The Bulls Still Have to Make Their Case

Posted by Ray on February 9, 2011 under Main | Be the First to Comment

I have stated that you have to be long this market until the Fed pulls the ample liquidity it has been pumping into the markets for the few months now. Before the Fed announced QE2 I was right to be bearish as the indices were heading lower under numerous stresses from both domestic and foreign sources. It was in August when Ben gave his speech about asset purchases and then the next meeting which started them that caused the markets to take off. Up until that point there was no real reason to be bullish.

Frankly, outside of the excess liquidity, there is still little reason to be bullish. Just because stocks move higher it does not mean that the economy is all better, sorry, but it does not work that way. I believe that the economic data we are seeing is heavily distorted and if we are in fact having 3-4% GDP growth, like several Fed officials claim, where are the jobs? That is a huge jump in GDP growth and that would certainly create jobs, but here we are witnessing the greatest exodus from the job market since the data has been tracked. The U-6 data is way up over 17% and Shadow Stats says we are saddled with 20%+ of unemployed/underemployed.

If we are experiencing 3-4% GDP growth why in the world are we still experiencing ZIRP and QE of any kind? It makes no sense at all. I know, because “inflation is too low.” Inflation as defined by Ben Bernanke and not by people who have to buy food and energy every day. The fact that we are arguing over the definition of inflation is asinine. Normal, sane people, would define inflation as the normal cost of living items, but the insane people say that inflation should be measured by the cost of computers and flat screen TV’s, that makes sense. The bottom line is Ben is distorting everything with this insane monetary policy and is causing food prices to rise around the world, including right here in the USA.

The economy is better, I have admitted this for some time now, but it is still sick and not functioning correctly. What we are seeing now with runaway government spending and excess Fed easing is a serious risk to the US dollar. I realize that every country wants a weaker currency so they can export their way to prosperity or so they can grow their way out of their debt problems, but this will not work for the US. The US debt issues are so large and the trade imbalances are so out of balance that it is impossible for the US to grow its way out of its debt problems.

While Ben tells Congress that the US must get the deficits under control immediately, a first I might add, it is impossible to do so. Have you ever wondered why the US cannot cut annual spending? They tell you it is because of entitlement programs, right? They also say these entitlement programs are solvent, at the moment at least, right? Wrong. The proof of this is in the annual deficits. When you received your paycheck there were federal income taxes withheld and FICA taxes withheld, for Social Security and Medicare. Supposedly the FICA taxes went into separate accounts to be used at a later date but our leaders used that surplus money to plug holes in previous deficits and gave the SSA and Medicare IOU’s instead. Now the SSA and Medicare are cashing in those IOU’s which is why the government cannot cut the annual deficit and it proves that the programs are insolvent.

All of this is evidence that the economy and economic health of the US is not good. We are still in trouble and all we did in 2008-2009 was transfer the bad debts from the banks to the US government, kicking the can down the road, and the banks are still in bad shape. The economy is not replacing lost jobs and probably never will replace all those jobs lost in the last few years. The only way the unemployment numbers will get better is because of how the BLS calculates the unemployed, i.e. not counting the ones that fall off the rolls.

The bulls need to make the case that the economy has really recovered. I am a bear and I said to own stocks, and commodities, and I was right too, but I am under no illusion that things are that much better. A stock market going up doesn’t really mean anything especially when the Fed is giving primary dealers billions of dollars every week to do something with. Not to mention that rising stock prices only help the investing class anyhow which is a shrinking portion of America nowadays.

You can fool some people some of the time

Posted by Ray on November 8, 2010 under Main | Be the First to Comment

I believe what the Federal Reserve has begun was completely idiotic and unnecessary which will ultimately hurt the majority of the American people. However, many economists disagree with what I just said. I guess you can fool the people sometimes, but economists can be fooled all of the time. Part of economist’s problem, and why they are so horrible at predicting things, is because they live inside of models and rarely look up. They are also way overpaid for what they do which adds more of a problem with their theories since higher prices do not impact them as fast as it impacts 80% of Americans who live paycheck to paycheck.

Paul Krugman is one of those people who has been far more wrong than right, but for some reason people still listen to him, odd, really, really odd. Mr. Krugman has taken aim at Jim Rogers recently claiming that inflationist’s have gotten the last few cycles’ dead wrong. Really? So, oil going from $50 to $147 never happened. Gold rising to new highs isn’t happening. Food prices going ballistic did not happen then and is not happening now, sure, whatever. The fact is that prices, including food and energy, have moved higher this year and before the collapse of 2008, but Krugman says that did not matter… why do people read him?

It is my opinion that higher food and energy prices helped collapse the system in 2008. As prices rose people diverted more money to the things they needed the most, food and heat which took away from our consumption oriented GDP. After the collapse began we saw these prices ease, a lot, and GDP did pick up after the crossing point was reached. Of course, government intervention helped and many people simply stopped paying much of their debt which has helped GDP since now one cannot pay their bills, not lose their home and now needed a new Kindle or iPad. Now we have rising commodity prices again, but no one seems to think this is bad news. Well, it is.

While mainstream economists talk about “sticky” CPI, excluding food and energy while concentrating on wage inflation as the sole indicator of inflation proves that most economists have lost their minds. Wage inflation does not have to come before food and energy inflation, I am not sure why anyone thinks this is always the case, and if we look back at 2008 we see a similar situation, rising commodities and flat to lower wages. This is a major red flag, but most mainstream economists don’t care. These economists look at me or a Jim Rogers and assume we do not have a clue about what we are talking about. The do not seem to understand that an economy can go from deflation/disinflation to inflation overnight, it happened in Germany. Maybe they are right, but at the same time they are so devoid of reality it is not even funny.

To think food and energy prices do not matter to people is idiotic. It is the same as saying fish can live fine out of water as long as they can hold their breath long enough. With money being diverted to $4 gas or $5 loaves of bread it is clear that we will continue to have deflation in color TV’s which means economists will not see any inflation, anywhere. This is a common sense issue which might fool Wall Street people into believing everything is fine, but Main Street, well, Main Street is not quite that stupid. They know $4 a gallon gas and $5 loaves of bread is bad news. They know that those iPads will be out of reach when a greater portion of their incomes are moving towards those unimportant things… like eating. This is bad news for the economy.

I have no illusions, the market will go up and economists will demand more QE because it is “working”, but this policy is not benefiting Main Street, it is killing it. More and more investors are moving out of stocks which negates the “wealth effect” of magical 9% S&P gains which are based on pure liquidity and not fundamentals. While stocks will move higher I am betting silver and gold will continue to outperform, along with other commodities. This is a catch 22 to the Fed because higher commodity prices is bad for the people, but good for GDP growth, even though it is imaginary growth, but that doesn’t seem to matter as long as the politicians are happy. So much for an independent Fed.

I think the recent views and writings of major economists have proven that they are completely worthless. To think intentionally driving the prices up for the basic essentials in life with high unemployment and flat incomes is barbaric. The worst part is economists all say this is a good thing, what world do they live in? We might get wage inflation out of this at some point, but it will be after price inflation is in full swing and major damage is done to the consumer. I also have no idea how the Fed can reverse this latest policy decision without blowing itself up, I actually believe this is now a permanent policy the Fed is following, just like Zimbabwe.
The biggest question is will Tim Geithner and Ben Bernanke be impeached for lying to Congress when they said they would not monetize the national debt? They should be, the last I checked lying to Congress was frowned upon, but we do now live in bizzaro world.

The Fed is doing everything I feared it would do and they are inflating the country out of its debt, they say they are not, but what credibility can they possibly carry with the people now? On top of that, their actions speak louder than words. When you are intentionally trying to create inflation and write an op-ed about it that makes it harder to say we are not trying to inflate our way out of our trillion’s in debt. Everyone can see what is happening and when Brazil is giving you a smack down, as well as Russia, man, you got problems.

As far as economists, perhaps they should be put on a salary that mirrors the national average in their respective areas so they can understand how higher commodity prices really impact the people. It is easy to say higher prices don’t natter when you make high 6 or 7 figure salaries for playing with computer models, but on a modest 5 figure salary I bet they will see things differently. I am not one of those ‘social justice’ people, but in this case I might make an exception since they are all being complacent in one of the greatest snow jobs ever given to the people. This will do nothing for the people other than create misery and it certainly will not improve the image of Wall Street. We are not a banana republic because we voted in Republican. We are a banana republic because we have idiots in charge of our monetary policy. Stay long commodities.

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.

The trade of the decade?

Posted by Ray on July 31, 2010 under Economy, Main, The Federal Reserve | Read the First Comment

The 2Q10 GDP report came out and it was an eye opener for many people as it showed that the recession, depression, was deeper than most believed and things are surely not as rosy as we are being told. Aside from the inventory rebuild there is not much else going on, final sales are dead as a door nail and some firms, like Samsung, are reporting good earnings, but warning of weaker times ahead. I take the Samsung warning pretty seriously as they are a large or the largest supplier of electronics which had shown signs of strength recently. So when they say things may not be rosy in the near future I suspect that will apply to more than just TV sales.

What made the news cycle this week was a report by Fed President Bullard about the threat of a Japanese style deflation here in America. I am kind of shocked that people were caught so of guard by this news, about 10 economic data points already indicated this to be if not already occurring a very real near-term threat. I suspect we are in for some really tough times ahead and worse yet I suspect we will see the Fed start moving towards quantitative easing, again. As I have said, repeatedly, this will not do anything to boost economic demand as we must wait for the deleveraging cycle to be completed by the consumer before demand will return. Zero Hedge just wrote a piece about this tonight which illustrates exactly what I have been saying for a month now, but no one is listening. Here is what they said:

“In other words, all those who say QE2.0 will do nothing to stimulate the economy are correct, as all such a greenlighted action would encourage is the warehousing of yet more cash by banks. And since banks have no incremental incentives to lend it out, it doesn’t matter if the Fed’s liabilities are $2.5 trillion or $2.5 quadrillion. Instead of stimulating inflation, which is the end goal, all such an action would do is to create further doubts about the stability of the dollar, which in turn, as Ambrose Evans-Pritchard discussed, is a sure way to go to hyperinflation without first passing either Go, or inflation.”

They also indicate my thoughts exactly, we bypass money velocity inflation and go straight to dollar devaluation, i.e. currency crisis, hyperinflation. The irony is that you would only feel this pain on imported goods and we do consume 87% of what we produce domestically so it may take some time before any real currency devaluation hits home. Regardless, Bullard indicated along with prior reports by Ben Bernanke himself that QE is on the table. The question is what kind of QE, treasury purchases or other asset purchases? Also, how much, I bet $3-5T in total purchases, but who knows.

What we do know, compliments of David Rosenberg, is that Ben Bernanke said IF we hit a Japanese style deflation that the target rate on the 30 year treasury would be 2.5%. Rosenberg says that if we hit that rate, down from the current 4% yield, one would receive about a 30% rate of return. I think he is right and if one followed his recommendations of treasuries and gold, along with high yield stocks, you would have avoided much volatility this year and had nice returns. I am happy to say I bought 2’s and 5’s when the yield was 1.10% and well over 2% so I am happy. I suspect the rally in treasuries will continue and if QE happens, wow.

The trade of the century, although risky, would be to leverage a long position into the 20+ year treasury market, UBT (2X bull) or TMF (3X bull). IF Rosenberg and I are right and this happens, QE, deflation or a major selloff in equities, those positions would do very well. However, they are risky, they are leveraged ETF’s, but if you time it right I believe that you could do very well. I also believe that the bull market in bonds is in full force again, very similarly to the summer of 2008 I might add which adds a bit of mystery to the rally in treasuries. The mystery is, what is going on and is the bond market telling you that something really bad is coming?

A look at the chart above looks like there is something going on in the bond market. We broke above the 123/4 mark on the 30 year futures and now that is support. I believe it goes higher because of, at least, of deflationary pressures and, at worst, because of QE. However, while I am short-term bullish on treasuries I hate them long-term since it will be impossible for the U.S. to meet its long-term debt obligations which means they will default somehow in the future, in my opinion. I also believe, as stated earlier, that QE will wreck our currency maybe not now, but at some point in the near future which makes gold very attractive as well. If QE is announced treasuries will go nuts and so will gold. If one is levered into treasuries you could do well, if you want the risk.

What QE means for stocks, I do not know. I would think QE would be bad for stocks as it signals things are not good and the economy is weak, but we are living in bizzaro world where good news is fantastic and bad news is even better.

Deflation, a reality

Posted by Ray on July 15, 2010 under Main | Be the First to Comment

Deflation is more than a pipe dream, it is basically here and it is global in nature. We saw a whole slew of data points come out over the past 12 hours and none of it was very positive from my lens since it all pointed towards either a slowing of the economy or deflationary headwinds. There is just no question that the second half of 2010 is going to be vastly different than the first half for America and 2011 is going to be worse than expected. To be blunt, when the Federal Reserve is telling you things are bad, things are much worse than you think. We are talking about the same Fed that got everything wrong or underestimated every problem we have had over the past 30 years. In their notes yesterday, wow, there was just nothing positive. We will have quantitative easing and it will be spectacular since we have no idea how this will impact the U.S. long-term.

China released its GDP figures last night, some 10.3% GDP, but its CPI was 2.9% compared to expectations of 3.5%. Some would argue that is good news, but I would disagree. With rapid growth you would expect to see inflation higher than 2.9% and if they are paying lower prices that means they are having end demand problems as well. Some say this ‘planned’ slowdown is good and maybe it is, but if China is the engine for the global economy and it is fulfilling its goal of a slowdown how in the world can that be good news for the U.S. or Europe? I don’t see it. I also see a stronger RMB as a major problem for China and the rest of the world, but I have beat that horse to death by now. Just remember, manufacturers with 3-4% profit margins cannot pay their employees more while their currency is rising and other currencies are falling or staying flat, a best case scenario for the U.S. and the EU. Watch out below in China and I feel much more comfortable in India or Brazil than I do in China at this point maybe even in Indonesia.

Data in the U.S. was horrible and there is no way to deny that. The initial claims data is very noisy since the seasonally adjusted data is looking for retooling of the auto industry which is not happening right now, but it makes the weekly number look real nice. Unfortunately, it is not reality and to put everything into prospective, last week’s number was revised up, this number, 429,000, will also be revised up as well and take a look at the unadjusted data set. The unseasonal adjusted data is flat week over week at 513,347 which looks similar to last week’s figure and shows how the BLS is not seeing through the distortions of the auto industry retooling and makes the case that seasonally adjusting doesn’t always work. Either way, this figure is a head fake and even Steve Liesman admitted that so what does that tell you?

The CPI/PPI, what can I say? Disinflationary at best and this is what the Fed is worried about. This problem is global, not just a U.S. problem and, unfortunately, looks a lot like what happened in the 1930’s which was made worse by Europe’s debt problems I might add, sound familiar? The Fed also said we are looking at 5 to 6 years of this, ouch, and this means equity prices should be trading at what P/E exactly? Certainly not 20, maybe 10, 15? No one knows, but we are way overvalued that much we all know at this point. To make a point about deflation let’s take a look at Marriott’s earnings, they were good, but if you look at their room rates YoY they were down across the board from 2009, I thought we were in the midst of a fantastic recovery? If Marriott has to cut its rates by 4% all over the world, except in the UK, what does that tell you about pricing power? There is none, they have to discount to fill rooms. Also, their luxury brands were flat and their lower end brands were doing much better, staycations anyone. Don’t bet on global growth, you will get slaughtered.

The Empire State report, from 19 to what??!! To say that we are not having a slowdown with an Empire State report slipping 15 points, 19.57 to 5.08, on top of the ISM making lower highs, the Baltic Dry Index plummeting and unemployment hideously high is insane. This is just the icing on the cake, in my opinion, I am sure some people will claim it is a one off event, but there is a clear pattern here and it is down. All of this means a slowdown, good earnings or not. This is also not a case of more stimulus with the exception of extending unemployment benefits, we need to let this thing sort itself out at this stage of the game. Unfortunately, we will get it whether we want it or not starting with quantitative easing from the Fed which will do nothing to boost money velocity. The bottom line, the Empire State report was awful and will likely not be talked about much today or ever again. The other Fed reports will likely show a similar slowdown as well.

Painful, I think that is the word we are looking for as we look at the data today. How or why futures are not down bit time, who knows. I think you would be hard pressed to find anyone, myself included, who said that 2Q10 earnings would not be good, but forward earnings are the key and all forward looking data points look terrible. The ECRI comes out tomorrow and it is pushing closer and closer to that -10% mark, but I guess that indicator only matters when we are on our way up, not on the way down. Be very careful in this market as it is devoid of reality at this point. Valuations will matter and the fact that we are seeing deflationary pressures mount from China to room rates at Marriott means you have to treat valuations differently. You cannot look at a 19 P/E and consider that cheap in a deflationary environment and we have very little experience in these environments to boot, so think deep value, ultra low P/E’s and high dividends from strong companies that do not need to go to the capital markets to raise capital. Good luck.