Cara's Commentary & Community Chat, Fri., May 22, 2009

Shadowstats has this example, it should go with the previous examples:

http://www.goldensextant.com/Resources/RealDJI2007...

VERY interesting point of view, if you compare advances in the cpi adjusted dow with a cpi adjusted long term gold chart.

source:

http://www.gata.org/node/7441

Here's a wrinkle that I'm sure was overlooked:

http://www.guardian.co.uk/business/feedarticle/852...

"The tough part is watching HobieCats and WaveRunners and listening to the music of beach weddings while I'm trying to do my work."

Sounds like all you'd need to do is eliminate the "work" part and you'd have a nice retirement spot, there.

I keep wondering what it would cost to live down there. I'm gonna have to move when they double the state income tax here in the next few months, anyway. Maybe I should be looking somewhere offshore, too. I wonder if I'd need to get my Canadian citizenship back before I'd be an "acceptable" immigrant? Do you know where there is good info on the subject?

from a purely technical definition of the term in finance, i would agree that don coxe has a conflict of interest of sorts because of the commodity fund he manages.

though from a more realistic analysis i would say his conflict of interest is no different from any analyst who espouses a macro-economic view to which they invest in.

consider a few things:

1. Don Coxe has been doing conference calls and publications years before starting the Coxe Commodity fund.

2. Don does not push his fund on people in conference calls

3. his viewpoint has been fairly consistant for years now, so its not exactly clandestine trading activity that he participates in with a commodity fund. he is a bull on the asset class, be it via a fund w/ his name, or how he invests client accounts, he's simply transparent about his investment thesis.

4. under the same rules we could accuse anyone who invests in the same direction as their advice on the internet via funds.

Bill, you had mentioned starting a possible ETF for Jr. Golds in the future, if this comes to fruition, any bullish gold comments you provide on this site could be construed as a similar conflict of interest, despite the fact that you have been transparent and open about your views for years on gold, and dont use this blog to push your funds on people.

so in that spirit i dont think its entirely fair to say Don has a conflict of interest as it gives the impression that there might be something unethical to the content of his weekly conference calls. i dont believe thats the case, unless people out there are privy to some information i am not.

MOst people aren't aware of the intervention of their own senses

...

I just checked a couple of indicators that I occasionally look at and then both suggested that equities should have a sell-off in the near future: the TED spread was rising since May 19, after falling for MANY days in a row, and the CMBX spreads are at their highest levels in 2009.

"Do you know where we can get an up to date accounting of Fed buying of the long bond?"

No, I don't... But if anyone knows of such a site, I would love to hear about it!

The yield-spike may be nearing the point where it threatens to short-circuit economic recovery. While lower spreads on mortgage rates have kept a lid on home loan costs so far, mortgage rates have nevertheless crept back up to 5pc.
The Obama administration needs to raise $2 trillion this year to cover the fiscal stimulus plan and the bank bail-outs. It has to fund $900bn by September. http://tinyurl.com/r8ugtm

Someone sent out a link this weekend about China allowing its corporations to issue bonds denominated in $USD. They are planning to issue $30B worth of bonds in the next two quarters. The first companies who filed to do so were the huge Chinese natural resource companies.

What are the implications of this development? The article suggests the following:

1. "It’s conceivable that the sheer volume of dollar-denominated bonds could indirectly prop up the U.S. dollar. By implication, this could also wreck the “gold bugs” who are betting the farm, instead of investing in the precious metal as part of a disciplined investment strategy.

2. The prices of resource-based companies and commodities could go sharply higher as investors realize there is a potentially unlimited source of funding chasing relatively few quality assets.

I can also add another possible implication: the Chinese will partially switch to buying their own dollar-denominated bonds rather than those issued in the US, driving up the yields of the US bonds even more. Lately, a rising bond yield implied a rising POG.

Notice that 1 contradicts 2 and 3, which suggests that it is difficult to predict how the various impacts of a complex event will interfere (constructively or destructively) to impact the price of a certain asset class.

CP, here it is, as discussed before, works for me.

https://addons.mozilla.org/en-US/firefox/addon/722

Quasi

David- I subscribe to CME quotes for about $15 per month. What I like about it is I can see more than the current future contracts which can be misleading for longer term trades. I can also see real time volume, which is probably more important. For the current futures you can get them here... http://tinyurl.com/2x75s .

I have been thinking about the past year for trading and am working through the following thesis... Of all the trades that I have made, the most profitable have been the "hard" trades. Everyone talks about trades that have had a nice run as"the easy money has been made". Well, sure, but the hard trade is long before the fact. NUY was paraphrasing Bill that the real money is made on the edges, I couldn't agree more. Posters also talk about "dead money" for trades. Well, what is the cash I have in my account, and no, 1% dosen't cut it. So proper position size and a ability to move quickly seem to be the rule for the day.

So what is the hard trade right now? Can't be going short, everyone has been working that angle for a few months. I think the hard trade is going long XLF, and more importantly KRE, or scaling back into UNG after profiting 30%.

What do you think? I'm also ready to let go of my winners in AUY and KGC. It will take a real directional change to shake loose my 1/3 left in the E/P guys.

Good luck, man.

Thanks, Dave! I will use quote.com from now on.

Thanks, Mark -- the bloomberg quote is a good quick way to see what is happening in the futures market.

As for always choosing the "hard" trade -- sometimes it works and sometimes it doesn't. The people on this blog were talking about shorting this rally for several weeks now, and I believe they won't stop talking about it until the market gets oversold (the pullback has probably already started two weeks ago, since both XLF and KRE had only two UP days since May 11, with KRE greatly underperforming XLF, which as Don Coxe pointed out is not a sign of a true recovery in the financial sector). As I had mentioned earlier, the TED spread has been rising for 3 days in a row and the CMBX spreads are close to their highest levels in 2009. This is not the time to go long financials. I read somewhere over the weekend that the bullish sentiment is record high now, so this blog is not representative at all of the general mood. So going short now is still a contrarian trade.

As for letting the gold miners go, I was pondering hard about that this weekend and decided that if S&P breaks below 880, then I will sell all my WGW and UXG (the riskiest gold stocks I have) and will move that money into GLD.

I don't think there's been any projection of any outcome with a deflationary outlook from any source, save a very few.

Nobody will acknowledge that we have already had a massive inflationary bubble burst running since 2003. Many of the expectations are that this will re-occur as if the previous one had never existed. A long term monthly chart of the bank stock TD.TO gives us a very clear view of when, exactly the real bubble was most pronounced.

If the downdraft in stocks is not yet done, then its likely that CPI-adjusted comparisons may be ignoring both the collapse of the previous inflationary bubble in housing and commodities, and can dissuade that we may have a continuation of the bear market, because neither of those are factored in.

As for gold, a third test of the high at this stage will point to a breakout against previous CPI-deflated points on the long term chart. There is no hard and fast rule for a fix in gold prices related to surging forex values, because the bald fact is that gold will have defied any such consideration.

"I haven't seen the bullish take you refer too...All I hear, here and else where, is pull back/correction."

I also have that feeling, but then I realize that I am reading blogs of "individual investors" or of notable contrarians (like Hussman), who probably make up less volume than the huge mutual funds that are feeling the peer pressure now to perform and join the new bull market. 2nd_ave wrote about this "performance anxiety" a few weeks ago -- I think it was responsible to a large extent for keeping the rally from collapsing much sooner, but I think this anxiety is getting old now as most of the "big" players who were afraid of missing the new bull market have probably already invested all the money they wanted to invest at this stage.

Asset Markdown has yet to occur in Europe. "This sucker's going down" doesn't apply yet to European asset prices.

From Mauldin's newsletter:

"Let me quote from the very interesting study the team at Variant Perception did.

"As we have repeatedly said, Spain is set for a long, painful deflation that will manifest itself via a spectacularly high unemployment level, a real estate collapse and general banking insolvencies. Consider this: the value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That's almost 50% of Spanish GDP. Most of these loans will go bad.

"Spanish banks are now facing a very bleak outlook. Spain's unemployment rate reached over 17% last month; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family. Spain and Ireland had the worst housing bubbles in the world and now Spain has as many unsold homes as the US, even though the US is about six times bigger.

"Why are Spanish banks not insolvent? Spanish banks are not marking their real estate loans to market. We've often wondered how it is that our thesis for Spanish real estate and industrial collapse has not created more victims. The answer is simple according to an article in Expansion, the Spanish equivalent of the Financial Times, from the 19th of April titled 'Spanish banks control half of all real estate appraisals.' You can't make this stuff up. We haven't even begun to see the worst in Spain yet."

European banks are in far worse shape than their US counterparts. That is because they utilize far more leverage, on an average about 30 times leverage. How can that be, in what is supposed to be a conservative industry?

"European banks were only restricted on the basis of risk-weighted assets, unlike the US where it is the total leverage ratio that matters, so most European banks bought assets that were rated by Moody's and S&P, who couldn't rate their way out of a paper bag, and for anything that wasn't highly rated, they bought credit default swaps or guarantees from AIG and MBIA. Because of that European banks were able to lever up a lot more than their US counterparties. Given the much higher leverage levels and general worsening of collateral values, we think that all the shoes in Europe have not dropped."

European banks have assets of about 330% of their GDP, compared to US banking assets, which are about 50%. They have over $700 billion in loans to Asian businesses (which are watching their exports collapse) and $1.3 trillion in loans to Eastern Europe, which is in a very serious recession, and so many of those loans are simply not going to be worth anything. Simply put, there is going to be a need for massive amounts of money to bail out European banks, or we'll watch their economies simply implode.

Where is the money for the bailouts going to come from? Germany? That will be a tough sell politically in a country that is in a much worse recession than the US. How do you tell your citizens you need to bail out banks in other countries with their tax dollars? Italian and Austrian banks are going to need a lot of capital, more than their governments can pay. It is going to be a very tough problem.

Governments around the world are responding to the global recession by running massive deficits. In addition to the US, the UK, Japan, Russia, Spain, and Ireland are all running deficits of over 10%.

And, as in the case of the US, these are not going to be one-time deficits. The IMF predicts that England will shrink again next year and the recovery in the US will be modest at best. The US economy is expected to grow by 0.2% (far from the optimistic projections of various US government agencies), the 16-nation eurozone will eke out a modest gain of 0.1%, and the Group of Seven (G7) leading industrial economies will, as a whole, only grow by 0.2 percent. They project that Japan's economy will stagnate next year."

Hey Mark -

Hard trades. Hmm. Yeah. I'm not sure if it was that book, or Vad, that talked about the anatomy of a trade. First accumulation with no volume and very little price movement, then an up move on volume, then a shakeout down, and then the real move up. I've been shaken out enough times that now I sometimes realize its happening! I start to feel that I need to sell but then say to myself, "ok, it's just a shakeout."

I think our UNG trade is in "shakeout phase." Sometimes news helps the shakeout. "Oh my gosh natgas inventory is almost full. Quick, sell now" giving the big guys more to accumulate on some good volume.

One of the important lessons I've learned trading is, don't fight the current trend. At the same time, looking for reversal patterns is important. If you can spot accumulation, then that's a sign that someone else thinks there is a reversal coming soon. You can buy with them, but set your stops in case you (or they) are wrong. And selling depends on your time horizon for the trade. The natgas trade horizon is a year, probably. So maybe, don't sell during the peaks and valleys on the way up - write covered calls at peaks, buy them back at valleys and write puts, buy the puts back at peaks, rinse repeat. RSI helps with this, but its not perfect.

I'm not a fan of XLF. I'm short. I like to follow what Ms Whitney says, and she feels that the current asset issues have obscured the fact that the large bank business model is not coming back, and there will be no return to the big profits of yesteryear. That, and the multiple RE crises have not even come close to having been played out yet. I also think there are a number of swans that can come home to roost (!) so the risks are definitely to the downside, rather than the upside with XLF.

The local/regional banks seem to be better bets, but - maybe wait for wave C down before backing up the truck? I think the shorts have farther to go yet before being wrong.

EDIT: but the all important question is, what's your time horizon? When I talk about bank trend, I'm thinking overall trend will be down for the next year or two - but there can of course be rebounds lasting a while within those longer term trends

"...my "real World" experience where it seems everyone I know is unemployed or about to be! In all my life I have never known this many people out of work. At my age 50+ I would expect to see unemployed friends and relatives numbers rise just due to age discrimination or plain old "age attrition"."

This is what I have seen here. We began a bit earlier in the midwest. Ten years back my cousin's husband was forced to retire at age 60 from a company where he had worked over thirty years. I say "forced", but actually it went like this — "Leave now with your health insurance until your 65 and on Medicare, or leave a little later without insurance."

He was lucky. The nearly century-old company went out of business shortly after he got to 65. It began with those in the 50 to 60 range and is now moving to younger ones. There is virtually no safe category, large, small, medium companies, private, public and local government — all jobs are now at risk.

My next door neighbor, in her 50s, a former office manager for a medium size company, applied for a clerk job with the local community college last week and didn't get it. There were over 150 applicants for the one job. It went to a younger, but not so "over qualified" woman.

You wrote:

"We are now (i) expecting that final pop, and (ii) starting to take profits. It’s been a terrific run"

My question....Isn't an increasing proliferation of dollars (Obama) and/or the dollars diminishing respect as a global reserve currency increasing the POTENTIAL for gold to move permanently to a triple-digit price? And shouldn't silver become a 50 dollar item anyway? Won't some of this depend on whether we have stagnation AND rising prices or stagnation and "true" deflation?

I've got a strong feeling that gold, as expensive as it now seems, is about to become that much more expensive. If we view the recent price action as a consolidation pattern then wouldn't a true breakout to new highs combined with a departure from that consolidation auger much higher prices? Or is it some kind of top?

To put the question another way, where do you imagine that the "final pop" you reference will take us price wise, and what precisely do you mean by final?

Final for this year, final forever? Let us know. Is it time for Kaimu to get out the shovel and trade all his pirate's treasure for fiat currency?

Les,

it's a presenter to view the shows created with this particular software. Been around for ages.

FYI Vad, I tried to install the presenter but was unsuccessful. Ain't Windows great? ;)

I share shows created in this software for years... run into 2 or 3 cases when it didn't work. I guess, it's just the law of big numbers, lol... BTW, couple viewers told me they got the message about unsuccessful install, but when they returned to the link show worked for them... maybe try that?

Windows is a patchwork, no kidding...

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