Well, what do you know?

Posted by Ray on June 30, 2010 under Economy, Markets | Be the First to Comment

Apparently it is now fashionable to be bearish since the S&P’s smashing, as in breaking below the 1040 level and 1035 for that matter, performance over the past few days. I hate to break it to everyone, but the time to be bearish was at 1120 and when the VIX was at 15, now, well, be bearish, but be careful. Those looking to jump on the short wagon might find themselves over paying for their positions and they might get squeezed out in the next few days. Don’t get me wrong, my S&P 500 target price is still 900, but I fully expect a retest of the 1040 mark in the very near term.

How bad is the economy?

Anyone even questioning how bad the economy is has their eyes closed and their head stuck in the sand. All the data is rolling over, look at the Chicago PMI today which came in at 59.1, sure, it met expectations, but it is down from where it was and is establishing a declining trend. The leading indicators are down and probably going to look horrible in the near future. I am sure initial claims will still be well over 450K tomorrow, oh, the ADP data stank to high heaven today as well so forget about an upside surprise on Friday. There is some housing data out tomorrow morning and I am sure it will not be good, it is May contract data, but never fear because Congress is attaching an extension of the home buyers tax credit to the unemployment extension, fantastic!

In short, things are much better than, say, September 2008, but things are not good and we are heading for either a double dip or very slow growth in the second half of this year. Treasury yields are telling us we got serious problems ahead and deflation, sound familiar yet, is an immediate threat. However, remember that inflation will come on very fast at some point in the future, you will never see it coming. The good news was that the ECB lending news was not as bad as I was expecting, but let’s face it, the news is still not good in Europe and the risks are very high. Spain may be downgraded, it will be very soon, which I am sure is surprising and people are wondering why such a fiscally sound country be downgraded?

The only thing I am surprised about is the U.S. and the U.K. still have the ‘AAA’ ratings after their drunken stupor of a spending spree, with much more to come before the majority is kicked out in November. After all, once your vote is cast and they lose their jobs what do they care if you dislike them or not? Expect another stimulus which is sure to extend our pain well into 2011. In the end all we will have found is that we have spent a lot of money with very poor results, just like the 1930’s. Let’s just hope this time it does not end like it did in 1941, there seems to be a correlation between poor economic stretches and wars.

What should give bulls some fuel is that everyone is so bearish it is bound to be a contrarian indicator. Am I going to bet on that? No, not yet at least. I spent the majority of this morning dumping everything I absolutely did not love to own building cash and some short positions, the markets were up this AM. While I am sure we will get a bounce in equities I am not so sure we will get it this week, a notable bounce at least. There will be short covering before the 3 day weekend, but at the same time I do not believe any one wants to be long either. What does that mean? We go lower, in my opinion at this very moment, but we could very well get a sharp bounce tomorrow before we go lower. If we break above 1040 we might go higher, but we are certainly not going to make new highs again this year, from what I see right here and now. Things are much worse than they appear unless you are 100% treasuries, suddenly that call I made back in April doesn’t look so crazy anymore either.

High Yield

Posted by Ray on April 12, 2010 under Main | Be the First to Comment

It is time to par back on high yield, in my opinion. The returns have been very strong over the past 12 months and there is no reason to be a pig. While I owned some high yield throughout the last year I piled into it in 4Q09, but with returns, for bonds, through the roof and the complicit nature of the markets I think it is time to dump the junk.

I am not selling all of my holdings, but 80% seems reasonable. The issue is, where does one redistribute capital in this market? I am not selling my PCY, emerging market debt, since I feel it has room to run and the 6% yield is attractive. I am also holding BBB+ or investment grade bonds for now as well. I just cannot phantom why the markets are trading so complicit to risk right now and there seems to be very little value left in most equities to be had. Until I find something short-term treasuries seem to be the only place to go, but even there I only expect the yields to drop back into .90% versus the 1.04% we are currently at.

I am considering preferred stocks, such as JPM or Citi preferred, since they have an implied guarantee, still. Outside of that, there is not much out there and I am not wild about investing in financials since they are still insolvent. My other grand ideas for 2010 have already surpassed my expectations as well, frontier markets are on fire, up some 10% YTD, and even my PLND (Poland) ETF has performed very well, up 11% YTD. I actually expected Poland to take a hit with the President and Central banker’s demise over the weekend, I just hope they avoid Keynesian economics still. Even my boring portfolio has performed extremely well.

So, what to do with ones capital is the tough question to answer right now. Besides going short I am not really excited about anything. Valuations are way too rich and if Alcoa is any indication how earnings season will go I feel good about shorting the markets more. However, Alcoa never makes its estimates, but the revenue miss was horrid. I believe the selloff must be coming as there is very little value to be had out there and spreads are so tight it is crazy to think there is more room to run. Treasuries and VIX calls it is! Since everyone hates those trades right now it must be right.

LIBOR Overnight Shoots Higher

Posted by Ray on March 16, 2010 under Main | Be the First to Comment

Just a week or so ago the overnight LIBOR rate, this is the rate banks loan money to each other at (such as prime plus LIBOR or similar), was a paltry .17% and today it is a whopping .22%. While this is might not seem like a huge issue, and it is not on its own, it is a signal of something. Perhaps it is signaling that the wall of liquidity is coming to an end or that there is more risk lending to institutions than originally thought. Or, perhaps, Zero Hedge’s rumor mill was right and some of the GSE’s cut off 10 European banks from lending which caused the overnight rate to shoot up, it looks like they had it nailed.

I typically do not act or comment on rumors because some 90% are not true, but this one I watched because LIBOR was one of the signals preceding the credit crisis beginning in 2007 to 2008. If this rumor ends up being true, and it looks that way, I think there will be some negative implications for the equity markets as the rally is liquidity driven. However, LIBOR at .22% is nothing to worry about, at all, and unless it climbs higher I would not be worried, but it is on my ‘watch’ screen as it has implications. Also, the LIBOR rate is outside of the Fed’s control, frankly, as they already spent all their ammo in that department.

Well, let me rephrase that, they would need to start up recently closed programs and institute new programs in order to bring down the interbank lending rate. The markets are not fully healed and credit is still tight meaning that trust is still lacking in many areas. Credit is merely trust and, frankly, would you really trust a European bank right now? Who knows how much Greek debt they hold or other PIIG debt they have on the books. If you do not know you cannot trust them. If you can’t trust them you do not extend credit to them or you charge them more for credit to cover the potential risk. It is a vicious cycle and the system cannot handle any other shock or it will be in jeopardy again.

I am not saying there is much to read into, yet, but keep an eye on it as little things like the LIBOR usually signal or are the first sign of potential larger problems. It also looks like the Zero Hedge rumor mill was on to something, I am going to email them to see if they have a follow-up on the story. In the mean time, do not look for anything exciting from the Fed meeting, nothing will happen and the language will not change, which should concern you as well. Trade carefully and the market that is in front of you, I bought August VIX calls today as volatility is way too cheap, historically the VIX is at 20, and there seems to be no one betting it will go down, look at the put action.