Archive - Sep 2010

This weeks analysis of the Commitment of Traders and Retail Positioning research. Tools to trade against the herd.

Buying conviction remains a big question as volume was the lowest total for any week since Christmas, 2009.

A bold idea? Or a dumb plan?

Coxe Advisors is out with its latest must read piece, in which Don Coxe tells readers it is time to once again reduce stock exposure, explains why gold will continue to outperform, and thus why it is a better investment than a 10 Year in the mid-2%'s, why fiscal stimulus is now too small to be effective which leaves Bernanke as the only saviour of the economy, and asks what experiments the Chairman has in store next: "Already, economists are discussing which Fed innovations lie ahead if the economy etiolates further. Among the suggestions for neat new ways to debase the Monetary Base: buying up large parcels of credit card and automobile debt. (Who knows? Maybe the Fed will become the nation’s biggest used car dealer. “Buy from Big Ben, Who’s Got the Biggest Deals!”)." All presented in Don Coxe's usual inimitable style.

The bears were certainly back in town for the Euro, news out of Europe has been mixed. German macro data has been disappointing, showing that the overall euro area is entering a period of weaker growth. Also this past week, some European peripheral countries, and especially Portugal, Ireland, Spain and Greece, saw a rise to record levels in their 10-year bond and CDS spreads.

South Africa is popping up on the radars of several big hedge funds as one of a handful of frontier emerging markets ready to make the move to prime time. Direct investment has been pouring into the banking sector in South Africa in recent years, possibly presaging a major long term bull market. Prices are so low and earnings leverage so great that any dire political risks you can come up with have got to already be priced in. Has Armageddon been avoided, or only just postponed? (EZW), (AFK), (GAF).

British-style military impotence, Habspurg-like default or French-echoing revolution?

A recent guest post by Gonzalo Lira on Zero Hedge, providing a theoretical framework for the arrival of hyperinflation, went viral, generating over 75k views and over 1,000 comments, further confirming that the biggest and most confounding debate in all of finance is what will the final outcome of the Fed's market manipulative actions be: deflation, inflation or, and not really comparable, hyperinflation (which is a distinctly different phenomenon from either of the above). The post infuriated some hard core deflationists who continue to refuse to acknowledge the possibility that in its attempt to inspire inflation at all costs, the Fed may just push beyond the tipping point of monetary imprudence away from mere target 2-3% inflation, and create an outright debasement of the world's reserve currency. One among these was none other than Mish himself, who a week ago recorded a podcast on Global Edge with Eric Townsend and Michael Hampton (link here), in which his conclusion was that Hyperinflation is the endgame, "so it is unlikely." Of course, the very premise of this statement argues that even in a monetary collapse the Fed will retain control over the flow of money, which of course is unlikely, and thus makes us very skeptical that such a simplistic and solipsistic argument is enough to resolve the debate. Since one of the items covered in the Mish podcast was Lira's argument, it was only fair that Gonzalo himself should be heard. Here is the Gonzalo Lira podcast defending the "Hyperinflation" case.

On Labor Day, President Obama announced a new $50-billion infrastructure plan next year as a way of a second stimulus for job creations as well as for the faltering economic recovery. However, in light of the fact that the Democrats are losing a bunch of congressional seats, and their majority, this new plan would seem more of a last-ditch effort with little substance. So far, the Obama administration has demonstrated very little understanding of the economy, markets, and business.

It is no secret that both the household debt/income ratio, as well as the debt service ratio (interest expense as a % of disposable income) continue to be near all time high levels, albeit slightly lower than recent all time records. In fact, the debt service ratio has declined more in real terms than in nominal terms, making the argument that the consumer deleveraging process might not be as dramatic as some expect. Yet it is precisely when looking at the real, and not nominal, value of a projected debt service burden, that explains why consumers will continue to be faced with a crippling debt regime, why deleveraging will continue, and why the economy will be far weaker than the Fed expects for years to come. Goldman's Jan Hatzius, who continues to be more bearish on the future prospects for the economy than ever before, explains.

We are back to 2007 - at least such is the case if one reads recent Goldman pieces that try to sound optimistic, such as those by head strategist David Kostin. While all recent Goldman analyses on the economy are downright nasty, the only way to goalseek a favorable view is by going back in time to those lofty days of the summer of 2007 when the answer to everything, including a Baltic Dry index in the stratosphere and other sundry illusions was the decoupling theme, either of China, or of the entire developed world. In his latest weekly kickstart piece, David Kostin pushes precisely that. And while we do learn that the performance of the recently incepted trading strategies continues to disappoint ("Our low operating leverage trade (long / short ) was down 0.5% and our dividend growth trade (long / short SPX) was down 0.7%."), there is much hope... as long as investors have the mindset of the Norwegians who invest for infinity... or at least 2030. "Over the next two decades emerging equity market capitalization could increase substantially in absolute terms and overtake developed markets. Our Chief Asia-Pacific Equity Strategist Tim Moe and his colleagues just published a report that forecasts the changing landscape of emerging market equities through 2030 and explains why developed market asset managers need to own more EM equities." Alas, decoupling is and always will be a myth. And, no this time it is not different. Anyway, all the charts that are fit to print and then some in this weekly summary chart compendium.

Nine years ago, I was in Crete, just as I am now. It was a beautiful day, until I reached home and saw utter horror on the television. There are some things that you will never forget...

The global supply of food is going from bad to worse. The torrential rains in Pakistan have been a game changer. There is a ton of cash sitting on the sidelines because so many investors are afraid of an autumn stock market crash, and are loathe to buy the top of the greatest bond bubble in history.

Nothing tests the mettle of an idea like laying money down. It’s where cool calculation stands in stark contrast to sunshine pumping. People can talk all they want about how great Greek bonds are. If they’re really on board with the technocrats and think the EU is going to hold together as is, then long that 10Y Greek debt and short 10Y Bunds. The trade shows the risks of the status quo more clearly than anything else. The whole thing looks like picking up pennies in front of a steamroller. Spread divergence has fateful traps too. It needs faith that time will soon be on your side, and soon and the world’s tail risk killers will fail. On one side are hubris-riddled bureaucrats with a deep line of taxpayer credit to distort reality. It’s the force of history via out of sample mean reversion versus the hubris of man. Who says investment doesn’t have tragic plotlines?