Monthly Archives: July 2011
Welcome to the Funny Farm.
I promised you a roller coaster for the financial markets this week, and that is exactly what we are getting. The on again/off again talks and the finger pointing that follows seems to be generating round lot moves of 30 points in the S&P 500. The high frequency trading algorithms are running wild.
Keep in mind that what the republicans in the House of Representatives are trying to pull off here nothing less than a Coup ‘d Etat. Their machinations are a blatant attempt to expand the power of the House while they command a majority. The debt ceiling has never before been used in this way.
They have taking a normal housekeeping matter and to turn it into a political weapon. Now that they have set the precedent, you can expect the democrats to behave just as badly next time they are in the driver’s seat, making all our lives permanently miserable.
I have traded markets like this before, and there is only one way to do it. Close your eyes and stop thinking. Become a robot yourself. If the market is up big, sell it. If it is down big, buy it. It is impossible to predict how the next headline will read. Stocks are really operating independent of the though process. Try an analyze this, and it will just blow up in your face.
Using this twisted, but functional logic, the thing to do after a 50 point sell off in three days is to buy. Just write the damn ticket. If you are mercifully mostly in cash, as I am, then you have plenty of dry powder to do this with. If you don’t, you’re screwed.
Oops, There Goes My Position
Quote of the Day
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” said Andrew W. Mellon, President Herbert Hoover’s Secretary of the Treasury. The Republicans did not win a presidential election for 20 years after that comment.
Report From Europe, Part IV.
Milan, Italy appears to be a city entirely populated by fashion models riding bicycles on the city’s frenetic streets. That is one’s first impression coming out of the monolithic Milano Centrale train station, built by Mussolini to reaffirm faith in his state. Despite years of allied bombing during WWII, the building is as imposing as the day it was built.
You Think It’s Easy Fitting into a Size 0?
I came to this medieval city to speak at another strategy luncheon, which was attended by readers from throughout Europe, from the surgeon hailing from Trondheim, Norway, to the Hungarian hedge fund manager. The Westin Hotel provided a spectacular lunch, as only the Italians can.
Much of the conversation revolved around the Euro, which everyone in the room to a man believed was grotesquely overvalued, given the continent’s economic outlook. Still, as long as the European central bank pursues its mindless policy of raising interest rates to control commodity driven inflation, it will remain firm.
We discussed various breakup scenarios for the EC which come into vogue every time Greek debt gets downgraded, which is often. This is unlikely, given the modern European’s dislike for open conflict. Bring nationalism into the equation, and things could deteriorate quickly. Germany could bail, unwilling to refinance the debt of lazy, tax avoiding, garlic eaters. Southern Europe could do a disappearing act, unwilling to pay their debts to the sauerkraut eaters up North.
Yes, I Can Be Bribed
In either case, the European currency bloc shrinks, or disappears completely. It is just a matter of time before an opportunistic political party rides this fast track into power. The Germans will tell you from hard earned experience that this always ends badly.
I cautioned that the risk of nationalism was probably greater in the US now than in any other major country. Of the dozen republicans now vying for the presidential nomination, at least three could be described as extremist, pandering to conservative America’s worst fears (high taxes, immigration, cap and trade, gay marriage, the rise of minorities).
An isolationist America would withdraw from international organizations, like the United Nations, the World Bank, and the IMF. Bushes wars in Iraq and Afghanistan would be stepped up, while we would probably walk away from Obama’s war in Libya. It would adopt a more threatening posture towards Russia and China. Remember, Sarah Palin threatened to launch a nuclear war against Russian for its invasion of Azerbaijan. We laughed, the Russians, not so much.
I had exactly one free afternoon to spend in this amazing city. I visited Michelangelo’s Last Supper at Santa Maria della Grazie monastery, looking for evidence of the conspiracy theories long ascribed to this masterpiece. I did a quick run through the Galleria and stepped on the bull’s balls, conducting three clockwise rotations to bring good luck. Looking at my performance since then, it obviously worked. The impact of the fashion industry on Milan is enormous, with every conceivable brand imaginable on show.
I managed to scoot into the main Brioni store just before closing. There, I watched two Russian Mafia types in their thirties buy a half dozen exquisitely tailored, 200 thread count suits each for $6,000 apiece. That’s $72,000 worth of clothes…. for guys! Alas, they don’t carry an American size 48 long in stock, it would have to be a custom order, so I left with only a couple of Leonardo ties in hand. In any case, I happen to know that I can get the identical suit at the Brioni shop Caesar’s Palace in Las Vegas for half, thanks to flaccid Uncle Buck, plus they likely have my size. And I will be there in two months for a strategy luncheon (see above).
The next morning found me in a mad dash back to the train station, my taxi driver artfully weaving in and out of traffic, where I boarded a first class Eurostar train. The engine powered North towards the Italian Alps, passing through the Milan slums. Retracing the route seen in the classic Frank Sinatra war flick, Von Ryan’s Express. Next stop: Zermatt, Switzerland, and the Matterhorn.
To be continued…
The September 23 Las Vegas Strategy Luncheon.
Come join me for lunch for the Mad Hedge Fund Trader’s Global Strategy Update, which I will be conducting in Las Vegas at 12:00 noon on Friday, September 23, 2011. A three course lunch will be followed by a 30 minute PowerPoint presentation and a one hour question and answer period.
I’ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I’ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $245.
I’ll be arriving an hour early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets. The event will be held at a major hotel on the Las Vegas strip. Details will be emailed directly to you with your confirmation.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.
Quote of the Day
“It’s a bit like looking for gold in a minefield,” said Fidelity International’s China Special Situation Fund manager, Anthony Bolton, amid widespread accounting fraud in the country.
The Death of the Consumer.
I often get asked why I never put out “BUY” recommendations on consumer discretionary stocks. I promptly send them in search of the latest consumer spending figures at the Bureau of Economic Analysis, which do not paint a pretty picture (click here).
Since 2008, quarterly spending has come in at a scant 0.5%, the lowest figures since the Great Depression. You can blame deleveraging by the individual. While the government is telling us to spend more to stimulate the economy, we are in fact doing the opposite to put away more cash for a rainy day. They are also taking out an insurance policy against a future financial crash which could come as early as next year.
You can find this in consumer debt, which saw a zenith of 130% of disposable income as recently as 2007. Today we are back down to 115%, possible on our way to 70%, the 1970-2000 average. This is also reflected in the savings rate, which has risen from 1.2% in 2005 to 4.9% today, and may hit the long term average of 8%.
If anything, these numbers are about to worsen dramatically as 80 million baby boomers retire. The over 65 crowd is not exactly known for the big spending, low saving ways.
I always tell people that being a former scientist and math major, I am a numbers guy. Just cut the BS, the spin, the apples and oranges comparisons, and the”independently” financed research, and give me the damn numbers. I can reach my own conclusions, even if you don’t like them.
The figures above are a major part of my own long term forecast for US GDP growth rate of 2.0%-2.5%. Having decimated the middle class by shipping 25 million jobs to China, assurance a decades long decline of standards of living, should you expect anything more? Walmart (WMT) says that it now has a major problem in that its low end customers are literally running out of money. This is not good for the industries specialized in this area.
Those looking for fodder that the US is coming down with the “Japan Syndrome” and the two decades of lost economic growth this entails will find fertile ground here. US consumer spending still accounts for 70% of GDP growth. In Japan, it peaked in the late eighties at 20%. So the loss of the consumer will be far more damaging here than it is in the country that is suffering its third decade of flat economic performance.
In stock market terms, this means we may get a little more upside by the end of the year, possibly 50 or 100 points in the (SPX), but not much more. Off to a raging bull market we are not. The nimble may be able to profit from this, but for most it will be a snore.
Wake Me Up When the Consumer Returns
Quote of the Day
“People call China an emerging market, but they don’t realize how emerged it already is,” said Michael Yoshikamai, CEO of YCMNET Advisors.
Bring Back the Smoke Filled Rooms.
I write this from poolside at the historic Claremont Hotel in Berkeley, California. The weather couldn’t be more perfect, and the local beauties, many coeds on summer break from the university, are strutting their wares, or the lack thereof. It is shocking what some people will tattoo on their bodies these days, and where they will do it. The blue sun umbrellas array themselves around the water like a postmodern impressionist painting.
I am sending out the letter late today in the hope that I will get some insight into the debt ceiling negotiations before the markets open. So far, no joy. The (SPX) opened down 15 points in Asia, oil is tanking, Treasury bonds (TBT) are getting beat up on a prospective downgrade, and Uncle Buck is getting mugged. Fortunately, my long in equities is partially hedged by my short on the bonds. Is it possible that I have underestimated the stupidity of congress?
In days of old, when such impasses presented themselves, Speaker of the House, the rosy cheeked Tip O’Neil, would meet his counterpart in the Senate for a night of poker. Several bottles of Scotch later, a deal would get struck, and the two would be photographed together shaking hands the next morning, talking about the good of the country. The process moved on.
That doesn’t happen anymore. Speaker John Boehner is new at the job, with a mere six months in the post, and he is learning through trial and error, mostly the latter. He is up against a world class constitutional law professor. I can’t imagine Boehner playing cards with Harry Reid, Obama, or anyone.
Even if he does come to an agreement, it is unlikely that he can make it stick by getting his own party to follow him. Many of the new junior house members are from the Tea Party, whose understanding of economics, financial markets, and the law making process is shaky at best. In another six months they have to start campaigning again, going to their supporters and financial backers with a list of what they have achieved. Raising the debt ceiling is not on that list.
If Tip O’Neal faced recalcitrant members of his own party, he would threaten a cut off of all pork barrel projects in their district, banish them to the least popular committees, and kill any bill they brought to the floor. But at least if Tip cut a deal, you knew he could deliver the votes. Today, rebellious republicans won’t even take a call from Boehner, who view him with almost as much hostility as they do Obama.
What we are seeing here is sausage making in public, in all its odiferous ugliness. It is negotiation out in the open, never a good idea, especially when both sides believe the other is doing so in bad faith.
All of this leads us to bemoan the passing of the Reagan republicans, who you could work with and get a few laughs along the way. It also means that the volatility that I promised you last week will be arriving by the boatload in coming days. I still believe a deal will get made in the coming nine days, so I will use the sharp dips to add selective risk exposure. Watch this space.