Sunday, September 30, 2012

Dark Clouds Over Euro.


Beginning 2012 Euro was already sliding down from 1.4750 of 2011 and had reached 1.27 by Jan 2012. Greece was at the front and centre of all news and it was looking as if Euro is going to break up any-time  And I was writing that we should keep an eye on the commercial position in the COT report. Commercials were increasing their long position throughout the year and even when Euro reached 1.20 in June/August of 2012, the long position of the commercials were at record high. In June 2012, the Euro long position in COT was at record level of 329K long vs. 70K short. In other word, when the Euro was reaching its low for the year, commercials were holding almost 5 long for 1 short. 

Now when Euro has touched 1.32, we see that the commercials are reducing their long drastically. From the last week COT report, there are only 120K long vs. 60K short. Looking at other way, while there has not been major change in the short position, the long position has reduced by 64% over this period and most of these reductions have come in the last two weeks.

Regular readers know I had written in the past that demise of Euro is premature. But now it seems that the cows are coming home.  Spain is going to ask for almost $ 300 billion by October end and after that Italy.  There is not enough money in Europe to bail out 11 of the 17 members. And everyone expects Germany to pay up. I don’t think it is going to happen and my prediction of two years back that we might have two tired Euro, one for Northern Europe and one for Southern Euro, may well come true in 2013/2014.

The monthly chart of Euro is also very interesting;

It has made three attempts at 1.20 levels since 2008-9 and is now hanging just above there. If it breaks that level, there is only air below till 0.90 where it started its life.

Tom McClellan of McClellan Publication shows some interesting chart about Euro Dollar COT Position and according to him, the stocks somehow follows it with a 12 months lag. That indicator is reaching the top around November 2012 and dives 30000 ft down in 2013/14.

Seeing how the commercials operate on a very long term time scale, I do not think there is imminent danger and we will most likely get the final pop by November / December of 2012 but I would expect to take position on the defensive side thereafter.  

On a shorter term time scale, coming week, it is very likely that we will see a test of SPX 1420. If we see SPX testing 1410-20 level and bouncing from there, I would most likely start taking long position. While going long, I would select sectors like Bio-technology (XBI), pharmaceuticals (SGEN), precious metals (CDE, AGQ, DGP) and TBT. Deutsche Bank and JPM both have buy recommendation on CDE and it has a beta of 1.5. However, PM sector is due for a pull back and most likely we will get the pull back this week.  And since we are not day traders and want to take the correct position while avoid whipsaws, we better be patient before taking any position.

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Saturday, September 29, 2012

Weekend Report.


We all can see the writing on the wall but can we read it? The Chicago PMI, another cooked up data by the Govt. went negative, despite all efforts by the powers that be, for the 1st time since 2009. The following chart is from Reuters:

Now we know the reason for the “Hail Mary pass”. Bernanke knows something which we don’t. But the virus has developed resistance for the medicine and now the medicine is causing more sickness. Borrowed money, money printed out of thin air cannot create prosperity. I wish you would see the following presentation in full:



So do we go short here?

Heck no! Not till after election. Let me quote from Stock Trader’s Almanac:

Psychological: Intoxicated. Despite weak fundamental data, Europe’s debt crisis, escalating geopolitical tensions, the pending fiscal cliff, etc. the market continues to drift higher with only an occasional pause. Central banks, the world-round, have either pledged to or have already begun to refill the punch bowl. At some point it time it may run dry again, but for now the market seems to care little about anything else.

Fundamental: Weak. Global growth is slowing and it was confirmed by warnings from Caterpillar and FedEx. Many Q3 corporate earnings forecasts are actually expecting year-over-year declines. Unemployment is still above 8% and the recent decline in the headline rate was actually due to the labor force shrinking, not because of new hirings. Today’s sharply lower than expected final Q2 GDP showing just 1.3% annual growth and the abysmal durable goods orders report only further underscores why the Fed took action.

Technical: Consolidating. After breaking out to new recovery highs, the market yielded to typical end-of-September weakness while digesting the Fed’s latest action. Provided the geopolitical environment and economic data do not deteriorate in any meaningful manner in coming weeks, the market is likely to resume its drift higher, at least until after the election when Congress returns to session. 


My short term cycles are down for some more time and I think we will see lots of chop. I was hoping that PM sector will sell off and offer a good entry point but so far it has not obliged. SPX 50DMA is around 1410 and unless it is broken convincingly, there is no reason to go short given that the last push up is about due. ( Does not apply to day traders). I see that the sentiments have turned bearish in the last two weeks and everyone is expecting the top or some sell off.

When everyone agrees it is time to be contrarian. The market inflicts maximum pain to maximum number of people and I think it is laying a bear trap. In the coming week, we might see little more selling just to keep the bears excited and entice them with more shorts and then zoom up. Where and how far it will go up, I do not have any idea. However, it can test the all time high of 1526 before the fat lady sing again.

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Thursday, September 27, 2012

On Script So Far.


Few days back I wrote that I expect lots of head fake and whipsaws. Yesterday I said that it is not yet real deal. And here we are today; another 1% gain day when GDP estimate was below 2% (nearing recession) and Europe is burning. All because China is expected to pump and save the world? One reader complained that there is no action with me but I would like to point out that it unless we have a definite trend it makes sense to wait in the sideline and not chase the bus in either direction, unless of course you are a day trader. Money not lost in trading is money earned.

So far SPX has tested 1470+ and is now moving between 1430 to 1460. Unless it clears 1460 with authority or breaks down below its 50 DMA which is around 1410 now, we are in the chop zone and taking a position in the chop zone is injurious to health.

The signals are all conflicting, both technically as well as fundamentally.  The world economy is possibly on its death bed and the doctors (central bankers) are keeping it alive with huge doses of steroid (read liquidity). It is not going to make it better, but will definitely keep it alive for a while longer while prolonging the agony.  
Looking at a very long term chart (monthly), I get a feeling that we still have another 100 point or so to run.



We got the bounce we were looking for and from here, either we test /ES 1455-60 again tomorrow and sell off or we break it and start the final phase of the journey. Seasonality and cycles say that we will take a breather; I think we will see a high in the morning and sell off in the afternoon. But that is just a guess and don’t catch my neck if it turns out some other way. It does not really matter because all I am interested to see is a failed test of the high before deciding the next course of action.

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Wednesday, September 26, 2012

No Cigar Yet.


I am amazed to see how quickly the sentiment changes from euphoria to doomsday. Was it last week, there were talks of SPX 1500 or higher? And now the coming doom! Part of the reason being the Fed has taken out the surprise factor. For last three months the Pavlovian dogs have been drooling about the coming QE and now that it is here, they are caught in the headlight.  And so far we just had about 2% correction.

Few days back I wrote that we should expect a correction of about 5% or so and that would be a good buying opportunity. I cannot say for sure how deep the correction will be but so far it appears that it is not a real deal. So long SPX does not break down below 50 DMA, there is no reason to take it seriously.

I think we will test SPX 1410 on Friday and if we bounce from there, which would be an opportunity to long. Again, timing is everything and if that bounce fails to clear the high of September 14, then and only then we can say that we have a good shorting opportunity.  Of course this is a text book situation and the real thing may unfold differently, but it’s all about probability. Nobody except GS and JPM can beat the market everyday of the quarter.

Nothing has been fixed, Europe is as broken today as it was day before, China is still a fantasy land of infinite growth, Japan with its 240% debt to GDP ratio is now ready to fight China and drag USA with it, Israel and Iran can’t wait to bomb each other. But hey, what does it matter, USA can still print money and prosper.

We know how it is going to end but if your central bank is giving you free money, it would be very un-patriotic to refuse that offer. After all, it is the land of the free and brave. I am not so brave but I still want the free money. So I am waiting for a pull back of gold and silver to their 50 DMA and take an entry which should be good for at least the 2ndquarter of 2013. The fly in the ointment in the theory is a possible war somewhere in the world which will cause huge recession worldwide. But that is something we do not have  much control and if I can read the evil plan of the Banksters, we are OK till May of 2013.

Tomorrow we may see a bounce but the selling is not over yet. We need to test the 50 DMA in SPX which is around 1410 and see if that holds. I am ready to wait till Friday to decide if there is a trade worth taking.

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Tuesday, September 25, 2012

Have We Seen The Top?


However much I want to believe that it is a top and the road is down, I am not jumping the gun yet. Yes it is topping but even with this 1% drop (wow!) (how come Ben?) we do not have the sell signal yet. Remember that chart of Presidential Election Cycle from Bespoke? Here it is for your ready reference:

So it is just about time for a correction.  Whether it will be 3% -5% correction or 10% + correction, we will have to wait and see. As of now it is a warning shot. The line in the sand /ES 1445 has been broken. The indexes opened high, reached higher and closed in red, which means that more correction ahead. It need not be tomorrow though because SPX has 4 red days in a row and a bounce is due.

Yesterday I wrote that we will see a test of the high today and a top is near. We did see SPX reach 1462.80 before selling off. So it is on script.

In the morning I tweeted that all the asset classes are selling in sync. But when the indexes dropped hard in the last two hours, oil, gold and silver did not budge much. May be gold and silver will sell off in the Asian session , so I am willing to wait a while longer to decide if the sell-off is real or it’s a head fake. In all probabilities, we will see a bounce in the next few days.

I want to share a chart from Lance Roberts:

Lance thinks that any correction here is a buying opportunity and I somewhat agree with him, at least till election. I would love the indexes do a dead cat bounce, re-test the high in the next few days or so and roll over 100 SPX points, but that’s just wish full thinking.

Euro is hanging around 1.29 levels and it has already made three attempts to break below and have bounced from there. Will 3rdtime be the charm?  If it breaks from here the next level is 1.2750 and it will take equities along with it.

The Euro position in the latest COT report shows that commercials are still net long Euro by almost 3 times.

However, the long for the last week has come down to 140 k from 230 k. which is almost 40% drop in the long position in one week and that indicates that the commercials may be winding down their long position. We will keep an eye on this one. If you remember, in the past I had repeatedly mentioned that commercials are long Euro and all talks of Euro disintegration is just talk, at least for now.

Bonds gave a buy signal and their bounce seems to be more serious kind of bounce.  From $132 in end of July, TLT came down to $118 on 14th Sept. It has now bounced back to $ 123. I think it will re test the high one more time before the boom is over.

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Monday, September 24, 2012

Wait and Watch.


As I said yesterday, I was not convinced that we had a trend change and we are more likely to see a test of the high. So when the market opened lower, I sent out tweets that /ES 1445 is the line in the sand. The line held and the market erased most of the morning loss. Just to repeat myself, today was officially the  1stday of QE3.

It has been a long time; we have not checked the sentiment indicator chart below:

In the battle between fear and greed, greed definitely has an upper hand right now.  Yesterday I asked, can the equities prices fall when there is a QE in play? The answer is: depends. In short term, the risk asset prices rise as we have seen in QE 1 and QE 2. But when there is QE infinity like they have in Japan, the asset prices go down over a longer time horizon. It has happened in Japan where Nikkei is down to 9000 from 38000 in 20 odd years.

I quote the following from Peter Tchir:

The Fed first cut the target rate from 5.25% to 4.75% on September 18, 2007.  Remember when 50 bps was a big cut and not twice the target rate?  The S&P 500 was 1,477 the day before the cut.  It popped 43 points that day to close at 1,520.  It got as high as 1,565 in October and has never been above there since.  So in a 5 year period where the Fed has been more aggressive than any other central bank known to mankind, the Fed is still losing.  Before going further, think about what the Fed has done since that first rate cut and where stocks are now.
I am not looking to go toe to toe with the Fed for 10 rounds of a bare knuckle brawl, but “don’t fight the fed” as an effective investment strategy has a lot of flaws.
Also contrary to the universally accepted wisdom that QE ensures good stock performance, we show QE isn't a cure all for stocks and then many other things, including powerful earnings growth (which we neglected to mention) helped power stocks.  On an even more basic level, the initial QE1, didn’t turn stocks around immediately, and stocks in fact sold off for months and hit record lows after QE was announced.

Therefore, while liquidity will trump in short term, fundamentals will catch up in long term and one should play accordingly.

What is the short term play now? The market is in consolidation mode and the mantra is BTFD. I am waiting for the market to break this consolidation range in either way. A correction is due but with all the free money around, it is hard to come by. So the only sensible thing to do is to wait. The cycles are showing a top in a day or two, therefore I expect a test of high by tomorrow or soon thereafter.  If it makes a new high, all bets are off. If it fails to make a new high, the minor expected correction may follow through. As of now, there is no sell signal yet.  October is going to show which candidate will win the race.

Precious metal sector is showing some signs of weakness. Silver appears to be weaker than gold.
In conclusion, its wait and watch time and cash is king.

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Sunday, September 23, 2012

Bearish Reversal?



Friday we had a bearish reversal day when the market opened higher closed lower / red.  In a normal world I would have considered it as the signal for a top and trend reversal. But in this day and age of new normal, I am asking myself, was it a failed tests of the high and I am not convinced that it was so.  The price actions of other risk asset classes were not in sync with a sell off yet. Therefore, my take is, even if we see little weakness in the next day or day, we are unlikely to close below 1450 in SPX. If however it does close below 1450, that will be the 1stwarning shot. On the other hand does it mean we are going higher to the moon? Not yet.  I expect there will be lots of head fake and whipsaws in the next few days.  Let us not forget that QE3 or QEInfinity officially starts from Monday.

Question is, can the market go down when QE is on? The following chart is from Dshort.

Which shows that equities have gone up during the earlier QEs.  This was precisely the reason the US stock market is sitting at multi year high when everything ran up on the anticipation of QE.  But it does not tell the whole story. The law of diminishing return in coming in play and the balloon seems rather fully inflated. The next is an asset bubble burst of epic proportion. Also if you carefully analyze the chart, you will see that immediately after every QE the market has actually gone down and then up.

I think we are coming close to a short term top of some kind but it is not the ultimate top. For that we will have to wait till after election when the sh*t fits the fan. It now seems that whole world want ”O” to be re-elected and EU leaders have expressed their dislike for the Republican candidate and the party in many shapes and forms. Europeans and even the Russians think that they are better off with the known devil in an uncertain world and they will not rock the boat too much till November. Even the two mad men of Middle East will wait till the election in USA to start the war game, if at all. In some sense, discussing politics is a waste of time because the politicians have already sold themselves many times over to the highest bidders and irrespective of whom so ever wins, we will be screwed. Guaranteed!

Bottom line, a 5-7% correction now will be a good buying opportunity. In any event, precious metals will be a safe play long run because everyone is printing and inflation will pick up sooner rather than later. You may ask if inflation is a concern how come bond yields are going down. One of the reasons is that the Fed is monetizing the debt and now holds almost 30% of all outstanding treasuries. But soon the Fed is going to lose control and interest rates will rise poking a giant hole in the bond bubble. It’s just bit early for the balloon to burst but burst it will. The Fed is actively seeking inflation and it will get it. The problem with inflation is, once the genie is out, it is difficult to put it back in the bottle. It is a question of when not if.

Elsewhere in the world, Spain is fighting with its autonomous regions who are asking for fiscal independence.  It is like playing a game of bluff within bluff. Catalonia is bluffing Spain and Spain is bluffing EU. Who will blink first? And here is an article about another region of Spain which is without medicine as well as empty construction projects.
And we thought only China has ghost towns. It seems the story of boom and bust is same everywhere.

All in all, it is going to be an interesting week or two going forward. So remember to fasten your seat belt and trade safe.

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Thursday, September 20, 2012

Teaser?


Well, the market action was kind of a teaser. It raised hopes for the bears with SPX down 10 points by 10AM. But I sent out four tweets suggesting caution and to avoid taking short bets. Thankfully, it worked out as planned and the indexes were almost unchanged. We should be testing the highs of last Friday and that may well happen tomorrow or next Monday.

Therefore, nothing much to blah blah today. I think we are approaching a topping zone but given all the liquidity around, it is risky to be short without adequate confirmation. Next week has a possibility to be interesting.

Tomorrow is triple witching and regular folks should stay home, away from computers, least we do something stupid and take a trade.

Hope my nagging is able to keep you from harm's way. That's all I have for tonight. Thanks for reading World of Finance. Join me in twitter (@BBFinanceblog) and share it with your friends.

Wednesday, September 19, 2012

Qfinity and Insanity.


Well, we did see a green close, as I said yesterday and we still have two more days to see the test of the high. In this day and age of Qfinity anything is possible and team O&B may not like to see the market red for too many days. It is now illegal to have red close for more than two days in a row.  However if we do not see the test of the high by Friday and we see continued weakness, I would advise caution if you are planning to go short. The cycles are up till around 25th-27thSeptember. After all, the test of high is only about 10-15 points away and unless we have seen a failed test of the high, it is too risky to short.

That Bernanke put is reflected in the following chart.
Investors Intelligence Sentiment Chart

The bullish sentiment is now reaching the danger zone but not everything is extreme yet.

Today both bonds and equities were up. Gold and silver spent the day hurrying up and going nowhere. But Crude gave sell signal. However, given the geo political madness in Middle East, I do not want to take a short trade on Oil. Thanks but no thanks.

I would like to share few videos from Bloomberg:
That pretty much explains QFinity.
Forbes also talks about gold:

If you remember, I had written before that I expect gold to reach around $2500 in near future and I am waiting to get long gold again, now that every central bank has started printing money and inflation will come before they realize it. I am waiting for a good entry in PM.

Things may seem quite but it is churning inside and it is highly unlikely that a triple witching week will be quite. It is time for portfolio adjustments. So better be careful.

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Tuesday, September 18, 2012

Backing and Filling.



Today it was all about backing and filling, like I said yesterday. In the morning I Tweeted that it is not the time to short yet. And the market was not in a hurry to go anywhere. I think we are going to see green close tomorrow and a test of SPX 1470 by Friday.

Only exciting thing was the selloff of Nat. Gas which lost over 3% and Crude closed below $ 96. But again, no sell signal yet.

The interesting development going forward is going to be how Spain goes with the begging bowl to ECB. Remember how they removed Bunga Berlusconi? The Italian bond yield spiked up and the greatest womanizer of Italy was forced to step down despite having a majority in parliament.  Now the same routine will be played on Rajoy.  Spanish bond yield have started to flirt with 7% and the much promised unlimited yet sterilized bond buying program of ECB is not anywhere near. The markets are going to test the resolve of the ECB and the European politicians very soon.

Let me quote from Peter Tchir:
I am growing more concerned that Europe is slipping back into crisis mode.  We have had a window where the ECB stepped up, Germany backed down, and there is enough “wiggle room” to get something done.  Spain needs to ask and they need to ask soon, because all Europe has is “wiggle room”.  There is not true deep support for the ECB’s new policy.  Heck, the IMF has admitted how difficult it is to structure programs for EU nations.  The German court upheld ESM, but will other countries raise their own challenges?  Will disgruntled Germans (and those in other countries) find alternative ways to try and block plans for more widespread ECB intervention?
I don’t know the answers to those questions, but it would be foolish to think that someone isn’t working on those plans of attack.  Draghi is desperately trying to get pregnant.  He knows there is no such thing as being “a little pregnant” and once the OMT is turned on for Spain, and then Italy, there will be almost no turning back.  Either the programs will work right away – doubtful, or every 6 months or so, Europe will be faced with the alternative of taking losses on existing programs and stopping them, or upping the ante – likely.  So the likely scenario is every so often (3 to 9 months), Europe will face the same old decision, admit you were wrong, take losses, and move on to proper restructuring, or paper it over and pretend it will get better (which eventually it may).  We all know what Europe will decide.  Politicians and Central Bankers don’t lose money, not if they can help it.  So Draghi needs to get on that slippery slope of aggressive buying before he gets stopped out.

 That scenario very much plays along with the expected sell off in the equities by the last week of September, early October and eventually, the mess in Europe, Fiscal Cliff in America and geopolitical volcano in Middle East will all come together to create the perfect storm in 2013-2014.

I feel bad that the best days of investing are behind us all. The period from 1985 till 2000 was golden when SPX travelled from less than 200 to 1500 in 15 years without any hiccups. And we are still struggling to go near 1500 after another 12 years. More likely we will see SPX below 500 again because of the stupid policies of the central bankers and politicians. It is no fun investing in a bear market.  Just ask Japan and I am afraid, so is Bernanke that USA is becoming another Japan. To avoid that deflation he is ready to embrace inflation but when you ride a tiger, you cannot get down without getting killed. Ben knows that as well but he hopes it will not be his problem as his term will expire soon. He has already shown his hand and there is no other trick up his sleeve.

But I am just wasting time with all these silly talks. It’s all markets fault. There is nothing happening and please don’t do anything silly out of boredom. Two good opportunities are around the corner and we just have to be patient. You know my favourite quote” Forget about the fear of missing out”.

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Monday, September 17, 2012

Quo Vadis?



The 1st meaningful economic data after Helicopter Ben announced QEinfinity  was the empire manufacturing  index and it was a disaster.  It was at its lowest level since 2009, dropping to a minus 10.4 reading. No wonder Ben sees something which we don’t and he is very afraid. At the same time, it is like a mad professor unwilling to accept that what he is doing is not working. In his mind, QE must work even if by work he means risk assets going up along with commodities. And I think the 4th qtr. GDP reading will come at 1% or below.  ECRI is defending its call that USA is already in recession.

From Dshort.com: Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there's nothing that policy makers can do to head it off.

ECRI's recession call isn't based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down — before the Arab Spring and Japanese earthquake — to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not "soft landings
."


And yet we expect the stock market to reach somewhere near 1600 in SPX. It’s so eerily similar to 2007-2008. On one hand I see the market price action following the Presidential cycle pattern. The following chart is from Bespoke:


On the other hand I see that OEXA200R is at the top of the range and historically there is not much room to run higher.

And then there is so much liquidity in the market, at least $85 billion a month from here till Nov.

So which way folks? We know economy is tanking but we also know that liquidity trumps at least in short term.

In situations like this I turn to my cycles and crystal ball for direction and they are saying that we most likely will follow the Presidential cycle. Which means we will possibly find a correction by end of September and a final push to new highs by the election?  2013-2014 will definitely be nasty unless the Fiscal Cliff thing has been worked out by then. But given the deep political divide between the two parties, any compromise looks very unlikely. Just look at the following secret video of Romney.
May be he is telling the truth but telling truth is never a strong quality of a politician. That’s why Obama was so successful in the 1stplace. His occupational training had prepared him to avoid truth in any kind or form. But what do I know of politics and my ill advised head butting in politics is of no use in finding what the stock market will do.  

We had a little bit of a correction today some of which was somewhat covered in the last few minutes. I think this week we will see the markets going back and forth and a test of the high by Friday, the triple witching day. If the market fails to make a new high by then, most likely we will see a 5%-7% correction which will be a buying opportunity.

Lets see how things work out.

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Sunday, September 16, 2012

Hail Mary Pass.




We now have an open ended money pumping mechanism in USA. Is that a good news or bad? This program was initiated in the name of job creation, but will it? Remember that Democratic hack Chuck Schumer, who is in bed with TBTF banks telling Bernanke in one of the Senate hearing that the fed is the only game in the town? I think everyone knows and understands that the Fed QE has nothing got to do with job creation. It is all about the 1stand 3rd mandate of the Fed, i.e. to give free money to its member banks and to blow another wealth bubble to create an illusion of wealth and implement the trickledown theory.

So from now till Nov. US markets will have about $ 85 billion per month of flow and now they will target the MBS not treasuries. Did any of the reporters attending JH or any of Ben’s press conferences ask him what happened to the $2 trillion that he had already dumped in the market since 2009? Why it did not create any jobs to reduce the unemployment?  The fact is jobs are not created by Central Bankers. Yes they can help. If the interest rate is too high, the central bank can help reduce the rate of interest. When there is liquidity crisis, they can pump liquidity and help the small business get loans. But today in America, the interest rate is near zero and banks are sitting on huge reserves. Banks have no interest in giving loans to the small business which creates the jobs. Simply because, the banks can get free money from the Fed, purchase the US treasuries which give them risk free 3% and use the same treasuries as collateral for further loan. The giant Ponzi scheme and debt monetization that I wrote few months back. So the only way this more free money will be used in speculation and derivatives trading by the TBTF banks. It might push up the equities prices but won’t achieve anything else. And now they have given themselves a mandate to go on printing and pumping till infinity. It is un precedent for any central bank to take this step unless there is desperation and their back is on the wall. There is nothing else they can do, if this also fails, which it will.

So what is the unintended consequence? While the massive deleveraging is on with no growth whatsoever anywhere and the geopolitical situation is so bad that there is talks of possible war between Israel and Iran, or is it China and Japan or some other countries in far east, how long before inflation takes hold in USA?

As and when it does, what it will do to the wealth effect that Bernanke is desperately trying to create.

The long bond yield has started to rise and inflation expectation and it very much matches with my view that the 30 year period of the bull market in bonds is coming to an end. I think one can safely bet for the rise in the interest rates in USA. The bond market is many times bigger than equities market. When the bond market bubble burst there would be no place to hide. Don’t expect the money to flow in equities because the S&P earnings ratios are already high and the companies are not going to be able to generate any higher income going forward. There is only so much IPads you can sell or dump so many new cars on dealers and book sell, or build so much empty homes. Don’t expect China to bail out the world because there is trouble in heaven. For e.g. the low cost manufacturers of Christmas decoration manufacturers in Yiwu province are seeing their order dropped 20% to 40% for this year. They are the bell weather for Chinese exports sector.

So I am wondering where the job growths are going to come from? If US companies are unable to sell abroad because the BRICs have no money, if Chinese companies cannot export because Europe has no money, if Middle East is going to blow up anytime, what will happen to all those freshly minted dollars? The worst nightmare situation that can happen is: Dollar goes up, interest rates go up and asset prices go down. Along with it comes the social unrest. What we are seeing in MENA region, in southern Europe and Greece, reaches USA. By the way, while there is no demand for the business to hire more people, another reason is the huge bureaucracy that makes the life of small businessmen hell. Few years back one of our business tried to expand it the US market. We used to think that doing business in Canada is tough. But what we saw in the state of New York, with their labour laws and 1000s of forms and regulations, made us realize that Canada is much more business friendly than USA. They talk of NAFTA making business easier between US and Canada but that’s absolutely incorrect. You can import poisonous toothpaste from China and sell it in USA with much less hassle than importing a container of maple chocolate truffle. The FDA would make life living hell and yet businessmen make an effort. Hats off to those who continue to do business in this hostile environment. But what else you can expect when your president says that the businessmen did not develop their own business. The alternative on the other side is not any better either.

Yesterday John Mauldin sent his news letter “Thoughts from Frontline” and he makes a top ten list of most important issues facing America. They are:
1.       Deficit.
2.       Deficit
3.       Deficit
4.       Deficit
5.       Deficit
6-10.Everything else.
And I could not agree with him more. With a deficit of well past $16 trillion and the printing press at full speed, the future does not look very promising. How we will use this knowledge in our investment world is another story.

That’s it for this sunny Sunday. Enjoy the weekend and please join me in Twitter( @ BBFinanceblog) and share with your friends.

Saturday, September 15, 2012

Pushing On A String.

Good Day Friends.

Back after a long sabbatical. The career change thingy is half way through and I think the final result of the move will be known by Jan 2014. Till that time, I would depend on charity and learn something new, like French or some other silly things or travel a bit. We will see what the future brings.

But boy o boy, what a three week it had been. Now we have unlimited and yet sterilized bond buying by ECB and unlimited QE by Ben the printer of the debt monetization agency of USA. Bank of Japan has been doing it for last 30 years and we know where that leads. Now we have to wait for PBC of China to start its press and the whole world will be awash with money.  Before we go any further let us just laugh a little with the joke that is on us.


That explains QE for us , laymen, very nicely isn’t it?

The funny thing is, I had written before, possibly sometimes in June, that I expect the QE in September. And yet I was not long. Silly me. I forgot that stock market and economy are not the same.  But I hope to get long one more time before the election and have some fun with Barack and Ben. After all, the most powerful men in the world are telling you to take the "risk on" trade. They want to create the feel good factor when everyone thinks that their asset value is going up and so everything must be good. Therefore they will vote for Barack O. And I expect SPX  to test 1600 before the election.  But don’t just jump in to buy stocks just yet because, short term the market is stretched and by the last week of September, I expect a minor correction which should last for a week to ten days. That will be a good, low risk opportunity to go long.

Now that all surprises have been removed, and we will have a perpetual QE on both sides of the pond, does it mean, stocks will never go down?  Although in short term stock market does not follow economy, at some point the technical will merge with fundamental and it will be good to remember that the whole world is slowing down. How long you can create demand and prosperity with fake money? Didn’t they try it in 2000 when they blew up the tech. bubble? Or in 2005-6 when they created the housing bubble? It was the same Fed who was behind those two bubbles. In the 1st one old hoot Greenspan was in charge and in the 2nd one Great Ben was a party. They gave testimony before US congress that there is no danger of the bubble bursting. You can see how right or wrong they were and why should we believe them now. So while we will get long and take the free money that they are handing out, we should not forget the history and be oblivious to the danger.

Gold and silver is going to reach new high and most likely inflation will start in earnest. Already inflation expectations are above 5%. I will also be buying TBT for a long haul.

We are entering a very exciting phase and the rules of the engagement have been changed. So be careful with your investment decisions and do not chase short term gains, unless you are nimble and know what you are doing.

We will continue our discussion. For now lets enjoy this beautiful weekend.
Thanks for all your beautiful emails and comments and I look forward to hear from you soon. Join me in Twitter (@BBFinanceblog) and share it with your friends.