT, SPX, SLV


"Well, the players have changed but the game remains the same, and the name of the game is 'Let's Make a Deal.'"
--Jack Trainer (Working Girl)

Compromise can be defined as both sides of a negotiation 'giving something up' in order to reach an agreement. Meeting somewhere in the middle, it is often phrased.

Two weeks back Big Government politicians Washington (and their pundits) came out of the woodwork to criticize Tea Party incomers for being unwilling to compromise (some TPers wound up caving under the pressure). Compromise, the Establishment argues, is the way things get done in Washington.


Nearly all debates in Washington involve whether the federal government should get bigger or not. Whenever government gets bigger, freedom is lost. This is because resources are forcibly moved out of the hands of people and into the hands of the State.

Suppose, then, that every disagreement in Washington is between a group that thinks government should not get bigger (or heaven help us, smaller) and a group that thinks government should get bigger. Any compromise (i.e., meeting somewhere in the middle) necessarily means that government gets bigger. As such, more freedom is lost.

This sums up the debt deal 'compromise' last week.

As long as the federal government can marshal resources in discretionary fashion, 'compromise' in Washington equals loss of liberty.

Tuesday, August 9, 2011

Going Vertical

"I feel the need, the need for speed."
--'Maverick' Pete Mitchell (Top Gun)

Another N-V-T-S trading day. Last night the Dow futes were down about 300 but in the span of a few minutes in the early am prior to the bell, futures reversed higher and were up about 1.5%.

After the opening bell markets rallied a bit and then oscillated in front of the FOMC statement. Kowtowing to the market's need for speed, Uncle Ben & Co indicated that the Fed would keep interest rates at zero until at least mid 2013 (the 1st time I've ever seen a specific time frame expressed here). The Fed also promised to employ various 'policy tools as appropriate' depending on economic conditions.

Initially, markets didn't like this statement and the indexes drained to the tune of about -2%. Then, in classic 'the first move on FOMC day is a head fake' fashion, stocks reversed and ripped higher, ending on the high tick. The Dow was +429 with the SPX and COMP up 4-5% each.

Once again, we saw intraday range of more than 5%...major league volatility.

I was busy parsing out trading inventory into that late day lift. If we continue higher I'll hold more for sale.

It is my growing sense that we are entering a significant downleg--meaning that rallies should be sold rather than bought. The word circulating in my crowded keppe is 'deleveraging.' Over the past few days, we've witnessed what happens when market particpants want to deleverage in a big way: a tidal wave of supply.

I am having my doubts whether central banks have enough sandbags to stem the tide if deleveraging continues. There is so much debt and leverage out there that if risk appetites wane, I'm just not sure central banks will be able to hold it all together.

Think about it this way. In the last few days we saw all of the market gains realized during QE2 get washed away.

What does this imply about the size and effectiveness of another round of Fed intervention?

position in SPX

Default by Printing Press

You declared you would be three inches taller
You only became what we made you
Thought you were chasing a destiny calling
You only earned what we gave you
--The Who

For once former Fed chair Alan Greenspan is correct. If default is defined as not paying back a debt obligation, then the US would never default as long as it runs the monetary printing press.

But if the US does print up cash to pay back debt, then that is also a form of default, is it not? After all, creditors are getting devalued dollars in payment.

Creditors will surely respond by dramatically increasing the cost of borrowing, or perhaps by cutting off future lending entirely.

Meanwhile, people scratch their heads in amazement as gold continues to mark record highs...

position in gold, USD 

Monday, August 8, 2011

Waterfall Hazard

"The guy did a Peter Pan right off the edge of this dam right here."
--Deputy Marshal Samuel Gerard (The Fugitive)

The answer to the $trillion question turned out to be a), the 'elevator shaft' scenario. US markets gapped lower by over 2% and, save for a few rally attempts here and there, basically sank throughout the day.

In the last 30 minutes, margin calls intensified the selling, sending the Dow to a -600 point day. The SPX was off almost 80 handles.

Last Friday I put back on a small SPX short position which I let fly into the morass this afternoon. Stocks are going down very easily here.

Indeed, downside bets may be getting too easy. What we've witnessed in the past week is a 'waterfall decline' which is self-explanatory by the image above. And contrary to the waterfall imagery, markets rarely move in a straight line without relieving some pressure.

About two weeks ago the SPX was tickling 1350 and appeared to be tracing out a reverse head and shoulders pattern (bullish). The SPX has shed about 17% since then, which qualifies as a multi-day crash.

While I sense that, ultimately, the indexes have more work to do on the downside, I'm warming to the risk/reward of a long side trade. Technically, the SPX has some support right around here. Moreover, trend exhaustion indicators are suggesting high probability of a near term 'trend reversal' in all major indexes. And bullish percent indicators now show levels that favor upside rather than downside.

As such, I did some buying in big cap tech this pm.

A wild card over the next day or two is the FOMC meeting. Cratering markets are exerting big time pressure on the Fed Heads for another round of QE. Past Fed interventions have invited huge amounts of risk taking behavior steeped in moral hazard. All this risk is looking once more for a bailout from the Fed.

The money pouring into gold (north of $1700/oz today) is betting that Uncle Ben & Co will do the deed and keep moral hazard in play.

position in select big cap tech, gold 

Duration Mismatch

All our times have come
Here, but now they're gone
--Blue Oyster Cult

Nice description of the problem of 'duration mismatch' that has been engineered by the manipulation of interest rates by central banks.

Duration mismatch means using short term debt to fund projects that mature over long time periods. Suppose that you wanted to buy a house and that you figure it will take you 30 years to pay it off. Instead of taking out a 30 year mortgage (which would correctly match the duration of you debt with the duration of your project), you decide to take out a one year loan to pay one year's worth of interest and principal. At the end of the first year, you will look for a new one year loan on new terms.

It takes no genius to understand the risks here. What if interest rates explode higher in the next 12 months? What if it is hard to find a loan at all?

As the author points out, borrowers may be willing to take this risk if they think that interest rates are in periods of secular decline. In such a situation,duration mismatch pays off for the borrower.

This is precisely what has been occuring for years now, as the Federal Reserve has been suppressing interest rates below free market values for about 30 years. Yes, 30 years.

Everyone has jumped on the duration mismatch train. Individuals, companies, governments. Indeed, the most serious duration mismatch in place currently is likely the fact that the US government has been borrowing in short term debt markets to fund long term liabilities in programs such as Social Security and Medicare. Currently, OMB estimates federal government interest expense at about $200 billion in 2012. Should interest rates reverse higher in secular fashion, then our interest expense could easily triple or more in just a year or so.

We're rolling the dice that the Fed can keep interest rates suppressed. If interest rates can't be held down, then duration mismatch will morph into the grim reaper.

no positions

Sunday, August 7, 2011

Monday's Math

These changing years
They add to your confusion
And you need to hear
The time that told the truth
--Level 42

On the wake of the US credit downgrade, the $trillion question being asked is what happens to markets on Monday?

The thoughtstream I've been sampling has been mostly bearish. e.g., 'we're in for another 6-10% decline over the next couple of weeks.' That may indeed occur.

On the other hand, it is likely that some of last week's severe sell-off was due to market participants connecting the downgrade dots in advance. In such case, it would not be the most unusual thing in the world to see markets rally 'in relief' on Monday.

Moreover, the FOMC is due up midweek and if Uncle Ben waxes poetic about QE3 then markets are likely to applaud.

Any perception of good news in an already severely oversold tape (near term) may trigger an intense rally.

Personally, I'm leaning (and positioned) toward the rally scenario although the 'straight down' scenario would not shock me''

Should we indeed lift, I'll be looking to pare more long exposure because the macro picture as well as the technical picture are both more clearly bearish from where I sit.

position in SPX

Saturday, August 6, 2011

US Debt Downgrade: Way Late

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

After markets closed on Fri, S&P announced that it was downgrading the United States from the top shelf AAA credit rating to AA+.

In its report, S&P based its rationale on the recent turmoil surrounding the debt deal which the agency said reduces clarity on US capacity for reducing spending and controlling debt.

While the past week's debt deal was woefully inadequate, fingering the most recent process and outcome as the 'cause' for the downgrade is laughable. Our fiscal health has been deteriorating for years. Even cursory examination of the US balance sheet indicates that we are far from being an attractive credit risk. Absent our reserve currency status and control of the monetary printing press, US creditworthiness would be approaching banana republic status by now.

Indeed, it can be argued that we have been defaulting on debt obligations for decades by devaluing the dollars that are paid back to creditors.

As we've noted before on these pages, the ratings agencies are chronically late w/ debt downgrades, as witnessed during the 2008-2009 credit market meltdown. It appears that S&P is exploiting the recent debt ceiling debacle in DC to do something that they should have done long ago.

position in SPX, USD

Friday, August 5, 2011

Fast Times at Wall Street High

"People on 'ludes should not drive."
--Jeff Spicoli (Fast Times at Ridgemont High)

The intraday moves continue to be eye popping. Deleveraging combined with high frequency trading is the likely culprit.

Currently, this is the consummate 'fast market.' Intraday range on the SPX has been about 50 handles today...

During the earlier lift, unwound much of my long exposure that I bought in the hole yesterday. Still holding some Microsoft (MSFT) and Merck (MRK) that will be held for sale if prices continue to firm.

My sense is that if prices don't squirt higher pretty soon, then very near term oversold conditions may be worked off as a function of time rather than price, and we'll head toward SPX 1125.

Even if we should we rally back up toward SPX 1225, Boo the bear will likely lean against this level pretty hard.

positions in MSFT, MRK, SPX

Thursday, August 4, 2011

Breaching the Line

"Sure went down the toilet on that ugly bitch."
--Marv (Wall Street)

Ugliest stock market day in quite a while. The 'wide and loose' price behavior brought back memories of 2008.

Major indexes were down 4-5% with the Dow off 512. After a morning surge below SPX 1225 tripped some sell stops, the S&P regained the 1225 level in late morning at early afternoon, or about a 2.7% loss. Lots of folks, your truly included, were watching to see whether that 1225 level would hold.

It didn't. Once 1225 was decisively breached in the early afternoon, then selling brought out more selling. My sense is that leveraged index players were being carried out on stretchers in droves today, and the action late in the day had the feel of margin calls.

Those margin calls drive forced selling--the good gets sold with the bad. As such correlations among risky assets approach 1.0. Great example of this today.

Significant support now rests below at 1125 and 1025.

I wound up covering my S&P short on the break below 1225 in early afternoon--prematurely as it turned out. However, markets are very oversold in the near term. The SPX is off more than 10% in just a few short sessions. Volatility indexes are going vertical--with the VXO up 45% today! Jason's sentiment gauges are suggesting extreme near term pessimism.

Because I had been battling this chunky short position for quite some time, I decided to book a decent trade, clear my head, and look at the situation with a fresh set of eyes.

The afternoon melt actually found me buying some of my favorite large cap names into the afternoon abyss--for a trade. I think this tape has unresolved issues to the downside. But in the uber near term, I think Snapper (a.k.a. snap back rally) has a decent chance of making a cameo appearance.

If Snapper doesn't show tomorrow (Friday), then people will surely start pondering the 'crash' scenario going into the weekend.

position in select large cap stocks

Wednesday, August 3, 2011

Jumping Bonds

I get up, and nothing gets me down
You got it tough, I've seen the toughest around
--Van Halen

Wow, you don't see moves like this in long bonds every day. Long dated Treasuries are up about 5% in a couple of days.

Suggestive of investors who want to get out of risk in a hurry.

no positions

Locking Out the Republic

Just a little more time is all we're asking for
Just a little more time can open closing doors
--Corey Hart

The video here contains some interesting comments on what may be the unconstitutional nature of the 'Super Congress' being formed as part of the newly inked debt deal.

The basic argument stems from the notion that all representatives are constitutionally authorized to be involved in the legislative process. Barring elected representatives from full involvement in the process, including debate and proposing amendments, equates to disenfranchising the voters who elected those representatives.

In such case, the governing design would no longer reflect a republic.

Excluded representatives could rightly sue to regain entry into the process. The judge said the he knew of at least a half a dozen senators at minimum likely willing to take such action.

Will be watching to see how this unfolds...

Tuesday, August 2, 2011

No Relief in Sight

In violent times
You shouldn't have to sell your soul
In black and white
They really, really ought to know
--Tears for Fears

After yesterday's 'pop and drop' on the debt deal news, we suggested that those positioned for a post-agreement relief rally were hoping that the best was yet to come.

With the benefit of hindsight, yesterday's gap higher may have been it.

The Senate's passing the debt bill today was immediately sold. The SPX closed on its lows, down about 2.5%, on its largest volume in a month. The SPX has now cut decisively below its 200 day moving average. Support rests below on the '25s': 1225, 1125, 1025.

Outside markets have been on the move as well. Gold screamed $30 higher today after the debt passage news was announced. Long bonds rallied again, with 10 yr yields down about 10% in three days. The Swiss franc has been on fire, hitting new highs for the move almost daily and up about 5% in three days. Nearly all foreign markets are retreating. The German DAX, one of the strongest performers worldwide, is off about 6% from yesterday's intraday high.

Add it all up and you get waning appetite for risky assets amid a macro context built on ever increasing piles of debt.

position in SPX, gold

Gold and the National Debt

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

Interesting projection of gold alongside US public debt. Should the relationship hold, loading $2.5 trillion more onto the debt pile implies that gold 'works' to $1950.

Gold is marking another new high today. Seems the markets are doing the math...

position in gold, GLD

Opportunity Lost

"I take it you don't really care about the part you had in breaking one of the finest men you'll ever know. Add to it that as Air Exec, you were automatically in command the moment Colonel Davenport left. And you met that responsiblity exactly as you met his need: you ran out on it."
--General Frank Savage (Twelve O'Clock High)

When history looks back on America's fiscal train wreck, one question likely to surface is "When was the last time that the United States could have proactively changed course in order to avoid pending disaster?"

That day could have been yesterday when the House voted on S.365, better known as the Budget Control Act of 2011.

The set up seemed perfect. Republicans won a landslide victory last November on the back of the Tea Party movement, a movement grounded in the values of limited government and fiscal responsibility. Seemingly, the GOP possessed a mandate to stop American's spending addiction in its tracks. All that was required was for House Republicans, with a dominant majority, to vote no to more debt and spending.

But it wasn't to be. Some Republicans revealed their true colors as proponents of Big Government. Some of the new guard were co-opted by the old school. Others simply lost their nerve and did not want to be accountable for the consequences of standing firm.

In the end, House Republicans shirked their responsibilities to the Constitution and caved. House Republicans overwhelmingly voted in favor of more debt and spending. Sadly, more Democrats opposed the bill than Republicans.

As a result, another $2.5 trillion of debt will be injected into the veins that feed our borrowing and spending addiction.

And with it, the last chance to pull ourselves back from the brink may have been squandered.

Monday, August 1, 2011

Where's the Relief?

Clowns to the left of me
Jokers to the right
Here I am
Stuck in the middle with you
--Stealer's Wheel

Domestic stock markets gapped higher this morning on the back of last night's proclaimed debt deal. Before long, however, the major indexes starting leaking. By midday, the +1% gap open had morphed into a -1% loss. By the end of the day, the indexes had cut that loss in about half.

Those positioning for a relief rally once the debt deal was announced are hoping that today's open is not all there is. There remains some doubt that Big Government leaders will be able to marshal enough votes to pass whatever bill actually makes it to paper.

It also may be dawning on market participants that this deal does essentially nothing to solve our spending addiction. Indeed, more debt is the enabler.

Toddo and others think markets are starting to price in a US debt downgrade by the major ratings agencies. As we know, the edge of the sword these ratings agencies are not...

Of course, we also have escalating probs in the EU. Spain and Italy look to be the next bodies floating to the surface...

Until late last week and today, I was firmly in the relief rally camp (as misguided as such a rally might be). Am carrying decent sized trading positions in Microsoft (MSFT) and the metals. The metals continue to act well but MSFT is starting to trade funky. If we do happen to get a debt deal AND a rally, I'll be looking to parse out some inventory relatively quickly--especially MSFT.

Will also be trying to judge the nature of any such strength. Will be alert for clues that suggest that the rally might either be durable...or failing.

position in MSFT, SPX

More Smoke and Mirrors

Step right up, and don't be shy
'Cause you will not believe your eyes
--The Tubes

Predictably, our Big Government leaders cobbled together an 11th hour debt limit plan last night. Like so many of the preceeding 'crisis' acts, we have no actual bill to read. Like the health care legislation, odds are that many in Congress will vote on the bill without having read it.

Another round of smoke and mirrors.

There is still an outside chance that the thing fails. Big Government Democrats need to convince those who wanted tax increases. Big Government Republicans need to convince Tea Party types who wanted a balanced budget amendment.

Would be wonderful if both these groups dissented enough to sink this thing.