Well, it has taken some time

Posted by Ray on August 24, 2010 under Economy, Main, Markets | Be the First to Comment

I have been writing about the decaying economic data for some time now and have taken some heat for being a pessimist or a permabear, but now it appears that I was correct. It is also striking that almost a year ago I called this current economic funk we are in a Depression. I said one of the reasons why we do not recognize a modern Depression is because there is no need for soup lines and the like. In today’s world everything is automated with food stamps, 40M Americans are currently on food stamps a huge YoY increase, we have unemployment benefits (99 weeks currently), the HAMP (loan modifications), energy assistance, public housing and a slew of other safety nets available to those in absolute need.

Since we have all of those programs our growing economic troubles can remain out of sight and mind. We can be told things are improving because the data says it is. Never mind the fact that unemployment is “only” at 9.5% because people are so discouraged that they left the workforce. To me the most telling sign is the food stamp data which is just unbelievably high with almost 12% of Americans in need of public assistance just to feed themselves, think about that for a minute. That kind of takes the wind out of my sails about being right about the current economic climate. I never wanted to be right, but the data was never strong nor did it point to a sustainable recovery, which was merely a statistical recovery to begin with.

I have been silent for a few weeks because I have not felt so hot and I was letting the data set in. I think it is clear now that the recovery was not really a recovery and when the stimulus stops we are in deep trouble. As Rosenberg said, when businesses are dependent upon government spending for growth we got serious problems, I am paraphrasing the statement, but it is close enough. He was right all along and the permabulls have a rude awakening coming their way in the near future. Whether it is the Hindenburg Omen or just a slew of bad data, which will get worse, stocks are way overpriced, period. We will or the market will correct this error for us by forcing a multiple compression and it will either happen all at once or over a period of days, but it is coming.

My last call was to look into leveraged ETF’s for long dated treasuries, UBT or TMF, and gold, GLD or physical. This trade was profitable, UBT, which I own, was about $86 and it is now $102.43 and GLD was about $116, it is currently $120. Those were good trades that required guts in the face of deflationary forces and the fact that you were looking at a leveraged ETF, which are very dangerous, but they worked. I suspect that it will continue to work, but I would not, besides gold, buy the pair trade here. The Fed told us what they were going to do, monetize some debt on the longer end of the curve, and I suspect they will continue in the near future, we might now Friday for sure, but if they do more QE look for a $1-2T figure.

Ben Bernanke wants to flatten the yield curve to force lending by banks, but it will not work. It is a good theory for Ben, but the reality is banks do not want to lend and consumers do not want to borrow. QE will also not do anything to boost money velocity and I am not sure why anyone would possibly think it would. Banks will merely do what they did before the credit crisis and take on more risk so they can play a different yield curve other than treasuries. As we know, that did not work the last time so why anyone would think it will work now is beyond me, but I am sure that banks will take more risk to boost profits. After all, they are too big to fail.

The outlook for the markets is not good as Ireland just got downgraded and I think we will see some weak data at 8:30 tomorrow as well. Unemployment claims, a leading indicator according to, well, me and PIMCO, are rising and another week +500K will be devastating. Also, the employment report survey was out the very week we saw that 500K print, not good news for the unemployment figure out a week from this Friday. The Philly Fed, Richmond Fed and the Empire Report’s were not very good and I think we will see close to 50 on the ISM survey out next week, perhaps lower than 50 so be ready. All the data is pointing to very, very weak near-term economic pain ahead, there is little doubt about that.

I realize that balance sheets are rich with cash right now, but that means nothing as companies are merely hoarding cash at this point. It is, the cash on hand, good for corporate bonds though, which I still love. The outlook from CEO’s is also becoming more mixed, John Chambers from Cisco was not optimistic, this should scare you because this guy is always optimistic. Basically, much like in 2000, CEO’s merely did not foresee a slowdown in the immediate future, which is very surprising and takes down the credibility of many corporate leaders, in my opinion.

Because of all of this I am more bearish now than I have ever been in the past. I am positioned for a correction and pulled most longs off the table. I am in longer duration treasuries along with my UBT play, long gold, silver, corporate bonds (no high yield to speak of), some international holdings (frontier markets), a few biotechs, and inverse ETF’s. My long holdings are all dividend paying stocks with very low P/E’s and strong balance sheets. Blind belief that the market is going to head higher is insane and, frankly, we have just seen an insane rise in equity prices to begin with. That time is now over and the bears will come back to take control. I find it difficult to believe no one saw this coming, I have written about it and many others as well. The data never lies, ever, but the people reading the data usually have a reason to spin it in their favor.

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Quantitative easing, it’s reality, kind of

Posted by Ray on August 11, 2010 under Main | Read the First Comment

When I wrote last week that the Fed would do QE 2 and the trade of the century, granted that was over the top, was leveraged bull 20+ year ETF’s I received some flack, a lot actually. First, let’s talk about the economy and what is going on there. Second, let’s talk about the treasury, gold barbell trade that seems wild and crazy. To clarify something, no, I am not drunk as one commenter asked.

The economy, oh, how this recovery summer is not such a recovery after all. Perhaps Geithner’s op-ed in the Times should have read, “Sorry, we screwed up any chances of a recovery” instead of “Welcome to The Recovery.” Any improvement we have seen within the economy has been purely statistical or for the very wealthy, period. Yes, Saks and Macy’s are indeed having good years, but look at Walmart, not such a blockbuster year. If you strip away the stimulus spending and government transfers you have poor GDP readings, period. I cannot see how anyone would or could really dispute that, but I am sure there are some that will try.

The truest test of any economy is unemployment and I was saying, before it was popular by a certain ‘New Normal’ guy, that unemployment was a leading indicator, not a lagging indicator. Our employment situation is poor at best considering that we are having more and more people leaving the workforce because they are giving up. Imagine just giving up all hope of finding work, not that you don’t want a job, but you just can’t find one, but since you have given up our government says you do not count anymore, nice. Anyhow, if we include all those people who dropped out of the workforce we are up to 10.2-10.5% official unemployment. As far as the U-6 we are still around the 17% area, but I am willing to bet it is much, much higher and who knows, exactly, how many people simple have been unemployed so long they just don’t count anywhere anymore. Regardless, our unemployment issue is the truest test of our economic situation and has indicated for well over a year that the economy is in poor condition.

As far as the other economic data points and indicators, well, show me one that points to an actual positive improvement please. Hint, there is not one that points to a significant improvement in the economic condition in recent months. In fact it is so bad that the Fed is turning to a form of QE which they know will do nothing to boost the economy, but it will look like they are doing something. It is so bad you had Ben Bernanke testify in front of Congress and say; “I don’t know what is going to happen,” basically when he said ‘unusual uncertainty.’ You have the Fed Presidents talking about recessions, QE, Japan scenarios and a host of other issues, but don’t worry because CNBC says no double dip. You know what, they are right. There will not be a double dip because we never made it out of the first depression.

We got the Fed doing this reinvesting of interest and repayment of principal now, to the tune of about $300B or so, into treasuries. What is that going to do for the economy? Nothing. Ben is trying to force banks to lend by doing a bull flattener to the yield curve, good luck Ben. What he doesn’t realize yet is people do not want to borrow. In fact, people want to pay off their debts instead, go figure. Ben cannot boost demand and QE will not do anything at all besides make bond investors very happy. It is a dog and pony show to make everyone feel good and like the Fed has some ammo left, they don’t and the game is over for them. All more QE will do is damage the dollar at some point in the future, that is a certainty. Consumer demand will return only after the deleveraging period is done and that could take 10 more years, who knows. It will be a tough ride, that is for sure.

Now, for those who thought I was nuts for going long a leveraged 20+ treasury ETF and gold, well, you don’t have to say, my account says it for me. UBT was about $85 a share when the article came out and it closed today at about $90.50 and gold was at about $116.50 and it is at $117.73 (I am using GLD as a proxy). I do not believe the trade is done, I wouldn’t enter it here, but I am not exiting it either, especially after CSCO missed their revenue estimates tonight. This was not a crazy trade, it was the most obvious trade in the world. Easy money like this does not happen very often so I am not sure why anyone would think this was ‘high risk’ or abnormal. You can hold leveraged ETF’s, if they go in your favor, over a period of days, just not long-term.

Everyone knew the Fed was going to do something, anything, because the Fed is staunchly independent and not influenced by politics, yeah right. Come on, the Fed knew it had to do something to show it was helping the economy, but not too much because we have an election coming up. What could be safer than maintaining the balance sheet, but reinvesting loose change into treasuries to bring down long-term treasury rates? It does not raise any eyebrows, everyone knew they would do this and it does help borrowers, but it doesn’t help the real economy. Regardless, this was telegraphed and sets up the Fed for real money printing and QE after November.

In the meantime, I plan on locking in profits on my UBT soon and rolling into TLT on weakness. I fully expect that we see the 30 treasury move towards the 3% area, maybe 2.5% as Ben wrote about in the past. That makes longer duration treasuries very attractive still and inflation is not an issue now. However, inflation will be at some time in the future and QE will damage the dollar, hence the gold hedge. I think gold goes back to its high and make a run towards $1,300 an ounce, maybe higher is full blown QE kicks in this fall. Equities are not attractive, in my view, unless they pay an outsized dividend and have a strong balance sheet. Stocks like AAPL, no thanks, they do not work in this environment unless they pull a new killer product out of their back pocket every other month. Good luck.

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