Watch
Marc Faber, editor of The Gloom, Boom & Doom Report is, by his own account, "ultra-bearish" on the long-term fundamentals of the U.S. market. (Discussed in detail in this clip.)
However, in the near term, Faber sees plenty of money-making opportunities in stocks. Sure, prices aren't as cheap as they were in March, yet he's confident, "in this environment cash will become worthless." As a result, he says investors are, "better off being in equities," for the next two to three years.
Faber is most bullish on mining and energy companies. He recommends:
Newmont Mining and FreeportMcMoran as relative inexpensive. He also mentions Nova Gold, as another, more speculative buy.
In a contrarian call, on natural gas, he says Chesapeake Energy will be a winner when prices eventually rebound.
Oil giant ExxonMobil is another stock he thinks offer good value.
Outside of that, Faber says buying large-cap pharmaceuticals like Pfizer and Johnson & Johnson offer good defensive options.
Finally, he suggests U.S. airlines are poised for a rebound. If that happens, international airlines will follow and Thai Airways stock could double.
Showing posts with label stocks. Show all posts
Showing posts with label stocks. Show all posts
24 September 2009
5 May 2009
"Systemic Correlation Is At October 1987 Levels"
From Zero Hedge. quants see instability.....
First, there has been yet another dramatic shift in the style with the recent rally that began on March 10th. Value has markedly outperformed while Sentiment has strikingly underperformed. This marks the fourth such dramatic change in the past 10 months. From early May 2008 through July 14, 2008, Sentiment dramatically outperformed, returning over 50% during this period as Financial and Consumer Discretionary stocks fell and Energy and Material names rose. In mid July, these trends sharply reversed with the bursting of the energy bubble. Through the Fall of 2008, we saw Sentiment re-emerge strongly, again, while Quality also out-performed. Styles reversed yet again starting around November 21st, 2008 with the catalyst being the announcement by the Treasury of the TALF program and a general reduction in risk-aversion. Deep value names strongly outperformed, led by Book-to-Price and other normalized earnings factors, while Sentiment and Momentum factors manifestly underperformed. This trend yet again reversed itself starting on January 7th. Our Sentiment Index went on another tear and our Value Index declined sharply. And then on March 10th, yes, you guessed it, it all switched once again and reversed gears very strongly. Picking the right style has been critically important to generating outperformance while the Style that has been working has shifted repeatedly and sharply. Thus, this has been a very difficult environment in which to generate consistent outperformance.
Second, we continue to see factor volatility remain at historically high levels. Not only have there been a number of significant longer trends but we have seen the daily volatility of factor returns rise to levels with scant precedence. This month saw a number of days with extraordinary positive and negative returns to our theme indices as well as individual factors. Specifically, April 9th was the 2nd worst day ever for Sentiment and the 5th best day for Value, measured back to July 1950. April 20th was the single best day ever for Sentiment and the 5th worst ever for Value. And April 23rd was the 7th worst day ever for Sentiment. Just within this past month, we have seen some of the best and worst days ever for our quantitative indices, when measured over approximately 15,000 days. This environment certainly presents a challenge to both investors and portfolio managers who might not enjoy experiencing radical daily swings in the value of their investments.
Third, there have been a series of significant rotations in the correlation of quantitative factors Historically, the correlation between Valuation factors and Sentiment factors has been mildly negative. Presently, the correlation is almost perfectly negative. Moreover, within the factor theme portfolios, there have been significant rotations among factors. For example, free-cash-flow based variables and forward earnings variables have decoupled from more traditional normalized earnings variables. Dividend Yield and Total Yield are now almost perfectly negatively correlated with Book-to-Price and Sales-to-Price as distressed cheap companies have cut dividends.
In turn, this has caused the natural balance built into quant models to become unglued. In the context of a multi-factor model, one cannot take for granted that the valuation and momentum are offsetting each other. Of course, this depends upon the specific Valuation and Sentiment factors one is using in one’s models. As described above, a number of Valuation metrics have become negatively correlated, thereby tempering the overall performance of the Valuation Theme. On the other hand, Sentiment variables have increased their correlation, thereby amplifying the negative performance of the theme. Hence, for many quantitative models, the natural offset of Valuation and Sentiment has broken down with the result that the negative underperformance of Sentiment is dominating overall performance.
Fourth, risk models continue to do a poor job of predicting tracking error. As shown in Figure 14, since August 2007, the risk model we use has consistently been underestimating risk. We are presently targeting tracking error of 2.85% but have consistently been realizing tracking errors two to three times that level. This month was actually slightly better as realized tracking error was only 150% of the predicted level. From our conversations with clients, we do not believe this is solely a problem with our risk model but with all risk models. Nearly everyone is reporting similar stories.
Finally, fifth, the average systemic correlation across stocks is at near all times highs, exceeded only by the days following the October 1987 crash and a brief period in 1954. We measure this “implied correlation” as the correlation among a portfolio of stocks, where we assume the correlation is constant for each pair of stocks. In other words, implied correlations are the values one gets from doing portfolio math and ascertaining what the dispersion is among stocks within that grouping. A high correlation means that there is very little dispersion among the stocks and a low correlation means that there is high dispersion in performance. Today there is very little dispersion when measured in stocks across the market as a whole. Systemic factors are driving stock returns across the market. Stock specific news is largely irrelevant and that this is the case in the middle of earnings season, when stock specific news should be at its height, is truly remarkable. Getting the individual names right in the portfolio has never been less important. Getting your systematic risk exposures (e.g. your style tilt) correct has never been more important.
http://zerohedge.blogspot.com/2009/05/market-dispersion-has-collapsed.html
First, there has been yet another dramatic shift in the style with the recent rally that began on March 10th. Value has markedly outperformed while Sentiment has strikingly underperformed. This marks the fourth such dramatic change in the past 10 months. From early May 2008 through July 14, 2008, Sentiment dramatically outperformed, returning over 50% during this period as Financial and Consumer Discretionary stocks fell and Energy and Material names rose. In mid July, these trends sharply reversed with the bursting of the energy bubble. Through the Fall of 2008, we saw Sentiment re-emerge strongly, again, while Quality also out-performed. Styles reversed yet again starting around November 21st, 2008 with the catalyst being the announcement by the Treasury of the TALF program and a general reduction in risk-aversion. Deep value names strongly outperformed, led by Book-to-Price and other normalized earnings factors, while Sentiment and Momentum factors manifestly underperformed. This trend yet again reversed itself starting on January 7th. Our Sentiment Index went on another tear and our Value Index declined sharply. And then on March 10th, yes, you guessed it, it all switched once again and reversed gears very strongly. Picking the right style has been critically important to generating outperformance while the Style that has been working has shifted repeatedly and sharply. Thus, this has been a very difficult environment in which to generate consistent outperformance.
Second, we continue to see factor volatility remain at historically high levels. Not only have there been a number of significant longer trends but we have seen the daily volatility of factor returns rise to levels with scant precedence. This month saw a number of days with extraordinary positive and negative returns to our theme indices as well as individual factors. Specifically, April 9th was the 2nd worst day ever for Sentiment and the 5th best day for Value, measured back to July 1950. April 20th was the single best day ever for Sentiment and the 5th worst ever for Value. And April 23rd was the 7th worst day ever for Sentiment. Just within this past month, we have seen some of the best and worst days ever for our quantitative indices, when measured over approximately 15,000 days. This environment certainly presents a challenge to both investors and portfolio managers who might not enjoy experiencing radical daily swings in the value of their investments.
Third, there have been a series of significant rotations in the correlation of quantitative factors Historically, the correlation between Valuation factors and Sentiment factors has been mildly negative. Presently, the correlation is almost perfectly negative. Moreover, within the factor theme portfolios, there have been significant rotations among factors. For example, free-cash-flow based variables and forward earnings variables have decoupled from more traditional normalized earnings variables. Dividend Yield and Total Yield are now almost perfectly negatively correlated with Book-to-Price and Sales-to-Price as distressed cheap companies have cut dividends.
In turn, this has caused the natural balance built into quant models to become unglued. In the context of a multi-factor model, one cannot take for granted that the valuation and momentum are offsetting each other. Of course, this depends upon the specific Valuation and Sentiment factors one is using in one’s models. As described above, a number of Valuation metrics have become negatively correlated, thereby tempering the overall performance of the Valuation Theme. On the other hand, Sentiment variables have increased their correlation, thereby amplifying the negative performance of the theme. Hence, for many quantitative models, the natural offset of Valuation and Sentiment has broken down with the result that the negative underperformance of Sentiment is dominating overall performance.
Fourth, risk models continue to do a poor job of predicting tracking error. As shown in Figure 14, since August 2007, the risk model we use has consistently been underestimating risk. We are presently targeting tracking error of 2.85% but have consistently been realizing tracking errors two to three times that level. This month was actually slightly better as realized tracking error was only 150% of the predicted level. From our conversations with clients, we do not believe this is solely a problem with our risk model but with all risk models. Nearly everyone is reporting similar stories.
Finally, fifth, the average systemic correlation across stocks is at near all times highs, exceeded only by the days following the October 1987 crash and a brief period in 1954. We measure this “implied correlation” as the correlation among a portfolio of stocks, where we assume the correlation is constant for each pair of stocks. In other words, implied correlations are the values one gets from doing portfolio math and ascertaining what the dispersion is among stocks within that grouping. A high correlation means that there is very little dispersion among the stocks and a low correlation means that there is high dispersion in performance. Today there is very little dispersion when measured in stocks across the market as a whole. Systemic factors are driving stock returns across the market. Stock specific news is largely irrelevant and that this is the case in the middle of earnings season, when stock specific news should be at its height, is truly remarkable. Getting the individual names right in the portfolio has never been less important. Getting your systematic risk exposures (e.g. your style tilt) correct has never been more important.
http://zerohedge.blogspot.com/2009/05/market-dispersion-has-collapsed.html
27 April 2009
Surge in secondary offers threatens stocks' advance
NEW YORK (Reuters) - Companies seeking to repair their balance sheets are swamping investors with tens of billions of dollars in equity offerings that threaten to put a lid on recent gains in global stock markets.
Since January 1, investors have been tapped for $109 billion worldwide in secondary share sales -- or 37 percent more than at this point last year, according to Thomson Reuters data.
Analysts expect that pace to continue this year as companies, particularly banks and other financial firms, desperately seek to shore up their capital after the destruction wrought by the financial crisis.
The International Monetary Fund estimated on Tuesday that banks would need to raise $875 billion of fresh capital.
Companies may find a cool reception.
"It will be dilutive for common stockholders no matter what," said Matt McCormick, a portfolio manager with Bahl & Gaynor Investment Counsel in Cincinnati.
"'Stock by stock' dilution will likely have a cumulative impact on the broad market," McCormick added.
Any slowing of the market could be exacerbated if banks sell new shares because the government forces them to raise money, said Marc Pado, U.S. market strategist with Cantor Fitzgerald.
"The secondaries could slow the market in the mid-term, especially if the money is raised because banks failed their stress test," Pado said, referring to various simulations being conducted by the U.S. government to see how the 19 largest U.S. banks would hold up if the recession persisted and possibly deepened.
Under the best circumstances, a secondary issuance can depress a stock.
Last week, shares of Goldman Sachs Group (GS.N) fell nearly 12 percent a day after the investment bank said it would sell shares to raise $5 billion, in part to reimburse the U.S. government for money received through the Troubled Asset Relief Program.
STRESS-TEST STRESS
The results of the stress tests, set to be made public May 4, will likely determine the flow of secondary offerings.
"It'll only be after the results of the banks' stress tests are public that we may see some further recapitalization in the financial industry -- either as a necessity after the stress tests or as some look to repay TARP," said Jeff Bunzel, managing director for equity capital markets at Credit Suisse.
Banks deemed to have an insufficient capital cushion might have little choice but to seek more money from the government or sell additional shares to investors, who may only snap up shares if they are priced low.
"We think there's no hurry to jump into these offerings," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion.
And the going could be particularly tough for banks that fail their stress test.
"If you fail that stress test, no one is going to touch you," said Brad Hintz, a banking analyst with Sanford C. Bernstein & Co. After the collapse of banking stocks in the last year, many investors are wary, he said.
Banks aren't alone in trying to replenish their coffers.
While the largest secondary this year was a $19.4 billion deal by UK-based bank HSBC Holdings (HSBA.L), companies in other sectors have sold billions of dollars in new shares too.
For example, Swiss metals concern Xstrata PLC (XTA.L) sold $5.8 billion of new shares, and Australian conglomerate Wesfarmers Ltd (WES.AX) raised $3 billion in a secondary offering.
A major challenge to the market's recovery could come from the number of shares some companies, especially banks, will need to sell to raise money.
That resulting dilution could prompt short sellers to pummel the shares even more.
"If you are a short seller and think someone will do a dilutive secondary, why wouldn't you short them," McCormick said.
Either way, banks in particular may have to settle for lower prices.
"There's more money that needs to be raised than people expect, and the terms may not be as favorable as the banks would like," McCormick said.
(Additional reporting by Jennifer Ablan; Editing by Steve Orlofsky)
http://www.reuters.com/article/reutersEdge/idUSTRE53N3KE20090424?sp=true
Since January 1, investors have been tapped for $109 billion worldwide in secondary share sales -- or 37 percent more than at this point last year, according to Thomson Reuters data.
Analysts expect that pace to continue this year as companies, particularly banks and other financial firms, desperately seek to shore up their capital after the destruction wrought by the financial crisis.
The International Monetary Fund estimated on Tuesday that banks would need to raise $875 billion of fresh capital.
Companies may find a cool reception.
"It will be dilutive for common stockholders no matter what," said Matt McCormick, a portfolio manager with Bahl & Gaynor Investment Counsel in Cincinnati.
"'Stock by stock' dilution will likely have a cumulative impact on the broad market," McCormick added.
Any slowing of the market could be exacerbated if banks sell new shares because the government forces them to raise money, said Marc Pado, U.S. market strategist with Cantor Fitzgerald.
"The secondaries could slow the market in the mid-term, especially if the money is raised because banks failed their stress test," Pado said, referring to various simulations being conducted by the U.S. government to see how the 19 largest U.S. banks would hold up if the recession persisted and possibly deepened.
Under the best circumstances, a secondary issuance can depress a stock.
Last week, shares of Goldman Sachs Group (GS.N) fell nearly 12 percent a day after the investment bank said it would sell shares to raise $5 billion, in part to reimburse the U.S. government for money received through the Troubled Asset Relief Program.
STRESS-TEST STRESS
The results of the stress tests, set to be made public May 4, will likely determine the flow of secondary offerings.
"It'll only be after the results of the banks' stress tests are public that we may see some further recapitalization in the financial industry -- either as a necessity after the stress tests or as some look to repay TARP," said Jeff Bunzel, managing director for equity capital markets at Credit Suisse.
Banks deemed to have an insufficient capital cushion might have little choice but to seek more money from the government or sell additional shares to investors, who may only snap up shares if they are priced low.
"We think there's no hurry to jump into these offerings," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion.
And the going could be particularly tough for banks that fail their stress test.
"If you fail that stress test, no one is going to touch you," said Brad Hintz, a banking analyst with Sanford C. Bernstein & Co. After the collapse of banking stocks in the last year, many investors are wary, he said.
Banks aren't alone in trying to replenish their coffers.
While the largest secondary this year was a $19.4 billion deal by UK-based bank HSBC Holdings (HSBA.L), companies in other sectors have sold billions of dollars in new shares too.
For example, Swiss metals concern Xstrata PLC (XTA.L) sold $5.8 billion of new shares, and Australian conglomerate Wesfarmers Ltd (WES.AX) raised $3 billion in a secondary offering.
A major challenge to the market's recovery could come from the number of shares some companies, especially banks, will need to sell to raise money.
That resulting dilution could prompt short sellers to pummel the shares even more.
"If you are a short seller and think someone will do a dilutive secondary, why wouldn't you short them," McCormick said.
Either way, banks in particular may have to settle for lower prices.
"There's more money that needs to be raised than people expect, and the terms may not be as favorable as the banks would like," McCormick said.
(Additional reporting by Jennifer Ablan; Editing by Steve Orlofsky)
http://www.reuters.com/article/reutersEdge/idUSTRE53N3KE20090424?sp=true
13 April 2009
Marc Faber, Hyperinflation, Equity and Gold Prices
Anybody who wants to read up on the ‘paradox of inflation’ should turn to Dr Marc Faber’s classic ‘Tomorrow’s Gold’ for guidance. Even six years after publication this remains the best investment book currently on sale.
His foresight is amazing and the most part of a chapter is devoted to explaining how high levels of inflation impact on asset prices. That investors will switch from fiat currencies to precious metals is obvious enough.
However, Dr Faber also highlights what he calls the ‘paradox of inflation’, namely that with general price levels surging asset classes like equities actually become very cheap. He cites numerous historical examples, such as Weimar Germany.
Coming inflation
Now in November 2002 when ‘Tomorrow’s Gold’ was published talk of hyper inflation looked pretty ridiculous. Yet in the Bild newspaper the German Finance Minister Peer Steinbrueck warns that the world could face an inflation crisis in the medium term, after the immediate economic crisis ends, due to the huge amounts of liquidity being pumped into financial markets.
He said: ‘What causes me concern is that the next crisis is already being programmed because of all the enormous debt-financed counter measures being conducted worldwide’. For good measure he dismissed calls for a third German stimulus package in six months as ‘nonsense’.
But Steinbrueck is being over-powered by what he previously described as ‘British crass Keynesianism’ as governments ramp up spending around the world. Last week Japan announced a $154 billion stimulus package to add two per cent to GDP.
Yet if Dr Faber’s original thesis holds true then investors ought to be dumping stocks to buy precious metals now, and then waiting for a hyperinflation to make equities a once in a generation buy. The logic is clear: gold will keep and actually enhance its buying power while inflation will undermine stocks, providing a tremendous buying opportunity.
It would be interesting to know what the original Dr Doom thinks about this theory today. But as with most paradoxes there is surely a simple explanation.
Logical paradox
In periods of inflation companies find it impossible to raise prices fast enough to keep up with rising costs, so their profits margins are squeezed and therefore their shares are worth less, although not necessarily worthless. It is the reverse of the miraculous low inflation and high profit growth rates of recent years, admittedly only sustained by the ultimately unsustainable expansion of global credit.
Investors have to adapt to survive, and jumping back into previous boom asset classes far too early is a classic error. The trick, as Marc Faber says in his book, is to spot the next asset class bubble forming and get in and out before things get out of control.
Perhaps those rushing too late into the month-old US equity bear market rally might reflect on that concept, and consider selling out to buy hard assets before inflation takes hold. Inflation is, of course, suicidal for bonds and devalues paper currencies.
http://news.goldseek.com/PeterCooper/1239555600.php
His foresight is amazing and the most part of a chapter is devoted to explaining how high levels of inflation impact on asset prices. That investors will switch from fiat currencies to precious metals is obvious enough.
However, Dr Faber also highlights what he calls the ‘paradox of inflation’, namely that with general price levels surging asset classes like equities actually become very cheap. He cites numerous historical examples, such as Weimar Germany.
Coming inflation
Now in November 2002 when ‘Tomorrow’s Gold’ was published talk of hyper inflation looked pretty ridiculous. Yet in the Bild newspaper the German Finance Minister Peer Steinbrueck warns that the world could face an inflation crisis in the medium term, after the immediate economic crisis ends, due to the huge amounts of liquidity being pumped into financial markets.
He said: ‘What causes me concern is that the next crisis is already being programmed because of all the enormous debt-financed counter measures being conducted worldwide’. For good measure he dismissed calls for a third German stimulus package in six months as ‘nonsense’.
But Steinbrueck is being over-powered by what he previously described as ‘British crass Keynesianism’ as governments ramp up spending around the world. Last week Japan announced a $154 billion stimulus package to add two per cent to GDP.
Yet if Dr Faber’s original thesis holds true then investors ought to be dumping stocks to buy precious metals now, and then waiting for a hyperinflation to make equities a once in a generation buy. The logic is clear: gold will keep and actually enhance its buying power while inflation will undermine stocks, providing a tremendous buying opportunity.
It would be interesting to know what the original Dr Doom thinks about this theory today. But as with most paradoxes there is surely a simple explanation.
Logical paradox
In periods of inflation companies find it impossible to raise prices fast enough to keep up with rising costs, so their profits margins are squeezed and therefore their shares are worth less, although not necessarily worthless. It is the reverse of the miraculous low inflation and high profit growth rates of recent years, admittedly only sustained by the ultimately unsustainable expansion of global credit.
Investors have to adapt to survive, and jumping back into previous boom asset classes far too early is a classic error. The trick, as Marc Faber says in his book, is to spot the next asset class bubble forming and get in and out before things get out of control.
Perhaps those rushing too late into the month-old US equity bear market rally might reflect on that concept, and consider selling out to buy hard assets before inflation takes hold. Inflation is, of course, suicidal for bonds and devalues paper currencies.
http://news.goldseek.com/PeterCooper/1239555600.php
9 March 2009
CitiFX Technicals Gold bullish
Technicals - Bulletin
Technical Developments in the Foreign Exchange and Asset Markets
06 March 2009
This is crazy right?
Can we really see a Gold price at $2,000 and the S&P 500 at 360?
Gold and the S&P 500 long term charts We have articulated in detail that Gold is in a long term bull market and is likely to be a significant out performer
in this environment. If the rally in Gold in the late 1970’s was replicated, we would see it $2,000+
The S&P 500 has posted a monthly close below the 768 double top neckline. The pattern suggests a move towards 360 is possible
Not convinced?
See the relative charts overleaf which go back to the 1920’s
Market Commentary
CitiFX Technicals
06 March 2009
S&P 500 / Gold Ratio since the 1920’s
Gold at $2,000 and the S&P 500 at 360 would take this ratio to 0.18 which is just below the levels seen in the 1930’s depression.
Dow Industrials / Gold Ratio since the 1920’s
The S&P 500 at 360 is approximately 45% below current levels. A fall of 45% on the Dow Jones would take it to approximately 3,500. The Dow at 3,500 and
Gold at $2,000 would take this ratio to 1.75 which is effectively the average of the last two major lows in 1933 and 1980.
Is this really the end of the world as we know it? Both major assets (stocks and houses) are in a MAJOR bear market for the first time in over a generation
Market Commentary
2
CitiFX Technicals
06 March 2009
Dow Industrials and Home builders index in gold terms
Housing has been in a bull market since the early – mid 1990’s and accelerated higher still at the turn of the century when stocks started to move lower.
Now both asset markets are falling significantly with little signs of recovery in houses and plenty of signs for weakness in stocks.
U.S. Housing Starts and Dow Industrials Mid 1970’s Early 1980’s Now The world has been through cyclical bears within structural bull markets in Fixed
Income and Assets markets (stocks and houses) for too long. It has effectively been on steroids for 25+ years and now we are seeing both major asset
markets falling together for the first time since the early 1980’s (arguably as the Dow ONLY fell 24%) if not the mid 1970’s. We believe a structural turn
has taken place in
• Fixed Income with yields heading higher • Houses which remain depressed at best, and • Stocks which look very weak on the multi decade charts Credit
remains unavailable and chaos resumes. The only currency that is being used as a real safe haven is gold which we believe can continue to shine both in a
deflationary and inflationary environment. We firmly stick with our long term view that Gold can rally as far as $2,000+ We also reiterate that there is a
significant risk of the S&P 500 falling to 360.
The world over the centuries has gone through difficult periods and while that does not change, the world over the last 20 – 30 years is looking like a
very different place.
This is crazy right? Go back and look at those charts
Market Commentary
3
CitiFX Technicals
06 March 2009
CitiFX® Value Added Services & Products
Technical Developments in the Foreign Exchange and Asset Markets
06 March 2009
This is crazy right?
Can we really see a Gold price at $2,000 and the S&P 500 at 360?
Gold and the S&P 500 long term charts We have articulated in detail that Gold is in a long term bull market and is likely to be a significant out performer
in this environment. If the rally in Gold in the late 1970’s was replicated, we would see it $2,000+
The S&P 500 has posted a monthly close below the 768 double top neckline. The pattern suggests a move towards 360 is possible
Not convinced?
See the relative charts overleaf which go back to the 1920’s
Market Commentary
CitiFX Technicals
06 March 2009
S&P 500 / Gold Ratio since the 1920’s
Gold at $2,000 and the S&P 500 at 360 would take this ratio to 0.18 which is just below the levels seen in the 1930’s depression.
Dow Industrials / Gold Ratio since the 1920’s
The S&P 500 at 360 is approximately 45% below current levels. A fall of 45% on the Dow Jones would take it to approximately 3,500. The Dow at 3,500 and
Gold at $2,000 would take this ratio to 1.75 which is effectively the average of the last two major lows in 1933 and 1980.
Is this really the end of the world as we know it? Both major assets (stocks and houses) are in a MAJOR bear market for the first time in over a generation
Market Commentary
2
CitiFX Technicals
06 March 2009
Dow Industrials and Home builders index in gold terms
Housing has been in a bull market since the early – mid 1990’s and accelerated higher still at the turn of the century when stocks started to move lower.
Now both asset markets are falling significantly with little signs of recovery in houses and plenty of signs for weakness in stocks.
U.S. Housing Starts and Dow Industrials Mid 1970’s Early 1980’s Now The world has been through cyclical bears within structural bull markets in Fixed
Income and Assets markets (stocks and houses) for too long. It has effectively been on steroids for 25+ years and now we are seeing both major asset
markets falling together for the first time since the early 1980’s (arguably as the Dow ONLY fell 24%) if not the mid 1970’s. We believe a structural turn
has taken place in
• Fixed Income with yields heading higher • Houses which remain depressed at best, and • Stocks which look very weak on the multi decade charts Credit
remains unavailable and chaos resumes. The only currency that is being used as a real safe haven is gold which we believe can continue to shine both in a
deflationary and inflationary environment. We firmly stick with our long term view that Gold can rally as far as $2,000+ We also reiterate that there is a
significant risk of the S&P 500 falling to 360.
The world over the centuries has gone through difficult periods and while that does not change, the world over the last 20 – 30 years is looking like a
very different place.
This is crazy right? Go back and look at those charts
Market Commentary
3
CitiFX Technicals
06 March 2009
CitiFX® Value Added Services & Products
13 January 2009
Stocks to track lower, even Gold Stocks in danger if HUI goes below 250
Captain Hook.
"Unfortunately everything else is all down hill from there however, with a collapsing ratio on the Russell 2000 (RUT) suggestive small caps will not enjoy much of a rally at all, reflected in Figure 9. In terms of ratio related analyses, of which I will comment further later this week, having large caps continue to outperform small stocks will confirm the bearish picture taking things into spring if such a profile is maintained. So, it will be interesting to see if the collapse in the RUT’s put / call ratio in December was only a reflection of January Effect related positioning by small investors, or not. Continued low readings in the Triple Q (QQQQ) are suggestive this might be the case, as seen in Figure 8. If this condition is corrected in February after a disappointing performance this month however, such an outcome would provide fuel to extend the rally in stocks into April in mirroring the 1929 / 1930 post crash sequence.
And we are hoping for a change in heart amongst crude oil and precious metals investors post options expiry next week as well, where speculators have never been more bullish on the former, which is now evidently rubbing off on the later group due to gold and silver equities outperforming since November. This is evidenced in last week’s turn lower in the Philadelphia Gold And Silver Index’s (XAU) put / call ratio (see Figure 13), which again, is at least short-term bearish if not reversed quickly. If not, the rotation guys will continue to spin out of precious metals, which if accompanied by a continued reversal in the XAU’s put / call ratio, could spell real trouble if traction is not regained prior to April given larger degree sequential considerations. (i.e. the larger degree correction higher in stocks is anticipated to fade as spring is sprung.) Further to this, we are also watching for a reversal lower in the Amex Gold Miner’s ETF (GDX) (see Figure 12) as well, which would be particularly bearish considering readings never made it above unity.
In translating above perspectives into an action plan of what you should do for now then, without a doubt both the energies and precious metals should be faded immediately until more is known post expiry on the 16th. (Note: It’s not the 18th as the good people [heavy on the sarcasm] over at Microsoft would have you believe.) And while continued strength in the broads and talk of escalating tensions in the Middle East could maintain a bid in crude temporarily, it has been my experience playing with fire will burn you, so unless you enjoy such outcomes, the risk associated with long positions in energy related ETF’s knowing speculators have never been more bullish on oil should be considered untenable, and avoided for now. Again, things could change post expiry on the 16th, but for now, caution is warranted.
In terms of precious metals shares, in using them as a leading indicator for larger degree moves in the sector, watch for the December 22nd lows to be taken out, where if such an outcome does in fact take place, it will be possible to apply bearish counts to the larger sequence(s) (zigzags) across the sector coming out of the November lows. For the XAU, this would be 107.56, which as you will remember from recent analysis associated with the monthly plot, has now become support, formerly being trend-line resistance. And for the Amex Gold Bugs Index (HUI), this number is 263.59. Here, if this support is taken out, followed by a plunge through the large round number at 250, then a trip down to the 200 area would likely be in store, at a minimum. It could of course get worse than this if speculators were to become increasingly bullish during the drop, and the same was to return to broad market sentiment."
"Unfortunately everything else is all down hill from there however, with a collapsing ratio on the Russell 2000 (RUT) suggestive small caps will not enjoy much of a rally at all, reflected in Figure 9. In terms of ratio related analyses, of which I will comment further later this week, having large caps continue to outperform small stocks will confirm the bearish picture taking things into spring if such a profile is maintained. So, it will be interesting to see if the collapse in the RUT’s put / call ratio in December was only a reflection of January Effect related positioning by small investors, or not. Continued low readings in the Triple Q (QQQQ) are suggestive this might be the case, as seen in Figure 8. If this condition is corrected in February after a disappointing performance this month however, such an outcome would provide fuel to extend the rally in stocks into April in mirroring the 1929 / 1930 post crash sequence.
And we are hoping for a change in heart amongst crude oil and precious metals investors post options expiry next week as well, where speculators have never been more bullish on the former, which is now evidently rubbing off on the later group due to gold and silver equities outperforming since November. This is evidenced in last week’s turn lower in the Philadelphia Gold And Silver Index’s (XAU) put / call ratio (see Figure 13), which again, is at least short-term bearish if not reversed quickly. If not, the rotation guys will continue to spin out of precious metals, which if accompanied by a continued reversal in the XAU’s put / call ratio, could spell real trouble if traction is not regained prior to April given larger degree sequential considerations. (i.e. the larger degree correction higher in stocks is anticipated to fade as spring is sprung.) Further to this, we are also watching for a reversal lower in the Amex Gold Miner’s ETF (GDX) (see Figure 12) as well, which would be particularly bearish considering readings never made it above unity.
In translating above perspectives into an action plan of what you should do for now then, without a doubt both the energies and precious metals should be faded immediately until more is known post expiry on the 16th. (Note: It’s not the 18th as the good people [heavy on the sarcasm] over at Microsoft would have you believe.) And while continued strength in the broads and talk of escalating tensions in the Middle East could maintain a bid in crude temporarily, it has been my experience playing with fire will burn you, so unless you enjoy such outcomes, the risk associated with long positions in energy related ETF’s knowing speculators have never been more bullish on oil should be considered untenable, and avoided for now. Again, things could change post expiry on the 16th, but for now, caution is warranted.
In terms of precious metals shares, in using them as a leading indicator for larger degree moves in the sector, watch for the December 22nd lows to be taken out, where if such an outcome does in fact take place, it will be possible to apply bearish counts to the larger sequence(s) (zigzags) across the sector coming out of the November lows. For the XAU, this would be 107.56, which as you will remember from recent analysis associated with the monthly plot, has now become support, formerly being trend-line resistance. And for the Amex Gold Bugs Index (HUI), this number is 263.59. Here, if this support is taken out, followed by a plunge through the large round number at 250, then a trip down to the 200 area would likely be in store, at a minimum. It could of course get worse than this if speculators were to become increasingly bullish during the drop, and the same was to return to broad market sentiment."
24 November 2008
Market down till Feb 09 ~ forced selling
Down in the morning, up in the afternoon. Or is it the other way around? The topsy-turvy stock market is tough to read.
In the last year, the Dow Jones Industrial Average has briefly been over 13,000 and below 8,000. The past month has felt like the Cyclone roller coaster on Brooklyn's Coney Island -- lots of ups and downs, the whole rickety thing feeling like it's going to crash at any minute.
Great investors are taught to listen to the market. Each tick of the tape has something to say about expectations for growth, inflation, policy changes and looming recessions. The stock market is like a giant mass of pulsing plasma doing price discovery and a game of hot potato, getting stocks into the correct hands with the right risk profile. It's way too big for any one person to manipulate, let alone touch directly. Instead, millions of us provide input with our buying and selling decisions.
When it's at its most efficient, with buyers and sellers neatly matched up at the right price, it's a pretty good predictor. The Crash of 1929 announced a recession, and the wake-up call unheeded might have caused many of the bad policies leading to the Great Depression. The Crash of 1987? Not so much.
You see, the market is a great manipulator. In September, the Dow dropped 700 points intraday after the House of Representatives voted down the Treasury's TARP bank-rescue bill. Spooked, the House passed the bill the next week. Or how about this? The Dow was up 300 points on Election Day applauding an Obama victory and then down 1,600 points since.
The market can also be a bold-faced liar. On Jan. 22, the Fed announced an emergency 75-basis-point rate cut in response to huge drops in European markets. A few days later, it came out that a rogue trader at Société Générale lost them $7 billion and the bank was unwinding his positions. Oops.
So which is it now: an efficient mechanism or a manipulating liar? Should you listen to it warning of doom or anticipating renewal? I'd say stick wax in your ears and don't listen to the market until February.
Don't get me wrong. The freezing of the credit markets is wreaking havoc on the world economy. Corporate profits are dropping. Central banks are fighting off deflation and may not turn off the spigots fast enough -- which could ignite runaway inflation. But because of the credit mess, I am convinced the stock market is at its least efficient today. Don't read too much into any move. Here are the five biggest dislocations taking place:
- Tax-loss selling: Whenever you have a loss in a stock -- and who doesn't -- it's always tax smart to sell it, take a tax loss and either buy something similar or wait 30 days and buy the original one back. December can be an ugly month of indiscriminate selling. The December effect will be huge this year.
- Mutual-fund redemptions: Mutual funds are also dumped for tax losses. When the stock market is down in the morning, it's usually because of mutual-fund redemptions.
Fidelity's giant Magellan fund, down 56%, is one of many in the $6 trillion stock-fund business having an awful year. As investors call or click to get out of these funds, Fidelity and the others have to unload shares the next morning to raise cash. This forced-selling overwhelms the system. New York Stock Exchange specialists, who are supposed to maintain an orderly market, stop buying and back away. You get huge drops, which can unnerve even more investors and cause them to redeem.
- Mutual fund cap-gain distributions: To make matters worse, in December mutual funds do capital-gains distributions. In a down year like 2008, you would think there are no taxes to pay. Think again. Legg Mason's Value Trust, run by Bill Miller, outperformed the market for 15 years by buying many "unvalue" names like Amazon. As investors redeem, he is forced to sell many of these stocks originally purchased at very low prices, triggering huge capital gains in a year his fund is down 62%. You can almost guarantee investors also will sell more of these funds to pay their unexpected tax bill.
- Hedge-fund redemptions: Instead of overnight selling like mutual funds, hedge funds typically require 45 days' notice for investors to get out of a fund. They've been furiously selling since September to raise cash to pay investors. This usually shows up as a set of stocks that just go down and down and down with no obvious explanation.
Rubbing salt in hedge-fund wounds is the fact that Lehman Brothers was a prime broker to many hedge funds, holding their shares. While Lehman's bankruptcy was not a problem in the U.S., in England the policy is to freeze accounts until the mess can be sorted out. There are billions in assets locked in this bankruptcy, and hedge funds are forced to sell positions in the U.S. and elsewhere to raise cash, exacerbating the downside here.
More from Yahoo! Finance:
By the way, when hedge funds are down for the year, they work practically for free until they make up the loss. We'll see hedge funds close and stocks liquidated as -- no surprise -- hedge-fund managers like to get paid.
- Margin calls: Whenever stocks go down sharply, you quickly find who owns them with debt. We have seen spectacular margin calls, a requirement for more capital to cover share losses. Chesapeake Energy CEO Aubrey McClendon unloaded 33 million shares to cover losses. Viacom CEO Sumner Redstone had a forced sale of $400 million in Viacom and CBS shares because of a margin call on other stocks. You can bet many not-so-public margin calls are behind many huge price drops. These usually take place in the last 30 minutes of trading.
So won't January be alright once these dislocations weighing on the market are lifted? The January effect is supposed to be positive.
Well, often money managers are fired at the end of disastrous years. A new manager comes in, looks at the existing positions and dumps them all and remakes the portfolio with new stocks that he likes, thus generating more selling. My favorite Wall Street adage suggests that the stock market trades to inflict the maximum amount of pain. Remember, you can only ignore the stock market for so long. Once everyone thinks it can only go down . . . it might go up.
In the last year, the Dow Jones Industrial Average has briefly been over 13,000 and below 8,000. The past month has felt like the Cyclone roller coaster on Brooklyn's Coney Island -- lots of ups and downs, the whole rickety thing feeling like it's going to crash at any minute.
Great investors are taught to listen to the market. Each tick of the tape has something to say about expectations for growth, inflation, policy changes and looming recessions. The stock market is like a giant mass of pulsing plasma doing price discovery and a game of hot potato, getting stocks into the correct hands with the right risk profile. It's way too big for any one person to manipulate, let alone touch directly. Instead, millions of us provide input with our buying and selling decisions.
When it's at its most efficient, with buyers and sellers neatly matched up at the right price, it's a pretty good predictor. The Crash of 1929 announced a recession, and the wake-up call unheeded might have caused many of the bad policies leading to the Great Depression. The Crash of 1987? Not so much.
You see, the market is a great manipulator. In September, the Dow dropped 700 points intraday after the House of Representatives voted down the Treasury's TARP bank-rescue bill. Spooked, the House passed the bill the next week. Or how about this? The Dow was up 300 points on Election Day applauding an Obama victory and then down 1,600 points since.
The market can also be a bold-faced liar. On Jan. 22, the Fed announced an emergency 75-basis-point rate cut in response to huge drops in European markets. A few days later, it came out that a rogue trader at Société Générale lost them $7 billion and the bank was unwinding his positions. Oops.
So which is it now: an efficient mechanism or a manipulating liar? Should you listen to it warning of doom or anticipating renewal? I'd say stick wax in your ears and don't listen to the market until February.
Don't get me wrong. The freezing of the credit markets is wreaking havoc on the world economy. Corporate profits are dropping. Central banks are fighting off deflation and may not turn off the spigots fast enough -- which could ignite runaway inflation. But because of the credit mess, I am convinced the stock market is at its least efficient today. Don't read too much into any move. Here are the five biggest dislocations taking place:
- Tax-loss selling: Whenever you have a loss in a stock -- and who doesn't -- it's always tax smart to sell it, take a tax loss and either buy something similar or wait 30 days and buy the original one back. December can be an ugly month of indiscriminate selling. The December effect will be huge this year.
- Mutual-fund redemptions: Mutual funds are also dumped for tax losses. When the stock market is down in the morning, it's usually because of mutual-fund redemptions.
Fidelity's giant Magellan fund, down 56%, is one of many in the $6 trillion stock-fund business having an awful year. As investors call or click to get out of these funds, Fidelity and the others have to unload shares the next morning to raise cash. This forced-selling overwhelms the system. New York Stock Exchange specialists, who are supposed to maintain an orderly market, stop buying and back away. You get huge drops, which can unnerve even more investors and cause them to redeem.
- Mutual fund cap-gain distributions: To make matters worse, in December mutual funds do capital-gains distributions. In a down year like 2008, you would think there are no taxes to pay. Think again. Legg Mason's Value Trust, run by Bill Miller, outperformed the market for 15 years by buying many "unvalue" names like Amazon. As investors redeem, he is forced to sell many of these stocks originally purchased at very low prices, triggering huge capital gains in a year his fund is down 62%. You can almost guarantee investors also will sell more of these funds to pay their unexpected tax bill.
- Hedge-fund redemptions: Instead of overnight selling like mutual funds, hedge funds typically require 45 days' notice for investors to get out of a fund. They've been furiously selling since September to raise cash to pay investors. This usually shows up as a set of stocks that just go down and down and down with no obvious explanation.
Rubbing salt in hedge-fund wounds is the fact that Lehman Brothers was a prime broker to many hedge funds, holding their shares. While Lehman's bankruptcy was not a problem in the U.S., in England the policy is to freeze accounts until the mess can be sorted out. There are billions in assets locked in this bankruptcy, and hedge funds are forced to sell positions in the U.S. and elsewhere to raise cash, exacerbating the downside here.
More from Yahoo! Finance:
By the way, when hedge funds are down for the year, they work practically for free until they make up the loss. We'll see hedge funds close and stocks liquidated as -- no surprise -- hedge-fund managers like to get paid.
- Margin calls: Whenever stocks go down sharply, you quickly find who owns them with debt. We have seen spectacular margin calls, a requirement for more capital to cover share losses. Chesapeake Energy CEO Aubrey McClendon unloaded 33 million shares to cover losses. Viacom CEO Sumner Redstone had a forced sale of $400 million in Viacom and CBS shares because of a margin call on other stocks. You can bet many not-so-public margin calls are behind many huge price drops. These usually take place in the last 30 minutes of trading.
So won't January be alright once these dislocations weighing on the market are lifted? The January effect is supposed to be positive.
Well, often money managers are fired at the end of disastrous years. A new manager comes in, looks at the existing positions and dumps them all and remakes the portfolio with new stocks that he likes, thus generating more selling. My favorite Wall Street adage suggests that the stock market trades to inflict the maximum amount of pain. Remember, you can only ignore the stock market for so long. Once everyone thinks it can only go down . . . it might go up.
4 November 2008
Why the recent violent gyrations?
Is "synthesized unwinding of yen-carry trades" the answer? (October 31, 2008)
The recent rapid fire giant gyrations of US stock markets are certain to make observers dizzy and disoriented. Investors large and small are watching helplessly the sever pounding on their portfolios with intermittent short reliefs of the pressure. Most investors are frozen on the track afraid of making any move. Readers of this website must be eager to know why such wild gyrations and when the bottom will be reached. We certainly share the same desire and are constantly looking for the answer. Our findings will be reported on this new series of discussion titled “US Stock Market” until the bottom of the bear market is reached. The first installation of this series should have been Comment 61 though it did not carry the title of "US Stock Market (1)". That is the reason why this comment carries the title "US Stock Market (2)".
Major financial media do not provide much help in our quest to entangle the mystery of the stock market as will be discussed later. We should understand that major financial media are by nature mouth pieces of Wall Street, but not objective analysts of the actual market. Wall Street makes money when investors are euphoric and enthusiastically buy stocks whereas rainy days of Wall Street descend when investors large and small are frozen from fear like in the present situation. That is why major financial media are always biased toward bullish sentiments and urge investors to buy stocks. To make matters worse many on Wall Street are Euro-centric. For example, when they talk about strong or weak Dollar, they always mean strong or weak Dollar versus Euro and nothing else. When they encounter something that they do not have an answer, they always point their finger toward Europe for good or bad, though the slow moving Europe has failed to play any leading role throughout the drama of repeatedly forming and bursting bubbles under this ad hoc globalization scheme, which has been pushed strongly by all the US administrations since the Reagan era as discussed in article 10. Besides the Euro-centric crowd there is also a China-centric crowd that forms the core of so called “decoupling theorists”. This China-centric crowd wishes that China will rise like the superman to combat the dragon of global financial loss, that may well run into tens of trillions of dollars, by wielding its meager 1.8 trillion dollars of foreign currency reserve. In the valley between the Euro-centric mirage and China-centric fantasy lies the key, that is, Japanese Yen, to our quest. Astute readers have probably noticed already that in the recent market gyrations US stock prices as a whole are closely connected with the movement of Yen-Dollar exchange rate. When US stocks fall, Dollar falls against Yen, and when US stocks rise, Dollar rises versus Yen. The Wall Street Journal online and Bloomberg.com carried the simplistic view that when US stocks rise Dollar will go up and when US stocks fall Dollar will fall. Most guests on CNBC TV also expressed the same simplistic view, but a few mentioned the yen-carry trades as the culprit. The simplistic view is flatly wrong as will be discussed in the following paragraph. Even the view of yen-carry trade is not correct in the exact sense, though we ourselves have committed similar sin in Comment 61 by casually talking about yen-carry trades. The case of yen-carry trades will be analyzed in detail after we deal with the simplistic view on major financial media first.
The logic behind the simplistic view is as follows. When US stocks fall, Japanese investors are scared and dump their holdings. Those Japanese investors will convert the dollars obtained from dumping of their stock holdings into Yen and run back to Japan. When US stocks rise, those Japanese investors will rush back into US market by selling their Yen for Dollar and thus creating the tight correlation between US stock prices and Yen-Dollar exchange rate. If this argument is true then it should also hold for European investors, and Euro should rise and fall against Dollar as US stocks rise and fall respectively. However, actual data show that when US stock prices fall and Dollar declines big against Yen, Euro always fall sharply against Dollar but not to rise as the simplistic view should have claimed. When US stocks rise and Dollar strengthens vs. Yen, then Euro becomes stronger against Dollar, again just opposite from the expectations of the simplistic view. This evidence alone should be already enough to dispel the simplistic view. Furthermore we can analyze the amount of Dollar in the hands of Japanese nationals to show the invalidity of the simplistic view. There are around 2 trillion dollars that have flowed into the hands of Japanese from the persistent trade surplus of Japan. About half of those dollars are in the hand of Japanese Government and are invested in short-term US treasuries. A large chunk of the remaining dollars had flown through the hands of large Japanese exporters but have been invested in the factories in US, China and around the world. Japanese life insurance companies and some Japanese individuals are also large dollar holders. This group are after higher yields in dollar denominated debt instruments since in Japan the yields are near zero since the middle of 1995. Most part of the remaining dollars are held by large Japanese trading houses and banks in the form of liquid assets. Japan is also not known as a hub for hedge funds. The actual Japanese money that jumps in and out of US stock markets cannot not be so large as to be able to cause giant swings in Yen-Dollar exchange rate. If the holders of the simplistic view are true to themselves, they must believe that the Japanese players in US stock market hold such a large sum of dollars as to be able to cause wild swings in Yen-Dollar exchange rates, and then they must conclude also that this huge sum of Japanese money is causing the wild gyrations in US stock markets too as it moves in and out of US markets. In that sense we should call the holders of the simplistic view the Japan-centric crowd besides Euro-centric and China-centric crowds.
Now let us turn our attention to yen-carry trades. In order to talk about the issues surrounding yen-carry trades, we need to investigate how yen-carry trades actually work. Let us pretend to be a hedge fund conducting yen-carry trades. Suppose the Yen-Dollar exchange rate is 100 Yen/Dollar, and we borrow from a multinational bank one billion dollar worth of Japanese Yen. We dump the Yen for Dollar and use this one billion dollars to buy US stocks. Now suppose Dollar drops to 95 Yen/Dollar. Irrespective of the movement of US stocks, we are already suffering 5% loss on the currency front since we have borrowed cheap Yen but now we need to repay with more expansive Yen. Thus yen-carry trades are very sensitive to the level of Yen-Dollar exchange rate. Any time when Dollar falls below the level where yen-carry trades were installed, those yen-carry trades will be unwound by selling US stocks, converting Dollar into Yen and repaying the Yen loan. The unwinding of a large amount of yen-carry trades will cause Dollar to drop further versus Yen as well as a sinking spell of US stocks. The major players of yen-carry trades are American and European hedge funds, not Japanese entities. Until very recently Dollar has been trading above the line of 105 Yen/Dollar most of the time since the middle of 1995. Majority of yen-carry trades were installed above this 105 Yen/Dollar line. When Dollar fell below 105 Yen/Dollar line in late September, the massive unwinding of yen-carry trades must have occurred and pushed both Dollar and US stocks sharply lower. By early October most of the existing yen-carry trades should have been unwound already. The wild gyrations of both US stocks and Yen-Dollar exchange rate since Oct. 7, that is our concern, cannot be due to the unwinding of plain vanilla yen-carry trades since not much of such ordinary yen-carry trades still existed by that time. We suspect that a new kind of strategy, called “synthesized unwinding of yen-carry trades” by us, is the source of havoc since Oct. 7. The strategy will be discussed below in detail.
The unwinding of a yen-carry trade can be abstracted into two steps, they are, the sell of US stocks and the buy of Yen. These two steps can be synthesized by selling stock index futures and buying Yen futures. The new strategy is to conduct those two trades almost simultaneously to simulate an unwinding of a yen-carry trade. There is no need to have a pre-installed yen-carry trade here. The next question is what are the advantages and disadvantages of such a trade. The aim of this kind of trade is to anticipate a falling stock market and profit from the short side of stock index futures. The buy of Yen futures is aimed to push Dollar sharply lower in order to panic Japanese entities that hold dollars and induce them to sell those dollars for Yen and thus to push Dollar down further. If the attempt is successful, this strategy will be a win-win trade. However, if the market goes against the trade, it will be a lose-lose disaster. Under the current unsettled financial market condition and as deleverage has become the order of the day, even most venturesome hedge funds will be hesitant to engage in such high risky gambling unless it is absolutely necessary. The natural candidate for this kind of strategy are the already distressed hedge funds. Quite a few hedge funds have jumped back to US stock market too early and have sustained heavy losses caught in the subsequent down draft of the market. Their unhappy investors are expected to withdraw substantial sums from those hedge funds at the next quarterly redemption date, November 15. The only way for those distressed hedge funds to raise enough cash to meet the expected onslaught of redemptions is to dump their stock holdings. They know very well that their large scale dumping will send the stock market sharply lower and will cause them more losses. Thus they will try the strategy of synthesized unwinding of yen-carry trades. Those distressed hedge funds will accumulate short positions of stock index futures prior to their destined date of dumping their stocks at every chance when stock prices jump temporarily. When their dumping of actual stocks starts, they will buy large number of Yen future contracts at the same time. This double punches will send both US stocks and Dollar fall like an avalanche. The awesome shock wave of the avalanche will panic substantial number of investors frozen in the stock market from fear and causes them to dump their holdings as well. The same argument applies to the dollars in the hands of various Japanese entities as well. The joining of those dumb money will turn the avalanche into a landslide. The short sell of stock index futures will protect instigating hedge funds until the end of their stock dumping by canceling out the losses from dumping of their stocks whereas during the down leg of the land slide, those short positions will actually generate net profits for the hedge funds. Same thing can be said for their long positions in Yen futures. By this win-win game the distressed hedge funds hope to net some profits to cancel out a part of their prior losses. The sharp down turn of both stocks and Dollar from the stretch of Oct. 20 to Oct. 27 probably was the result of such strategy of synthesized unwinding of yen-carry trades.
There are two factors that will stop the landslide triggered by synthesized unwinding of yen-carry trades. The first factor is the threat of intervention by Japanese Government. Japan is determined to preserve its remaining export industry so the sharply higher Yen vs. Dollar becomes a severe threat. However, Japanese Government has reasons to be hesitant in the currency market intervention. The first is the worry about international condemnation at the time G7 is repeatedly criticizing China for its currency market manipulation to prevent rapid appreciation of Chinese Yuan. However, Facing the relent less pounding on Dollar vs. Yen, G7 gave in and issued a joint communique expressing concern about rapid movements of Yen-Dollar exchange rate. This communique is a de facto approval of Japanese Government to intervene in the currency market in order to stop further fall of Dollar vs. Yen. Another hesitation of Japanese Government about the currency market intervention must be the cost of intervention. In the period from the fall of 2003 to the spring of 2004, Japanese Government bought up 400 billion dollars to prevent Dollar to fall through the line of 100 Yen/Dollar. As has been mentioned in Comment 61, Japanese Government needs to buy up 1 trillion dollars in order to keep the rising Yen checked at the level of 100 Yen/Dollar. That probably was the reason why Japanese Government did nothing when Dollar fell through 100 Yen/Dollar and only signaled its intention to intervene when Dollar fell close to 90 Yen/Dollar on Oct. 27. The second factor that stopped the land slide is the installation of new yen-carry trades. As discussed before, yen-carry trades need to be installed at lowest possible Dollar value vs. Yen. With Japanese Government signaling that 90 Yen/Dollar is its bottom line, the Yen-Dollar level close to 90 Yen/Dollar becomes the ideal point to install new yen-carry trades and a large wave of yen-carry trades probably did be installed. Sensing the turn of the tide, the distressed hedge funds that instigated the land slide using the strategy of synthesized unwinding of yen-carry trades certainly will not stand by idly to see their hard earned profits melting away. They will join the foray by closing out their short positions in stock index futures and selling out their Yen futures as fast as they can. Thus the joined forces of the installation of new yen-carry trades and the unwinding of those “synthesized unwinding of yen-carry trades” sent both the US stock market and Dollar to a rapid ascend as witnessed on Oct. 28. Three days after the giant surge of Oct. 28, on Oct. 31 when the writing of this comment is in progress, the momentum of that giant surge is still felt throughout the markets.
Looking ahead, we should note that yen-carry trades are quick to be installed and quick to be unwound. If those newly installed yen-carry trades decide to take profit and unwind, both US stocks and Dollar will suddenly tumble again. Also not sure is whether the needs of distressed hedge funds to dump their stock holdings has been exhausted. We better prepare to see such wild gyrations to continue for a while. We are not sure that the pattern of the wild gyrations in recent weeks is a bottoming out pattern. Before we can be certain we will consider the giant pattern on the chart just as a huge consolidation pattern. It means there are substantial chance the stock prices will break downward out of the consolidation pattern and start to search for a new bottom.
The recent rapid fire giant gyrations of US stock markets are certain to make observers dizzy and disoriented. Investors large and small are watching helplessly the sever pounding on their portfolios with intermittent short reliefs of the pressure. Most investors are frozen on the track afraid of making any move. Readers of this website must be eager to know why such wild gyrations and when the bottom will be reached. We certainly share the same desire and are constantly looking for the answer. Our findings will be reported on this new series of discussion titled “US Stock Market” until the bottom of the bear market is reached. The first installation of this series should have been Comment 61 though it did not carry the title of "US Stock Market (1)". That is the reason why this comment carries the title "US Stock Market (2)".
Major financial media do not provide much help in our quest to entangle the mystery of the stock market as will be discussed later. We should understand that major financial media are by nature mouth pieces of Wall Street, but not objective analysts of the actual market. Wall Street makes money when investors are euphoric and enthusiastically buy stocks whereas rainy days of Wall Street descend when investors large and small are frozen from fear like in the present situation. That is why major financial media are always biased toward bullish sentiments and urge investors to buy stocks. To make matters worse many on Wall Street are Euro-centric. For example, when they talk about strong or weak Dollar, they always mean strong or weak Dollar versus Euro and nothing else. When they encounter something that they do not have an answer, they always point their finger toward Europe for good or bad, though the slow moving Europe has failed to play any leading role throughout the drama of repeatedly forming and bursting bubbles under this ad hoc globalization scheme, which has been pushed strongly by all the US administrations since the Reagan era as discussed in article 10. Besides the Euro-centric crowd there is also a China-centric crowd that forms the core of so called “decoupling theorists”. This China-centric crowd wishes that China will rise like the superman to combat the dragon of global financial loss, that may well run into tens of trillions of dollars, by wielding its meager 1.8 trillion dollars of foreign currency reserve. In the valley between the Euro-centric mirage and China-centric fantasy lies the key, that is, Japanese Yen, to our quest. Astute readers have probably noticed already that in the recent market gyrations US stock prices as a whole are closely connected with the movement of Yen-Dollar exchange rate. When US stocks fall, Dollar falls against Yen, and when US stocks rise, Dollar rises versus Yen. The Wall Street Journal online and Bloomberg.com carried the simplistic view that when US stocks rise Dollar will go up and when US stocks fall Dollar will fall. Most guests on CNBC TV also expressed the same simplistic view, but a few mentioned the yen-carry trades as the culprit. The simplistic view is flatly wrong as will be discussed in the following paragraph. Even the view of yen-carry trade is not correct in the exact sense, though we ourselves have committed similar sin in Comment 61 by casually talking about yen-carry trades. The case of yen-carry trades will be analyzed in detail after we deal with the simplistic view on major financial media first.
The logic behind the simplistic view is as follows. When US stocks fall, Japanese investors are scared and dump their holdings. Those Japanese investors will convert the dollars obtained from dumping of their stock holdings into Yen and run back to Japan. When US stocks rise, those Japanese investors will rush back into US market by selling their Yen for Dollar and thus creating the tight correlation between US stock prices and Yen-Dollar exchange rate. If this argument is true then it should also hold for European investors, and Euro should rise and fall against Dollar as US stocks rise and fall respectively. However, actual data show that when US stock prices fall and Dollar declines big against Yen, Euro always fall sharply against Dollar but not to rise as the simplistic view should have claimed. When US stocks rise and Dollar strengthens vs. Yen, then Euro becomes stronger against Dollar, again just opposite from the expectations of the simplistic view. This evidence alone should be already enough to dispel the simplistic view. Furthermore we can analyze the amount of Dollar in the hands of Japanese nationals to show the invalidity of the simplistic view. There are around 2 trillion dollars that have flowed into the hands of Japanese from the persistent trade surplus of Japan. About half of those dollars are in the hand of Japanese Government and are invested in short-term US treasuries. A large chunk of the remaining dollars had flown through the hands of large Japanese exporters but have been invested in the factories in US, China and around the world. Japanese life insurance companies and some Japanese individuals are also large dollar holders. This group are after higher yields in dollar denominated debt instruments since in Japan the yields are near zero since the middle of 1995. Most part of the remaining dollars are held by large Japanese trading houses and banks in the form of liquid assets. Japan is also not known as a hub for hedge funds. The actual Japanese money that jumps in and out of US stock markets cannot not be so large as to be able to cause giant swings in Yen-Dollar exchange rate. If the holders of the simplistic view are true to themselves, they must believe that the Japanese players in US stock market hold such a large sum of dollars as to be able to cause wild swings in Yen-Dollar exchange rates, and then they must conclude also that this huge sum of Japanese money is causing the wild gyrations in US stock markets too as it moves in and out of US markets. In that sense we should call the holders of the simplistic view the Japan-centric crowd besides Euro-centric and China-centric crowds.
Now let us turn our attention to yen-carry trades. In order to talk about the issues surrounding yen-carry trades, we need to investigate how yen-carry trades actually work. Let us pretend to be a hedge fund conducting yen-carry trades. Suppose the Yen-Dollar exchange rate is 100 Yen/Dollar, and we borrow from a multinational bank one billion dollar worth of Japanese Yen. We dump the Yen for Dollar and use this one billion dollars to buy US stocks. Now suppose Dollar drops to 95 Yen/Dollar. Irrespective of the movement of US stocks, we are already suffering 5% loss on the currency front since we have borrowed cheap Yen but now we need to repay with more expansive Yen. Thus yen-carry trades are very sensitive to the level of Yen-Dollar exchange rate. Any time when Dollar falls below the level where yen-carry trades were installed, those yen-carry trades will be unwound by selling US stocks, converting Dollar into Yen and repaying the Yen loan. The unwinding of a large amount of yen-carry trades will cause Dollar to drop further versus Yen as well as a sinking spell of US stocks. The major players of yen-carry trades are American and European hedge funds, not Japanese entities. Until very recently Dollar has been trading above the line of 105 Yen/Dollar most of the time since the middle of 1995. Majority of yen-carry trades were installed above this 105 Yen/Dollar line. When Dollar fell below 105 Yen/Dollar line in late September, the massive unwinding of yen-carry trades must have occurred and pushed both Dollar and US stocks sharply lower. By early October most of the existing yen-carry trades should have been unwound already. The wild gyrations of both US stocks and Yen-Dollar exchange rate since Oct. 7, that is our concern, cannot be due to the unwinding of plain vanilla yen-carry trades since not much of such ordinary yen-carry trades still existed by that time. We suspect that a new kind of strategy, called “synthesized unwinding of yen-carry trades” by us, is the source of havoc since Oct. 7. The strategy will be discussed below in detail.
The unwinding of a yen-carry trade can be abstracted into two steps, they are, the sell of US stocks and the buy of Yen. These two steps can be synthesized by selling stock index futures and buying Yen futures. The new strategy is to conduct those two trades almost simultaneously to simulate an unwinding of a yen-carry trade. There is no need to have a pre-installed yen-carry trade here. The next question is what are the advantages and disadvantages of such a trade. The aim of this kind of trade is to anticipate a falling stock market and profit from the short side of stock index futures. The buy of Yen futures is aimed to push Dollar sharply lower in order to panic Japanese entities that hold dollars and induce them to sell those dollars for Yen and thus to push Dollar down further. If the attempt is successful, this strategy will be a win-win trade. However, if the market goes against the trade, it will be a lose-lose disaster. Under the current unsettled financial market condition and as deleverage has become the order of the day, even most venturesome hedge funds will be hesitant to engage in such high risky gambling unless it is absolutely necessary. The natural candidate for this kind of strategy are the already distressed hedge funds. Quite a few hedge funds have jumped back to US stock market too early and have sustained heavy losses caught in the subsequent down draft of the market. Their unhappy investors are expected to withdraw substantial sums from those hedge funds at the next quarterly redemption date, November 15. The only way for those distressed hedge funds to raise enough cash to meet the expected onslaught of redemptions is to dump their stock holdings. They know very well that their large scale dumping will send the stock market sharply lower and will cause them more losses. Thus they will try the strategy of synthesized unwinding of yen-carry trades. Those distressed hedge funds will accumulate short positions of stock index futures prior to their destined date of dumping their stocks at every chance when stock prices jump temporarily. When their dumping of actual stocks starts, they will buy large number of Yen future contracts at the same time. This double punches will send both US stocks and Dollar fall like an avalanche. The awesome shock wave of the avalanche will panic substantial number of investors frozen in the stock market from fear and causes them to dump their holdings as well. The same argument applies to the dollars in the hands of various Japanese entities as well. The joining of those dumb money will turn the avalanche into a landslide. The short sell of stock index futures will protect instigating hedge funds until the end of their stock dumping by canceling out the losses from dumping of their stocks whereas during the down leg of the land slide, those short positions will actually generate net profits for the hedge funds. Same thing can be said for their long positions in Yen futures. By this win-win game the distressed hedge funds hope to net some profits to cancel out a part of their prior losses. The sharp down turn of both stocks and Dollar from the stretch of Oct. 20 to Oct. 27 probably was the result of such strategy of synthesized unwinding of yen-carry trades.
There are two factors that will stop the landslide triggered by synthesized unwinding of yen-carry trades. The first factor is the threat of intervention by Japanese Government. Japan is determined to preserve its remaining export industry so the sharply higher Yen vs. Dollar becomes a severe threat. However, Japanese Government has reasons to be hesitant in the currency market intervention. The first is the worry about international condemnation at the time G7 is repeatedly criticizing China for its currency market manipulation to prevent rapid appreciation of Chinese Yuan. However, Facing the relent less pounding on Dollar vs. Yen, G7 gave in and issued a joint communique expressing concern about rapid movements of Yen-Dollar exchange rate. This communique is a de facto approval of Japanese Government to intervene in the currency market in order to stop further fall of Dollar vs. Yen. Another hesitation of Japanese Government about the currency market intervention must be the cost of intervention. In the period from the fall of 2003 to the spring of 2004, Japanese Government bought up 400 billion dollars to prevent Dollar to fall through the line of 100 Yen/Dollar. As has been mentioned in Comment 61, Japanese Government needs to buy up 1 trillion dollars in order to keep the rising Yen checked at the level of 100 Yen/Dollar. That probably was the reason why Japanese Government did nothing when Dollar fell through 100 Yen/Dollar and only signaled its intention to intervene when Dollar fell close to 90 Yen/Dollar on Oct. 27. The second factor that stopped the land slide is the installation of new yen-carry trades. As discussed before, yen-carry trades need to be installed at lowest possible Dollar value vs. Yen. With Japanese Government signaling that 90 Yen/Dollar is its bottom line, the Yen-Dollar level close to 90 Yen/Dollar becomes the ideal point to install new yen-carry trades and a large wave of yen-carry trades probably did be installed. Sensing the turn of the tide, the distressed hedge funds that instigated the land slide using the strategy of synthesized unwinding of yen-carry trades certainly will not stand by idly to see their hard earned profits melting away. They will join the foray by closing out their short positions in stock index futures and selling out their Yen futures as fast as they can. Thus the joined forces of the installation of new yen-carry trades and the unwinding of those “synthesized unwinding of yen-carry trades” sent both the US stock market and Dollar to a rapid ascend as witnessed on Oct. 28. Three days after the giant surge of Oct. 28, on Oct. 31 when the writing of this comment is in progress, the momentum of that giant surge is still felt throughout the markets.
Looking ahead, we should note that yen-carry trades are quick to be installed and quick to be unwound. If those newly installed yen-carry trades decide to take profit and unwind, both US stocks and Dollar will suddenly tumble again. Also not sure is whether the needs of distressed hedge funds to dump their stock holdings has been exhausted. We better prepare to see such wild gyrations to continue for a while. We are not sure that the pattern of the wild gyrations in recent weeks is a bottoming out pattern. Before we can be certain we will consider the giant pattern on the chart just as a huge consolidation pattern. It means there are substantial chance the stock prices will break downward out of the consolidation pattern and start to search for a new bottom.
26 October 2008
29 July 2007
Be wary of buy and Hold
Those receiving conventional buy-and-hold advice from their brokers and advisors should be leery. We referenced Barton Biggs', former Chief Global Strategist with Morgan Stanley, book Hedgehogging in our April 2006 issue, Losers: Why We Invest with Them.
"Secular cycles, both in markets and sectors of the market, make a big investment management firm a very conflicting enterprise to manage if you are a businessperson, because the rational things to do to maximize short-term profitability are exactly the wrong things from both an investment and a long-term profitability point of view. For example, during 2000, even as the bubble was bursting, Morgan Stanley Investment Management, which has a business-dominated management, acted like businessmen: they heavily promoted the underwriting of technology and aggressive growth stock funds because those were the funds the salespeople could sell and that the public would buy. Management was not evil; they were doing what they thought was right. Large amounts of public money were being raised and very quickly lost. Short-term sales profits were collected at the expense of, not only the public, but the firm's long-term credibility and profitability."
Those who are looking for warnings from our "trusted" government officials should consider their track record. On July 12th of this year, U.S. Treasury Secretary Paulson declared, "This is far and away the strongest business economy that I have seen in my lifetime." Several days prior, on July 2nd, he stated, "In terms of housing, most of us believe that we are at or near the bottom."
If the truth is not already obvious to us, history can be instructive. With the help of Dr. Mark Thornton, of the Ludwig Von Mises Institute, one needn't look far to find examples of misleading statements at major market and economic turning points. Paul Warburg, an early advocate of the Federal Reserve, was on the Federal Reserve Board when he made this statement in January of 1930.
"Happily, we have now turned our backs upon the events of this unfortunate event."
Even more incredulously, on November 22nd of 1929, William Green, President of the American Federation of Labor, stated:
"All the factors which make for a quick and speedy industrial and economic recovery are present and evident. The Federal Reserve System is operating, serving as a barrier against financial demoralization. Within a few months industrial conditions will become normal, confidence and stabilization in industry and finance will be restored."
As a final word of warning, we leave you with the words of Dr. Carroll Quigley, a noted historian, former professor of history at Georgetown University, and consultant to the U.S. Defense Department, the Smithsonian Institute, and NASA. His tome, Tragedy and Hope: A History of the World in Our Time was used as a resource in our December 2006 issue: Mind Games.
"All past history shows that espionage has been generally successful and intelligence has been generally a failure. By this I mean that no country had much success in keeping secrets, in the twentieth as in all earlier centuries,but neither has any other country had much success in evaluating or in interpreting the secrets it obtained. The so-called 'surprises' of history have emerged not because other countries did not have the information, but because they refused to believe it. The date of Hitler's attack on the West in May 1940 had been given to the Netherlands by the German Counterintelligence Office as soon as it was decided; the Western countries refused to believe it. The same was true of every one of Hitler's surprises. Stalin was given the date of the German attack on the Soviet Union by a number of informants, including the United States Department of State, but he refused to believe. Both the Germans and Russians had the date of D-Day, but ignored it. The United States had available all the Japanese coded messages, knew that war was about to begin, and that a Japanese fleet with at least four large carriers was loose (and lost) in the Pacific, yet Pearl Harbor was a total surprise."
While the evidence of trouble has just begun to surface in U.S. equity prices, the love affair with credit, as demonstrated by record profits in the banking and brokerage industries, has only made investors, especially large institutional investors, more attached to this bullish run than ever. But, with the continuing contraction in the housing sector, and its impact on borrowing, the early warning signals are blowing.
The following is an excerpt from the email we sent our subscribers last Thursday, July 19th, regarding our latest issue of The Investor's Mind:
"We are releasing this month's Investor's Mind early because a variety of technical indicators are pointing to an end to the bull market run that began in the fall of 2002. I thought it important to release this piece on three high-level financial meetings that have taken place over the last few months, which I believe make it clear that those at the top of the money game have known for some time that the end of this period will bring massive shifts to the global capital markets."
Doug Wakefield
"Secular cycles, both in markets and sectors of the market, make a big investment management firm a very conflicting enterprise to manage if you are a businessperson, because the rational things to do to maximize short-term profitability are exactly the wrong things from both an investment and a long-term profitability point of view. For example, during 2000, even as the bubble was bursting, Morgan Stanley Investment Management, which has a business-dominated management, acted like businessmen: they heavily promoted the underwriting of technology and aggressive growth stock funds because those were the funds the salespeople could sell and that the public would buy. Management was not evil; they were doing what they thought was right. Large amounts of public money were being raised and very quickly lost. Short-term sales profits were collected at the expense of, not only the public, but the firm's long-term credibility and profitability."
Those who are looking for warnings from our "trusted" government officials should consider their track record. On July 12th of this year, U.S. Treasury Secretary Paulson declared, "This is far and away the strongest business economy that I have seen in my lifetime." Several days prior, on July 2nd, he stated, "In terms of housing, most of us believe that we are at or near the bottom."
If the truth is not already obvious to us, history can be instructive. With the help of Dr. Mark Thornton, of the Ludwig Von Mises Institute, one needn't look far to find examples of misleading statements at major market and economic turning points. Paul Warburg, an early advocate of the Federal Reserve, was on the Federal Reserve Board when he made this statement in January of 1930.
"Happily, we have now turned our backs upon the events of this unfortunate event."
Even more incredulously, on November 22nd of 1929, William Green, President of the American Federation of Labor, stated:
"All the factors which make for a quick and speedy industrial and economic recovery are present and evident. The Federal Reserve System is operating, serving as a barrier against financial demoralization. Within a few months industrial conditions will become normal, confidence and stabilization in industry and finance will be restored."
As a final word of warning, we leave you with the words of Dr. Carroll Quigley, a noted historian, former professor of history at Georgetown University, and consultant to the U.S. Defense Department, the Smithsonian Institute, and NASA. His tome, Tragedy and Hope: A History of the World in Our Time was used as a resource in our December 2006 issue: Mind Games.
"All past history shows that espionage has been generally successful and intelligence has been generally a failure. By this I mean that no country had much success in keeping secrets, in the twentieth as in all earlier centuries,but neither has any other country had much success in evaluating or in interpreting the secrets it obtained. The so-called 'surprises' of history have emerged not because other countries did not have the information, but because they refused to believe it. The date of Hitler's attack on the West in May 1940 had been given to the Netherlands by the German Counterintelligence Office as soon as it was decided; the Western countries refused to believe it. The same was true of every one of Hitler's surprises. Stalin was given the date of the German attack on the Soviet Union by a number of informants, including the United States Department of State, but he refused to believe. Both the Germans and Russians had the date of D-Day, but ignored it. The United States had available all the Japanese coded messages, knew that war was about to begin, and that a Japanese fleet with at least four large carriers was loose (and lost) in the Pacific, yet Pearl Harbor was a total surprise."
While the evidence of trouble has just begun to surface in U.S. equity prices, the love affair with credit, as demonstrated by record profits in the banking and brokerage industries, has only made investors, especially large institutional investors, more attached to this bullish run than ever. But, with the continuing contraction in the housing sector, and its impact on borrowing, the early warning signals are blowing.
The following is an excerpt from the email we sent our subscribers last Thursday, July 19th, regarding our latest issue of The Investor's Mind:
"We are releasing this month's Investor's Mind early because a variety of technical indicators are pointing to an end to the bull market run that began in the fall of 2002. I thought it important to release this piece on three high-level financial meetings that have taken place over the last few months, which I believe make it clear that those at the top of the money game have known for some time that the end of this period will bring massive shifts to the global capital markets."
Doug Wakefield
13 June 2007
Stocks to correct 15% by year end
If there is a single salient truth about the U.S. stock market, it
is that 2007 is a record setting year from almost every aspect.
While there are a few rare exceptions that place either 1929 or 2000
in the spotlight instead, our overall impression is that the mania
for stocks appears to be at least as emphatic now as it has ever
been. We have repeatedly illustrated margin debt extremes and the
historically low mutual fund cash-to-assets ratio as evidence, but
the best picture of the continuing mania for stocks remains the
sheer volume of trading. Not only is the volume of trading at a
historic high, the velocity of transactions have exceeded the
previous highs with such ease that one's only choice is the
assumption that a veritable mania is still in progress, and in fact,
never really ended. Apparently, the collapse and bear market that
endured from March 2000 to March 2003 was only a corrective phase to
the greatest stock market mania of all time.
We make the distinction of a "corrective phase" rather than a bear
market due to the observable fact that we cannot find one instance
of back-to-back stock manias in the past. Perhaps the semantics and
definitions do not work for some, but nevertheless, we find it
extremely difficult to dispute that the mania never really ended.
Even at the nadir in 2002, Dollar Trading Volume was still at a
level that equated to a 18.3% rate of growth in velocity from 1995,
when we posit the mania actually commenced. This seven year path
would have been extraordinary sans the final manic peak and
subsequent collapse!
As it now stands, DTV has grown 18.1% from last year's record total
and exceeds the fateful year of 2000 by 28.1%. Compared with Gross
domestic Product and total stock market capitalization, we are close
enough to record extremes to posit the possibility that a similar
outcome to 1929 and 2000 should eventually be at hand.
DTV is more than three times the size of GDP
for only the second time in history.
DTV versus market capitalization is 223%, only nominally lower than
the 228% registered in the Roaring Twenties.
If there is only one salient truth about the stock market today, it
is that the mania remains largely unrecognized by professionals and
the public, who blithely continue without concern, taking larger
risks with greater exposures than ever before, while denying
investments in favor of trading, per se.
We define Speculative Fervor as the one-year differential in DTV
compared with the level of GDP. A market that trades an additional
$2 trillion while GDP rises by 3% is more speculative than a market
that trades an additional $1 trillion while GDP rises the same 3%.
Although Speculative Fervor has not reached the levels registered in
1999 and 2000, this indicator has remained at "Roaring Twenties"
levels for four full years. It is easy to posit that recent high
levels have reinforced the notion that stocks can do no wrong, hence
the game is still played to the hilt. We believe it is imperative
to note that Speculative Fervor remained between +15% to -10% for a
stretch of 64 years (!!!) from 1933 to 1996, equating to the
historic norm. A return to these levels will result in a huge
dénouement for traders and investors. In our view, this outcome is
inevitable. We do not expect an identical collapse such as occurred
from 2000 to 2003, but an initial shock followed by a consistent and
steady disenchantment with the inability of stocks to recover over
the long term.
Stocks are overowned and clearly, overtraded.
is that 2007 is a record setting year from almost every aspect.
While there are a few rare exceptions that place either 1929 or 2000
in the spotlight instead, our overall impression is that the mania
for stocks appears to be at least as emphatic now as it has ever
been. We have repeatedly illustrated margin debt extremes and the
historically low mutual fund cash-to-assets ratio as evidence, but
the best picture of the continuing mania for stocks remains the
sheer volume of trading. Not only is the volume of trading at a
historic high, the velocity of transactions have exceeded the
previous highs with such ease that one's only choice is the
assumption that a veritable mania is still in progress, and in fact,
never really ended. Apparently, the collapse and bear market that
endured from March 2000 to March 2003 was only a corrective phase to
the greatest stock market mania of all time.
We make the distinction of a "corrective phase" rather than a bear
market due to the observable fact that we cannot find one instance
of back-to-back stock manias in the past. Perhaps the semantics and
definitions do not work for some, but nevertheless, we find it
extremely difficult to dispute that the mania never really ended.
Even at the nadir in 2002, Dollar Trading Volume was still at a
level that equated to a 18.3% rate of growth in velocity from 1995,
when we posit the mania actually commenced. This seven year path
would have been extraordinary sans the final manic peak and
subsequent collapse!
As it now stands, DTV has grown 18.1% from last year's record total
and exceeds the fateful year of 2000 by 28.1%. Compared with Gross
domestic Product and total stock market capitalization, we are close
enough to record extremes to posit the possibility that a similar
outcome to 1929 and 2000 should eventually be at hand.
DTV is more than three times the size of GDP
for only the second time in history.
DTV versus market capitalization is 223%, only nominally lower than
the 228% registered in the Roaring Twenties.
If there is only one salient truth about the stock market today, it
is that the mania remains largely unrecognized by professionals and
the public, who blithely continue without concern, taking larger
risks with greater exposures than ever before, while denying
investments in favor of trading, per se.
We define Speculative Fervor as the one-year differential in DTV
compared with the level of GDP. A market that trades an additional
$2 trillion while GDP rises by 3% is more speculative than a market
that trades an additional $1 trillion while GDP rises the same 3%.
Although Speculative Fervor has not reached the levels registered in
1999 and 2000, this indicator has remained at "Roaring Twenties"
levels for four full years. It is easy to posit that recent high
levels have reinforced the notion that stocks can do no wrong, hence
the game is still played to the hilt. We believe it is imperative
to note that Speculative Fervor remained between +15% to -10% for a
stretch of 64 years (!!!) from 1933 to 1996, equating to the
historic norm. A return to these levels will result in a huge
dénouement for traders and investors. In our view, this outcome is
inevitable. We do not expect an identical collapse such as occurred
from 2000 to 2003, but an initial shock followed by a consistent and
steady disenchantment with the inability of stocks to recover over
the long term.
Stocks are overowned and clearly, overtraded.
16 May 2007
New York Post on an FOI re the PPT
My request for information about the actions of the secretive Working Group on Financial Markets at the Treasury Department "seems to have fallen through the cracks," according to the wording of an internal government document I just got my hands on.
That document, dated April 5, 2007, indicates that the Treasury's Disclosure Services division spent quite a lot of time discussing the request I made last summer under the government's Freedom of Information Act.
In fact, "Spotlight on New York Post FOIA Request" is the final issue on a seven-item agenda. And the 13-page PowerPoint presentation titled "Bottom Line" devotes a page and a half to the Post's request.
One of the "lessons learned and the way ahead," according to this presentation, is to "process and respond to Mr. Crudele's requests ASAP."
It's now more than a month since that meeting and I still haven't received documents or even an official letter. I guess ASAP might mean something other than "as soon as possible" in government lingo -- perhaps "as soon as pigsfly."
For those of you who haven't been following this saga, let me fill you in.
Back when Goldman Sachs Chairman Henry Paulson took over as Treasury secretary nearly a year ago, I did a multi-column investigation of the Working Group on Financial Markets, which is also endearingly nicknamed the Plunge Protection Team.
As far as I can tell, variations of the group have been in existence since the late 1980s. The PPT operates in that shadowy space between the government's desire to keep the market safe for national security reasons and Wall Street's desire to keep prices up for selfish reasons.
Other newspapers have since reported that -- unlike his predecessors -- Paulson calls frequent meetings of the Plunge Protection Team, which now seems to include Wall Street big shots as well as top officials such as Federal Reserve Chairman Ben Bernanke and New York Stock Exchange Chairman John Thain.
It's nice that all these folks have time to get together. And it is wonderful that the naive media think these meetings of government and finance brains are innocent. But I'm suspicious.
Of what?
I believe the Plunge Protection Team has emergency powers to protect the stock market if the situation warrants it. (Incidentally, I wholly support such action.)
But I also believe that the Plunge Protectors -- left unchecked -- could cause a tremendous loss of confidence in our financial markets. And they could create the very national security problems they think are fixing.
That's why I've asked for the minutes of meetings of the Plunge Protection Team on very specific dates when the stock market pulled a couple of rabbits out of its hat.
I didn't want to get greedy, so I kept the scope of my search narrow.
But apparently I must have guessed right and asked about sensitive enough issues because the Treasury ignored that first request and hasn't been any more obliging in response to follow-up letters.
It was only after I wrote an open letter to Paulson and published it in this column on April 3 that Treasury seemed to get the message. Two days later I was on the agenda of its FOIA Operations Overview.
At that meeting it appears that the folks at Treasury decided that my "request does not meet the criteria for an expedited request and asked the OGC [Office of General Counsel][for] concurrence on April 4."
Expedited! The request for this information was made last July!
I also got the impression when I spoke with a Treasury official last week that my request was about to be turned down.
A spokesman at Treasury told me that the government was trying to determine who the "appeals officer" was for this case -- an indication, I imagine, that I'm going to be asked to beg someone else for the information to which we are legally entitled.
I'm not surprised. Congress has tried to crack the mystery of the Plunge Protection Team and failed.
After my first FOIA request was filed, Rep. Ron Paul, R-Texas, last fall asked for the very same things I did -- the minutes of the Working Group's meetings.
"An informal inquiry to Treasury from our office yielded nothing. They claim such minutes are not taken and don't exist," one of Paul's people told me in an e-mail last September.
Very interesting! This intriguing group of government officials and private financiers meets regularly under Paulson and nobody keeps a record of what they discuss or do.
Why am I so interested?
If the Plunge Protection Team is doing what I suspect -- namely, coming to the rescue of stocks whenever it deems it necessary -- this would not only change the entire nature of investing in this country but would be the biggest financial story ever.
* * *
That document, dated April 5, 2007, indicates that the Treasury's Disclosure Services division spent quite a lot of time discussing the request I made last summer under the government's Freedom of Information Act.
In fact, "Spotlight on New York Post FOIA Request" is the final issue on a seven-item agenda. And the 13-page PowerPoint presentation titled "Bottom Line" devotes a page and a half to the Post's request.
One of the "lessons learned and the way ahead," according to this presentation, is to "process and respond to Mr. Crudele's requests ASAP."
It's now more than a month since that meeting and I still haven't received documents or even an official letter. I guess ASAP might mean something other than "as soon as possible" in government lingo -- perhaps "as soon as pigsfly."
For those of you who haven't been following this saga, let me fill you in.
Back when Goldman Sachs Chairman Henry Paulson took over as Treasury secretary nearly a year ago, I did a multi-column investigation of the Working Group on Financial Markets, which is also endearingly nicknamed the Plunge Protection Team.
As far as I can tell, variations of the group have been in existence since the late 1980s. The PPT operates in that shadowy space between the government's desire to keep the market safe for national security reasons and Wall Street's desire to keep prices up for selfish reasons.
Other newspapers have since reported that -- unlike his predecessors -- Paulson calls frequent meetings of the Plunge Protection Team, which now seems to include Wall Street big shots as well as top officials such as Federal Reserve Chairman Ben Bernanke and New York Stock Exchange Chairman John Thain.
It's nice that all these folks have time to get together. And it is wonderful that the naive media think these meetings of government and finance brains are innocent. But I'm suspicious.
Of what?
I believe the Plunge Protection Team has emergency powers to protect the stock market if the situation warrants it. (Incidentally, I wholly support such action.)
But I also believe that the Plunge Protectors -- left unchecked -- could cause a tremendous loss of confidence in our financial markets. And they could create the very national security problems they think are fixing.
That's why I've asked for the minutes of meetings of the Plunge Protection Team on very specific dates when the stock market pulled a couple of rabbits out of its hat.
I didn't want to get greedy, so I kept the scope of my search narrow.
But apparently I must have guessed right and asked about sensitive enough issues because the Treasury ignored that first request and hasn't been any more obliging in response to follow-up letters.
It was only after I wrote an open letter to Paulson and published it in this column on April 3 that Treasury seemed to get the message. Two days later I was on the agenda of its FOIA Operations Overview.
At that meeting it appears that the folks at Treasury decided that my "request does not meet the criteria for an expedited request and asked the OGC [Office of General Counsel][for] concurrence on April 4."
Expedited! The request for this information was made last July!
I also got the impression when I spoke with a Treasury official last week that my request was about to be turned down.
A spokesman at Treasury told me that the government was trying to determine who the "appeals officer" was for this case -- an indication, I imagine, that I'm going to be asked to beg someone else for the information to which we are legally entitled.
I'm not surprised. Congress has tried to crack the mystery of the Plunge Protection Team and failed.
After my first FOIA request was filed, Rep. Ron Paul, R-Texas, last fall asked for the very same things I did -- the minutes of the Working Group's meetings.
"An informal inquiry to Treasury from our office yielded nothing. They claim such minutes are not taken and don't exist," one of Paul's people told me in an e-mail last September.
Very interesting! This intriguing group of government officials and private financiers meets regularly under Paulson and nobody keeps a record of what they discuss or do.
Why am I so interested?
If the Plunge Protection Team is doing what I suspect -- namely, coming to the rescue of stocks whenever it deems it necessary -- this would not only change the entire nature of investing in this country but would be the biggest financial story ever.
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