This is the Mad Scientist Speaking

Some really cheap stocks in an otherwise vulnerable market

2012-01-17T18:07:00.000-08:00

Agnico Eagle Mines (AEM) has been a complete disaster. Their loss of their most productive mine coupled with a general contraction of multiples in the Gold sector has seen the stock move from $85 to $36 a loss of almost 60%.
The stock is really cheap here and I would not be surprised if someone stripped in and bought it out.

Talisman Energy (TLM) is trading at a price that gives $0 to its gas reserves. The current market cap is easily justifiable based on oil production/reserves alone (compare Crescent Point or Baytex Energy's enterprise value to Talisman and adjust for barrels of oil production).

I will be initiating positions tomorrow.

S an P 500 at 250?

2012-01-06T05:51:00.000-08:00

Can the index go that low?
Impossible?

Let me explain my thinking.
Current estimates for the S & P 500 are around $100 of earnings.
I think by 2013-2014, a 20% decline in revenue is possible. With almost 50% of revenue coming from overseas, a 20% USD appreciation could by itself knock off 10% of revenues.
Certainly financial institution revenues are also highly suspect and a 30-40% decline there is quite feasible.
Overall, a recession with strong USD appreciation could knock 20% of revenues.

That would reduce earnings from $100 to $80.

Corporate profit margins are at historic highs. Even a mean reversion, which is certainly likely in a global recession would reduce earnings on those revenues by 50%. That would bring earnings to $40 per S an P 500 unit.

Stock market bottoms have gone as low as 5-6 times earnings. A 6.25 multiple on $40 would put the S and P 500 at 250.
Not my baseline projection but certainly more possible than most people think.

I am back !!!!!!!!!!!!! 2011 in review and looking ahead

2012-01-01T09:17:00.000-08:00

Happy New Year to all!
We closed out the year up 6.32%. It was a extremely volatile year in which hedges paid off very well.
The best performers for the year in our portfolio were
Long

Dejour Energy up 45%
And that is it. That was the only non trading position that I made money on the long side.

Fortunately we were never net long at any point in the year.
Best Shorts
X -US steel down 56% from Entry
AMZN- Amazon down 22% from Entry
We also made money with Gold and Silver Shorts.

Almost 16% of total return came from selling calls and puts against our longs and shorts respectively.

Best ideas for 2012

1) Long CAD versus AUD.
As Australian Housing goes into terminal implosion along with China landing on its Derriere, we see oil and the Canadian economy outperforming base metals and the Australian economy.

2) Short Nucor (Steel is dying), Starbux , Macy's and Amazon (continues from 2011).

3) Long Several Oil producers/Short Oil.

4) Bullish on Gold in Yen terms after first quarter of 2012.

Select way out of the money Calls and Puts on some stocks/ETFs.

Year End Target for S and P - 600-800

Crash Alert!!!!!!!!

2010-12-28T21:01:00.000-08:00

Sentiment is at super extremes right now. I fear such a situation will correct itself most likely through a crash.
See below,

CORN - CHICAGO BOARD OF TRADE                                        Code-002602
FUTURES ONLY POSITIONS AS OF 12/21/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF 5,000 BUSHELS)                         OPEN INTEREST:    1,518,419
COMMITMENTS
587,744  124,981  140,980  640,827  1012811  1369551  1278772  148,868  239,647

CHANGES FROM 12/14/10 (CHANGE IN OPEN INTEREST:     28,403)
 23,998    2,862   -5,966   11,459   31,193   29,491   28,089   -1,088      314

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   38.7      8.2      9.3     42.2     66.7     90.2     84.2      9.8     15.8

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:      861)
    278      118      174      212      389      560      631


All time high Net and Total Long positions for Speculators.

SOYBEANS - CHICAGO BOARD OF TRADE                                    Code-005602
FUTURES ONLY POSITIONS AS OF 12/21/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF 5,000 BUSHELS)                         OPEN INTEREST:      660,863
COMMITMENTS
257,558   41,529   86,829  258,352  445,154  602,739  573,512   58,124   87,351

CHANGES FROM 12/14/10 (CHANGE IN OPEN INTEREST:     17,690)
  8,493    4,063    4,175    7,047   10,739   19,715   18,977   -2,025   -1,287

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   39.0      6.3     13.1     39.1     67.4     91.2     86.8      8.8     13.2

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:      590)
    225       89      173      117      209      438      423

A nice 6.5 to 1 ratio. 

NASDAQ-100 STOCK INDEX (MINI) - CHICAGO MERCANTILE EXCHANGE          Code-209742
FUTURES ONLY POSITIONS AS OF 12/21/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(NASDAQ 100 STOCK INDEX X $20)                       OPEN INTEREST:      333,555
COMMITMENTS
124,509   37,197    1,220  182,038  280,500  307,767  318,917   25,788   14,638

CHANGES FROM 12/14/10 (CHANGE IN OPEN INTEREST:   -187,192)
  5,060  -51,595   -8,820 -170,951 -103,265 -174,711 -163,680  -12,481  -23,512

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   37.3     11.2      0.4     54.6     84.1     92.3     95.6      7.7      4.4

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:      219)
     71       25        8       69       69      143       99

Capitulation? See the large reduction in shorts this week.
AUSTRALIAN DOLLAR - CHICAGO MERCANTILE EXCHANGE                      Code-232741
FUTURES ONLY POSITIONS AS OF 12/21/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF AUD 100,000)                           OPEN INTEREST:      115,007
COMMITMENTS
 69,875    9,325      117   14,331   93,481   84,323  102,923   30,684   12,084

CHANGES FROM 12/14/10 (CHANGE IN OPEN INTEREST:      1,423)
  7,205      433      -33   -6,695      332      477      732      946      691

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   60.8      8.1      0.1     12.5     81.3     73.3     89.5     26.7     10.5

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       66)
     30       11        1       10       19       41       30
7:1 Longs to shorts. 
E-MINI MSCI EMERGING MARKETS - CHICAGO MERCANTILE EXCHANGE           Code-244742
FUTURES ONLY POSITIONS AS OF 12/21/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(MSCI INDEX X $50)                                   OPEN INTEREST:       38,318
COMMITMENTS
 13,775    1,920        6   17,379   34,546   31,160   36,472    7,158    1,846

CHANGES FROM 12/14/10 (CHANGE IN OPEN INTEREST:     -8,313)
   -482      239        6   -3,134   -3,486   -3,610   -3,241   -4,703   -5,072

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   35.9      5.0      0.0     45.4     90.2     81.3     95.2     18.7      4.8

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       49)
     14        3        1       20       18       35       21

Same here.

GOLD - COMMODITY EXCHANGE INC.                                       Code-088691
FUTURES ONLY POSITIONS AS OF 12/21/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF 100 TROY OUNCES)                       OPEN INTEREST:      582,133
COMMITMENTS
251,722   45,298   67,525  194,090  445,898  513,337  558,721   68,796   23,412

CHANGES FROM 12/14/10 (CHANGE IN OPEN INTEREST:    -12,519)
 -8,195    5,576  -10,045    9,354   -6,973   -8,886  -11,442   -3,633   -1,077

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   43.2      7.8     11.6     33.3     76.6     88.2     96.0     11.8      4.0

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:      339)
    203       59       54       50       50      277      142

A bit healthier than last week but still very extended.

PALLADIUM - NEW YORK MERCANTILE EXCHANGE                             Code-075651
FUTURES ONLY POSITIONS AS OF 12/21/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF 100 TROY OUNCES)                       OPEN INTEREST:       22,590
COMMITMENTS
 16,446    2,014      335    3,012   19,686   19,793   22,035    2,797      555

CHANGES FROM 12/14/10 (CHANGE IN OPEN INTEREST:       -534)
   -259     -161       97     -408     -423     -570     -487       36      -47

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   72.8      8.9      1.5     13.3     87.1     87.6     97.5     12.4      2.5

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:      148)
     82       16        8       20       33      108       54


PLATINUM - NEW YORK MERCANTILE EXCHANGE                              Code-076651
FUTURES ONLY POSITIONS AS OF 12/21/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF 50 TROY OUNCES)                        OPEN INTEREST:       37,473
COMMITMENTS
 24,785    1,491      152    7,106   34,433   32,043   36,076    5,430    1,397

CHANGES FROM 12/14/10 (CHANGE IN OPEN INTEREST:        953)
    301     -359       79      611    1,315      991    1,035      -38      -82

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   66.1      4.0      0.4     19.0     91.9     85.5     96.3     14.5      3.7

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:      133)
     79       11        4       15       34       95       49
Stunning ratios for both Palladium and Platinum.

CRUDE OIL, LIGHT SWEET - NEW YORK MERCANTILE EXCHANGE                Code-067651
FUTURES ONLY POSITIONS AS OF 12/21/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF 1,000 BARRELS)                         OPEN INTEREST:    1,369,544
COMMITMENTS
321,441  161,027  301,255  663,325  854,606  1286021  1316888   83,523   52,656

CHANGES FROM 12/14/10 (CHANGE IN OPEN INTEREST:    -11,235)
 -7,672   -5,301  -18,265   21,843   21,441   -4,094   -2,125   -7,141   -9,110

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   23.5     11.8     22.0     48.4     62.4     93.9     96.2      6.1      3.8

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:      328)
    122       86      134       88       96      282      257



In fact crude oil seems modest compared to the rest.
Coupled with lowest short interest, lowest VIX and highest AAII sentiment, this could prove nasty.
I am risking a small amount in way out of the money puts for February and March for some stocks. Other than that, overall I am net short about 20% of my portfolio.

Revisiting my best call ever and how it applies to today

2010-12-25T11:51:00.001-08:00

Time May 2007.
Since predicting $100 plus oil from early 2005, it looked like I was getting most things right. I had spectacular gains in most oil stocks/options. My Dec 2010 85/100 Crude Oil Calls were doing great.
I had made even more gains in Oil refiners. Valero and Tesero options had been my favourite plays. At that point I permanently turned bearish on Refiners. To me this was the easiest call in history of investing, yet no one and I mean no one saw it coming. The analysis was simple, oil production was peaking out or close to peaking out. Refinery additions were coming in fast and furious. In such an environment how could the crack-spread i.e the difference between oil products and oil rise? Yet I counted no less than 5 "top" newsletters recommending them because of the Peak Oil Thesis. A week after I sold my positions and ran my thoughts by my intellectually superior friend Greg Jeffers (we discussed the idea of long Ex and Production companies short Refiners) I wrote this for www.financialsense.com

http://www.financialsensearchive.com/fsu/editorials/lalani/2007/0531.html

The relevant portion of that article

Secondly, the reason we have not built any refineries in this country for about 30 years has a lot to do with the fact that it is an extremely expensive capital intensive process and the NIMBY syndrome.

But above and beyond that there is another reason. Right now refining capacity and crude supply are finely balanced. In 10 years refining capacity (in my opinion) will exceed oil supplies by 5-7 million barrels per day even if we do not build another refinery anywhere. I really do not see the Valeros and Teseros making record profits when all the refineries are clamoring for the same crude. So why invest?

And the end result.
I was not able to get a start date graph from the day of my article, but you can observe it clearly on the chart above.
Since May 31st 2007, XLE is virtually unchanged whereas both Valero and Tesero are down about 65% from May 2007. Mind you, XLE has a huge refining component as well. An Exploration and Production, oil only companies index ( if there was one) would have done even better in this trade.
Long term calls rarely work out this well. But I believe my long term call on Steel versus Oil will work out at least this well over next few years.
In fact the fundamentals for this call are even better than the refiner-oil stocks spread.
The idiot analysts along with the steel companies have extrapolated China and India's double digit demand growth for steel and projected it out to 2020. More importantly they have already put in the capacity for it. Similar to refiners they are facing a higher raw material cost (iron ore, energy inputs and coal), however unlike the refiners they are already producing at low 73% of world capacity and are not profitable. China's property bubble is on the verge of bursting and another year of even 3% world GDP growth could push oil prices high enough to cause a recession. Also the supply demand for Iron ore looks a lot more bullish compared to that for steel, ensuring margin pressure for the foreseeable future.
I am short X, AKS, NUE, STLD with the largest weighting in X. I am long OIH, DO, ZAR-UN.to, ENI-Un.to and RVT in equal amounts against this basket.
I am currently down 2% on this trade but I expect it will produce very rich returns in 2011-2012.

Best Idea for 2011

2010-12-09T18:56:00.000-08:00

2010 has continued to prove one of the most irritating years in my investment career. Still I am encouraged by the market going completely irrational. Such things never last forever. After a few weeks of contemplation I have come up with what I think will be a great trade idea for 2011.
Long Oil and Oil Service stocks/Short Steel Stocks.
Considering the run up the market has had I would never venture on a straight long position in Oil related stocks. Steel Stocks have extremely high beta and a plain short is not particularly appealing. Options 1 year or more out are incredibly expensive and not so alluring.
While the fringe lunatics like Illargi, Stoneleigh and Prechter see a complete collapse of our Ponzi scheme, I am a bit more sanguine. That said, I see the road that lies ahead of us as painful to say the least. The thing I am most certain about is that World Oil excess capacity is far, far less than World Steel production capacity. Currently even according to most optimists we have no more than 2-3 Million barrel/day of excess oil production capacity. My sense is that it is no more than 1.5 Million barrels/day. We are hence at 98% capacity or higher.
World Steel Production is currently running at around 74%. With all the new capacity scheduled to come online, we are looking at a drop to below 70% if demand stays constant. Even in the case of improving demand we will not see the giddy days of 80% plus simply because of China's huge investment in this space. China's Steel producing capacity is expanding and expanding quite rapidly. In case of a total China collapse (not my base scenario) oil demand could drop 3-6% for a year at worst, whereas Steel demand could drop 20-30 % and utilization capacity would go to the low 60's with significant pain for the Steel industry. Even in such a case oil stocks and specially oil service stocks should have good earnings at around $50/barrel.

Comparing the stocks in the 2 groups leads to a very interesting picture. Most oil and oil service stocks are trading at single digit multiples of earnings if oil remains above $80/barrel. At current prices almost all domestic Steel stocks will make significant losses in 2011. That is correct, almost none will make a profit. So you have oil stocks priced for 30% lower prices, and Steel stocks priced for 30% higher steel prices. Based on capacity utilization, the market is clearly wrong. I shorted some US Steel (X) with a equal long position in Energy Income Fund (ENI.UN..which trades at a nice 15% discount). I will be adding more positions in this over the coming month. I will pick a basket of stocks in the Steel industry as the Steel ETF (SLX) contains too many base metal producers to be a good proxy.

High Probability of a major decline for the metals

2010-11-25T23:47:00.001-08:00

I think this will turn into a full scale rout. Still considering what Short/Put position would give the best risk adjusted return in this environment. I think the declines will be quite strong, regardless of the current belief that Gold is decoupling from the US dollar.
There are many graphs comparing the Gold bull market to the NASDAQ bull market of the 1990's.
Gold's bull seems small in comparison. However there are markets that topped at much earlier levels. Take the US housing market. Overall we got a 100% gain in US real estate , which in relation to wage growth made US housing a bubble. Here we have a 400% plus appreciation from the bottom, certainly enough to make an argument that the bull run is over.
For now I am in the intermediate decline camp.

Asian buyers are more likely Asian Sellers

2010-11-11T19:06:00.000-08:00

From Eric King's blog. "Asian buyers have Silver Shorts Checkmated"
The contact out of London has updated King World News on the Asian buyers which have been squeezing the shorts in the silver market. The London source stated, “There is an insatiable appetite for physical silver here and the shorts know that, the shorts know they are checkmated. The Asian buyers are layering in bids to take advantage of bear raids in the paper market which have been used to shake out the weak hands.”

Asian buyers were able to pick up silver at a discount at the lows of yesterday. They are continuing to buy today and tomorrow. People have to remember that spot trades 24 hours a day, so as the shorts raid the market, physical buyers already have orders in to buy tonnage of silver at a time on that weakness.

As I said to you the other day, the locals which were short with the banks were overrun when the price of silver stabilized just above $25.50 for a few hours. The local traders were margined out and silver moved over $1 higher later that same day.

In other words, the only entities that are left short here are the Fed backed banks. Nobody in their right mind would be short here.

That is a famous line near tops.

Spot has been trading in front of futures here in London all day. We have been in backwardation all day long on the LBMA.”

How about downside from here?

“They (the banks) wanted to target $25.50. If they are able to do that it will have to be achieved on a sharp, fast move down. The longer you hold the price down, the more physical you are going to give up and the lines will cross against you.

What kind of BS is this? The longer you hold the price down the more physical is going to be given up? Why is there a limit as to how much Silver can be sold in a matter of few seconds?

I can buy 1 or 10,000 contracts in exactly 5 seconds assuming I have the money.

The only way to get the lines to cross in your favor is a sharp move down where you quickly cover into stops from weak-handed longs. They will lose too much physical metal if they try to hold it down at those levels for an extended period of time.

You have to remember, the banks are trading against their own clients, on their own books, and they know where all of the stops are. If they see a large number of stops down there, they may go and grab them like a bandit.

As we close out the LBMA session, the banks are painting the tape lower here in an attempt to make the market look weak. As I said previously, the reality here is that there is an insatiable demand for physical silver. If we don’t get dips any time soon, the Asians will simply start to buy physical silver at higher prices.”

Where were these idiots at $8.00/oz. They waited till 3X the price to corner the market? Would they not be able to get 3X the Silver or the same Silver at one third the price?

So the Asian buyers are enjoying this weakness in the silver market?

“Of course they are. $30 is just going to be a small pause along the way to much higher prices.”

Me thinks the Asian source has a large amount of Silver to dump on to lemmings

Time will tell.

FD: Short 400 SLV from 28.01

The performance of the "King" of Metals

2010-11-07T19:34:00.000-08:00

Rising tides do indeed lift all boats. I had no idea to what extent the tide would rise.
Selling in a bull market is difficult and usually leads to sellers regret. I do not have any. I made many great trades in Gold and Silver. Luck has to run out sometime.
That said, I find it appalling how much praise goes to Gold.
Here is the story in a few charts of Gold's performance.
First against Copper.
Whoa! What a fantastic performance. Since I Identified the relative top in Gold in 2009, Gold has returned a whopping -50% versus the base metal Copper. King indeed!

Measured against Silver it is down about 27%. Not as bad but certainly a dismal performance.

Examining its performance against Palladium does not warm the heart either. Down 60%
!Good Gracious, what would Gold is money morons say.
And lastly in the metals group. Platinum. No appreciation or depreciation.

For all the hoopla attached to Gold it has not made a dent against Light sweet crude in the last 24 months.
This is a more recent chart as CORN ETF did not exist back in 2009, however Corn nearby futures were around $3.50 when I said Gold was done as Gold to Corn ratios were really out of whack. Gold has since then lost about 30% of its value against corn.

And lastly, a chart of how many ounces of Gold it takes to buy a house. Taking into account the appreciation of Gold and the depreciation of homes since June, I would say we are very close to the historic average. Since I see home prices going only further down in the US any further rise in Gold prices would make Gold relatively expensive to homes. Still the 1980's and 1930's extreme could be reached which would imply $2500 an ounce Gold.
All of this is to illustrate one point. Gold can either rise a lot nominally, or a lot relatively but not both. Anyone who insists on both is a complete moron. In 2008 to early 2009 Gold rose relatively but not much nominally. In early 2008 we were at $1000 and the same price was reached in early 2009 while the world collapsed. Today we have seen rapid nominal rise but no relative rise. Even against the stock market, and for all of Tyler Durden's rants ("today the stock market was down in the only currency that matters"), it has yet to exceed the 2009 high. It will eventually, I think, but the last 2 years have not exactly seen Gold do much. Relatively.
I think the time has now come for Gold to start rising relatively. But I doubt we will see huge nominal gains.

I have closed out most positions as this has been a difficult year. I am up around 6% and I rather close things out to have a positive year. This was the worst performance in 7 years of trading and I could have easily been up over 40% if I had not insisted on staying short the market. Painful lesson. That neutralized most of my spectacular gains in ZSILUS and CEF. We only have a few macro trade options which have the potential to deliver big, but considering how wrong I have been in the last 3 months, I am not holding my breath.

Reasons NOT to invest in Gold

2010-09-25T13:13:00.000-07:00

There are many reasons to "invest " in Gold, these aren't among them.
1) Gold goes up during deflation.
How can anyone be so stupid to make that conclusion is beyond me. The only fiat era deflation we have seen is in Japan and Gold went down more than 50% during that time in Yen. Could Gold go up during this "deflation" should we have it? Yes, but perhaps it will not. Any Jackass (yeah I am looking at you Mish) who looks at sample size of 1 for a study and concludes the opposite is beyond redemption.

2) Gold is not in a bubble because none of my friends own it.
By that argument even the Credit Defaults swaps or junior tranches of subprime mortgages were never in a bubble because no individual investor owned it. "But hedge funds did!" you might say. Yes and they own very very large amounts of Gold at present. So do not believe the hype.

3) Gold cannot go down because none of my friends own it.
An extension of retarded point 2. Pray tell me what prevented it from having severe corrections lasting greater than 6 months on no fewer than 6 occasions in the last decade. I assume even lesser people owned Gold when Bear Stearns collapsed than do now. Yet Gold went down more than 30%.

4) Gold is a store of value.
Not it is not. I have written about it in detail here.

5) Gold can never become a bubble regardless of price.
Not true Einstein. It can.
"The last bull run ended with Gold at $850/oz. That was the ultimate bubble in the price of Gold in USD terms. At that price Jewelry demand was almost annihilated. The price of Gold was atrocious in relation to its inherent demand, price of production and in relation to everything else. Most commodities had become too cheap compared to Gold. So had the Dow!
FOFOA says that Gold can never be in a bubble, however I fail to see what would you call the $850/oz price back then. It had discounted enormous amounts of future inflation and it seemed completely useless compared to 21% interest rates.
If you had put $850 in one ounce of Gold, after storage and transaction costs you would have less than $200 after 20 years. Forget the Dow, if you had bought risk free 20 year Treasuries (back then they certainly were) yielding 20% you would have made over $32,000. 160 fold difference!
That is what an end of the bubble performance looks like. When a risk free asset outperforms a legendary "store of value" by 15000% you know you have been taken to the cleaners!"

Just got done selling the last bit of Gold and Silver. It has been an amazing 6 years with these 2 metals. We have made a cumulative 15X after tax return on these 2 by using futures options, options on stocks and the metals themselves. Under the current circumstances, without Hyperinflation, the highest I see Gold going to is $2500. Under hyperinflation I see other assets outperforming. I rather leave this party early than late. I see a few other places where I can possibly get 20-50X returns risking small amounts of capital. I do not plan to post any more updates in the foreseeable future. Good Luck to all.

Gold is done...Stick a fork in it?

2010-09-22T12:48:00.001-07:00

I am very very likely to regret this statement, but hey I call them as I see them. I think John Paulson is going to have a bad year.
I think Gold goes to $1050 at the minimum and probably much much lower. I may change my mind at any moment but for now that is where I see it.
May the force be with you.

More on Silver

2010-09-15T22:24:00.000-07:00

There is tremendous excitement regarding the breakout in Silver. I can certainly see why. It has been a long time coming and expectations are high.
But breakouts do not excite me. Not to buy anyway. Unfortunately buy high sell higher principle never got to me.
For me something has to be hated for me to own it. That is a necessary criteria although not sufficient by itself.
Let us start with my very first blog post
http://ispeakofpeak.blogspot.com/2008/12/searching-for-perfect-bottomdow-15000.html
Stocks were hated, I thought they were cheap. While the deflationists were pounding their chests about a complete collapse, I felt that their victory would be short lived. I took some serious flak for it but most stocks bottomed around the time of that post (although the S and P moved lower in March 2009).
I despised Gold versus Stocks when everyone was doing the opposite.
http://ispeakofpeak.blogspot.com/2009/02/gold-is-done-stick-fork-in-it.html
So being contrarian comes naturally to me. Does not always work out so wonderfully as those examples. Although buying Silver ETFs and $20 calls on the Comex (yeah I know it was supposed to be shut down when we all cashed in our chips...)
turned out to be the second greatest trade of my life, buying NG 2013 futures has cost me 10% so far and an equal amount in opportunity costs.
Perhaps Silver will make it on this run to $30 or more. Considering how little I have left, it will not make any difference to me. I am getting excited at how cheap Canadian Oil Sands Trust or for that matter Chesapeake Energy and Natural Gas are getting compared to Silver. In each case the dollars I got from selling Silver will buy at least 3 times as much of these three investments as I could in June and September 2008. Here is 1 example.
So if Hyperinflation/very high inflation is coming ( I do not think yet), then I rather own an under-owned over hated asset than Silver. May turn out to be a mistake. But I am making it.

Sold almost all Silver/Gold

2010-09-14T10:02:00.000-07:00

Update
In an unusual move for me, I sold most my silver and gold into this spike. I held most of it in the form ZSILUS (a swiss etf). I have also sold a great deal of my physical silver. The net result has been to take precious metals from 45% net assets to under 10%.
I am not belittling Silver. It has been great to me. I bought a great deal at prices more than 45% lower. I also have owned Gold from around $500 oz. The market sometimes knows best and I am not sure whether prices will reverse right away.
Something about this breakout is not right to me.
I may put on other very low risk very high payout Hyperinflation hedges, but I do not see the imminent threat in the US.
Please make your own decisions. This was quite difficult for me, but I felt it was the best thing to do. For me.

Closed Corn Long position...preparing to short.

2010-09-10T12:33:00.001-07:00

CORN - CHICAGO BOARD OF TRADE 
Commercial short position and Speculator long position has gotten quite scary.
Not overstaying this party.
http://cftc.gov/dea/futures/deacbtsf.htm
Also going Short AUD and CHF.

The Economy likely to get a lot worse

2010-08-26T10:12:00.000-07:00

I have not been this excited about trades since
http://americanenergycrisis.blogspot.com/2008/11/searching-for-the-perfect-bottom.html
This time however for relatively bearish reasons. I think the big money will be made on the macro picture, however I do not think the Prechters of the world will get their wish. Every moron bear out there is modeling the USA collapse to that of Japan. Since the end of the gold backed currencies, we have had 100 or so Hyperinflations and 1 Deflation. So all their observations are based on a statistical pool size of 1. Having spent so many years in science, I cannot emphasize how retarded that observation is.
Even those basing their observations on Japan conveniently forget certain relevant facts. For example what was the average P/E of Japanese Stock market over the last 2 decades? When you look that up you will realize that in ZIRP environment stocks can trade at much higher ratios than the 5-6 people are calling for, for a very long time.
Second, What valuations did USA housing have compared to Japan at the peak? Japan's housing bubble was much much worse.
And finally for a few who say that Gold rises during deflation.... what happened to Gold during the only Fiat currency era deflation, in that currency?Answer: It declined by over 60%.

I have put on trades that will net 50X in case I am right about certain macro themes over the next 2 years and I have also moved to a slight net short position overall. As usual I use short term calls and puts to further reduce the volatility in my portfolio. I have had a very uneasy feeling about Silver and that has led me to sell calls against my (ZSILUS) position.

EUR/USD high chance of intra day reversal.

2010-08-06T05:58:00.000-07:00

The Euro is at 1.3275 as I write this and I think chances are high that we are at a near term top. Intra day reversal could come in here rather sharply or from slighly higher levels on Tuesday or Wednesday at around 1.34.
This one could be very vicious.

Purchased September CHF 0.90 puts

2010-07-11T22:31:00.001-07:00

The Swiss Franc has had one of the strongest appreciations against a basket of currencies in recent memory. The current perception is that this will continue forever. This makes the 0.90 September puts on Swiss Franc futures (versus USD) at $230 a contract ( the price I purchased them at) a bargain. There is a good chance the Swissie rally is really long in the tooth and it may devalue at least against the USD where it has risen 12 handles within a very short period of time. The position represents a small asset position so I will not be sweating it but I think it can be be very profitable if this trend reverses.

Closed short Gold position

2010-07-08T07:20:00.000-07:00

The Put spread on GLD (long 1X 119 July short 2X 115 July) was up to 1.05 this morning (up 400% since purchase) and I decided that that was enough.
I probably should have milked it for more, but there are times when you just got to take a 400% profit.

Shorting Gold

2010-06-28T21:52:00.000-07:00

I added the 119-115 GLD Put spread in a 1:2 ratio for July expiration. The spread cost was $21 per contract and has a break-even at 118.79 GLD and a maximum profit potential of $400 per contract or about 20 fold.
I think there is a good chance of breakdown of Gold here, unlike what the perma bulls think. We are in the seasonally weak period with an overextended COT position and very bullish sentiment. I do not think the dollar price of Gold can withstand further USD strength.
Since this is a 1:2 spread my profit is maximum at 115 and I start giving it away the further it goes with losses beginning at 111.
I doubt we will go that low by July 16th but I am prepared to go long some at that point. I also have a lot of positions which would benefit from a total market collapse ( I see that as the only situation where Gold retreats that much that quickly) so the position is not as risky as it appears.

Completely Hedged Again.

2010-06-20T12:22:00.000-07:00

The market continues to climb on low volume and that has allowed me to become fully hedged again. My net longs in Silver, RIMM, Corn and the Deep oil Drillers are now hedged with Short positions in the SPY. Longer term NG futures remain unhedged but I consider these to have almost zero Beta compared to the stock market.
I have also opened small long positions in the USD versus the CAD. This is an interest rate expectations play. The market is pricing by BOC significant rate hikes and I do not think these will come to pass. The last two times I went long USD versus CAD, turned out to be the two best trades of the year for me.
I am looking to sell some OTM calls on the index and I will get aggressively short if we approach 1150 SPY. I think the market is miscalculating the risk in Europe and the earnings power of the companies in this environment. Goldmann sees $93 in earnings for the S and P 500 for 2011, I see $62 at best. That is assuming mark to myth continues for the financials. Otherwise it could be a lot lower.

Deepwater drilling slaugher way overdone.

2010-05-29T14:03:00.000-07:00

Let us get this straight first. I do not like Obama. I have liked his actions on banning NEW deep water drilling even less. But his actions and the market's overreaction have produced some amazing bargains.
I have not been this excited about drillers since January 2009 when I bought them in bulk.
I had opened small positions in Diamond offshore some days back and I increased my position by significant amounts on Friday ($64.60). The 2 drillers I am looking at, NE (Nobel) and DO, assuming all their existing DEEP GOM rigs are made to stop drilling and cannot find a single contract ever again, are still cheap. DO has 7 out of 47 rigs exposed to Deep GOM. NE has 6 out of 55.
Most of these 13 rigs will still be employed as they are NOT exploring for oil but actually extracting oil ( I need to get the exact number from IR). Most likely 2-3% if their revenues will be lost IF they cannot find a home anywhere else. That does not mean that this insanity cannot continue or worsen for sometime. Buyers be prepared for a rough ride. But where there is fear there is opportunity.
Deep water drillers present an excellent inflation hedge available at bargain basement multiples (6-8 times earnings). I will buying a lot more if they remain here or get cheaper.

Natural gas Bottoms in

2010-05-27T18:10:00.000-07:00

The one commodity that has yet to participate in the huge rally from 2009 is Natural Gas (although Corn has not done much either). I have written about this previously but I have hesitated in calling a bottom as there will still too much overhang.
I think at this point we have enough positive factors that make it likely that the long term bottom is in.
One of the strongest factors is the very low rig count which is now beginning to work its way to lower Natural Gas Production. The effects will likely we felt in 6 months at most and the market is likely going to anticipate this and move up sometime before this.
In addition we have the following positive factors.
1) Record long speculator short position. If they cannot force a break below $4.00 they are going to start covering before hurricane season.
2) Decreased drilling in the GOM. This is a given considering the BP incident.
3) Record bearish sentiment on Natural Gas.
4) Seminal events which usually mark bottoms have occurred. XTO gave up on higher Natural Gas prices and sold the company out to Exxon. Chesapeake Energy CEO said he is moving toward oil production. He got tired of claiming how high Natural gas is going to go and how is company is going to make billions.

Let us take step back to 2009. February 11th. Suncor, the true morons of the oil industry after having refusing to hedge oil all the way up to $147 finally hedged oil for 1 whole year. At the time I said "Why aren't shareholders enraged by these actions. What kind of a company refuses to lock in a single barrel of production all the way up to $147 a barrel and then hedges at what is likely the be (as the market loves to F*** with most people most of the time) the bottom."

See chart
The point of maximum risk maximum reward are the October Futures. If the timing of the my analysis is off that could really hurt.
The point of mild risk modest reward are the longer dated futures (after May 2012). That is where I am going to add to my positions (currently down 5% from my entry).
Also a huge sell off in the stock market may make me interested in CHK. It is a great buy under $15, although I doubt it may get there. If we get a global stock market selloff prior to Natural Gas crossing $5.00 it may happen.

Update

2010-05-25T17:35:00.000-07:00

I was premature in assuming all short positions would be called away. With the market pulling off a phoenix in the last 20 minutes on Friday, I held on to all my short positions as puts either expired worthless, or I bought them back for pennies.
I covered all short positions (around 1040) at the open today as I felt sentiment had gotten too one sided. I hate being unhedged in this market for long so I will be looking to actively sell calls on SPY again into strength.
Whatever you do ..do not sell your core precious metals positions.

All shorts called away

2010-05-20T17:56:00.000-07:00

The extent of the price decline caught me off guard. All my short positions will be called away around 1085 on the S and P. That leaves net long 15% stocks and 20% long Silver. With no short positions to back that, it is making me uncomfortable.
I hate chasing short positions down here so I am going to wait.
Closed out my long USD/CAD position at 1.0654. Amazingly, for all my bitching, my best profits for the year (actual value not percentage) came from a LONG USD position. That my friends is the definition of irony.

Back in Silver

2010-05-19T20:57:00.000-07:00

Whew! That was a lucky dodge. Both metals obligingly pulled back. Including option premiums I was able to dodge 10% of the price decline which is good enough for me. Metals may go lower but the bigger risk is being out than in.
I have a ton of positions with futures and options around current prices and it should make for an interesting options expiration week. Short term I am betting on a slightly higher close into Friday.

Taking profits In Gold/Silver

2010-05-15T10:48:00.000-07:00

I am out of all paper positions in metals at this point. I think both metals are close to a short term peak. I do not see much downside risk in USD terms, maybe 10-15% at most. I will be selling puts to acquire them back on weakness. The way I do this is sell puts on SLV and use that to lower my cost price for ZSILUS.
I am heavily in cash. I also moved 20% of my cash from CAD to NOK on Friday. I think NOK has been unfairly beaten down here due to problems in Europe.
After a fantastic 2009 , 2010 has been quite frustrating. I am up 5% for the year but it has been tough slogging. I am short the stock markets (40% of portfolio)but I just sold short term puts for May 21st against it. I am short puts on RIMM (if it moved below 65 I will be long 5% of my portfolio) and I am long Diamond Offshore (10% of portfolio). Also Long USD versus CAD since parity. I took that trade off when USD/CAD moved over 1.055 and put it back on at 1.014.
That is about it.

USD Topping

2010-02-10T19:38:00.000-08:00

I hate making these calls. I have been on the right side of this USD move, but in spite of what the deflationists have been calling for this is not a long term move up. QE 2.0 is now 120 days away. The sentiment on the COT shows very high levels of optimism on the USD and that will end badly for the Speculators (see tables below). The question is whether this a short, medium or longer term top.
Shorter term Euro 1.35 should provide support and the we could move up to 1.40-1.42.
Longer term the US is in worse shape than the Euro-Zone (see comparison of California and Greece) and the USD will move lower over time.
Euro and British Pound positioning. I hope that imbecile at Elliot Wave can read this.

EURO FX - CHICAGO MERCANTILE EXCHANGE                                Code-099741
FUTURES ONLY POSITIONS AS OF 02/09/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF EUR 125,000)                           OPEN INTEREST:      197,457
COMMITMENTS
 34,867   92,019      698  120,004   56,636  155,569  149,353   41,888   48,104

CHANGES FROM 02/02/10 (CHANGE IN OPEN INTEREST:     10,579)
  3,660   17,071       18    9,684   -7,137   13,362    9,952   -2,783      627

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   17.7     46.6      0.4     60.8     28.7     78.8     75.6     21.2     24.4

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:      138)
     34       56       14       26       34       68       96

BRITISH POUND STERLING - CHICAGO MERCANTILE EXCHANGE                 Code-096742
FUTURES ONLY POSITIONS AS OF 02/09/10                         |
--------------------------------------------------------------| NONREPORTABLE
     NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
 LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF GBP 62,500)                            OPEN INTEREST:      116,362
COMMITMENTS
 14,012   66,768      224   84,481   18,914   98,717   85,906   17,645   30,456

CHANGES FROM 02/02/10 (CHANGE IN OPEN INTEREST:     20,650)
   -599   18,189      116   20,954   -1,079   20,471   17,226      179    3,424

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
   12.0     57.4      0.2     72.6     16.3     84.8     73.8     15.2     26.2

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       80)
     14       38        5       16       18       33       58

ScotiaBank and the Real Silver Part 1.01

2010-02-01T21:01:00.000-08:00

Part I

I was pleasantly surprised going through ScotiaBank's 2009 annual report.
The bank may have finally turned things around as far their short position on the metals was concerned.
on Page 106 we see that Precious metals holdings went up by approx 3.2 Billion CAD. from 2.4 Billion CAD to 5.6 Billion CAD. On the other hand liabilities of precious metals i.e the certificates sold, went down by about 1.75 Billion CAD (from 5.6 to 3.85 Billion CAD) {Page 123}. While their futures positions are as usual, impossible to decipher, it is good to see that SCotiaBank is now NET LONG 1.75 Billion CAD of precious metals rather than NET short over 3 Billion CAD of the same.
It is possible that they see the writing on the wall. It is possible that being custodian, for BMG funds, Claymore and Brompton ETFs, they realized just how hard it is to acquire additional metals. It is possible that they saw my article (yeah right) or Ted Butler's articles and decided to mend their ways.
In any case, this is a very welcome development.

Today's Gold

2010-01-31T18:00:00.000-08:00

Gordon Gekko put up an excellent post on zerohedge..

The Prechter Gold "Buy" Signal Has Been Triggered

The recent decline in Gold has not only caused mayhem in goldbug-land (especially those holding mining stocks), but also brought deflationists of all stripes – with, not surprisingly, Prechterites at the forefront - out of the woodwork shouting $400 Gold from the rooftops. Funny, all I remember is a deafening silence at $1200. Emboldened by the recent decline, Mr. Prechter has predicted a 40% decline in Gold prices from here. For those not in the know, Bob Prechter has been forecasting declining prices for Gold all throughout its decade long bull run. For example, in March of 2006 when Gold was about $560 he said, "Gold is in the final stages of a speculative surge…technical factors, in conjunction with a complete wave pattern and sentiment, point directly to a decline to at least $460 and probably close to $400". It reached $730 in May and closed that year at around $650. In 2003 Alf Field – who beat Prechter at his own game forecasting Gold prices much more accurately than him using the Elliot Wave Principle – wrote, "In mid 1999, when the gold price dipped towards a low of $253, Bob Prechter forecast an extended rally in the gold price that would be followed by a final decline to below $253 to a low point approaching $200…he forecast (at the start of the move) that the peak would be about $360 and he recommended short sales in gold after the price moved above this level in February 2003. He now believes that the market is on its way down to new lows below $253". Gold closed that year at around $430. What would have happened if you took his advice and shorted Gold at $360? You would have gotten reamed, that’s what. Ironically, for all his blathering about "sentiment" and being "contrarian", Mr. Prechter has become a great contrary indicator for the Gold market. His long term stock market forecasting isn’t that great either (yeah, I know he’s made 4-5 correct predictions in the last 40 years), but we’ll leave that aside for now.

My personal take is that Gold should outperform the stock market significantly, and will not average any year under $1000/oz. Short term moves even below $1000 are possible. As mentioned on this blog before, I moved out of all leveraged positions around Gold $1180, and Silver $19. I have started accumulating NON-leveraged positions on weakness by selling puts.

Apmex now shipping to Canada

2010-01-26T18:25:00.000-08:00

One of the most reliable US Bullion dealers is now shipping to Canada. I may have played a small role as I have emailed them several times detailing what an incompetent bunch the bulk of Canadian dealers are and what high premiums they charge. Apmex promotes bullion without being sleazy.
Suisse Gold on the other hand continues its calls to "get in" before the market goes to the moon.

"2010 Eagles are shipping the week of January 20th. You can take the opportunity to buy them now before the crowd and before SILVER GOES TO THE MOON !!

This auction is being offered by Suisse Gold Corp. • An Authorized SeekBullion.com Dealer"

Skip the Suisse Gold theatricals and buy direct from Apmex. Premiums will be much lower and so will the minimum order size. See example below.

0.59 cents over spot for John Matthey 100oz bar
http://www.apmex.com/Product/35629/100_oz_NEW___Johnson_Matthey_999_Fine_Silver_Bars.aspx

Annual ranking of asset classes delayed

2010-01-22T07:05:00.000-08:00

as I have no clue as to how 2010 will span out.....yet....
For now still sticking to my Dec 22 post

"Unless there is a rapid shift in Fed policy towards more monetization, the dollar could strengthen considerably more than consensus. My take on Gold is that, during the breakout above $1000 the crowd remained steadfastly negative while now they remain bullish in the face of severely negative price action. COT positions continue to remain extended and there is no fear among speculators. We will have to see if China comes in at $1000/oz and buys a boatload. The one very strong positive for Gold so far has been the relatively good performance of Silver and Gold shares in the face of marked weakness in Gold. Overall I remain, neutral to slightly negative short term. "

This has of course panned out short term, and I remain bullish until the Fed changes its stance to a more aggressive policy posture.
The only asset class that I really love at these levels is the long dated Natural Gas futures , which form the bulk of my positions (50%).
Other notable positions include short positions on the SPY, QQQQ and Amazon, matched with long positions on Silver and Exxon Mobil. I have also sold calls against my long positions and puts against my short positions.
Anyone with bright ideas for the best asset class for 2010 please chime in.....

Downgrading Fitch's rating service value from Junk to Utter trash

2010-01-05T19:50:00.000-08:00

Iceland decided that joining the EU was not worth the price and refused to pay back UK and Netherlands. This is a decision that clearly makes sense as UK depositors did not pay kickbacks the Icelandic people on the 13% they made in interest while parking their money there. For Iceland, to accept such huge liabilities on their head would be exceptionally stupid.
However Fitch decided that this move to not increase debt was a "failure to develop a credible macroeconomic stabilization program" .
At this point the Mad Scientist Rating agency downgrades Fitch's Rating Service value from Junk to Utter and complete Trash. Further downgrades are not possible as this is about as low as we can rate.

2009 Year in Review

2010-01-02T13:18:00.000-08:00

I had put up an annual ranking of asset classes in January 2009. Along the way I changed my views a lot based on price appreciation, but it is a good list to go back to see how my predictions panned out in general.
Back then, on February 1 I wrote,
This is my view of the various asset classes in order of attractiveness. On this scale a plus 10 would mean that I expect a large out performance compared to S and P 500 and vice versa for a minus 10.
Consult your investment adviser before making any investment decisions.

Silver + 10
Deep Water Drillers + 9
Coal producers +6
Platinum +4
Palladium +2
Gold +3
Corn +3
Soybeans +2
Wheat +2
Oil +5
Natural Gas 0 (2009) This has room to move up dramatically in 2010
Natural Gas drillers 0
Natural Gas producers +1
Oil Servicers +1
30 yr bond -6
REIT -5
Oil producers (independent) +3
Oil /majors +1
Refiners -5
Gold producers +4
Gold Juniors +9
Retail -2
Health Care +2
Tsx 60 +2
Potash producers +6
Fertilizers diversified +2
Industrial +1
10 yr bond -3
Financials Underperformance for first 6 months then out performance
Consumer Discretionary -2

Right off the bat the best calls were for the 30 Year Bond (down 17% versus SPY up 27% from Feb 1 2009), Gold Juniors (this one is hard to measure, but many stocks have tripled or quadrupled over this time frame), Silver (up more than 50% from Feb 1 at its peak in November).
Potash producers, Deep Sea Drillers and coal producers all produced fantastic results but I was disappointed that Deep Sea Drillers did not outperform by a larger margin.
Financials bottomed much sooner than I anticipated, but then went on to outperform as I expected.
The worst calls were for Natural Gas drillers, Retail,Reits and Corn.
Overall my portfolio was up over 135% which was largely due to a leveraged bet on Silver (2010 20 Strike price futures options), and Gold $1250-$1500 call spread. Both of which I was fortunate to close quite near the recent peaks.
My worst positions were a Short position on SPY (down 18%, but it was hedged against a lot of individual stocks and metals during that time frame) and AMZN (down 18% with similar hedges).
Nonetheless a good year by any standards. I am rethinking all strategies for 2010, with an emphasis on preserving gains and purchasing power rather than trying to have another banner year.
Before I end I have one score to settle,
I had put this up late in 2008

We have great stocks trading at 3-5 times expected earnings. Sure many estimates will come down but many will not. Those are bargains of the century. If you think that we will stop eating or using coal over the next 10 years because of “Deflation” then by all means, buy the classic 10 yr treasury bond yielding 3.5%. The long bond has peaked and we will now see yields moving past 4.5% in 1 year, in my opinion. The unlimited supply from the US Treasury and limited demand from foreigners (as they have less to recycle as we cut back spending) will guarantee that. Remember the last deflation scare in 2001-2002? 10 yr yields went as low as 3.03% and then rocketed higher.

Back to stocks...We have Ebay trading at a 30% discount to it's price in 2000. Then, it made 9 cents a share, now it made 40 cents in a quarter. Then it had 1 billion in cash, now it has more than 4 billion. Ex cash it traded at 180 times earnings, now it trades at 5 times earnings. The long bond was at 6.5% and hence Ebay was trading at a 1200% premium (in terms of earnings yield), now it trades at a 75% discount. I am not recommending Ebay… but it serves to make a great example. All my life I have hated technology stocks because of their ridiculous valuations and now I may actually buy a few.
I have taken new positions in Mosaic, Agrium, Pennwest Energy Trust and Provident Energy trusts.

I am quite bullish on stocks and if not for the coming implications of peak oil I would have been over-the-freaking-top bullish on stocks.

For my efforts I was told that I made "very little sense" and I was living in la-la land by Ilargi of TheAutomaticEarth.
I am sorry Ilargi, it seems you got 2009 wrong.

Bernanke's tasks in 2010

2009-12-31T07:36:00.001-08:00

With an eventful year coming to and end Bernanke must have had a lot to be grateful. That is, thieving for his banker friends still remains largely hidden from the common public and that he can walk around without presidential level security. The icing on the cake is the "Man of the Year" award.
What comes in 2010?
His tasks in no particular order
1) Double bonuses for Goldman Sachs, after all with all the price increases he has caused, he needs to make sure at least they keep up with inflation.
2) Absorb 1 trillion USD of commercial mortgage paper on the Fed's balance sheet, so that anyone looking at it wonders out loud, "Is it twins?"
3) Keep USD within a reasonable range +/- 20%. Openly aim for -10% and UPOD.
4) Announce suddenly that the Fed is making so much money on the assets on its balance sheet that it will just destroy them from pure remorse. No need to force banks to exchange worthless cash for these beautiful assets.
5) Keep 10 year Treasury Bond yield from going AWOL. Split major dealers into 3 branches each to create the impression of more bodies showing up for auctions. Create two new categories in TIC data to explain bond purchases
a) Saturn (the Planet not the dealership)
b) NOYFB
6) Issue a Federal Reserve Credit Card with -19.99% interest and penalty for paying anything back. Comes in 2 designs...a) Beat Deflation Now! b) Beat Deflation Right Now!
7) Make current interest rates on Option Arm mortgages permanent. Difference between fixed rates and actual rates to be made good by US treasury.
8) Disclose to the public that the Federal Reserve is actually a secret society founded in 50 AD to protect descendants of Jesus and "do God's work".
All in all a full plate. In fact his task looks exactly like this,

Sorry the ones in English did not allow embedding.

Bottoms up?

2009-12-30T06:16:00.000-08:00

While the nominal price of Gold may not have reached a bottom, the relative value of Gold versus the S and P probably has. I fully expect this ratio to move to at least 2 over the next 2 years. Whether it will come at GLD 200, SPY 100 or GLD 100 SPY 50, remains to be seen.

USD sentiment

2009-12-28T19:13:00.000-08:00

While I remain positive as to the direction of the USD short term, somebody needs to show Prechter the preacher this on the sentiment on the USD.

U.S. DOLLAR INDEX - ICE FUTURES U.S.                                 Code-098662
FUTURES ONLY POSITIONS AS OF 12/22/09                         |
--------------------------------------------------------------| NONREPORTABLE
    NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(U.S. DOLLAR INDEX X $1000)                          OPEN INTEREST:       59,792
COMMITMENTS
 45,973   11,843    3,094    5,748   41,744   54,815   56,681    4,977    3,111

CHANGES FROM 12/15/09 (CHANGE IN OPEN INTEREST:      8,521)
 8,394       34     -207      311    9,015    8,498    8,842       23     -321

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
  76.9     19.8      5.2      9.6     69.8     91.7     94.8      8.3      5.2

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       76)
    34       26        4        8       10       45       38


Speculators are now long more contracts than almost any other time in COT history
that I can check. 99% bears you say Bob?

Suisse Gold predicts high prices for silver based on "Lots and Lots and Lots available"

2009-12-26T15:48:00.000-08:00

A few weeks back Suisse Gold was predicting that this was the "last chance" to buy Silver under $20/oz. That did not pan out too well as Silver never even momentarily made it over $20/oz. Now Suisse Gold (SG) is back...
In the most effective marketing ploy since US bankers convinced unemployed individuals to buy homes they could not afford, SG put this up on the Seek Bullion Website.
They have
"Lots and Lots and Lots of eagles" (Note the triple word use, because Lots and Lots alone, would not convince you of an impending price surge and hence the urgency to buy). In fact they have so many that they are convinced that there is no shortage. I do not know how many I would have to have before I was convinced there is no shortage anywhere in the world, but whatever that magic number is, SG has it.
However least we all should worry that such an avalanche of supply would depress Silver prices , fear not. SG, with an authority that would make Nostradamus look like bumbling idiot, predicts that we should "Buy now before Silver hits 21 bucks."

Denninger did mark the USD bottom!

2009-12-22T07:11:00.000-08:00

http://ispeakofpeak.blogspot.com/2009/11/denninger-marking-usd-bottom.html

Denninger has been right on the money in helping me assess where the USD is going. His incessant ranting about Deflation marked the USD top for me, and he was just 0.4% off in marking the USD bottom.
Got out of my leveraged Gold positions thanks to him. Check's in the mail Denny.

Unless there is a rapid shift in Fed policy towards more monetization, the dollar could strengthen considerably more than consensus. My take on Gold is that, during the breakout above $1000 the crowd remained steadfastly negative while now they remain bullish in the face of severely negative price action. COT positions continue to remain extended and there is no fear among speculators. We will have to see if China comes in at $1000/oz and buys a boatload. The one very strong positive for Gold so far has been the relatively good performance of Silver and Gold shares in the face of marked weakness in Gold. Overall I remain, neutral to slightly negative short term.

Gold: The Ultimate bubble

2009-12-12T08:11:00.000-08:00

FOFOA just wrote a brilliant piece on why Gold is not, never was, and never will be a bubble.
Let me work out some common ground here, as there is a lot I agree on.
1) The US Govt Bond market is a bubble. I have said so many many times. FOFOA calls it a Ponzi scheme in its final stages. I agree.
2) FOFOA says that Gold is not currently in a bubble. Yes, but it is quite fairly valued against most other asset classes. There are some ridiculously overvalued asset classes like US Treasuries and financial stocks (Interestingly John Paulson who made slightly more than FOFOA or me last year thinks both, Gold and financial stocks, are undervalued). But the bulk of the commodities are quite fairly valued to undervalued compared to Gold.

To me Gold is an asset class nothing else, and it can, and has actually become, a bubble in the past.
I do not buy into Exter's pyramid. See pic. (Actually I added Silver below Gold in the pic in the ratio of the market value of all Gold to all Silver in the world. Unfortunately you cannot see it due to the fact that the market value of all Silver is about 300 times smaller than all Gold.) I think it just a fanciful way of saying we have a lot less Gold than Real estate and Treasury Bills. So? We have microscopic amounts of Platinum compared to Gold , should I put that right at the bottom? As I have argued in the past, Platinum is a better bet for High Inflation/Hyperinflation than Gold. At best that pyramid shows relative appreciation potential WITHIN the US during hyperinflation. All liquidity will not flow in an orderly manner down this pyramid as its founder espouses.

Coming back to the valuation of Gold. Gold will likely appreciate substantially during the next few years. The reasons are numerous and have been detailed by many, however there is a limit to how much it can appreciate before it does become a bubble.
To see what that level would be we need to see what we can buy with Gold today.
Bill Downey published this recently

"How much things cost on Aug 15th, 1971" to what they cost at $900 dollar gold"

Dow Jones Industrial Average 890 or 25 oz. gold in 1971, versus 10,000 or 11 oz. gold today.

Average Cost of new house $25,250 or 721 oz. gold in 1971, versus 250,000 or 277 oz. gold today.

Average Income per year $10,600 or 302 oz. gold in 1971, versus $70,000 or 77 oz. gold today.

Average Monthly Rent $150 or 4.3 oz. of gold in 1971, versus $824 or .8 oz. of gold today.

Datsun 1200 Sports Coupe $1,866 or 53 oz. gold in 1971, versus $28,400 or 31 oz. gold today.

As we can see the difference is in purchasing power. We can buy a lot more for our gold today. The above example shows for the most part, we can buy things at about 1/2 the price of 40 years ago. Some things on the list are 1/4 the cost."

Here he is comparing the value of Gold today to that before the first Gold Bull run began.
Mind you, we are ten years into this one, and it looks by any standard Gold has done quite well.
The last bull run ended with Gold at $850/oz. That was the ultimate bubble in the price of Gold in USD terms. At that price Jewelry demand was almost annihilated. The price of Gold was atrocious in relation to its inherent demand, price of production and in relation to everything else. Most commodities had become too cheap compared to Gold. So had the Dow!
FOFOA says that Gold can never be in a bubble, however I fail to see what would you call the $850/oz price back then. It had discounted enormous amounts of future inflation and it seemed completely useless compared to 21% interest rates.
If you had put $850 in one ounce of Gold, after storage and transaction costs you would have less than $200 after 20 years. Forget the Dow, if you had bought risk free 20 year Treasuries (back then they certainly were) yielding 20% you would have made over $32,000. 160 fold difference!
That is what an end of the bubble performance looks like. When a risk free asset outperforms a legendary "store of value" by 15000% you know you have been taken to the cleaners!
Even today, for all its fanfare, Gold has performed poorly so far against risk free assets of countries where there is no chance of Government debt default or hyperinflation. For example against the 9 year Norwegian Krone treasury Bond purchased in 2000, yielding 6.5% (when 9.4 Norwegian Krones bought 1 USD, ) Gold would be up about 60% against this asset class over 9 years. Less if you factor in storage costs and bid-ask spreads. At the low point for Gold in 2008,
Norwegian Krone treasuries had almost performed as well as Gold. I am bringing this up to make 2 points.
1) Hyperinflation is bankruptcy of the Government due to money printing. Creditor Governments (like that of Norway) will never go bankrupt (at least as far out as the eye can see). Hence Gold will always under perform in those currencies.

2) Considering how little Gold has appreciated vis-a-vis risk free Norway treasuries, Gold is nowhere near being in a bubble and has a long, long way to go.

This brings us back to how long it will take and what will be the signs that Gold is in a bubble.
Gold still lacks widespread participation to come anywhere close to being in a bubble. Although we have yet to see any serious price deflation, we have also not seen serious price inflation. The public will not come in before we have serious inflation. Without their participation there can be no bubble. There are many stories and ideas about a sudden collapse in the dollar. While possible, I think that there are strong deflationary forces at work and in the absence of monetization the natural trajectory for the USD would be UP. So at any time the pressure on the USD gets too intense the Fed can back off from money printing. The question is what forces will be at work at the time and whether they can back off money printing at those times. Hence while hyperinflation is a strong probability it is not the ONLY possibility. Left to its own devices, the Bond market can wreck severe deflationary pressure if it moves a couple of percentage points higher on the long end. Will Bernanke step up and say he will cap the 10/30 Yr bond rates with indefinite amount of printing? You can bet your bottom ounce of Gold we will have Hyperinflation then.

Faith in the USD.
All the actions of the past year, both from a monetary standpoint and Government spending standpoint have certainly eroded confidence in the USD. At the same time its main counterpart (the Euro) is grossly overvalued from a purchasing power parity standpoint.
From a logical stance the correct investment would be to sell Euros buy USD and invest in those assets which are significantly cheaper in the US than in the Euro-Zone. While easy in theory it is virtually impossible to do in practice, hence we see all momentum money rushing into Gold. However I expect a more logical stance from at least some Central banks. While India's Gold purchase has been touted as a huge move for Central Banks across the world, China has spent more than 15 times India's purchase price on buying OIL. They are securing reserves in the Ground for under $15 a barrel rather than buying Gold at $1100. In fact they had several chances to purchase Gold and Gold companies at vastly lower prices than today but they did not move on it. Why? Because they have more sense than Gold bugs. Gold is only a means to an end. It only works as a way to protect your assets against the devaluation of paper money. It only works as a way to keep up with rising commodity prices. However if you can buy the commodities themselves for much cheaper and store them (not practical for an individual to do) it makes no sense to buy Gold.
China at national level can do this and just as India's purchase put a floor under the price of Gold, expect China's purchase to keep a lid on the Gold:Oil ratio.

In the last 2 years I made 2 calls on this ratio.The first was when the Gold:Oil ratio dropped under 7. I sold my oil holdings and purchased the precious metals. The second was when Gold:Oil ratio hit 22, when I reversed the trade. What was amazing was that when the first happened, everyone was convinced that oil would go to $200 and above ( I was convinced too, except that I felt Gold was much cheaper than oil and fortunately made the trade). When the second happened in March, those same people were convinced that Gold would hit $1500, oil would go to $10 and the S and P would go to 150. It really, really pays to stay rational and examine the value of everything and not just its price.

To put FOFOA's claim in prespective, Gold would have to rise more than 35 fold relative to oil to reach the mid-level price projected of 1 ounce of Gold to 500 Barrels of oil. Currently oil in the ground is trading around $15/barrel. Total "proven" reserves of 1.2 trillion barrels would be worth about 18 Trillion USD. If Gold did go up 35 Fold (oil remaining at these levels, we will ignore nominal changes and focus on relative ones) the total Gold market would be worth over 160 trillion USD.
10% of the world's existing Gold would be able to buy all the world's oil resources for the next 30 odd years of production. The middle east producers would take a 97% pay cut in terms of the price they got for their oil in real terms. (I have alluded to a possibility of an extreme Gold:Oil ratio in the past , I now see that as a bit less likely, however should it occur it will not last more than a year and we would be lucky to get to 100 on the ratio.)
I see ZERO chance of a 550 ratio in the next 10-15 years (once oil is no longer the primary fuel of course anything is possible, that is like saying 1 oz Gold will be able to purchase 2,000 1995 laptops in 5 years...Sure!). In all hyperinflations that we have seen in the 20th century, outside of the country undergoing hyperinflation, Gold has NOT gone up relative to other assets.
Within the country itself there is a huge demand for hard asset currencies and there is substantial appreciation relative to other goods and services. Is this time different? That is what those caught in the last two bubbles said.

Random Thoughts

2009-12-04T12:36:00.000-08:00

I had sent this to my buddy Greg Jeffers on November 30 2009 on my thoughts on all markets. I did not get a chance to put it up until now.

Debt Defaults at Every Level
Last week saw the beginnings of investors realizing that no debt no matter how highly rated was safe. The rating agencies did not see Dubai's default coming and the CDS market certainly did not either. Investors and Speculators that piled into debts of all standing have to ask whether anything (or everything as they were pricing in) is safe anymore. We would watch the corporate debt prices carefully for clues on how this will unravel.

Greece looks like it will be next. What would Plato say?
The CDS markets are now pricing in some sort of a default from Greek bonds. the spread over German bonds suggests that the market has little faith in the ability of the Plato disciples to pay their debt back. An event of that magnitude would be a Category 6 hurricane right when Moody's and the other 2 stooges were Forecasting that every sovereign debt should be rated a minimum of 18 A's.

EuroZone interest rates. Rate hike? NAFC
While the market participants get excited at the prospect of leveraging themselves 20 fold on the Euro because they believe that rates hikes are about to come from Trichet’s quiver, we remain highly skeptical. Considering the fact that barring Germany and France, all other Euro-Zone economies are in horrible shape, we would not be surprised with a 75 basis point cut within 18 months.

Go for Gold?
While we remain incredibly bullish longer term, one cannot brush aside the impact of such a huge move in Gold on Indian Jewelry demand. To put this perspective, at the top of the last Gold bull run at $850/Oz (Somewhere over $7000/oz in today's dollars) 95% of the Gold demand was for investment. The jewelry buyers were completely priced out. At the $250 bottom that ratio was exactly reversed. Today the ratio is around 35% for investment and 65% for Jewelry. So while a long term top is nowhere in sight, one cannot ignore the impact of 25% price moves on the appetite of jewelry buyers. While investment demand has increased, a lot of it is still momentum chasing which will run for the exits at the first sign of trouble.

Central Banks will always buy Gold from this point?
While the world seems convinced that Central banks will power the next phase higher in Gold prices, we are skeptical that they will chase prices higher like Gold was the only investment in town. Gold is an important asset for them, however should the price of Gold go up much more in relation to other commodities I trust they will sell Gold and buy other assets. For example if Gold moves up to $1500 while oil moves down to $50/barrel, and oil companies are trading at $15/barrel of reserve, look for a nifty exchange.
While Central banks may buy Gold they would destroy themselves if they chose to buy Gold at any price possible. This is similar to insurance. While it is sensible to spend a portion of your income on Health and Car insurance, it would be ridiculous to spend 50% of your after tax income on it. If Central Banks insist on pushing the price of Gold higher and buying at all costs, I trust they will injure themselves. We would monitor the value of Gold is relation to other assets rather than its absolute price in sinking fiats to decide whether it is fairly valued or not.

Natural Gas...the Natural choice.
Longer dated Natural Gas Futures continue to price in complete abundance for the commodity as far as the eye can see.
While we would not bet the farm for the next 2 years consider us in the strongly bullish camp longer term. Our current natural gas rig count is abysmal to say the least. Combined with significant oil shortages in the next 5 years we see
Natural Gas trading at under $45 a barrel of oil equivalent longer term to be an enormous opportunity. We would not be surprised to see the entire heating oil region being retooled to be heated with Natural Gas if such BTU discrepancy were combined with oil shortages. At $200/barrel and BTU parity, longer dated Natural Gas futures could return almost 400% with very little downside risk.

Derivatives, Default and Deflation

There has been constant chatter that the vast amounts of OTC derivatives will lead to hyperdeflation. Why? Did OTC derivatives exploding from 1 billion to 1 quadrillion over 35 years lead to Hyperinflation? Why would contraction lead to Hyperdeflation.
Let us say that we made a bet for $500 billion with JPM that the sun would rise in the north tomorrow. JPM is also counting on this bet paying off for them as they have inside information that the East is where the action is.
Now tomorrow the Sun does rise in the East and I default, what happens? Loss of jobs in my company and a possible domino effect through the industry. Directly money supply would not be changed. Loss of jobs could be argued to lead to deflation, however nowhere near the impact of the actual collapse of 500 Billion USD of M6.Jamie Dimon will just fleece someone else However since 97% of the bets are actually made by the bug banks like JPM, let us reverse the above example where I have made the big bet on the east and JPM is hoping the Federal reserve will change the definition of east by morning. What happens here? Bailout 101. I get paid by 500 Billion USD as JPM will not be allowed to go under. Suddenly 500 Billion of M6 becomes M2. Such a scenario would Hyperinflationary not Hyperdeflationary.

Taking the leverage out of Gold

2009-11-23T12:33:00.001-08:00

Sticking with Gold has been extremely rewarding and will continue to be over the medium to long term. At this point I am selling all my leveraged Gold positions, including my $1250-1500 Call spread which has a nice 100% gain in 6 months.
Note this is an exit only of leveraged positions which can hurt quite badly ina downdraft. Gold and Silver ETFs and Physical bullion are not for sale.

All in Balls Out

2009-11-18T18:21:00.000-08:00

The very long dated Natural Gas futures are now finally at a point where the risk reward is quite quite compelling. The May 2014's at 6.33 represent a barrel of oil energy equivalent in 2014 at about $38. I expect to accumulate a good percent of my position over the next few weeks and eventually I expect that it would represent more than 50% of portfolio on an unleveraged basis.All in Balls Out.

Denninger marking the USD bottom

2009-11-17T07:35:00.000-08:00

After months of saying we will have massive deflation because the USD will appreciate (read other countries are much worse than the US) and Gold will depreciate (read Jim Willie is an idiot) Denninger has recently decided he ain't buying his own crap anymore. I have counted a total of 10 posts from him recently about how worried he is about the USD. When you have convinced someone as pig-headed as him about the USD, then perhaps the bottom (short-medium term) cannot be far.
As I have mentioned a few times recently, I still think Gold and Silver appreciate in non-USD terms. However considering that they have made large moves in non-USD terms a rest and a correction would not be very likely at this point.

Move over Dennis Kneale ..here comes Jon Nadler

2009-11-02T17:14:00.000-08:00

Jon Nadler wants to share in Dennis Kneale's 30 seconds of fame. In an interview on the Gold Bull run, Jon proved once and for all that common sense is surprisingly uncommon.
The entire interview , should you wish to torture yourself, can be read here .
Some highlights...

First and foremost, you have to have demand that far outstrips supply. Like any commodity in higher demand than supply makes available, you'd obviously see a price reflection.

Secondly, you'd have to have a falling stock market. The old adage is that gold is an inverse asset to currencies, stocks and other assets—so where's the bear market in stocks? Stocks have been up 50 percent-plus this year.

Third, you'd have to have an actual, tangible inflation level, and the threat of much higher inflation on the horizon as well. We don't see that either, which we'll talk about later.

And fourth, you'd need an increase in the price of gold across all major currencies—no exceptions. You can't have Aussie dollars and the South African rand going one way, while the euro and U.S. dollar is going the other.

Those four factors are not satisfied by the current picture in gold—not even remotely. What we really see is a momentum- and index-fund-driven speculative move that started almost on cue on Sept. 1. They've been piling in, hand over fist, with margin positions and futures positions that have now mushroomed to a level that's unreal—historic highs, on the order of 750 tons of long positions. They outnumbered the shorts 9:1 as of the week before last; it has since narrowed to 7:1 [as of Tuesday, Oct. 27]. Still, that's way distorted.

But I have to say from the get-go, I'm not a gold bear. I know that anybody who doesn't say "$2,000 gold!" is automatically a bear, but I'm just a realist who looks at supply and demand.

Oh Nadler, how is it that you can start an interview with four erroneous points? I mean, don't people believe in putting their best foot forward anymore?

Point 1: Have you seen Gold production(supply) numbers? Falling year after year relentlessly since 2002. Have you seen demand for 1 ounce Gold coins and Gold bars? 3 years back such premiums would be unheard of, now they are required to keep a check on this market as investors clean out all forms of bullion in small sizes. Seems to me demand and supply are quite favorable.

Point 2: You can shove that old adage where the sun don't shine Nadler. Since the US went off the Gold standard, there has been a massive bull market and a massive bear market in USD terms in Gold prices. During the bull market, the DOW went nowhere. It did not go down. It was at 1000 in 1970 and it was at 1000 in 1980 while Gold went up 26 fold. Non-Correlated is not the same as inverse. I can send you a dictionary on the house if you wish. During the gold bear market Gold went down (duh) and stocks went up. So you are basing your evidence on 1 out of 2 phases of a complete market cycle.

Again all analysis is made in USD terms. If you had actually looked at other currencies, as I and many other have, you would have seen that correlation with stocks just does not exist over any long time periods.

Point 3: No tangible inflation threat? No we have a bigger threat, the threat of a currency collapse, or multiple currency collapses and threat of Government debt default.

Point 4: Now that is plain ignorance. What Mr. Nadler wants is new highs in all currencies simultaneously. That is the only interpretation I can think of. Because Gold has made new highs in all currencies, just not recently. Unless all currencies are fixed relative to each other then Gold will make new highs in different currencies at different time points.

There are errors galore in the rest of the interview but I do not have the time for posting it.

Funnily enough Jon ends with,

Nadler: Ultimately, I think there's a lot less mystery in gold that adds up. If you dissect it all, you can come down with something more realistic. That realism compels me to say "reversion to the mean." We're trading some 30 percent above long-term averages. But if we take away the fear premium, take away the funds and the ETFs, and put in fundamentals, you're left with a range of $680-880—which isn't a bad level, by the way. It still gives producers double the return on their cost of production.

But Jon you were even bearish when Gold was more than $200 below the low end of your projection, weren't you? So now that is a price it will fall to. Sounds like some deflationist calls I have heard over the past 8 years.

Cit Files for bankruptcy

2009-11-01T13:49:00.000-08:00

http://finance.yahoo.com/news/CIT-files-for-Chapter-11-apf-1202955938.html?x=0&sec=topStories&pos=main&asset=&ccode=

CIT made the filing in New York bankruptcy court Sunday, after a debt-exchange offer to bondholders failed. CIT said in a statement that its bondholders have overwhelmingly approved a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to continue to do business.

"The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy," said Jeffrey M. Peek, chairman and CEO. Peek has said he plans to step down at the end of the year.

It received $4.5 billion in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments, and negotiated a $1 billion line of credit from billionaire investor and bondholder Carl Icahn. But the company failed to convince bondholders to support a debt-exchange offer, a step that would have trimmed at least $5.7 billion from its debt burden and given CIT more time to pay off what it owes.

It is unclear what the filing will mean for the nation's small businesses, many of which look to CIT for loans to cover expenses like buying materials at a time when other credit is hard to come by.

Analysts have warned that already ailing sectors, like retailers, could be hit especially hard, since CIT serves as the short-term financier for about 2,000 vendors that supply merchandise to more than 300,000 stores.

This is really a big blow to small businesses coupled with all the increased taxes being proposed to be added on them for health care spending. Expect the programmed traders to quadruple this stock over the next few days if what happened to GM is any indication.
I have been quite busy, but I hope to have some thoughts up Gold and some high tech bullshit (Stoneleigh's interview) nonsense coming out of The Automatic Earth website, soon.

The rally continues

2009-10-23T07:20:00.000-07:00

UK is not a publicly traded company so they were not able to beat and raise the guidance as far as their third quarter GDP is concerned. From Dailyfx

The British pound fell back from the intraday high (1.6695) and tumbled to a low of 1.6412 as the economy failed to emerge from the recession in the third quarter, and the currency may face increased selling pressures going into the North American trading session as investors scale back long-term expectations for higher interest rates in the U.K. As a result, we may see the GBP/USD retrace the weekly advance and may fall back towards the 100-Day SMA at 1.6362 to test for short-term support.

The advanced 3Q GDP reading showed economic activity in the U.K. unexpectedly contracted 0.4% from the three-months through June and marked the longest slump since recordkeeping began in 1955, with service-based activity weakening 0.2% during the quarter, while industrial outputs and building activity slipped 0.7% and 1.1%, respectively. As the economy remains in recession, the Bank of England is likely to hold a dovish outlook throughout the remainder of the year and may take further steps to jump-start the economy, and speculation for further easing is likely to dragon the exchange as investors weigh the outlook for future policy. At the same time, the index of services weakened 0.1% during the three-months through August amid expectations for a 0.1%, and growth prospects are likely to remain subdued going into the following year as households continue to face a weakening labor market paired with tightening credit conditions.

With USD putting in short term bottoms against many currencies except the Euro the index looks ready for a short-term rebound. Still think Gold goes higher.

Amazon however came in with "Mind-Blowing" numbers as one Analyst put it.

From The Business Insider, Oct. 22, 2009:

Amazon just came out with a great Q3, soundly beating expectations. The stock is popping 9% after hours.

EPS was $0.45 versus Street estimates of $0.33. Revenue came in at $5.04 billion vs. estimates of $5.03 billion.

Importantly, Amazon also raised Q4 guidance. Net sales are expected to be between $8.125 billion-$9.125 billion. The Street was expecting $8.11 billion.

By any stretch of anyone 's imagination that was not a big beat on revenue for the current quarter and certainly not "mind-blowing". The best earnings estimate for Dec 2010 year is $2.19, even if we increase that to $3.00, Amazon is now trading in bubble territory for retailer.

The market overall seems to be holding up but is having trouble moving higher even with great numbers from tech.

When it cannot rally on good news....

Treasury Market appears doomed unless a stock crash is engineered

2009-10-18T22:20:00.001-07:00

or the Fed rolls out QE 2.0

The latest TIC data looks positively horrifying.
Despite continued moronic assertions coming from the US administration's "strong dollar policy" and from the deflationists camps, the Chinese continue to defy their expectations of purchasing more than 100 billion USD a month of US Treasuries. Instead they sold about 3 Billion USD worth. This fits with my thinking on the subject.
The current run rate looks absolutely terrible. No two ways to cut it.
Foreigners have purchased about $370 Billion USD worth of treasuries in 8 months, which would be fine if the estimated deficit was coming in under $750 Billion. However with total borrowing by the US of over 2 Trillion USD next year, and no monetization (allegedly), that is going be a tough sell.
This year was taken care of thanks largely to the huge purchases by the FED and the total fear of Armageddon by the foreigners. Now with the apparent blue skies again, nobody is interested in lending to the US. With the FED QE 1.0 winding down, rates could rise rapidly and choke of any chances of stabilization in the economy or housing market. The Stock amrket needs to move down significantly, and quickly, or the FED needs to announce QE 2.0 quickly.

Exactly how retarded are the deflationists?

2009-10-10T18:38:00.000-07:00

Never in the history of money have people been so polarized in their views about hyper-deflation or hyper-inflation. Financialsense has recently presented some interesting interviews with some of the leading thinkers within each group.
One of the more fascinating ones was a debate between Mike Shedlock and Dan Amerman. Listening to that interview one got the sense that Mr Shedlock is beyond stupid and completely attached to his belief. He did not seem to even understand a simple concept as what is a "NON ASSET BACKED CURRENCY" as evidenced by him referring to the Great Depression response to Dan Amerman's question.
What is completely confounding however is that by his own definition he is completely wrong.

"Inflation is the expansion of money and credit. Deflation is the contraction of money and credit."
Mike Shedlock (approx 18 billion times and counting.)
I have to say that is about the most incomplete definition of inflation or deflation there is.
Let me try to complete it by asking a couple of questions and seeing where the answers lead us.

1) First: Where?
No really where? In Cleavland? California? USA? China? Jupiter? World?
In the broadest sense , since we are in a global economy the answer should be World.
In that case by every measure of Money supply and Credit globally, their net sum has been massively expanding i.e we have been experiencing massive inflation.

2) Next: By who?
For the first few years of writing his blog , Mike never ever mentioned who was needed to expand their debt levels to result in inflation. Now in the moment of his apparent triumph the definition has been changed to expansion of money and credit by common folk and businesses and NOT Governments, is Inflation.
Inquiring Minds have stopped listening to Mike's bullshit, but those who require comic relief have read his attempts to distort the truth. In My Rich Uncle
Mish reaches a conclusion, I had reached a few months back (damn that man is slow), that Total Credit was still expanding. That was in the US. In the world it was going virtually vertical. However this would be exactly opposite of what he has been trying to say, so the moron says

"Inflationists will no doubt quickly point out that total debt is still growing. However, government bailouts, health care schemes, lending money to corporations to keep them alive, are low-velocity debt that subtract rather than add to real economic growth."

I told him on his blog that why don't we change the definition to
"Inflation being the expansion of high velocity debt and credit and later we can change it to whatever else makes sense at the time." As is the case when anyone does not kiss his ass in public, the comment got deleted.
Getting back to the chart, we can see that every form of debt is still expanding or flat (in a YOY change rate way) although the growth rate of the Federal Debt is parabolic. Total Debt is still expanding.

3) In Relation to What?
The answer to this is quite obvious to anyone but the Prechters and Kevin Depews of the world.
In relation to the goods and services produced.
There can be no denying that while we are having a fire sale of the century (Hat Tip itulip.com), it is ending, and it has resulted in a massive decrease in supply of all goods.
So in the US
Money Supply going Up.
Credit going Up.
Globally,
Money Supply going Up really quickly.
Money supply plus credit going Parabolic in many countries.
Supply of goods falling.
Hence the Dollars or Yuans chasing each of the goods in existence has increased massively.
How is that deflationary by their own retarded definition?
While we do not have higher prices now, the deflationists have often pointed out that higher price are a latter symptom of inflation , not inflation itself.
So why have they asserted themselves in the last year?
Simply because after being wrong for almost a decade there was finally a substantial decrease in prices of most items (albeit from and to a much higher level than when these guys first started yapping about deflation), making their ideas more acceptable. Whereas examining their own definitions would make us wonder what they were smoking.

As Dan Amerman pointed out recently, the verbiage prevents you from making money and most likely will cause you to lose a lot of money.
Almost all of the top performing hedge funds (8 out of 10 I checked) of 2008 are betting heavily on inflation in the medium term and these are guys who nailed the subprime crisis. They are seeing the same thing I am, that it is hard to have falling prices with an ever weakening currency. Now you can call that Inflation, you can call that deflation, or you can call it a rat's ass. It does not matter. Asset prices will fall and commodity and eventually all goods prices will rise.
There is one area that I do agree with those blind squirrels though. Most stocks are quite overvalued and the coming bout of inflation will actually decimate the S and P (unless we go directly to hyperinflation..which I give a very very small chance).

Jon Nadler: A devalued commentator from a devalued website

2009-10-08T07:05:00.000-07:00

With due apologies to Daniel Hannan, who first used a similar phrase.
For a few years now, I have subjected myself to the commentary of Jon Nadler at Kitco.com. I have often asked myself why? The answer I have finally come up with is that I wish to replicate the chronic nausea that accompanies first trimester pregnancy, so that when my wife gets pregnant, I can empathize.

In this latest "piece" he writes.

A clear disconnect in outlook. Same as existed in the turbulent winter of 1980. With one MAJOR difference: no hedge funds in sight then, but plenty of ACTUAL inflation already in the system them. This, before Paul Volcker rolled up his sleeves and gave the world US real interest rates of nearly 6%. Did it cause pain? Of course it did. No adjustment made from the bottom of the top of a particular curve is ever absent of some suffering. Did it work? For quite some time. And then, it was back to the old ways. And now, the roller-coaster is at yet another dollar-trough. Yet the incessant chants are for sawing the bottom of the rail off and letting it go...where?

One small problem: the sheer amount vested and invested into these trillions of little green pieces of paper by...well, everyone, including Waldo, is so large that this is no longer a question of some give-up in US' over-extended, hedonistic, shopping-addicted lifestyles. The stakes now involve that promising-looking gold buyer in China, and the one in India, and it is not only on account of the current price tag of that piece of gold. It is on account of what happens to other economies and other central bank holdings when/if the dollar is to be "allowed" to succumb by inaction. And, this is why, one can almost fast-forward six or nine months and see a bit of a different world than what appears to be depicted today, from wall to TV wall."

Exactly how much does Kitco pay this guy? I have no problem with people taking the other side of my trade. In fact I thank them for keeping Gold and Silver prices so low for so long. But Jon has a fundamental disconnect. Every article of his has a huge amount of Gold bashing and loads of praise for the turdback. Jon has criticized every rally in this huge bull run and praised the turdback on every counter trend rally for the last 8 years. Above, Jon compares the price of Gold in 1980 to that today and concludes that since we have little inflation today, Gold is overpriced. It is shocking that such work comes from an "analyst" (that is using the term quite loosely as America's Next Top Model is likely to have had more analytical skills in Kindergarten than this doofus) paid to write for a bullion selling site.
I have a few questions for him. Hey retard, what did your house cost in 1980? Where was the Dow at? How many dollars were in existence back then versus ounces of Gold and how many are today? When your fucking neurons can digest that information maybe you can start making sense about what is overpriced and what is underpriced.
Furthermore, exactly when is Bernanke going to give the US any kind of positive interest rates? With the current Debt Load, it can barely hobble along at 0% interest rates. Sidebar Moron, the entire US Government Budget would be consumed in paying interest in 2-3 years with the increase in debt plus increase in interest costs due to 6% "real" rates.

Jon talks about the harm a dollar devaluation would cause to many countries. The only reason the dollar has survived till now has been the "beggar thy neighbor" currency devaluation by the Asian countries. Which is also precisely the reason Gold should be (and has been) going up against all currencies.

Well, at least we will have a perfect contrarian indicator to sell Gold when he becomes bullish.

PS. For those who have still not seen one of the greatest moments in British parliament history.

I know what Gold did last September

2009-10-06T18:29:00.000-07:00

And the September before that.
I have been bullish on Gold for quite some time. I have been a long term bull since around $450/ ounce although I was cautious earlier this year when Gold had completely decimated every other asset class. More detailed thoughts are outlined here and here.
Gold's performance the last 2 years against some stronger currencies is noteworthy for the coming months.

The moves were spectacular when considered in terms of even rather strong currencies. This time should be no different. As I have mentioned before I do not chase prices. However the weekly MACD breakout of Gold versus Stocks (shown below) is something I plan to trade with long positions in Gold versus short positions in Retail Stocks (RTH), which I think will be the most vulnerable group when stocks pull back.

The Buck stops here?

2009-09-28T20:20:00.000-07:00

There is no doubt in anyone's head that the USD has been oversold. That said, the USD is also the most over-owned asset class of our times and we have not even seen a fraction of those USDs being redeemed for US assets.

The equity markets have turned around sharply and multi heavy volume down days should be cautionary flag to anyone late to this party.

This perfect inverse correlation between the two is the only reason I have to believe that the USD might rally. I cannot envision a stock market continuing to celebrate an ever falling dollar.
Also if one accepts that the USD chart is bearish , then technically one must also accept that the stock market chart is bullish.
There a few major exporters in the world today that given the right circumstances might be able to pull off what looks like "Devalue themselves into prosperity." The US is definitely not one of them.
For a take on how successful this "rally" from the bottom in march has been, imagine for a moment you were an Australian investor.

Assuming you bought at the exact bottom you experienced a whopping 12-13% rally. Woo-Hoo! It is interesting to note that the bear market in Aussie dollar terms has been going on for some time and it remains very difficult for the MACD to cross into positive territory. Another downside crossover might produce a very nasty period for the stock market.

I believe the clue to the next big move in the USD might lie in the Euro price of the Long Bond.

While TLT (ishares long bond etf) looks quite volatile when looked on by itself, the price expressed in Euros, has been bouncing around quite less. It is here where I think we will see clues as to whether the USD will break down. Either the USD or the Long Bond Prices will break sharply down to force this price down when the USD is about to make another huge descent.

So far on this chart, we have seen a nice base form between June and October and I think this price breakout will lead the breakout (or breakdown) in the USD. To date, fthe market's acceptance of the Fed's monetization and the limited isssuance of long term Treasuries in 2009 have kept a tight lid on how low this could go. If the economy worsens further, there will be another set of QE and further worsening of US budget deficits. If the market can ignore that in its bid for "safety", and bid up the Euro price of the long bond, the USD will live to fight another day.

David Rosenberg: A Strong "Deflationist" and "Stock Bear" thinks that the USD will go lower and commodities will go higher

2009-09-27T10:29:00.000-07:00

How do you like them apples?
An amazing report which can be read in its entirety here

Click on images for better view.
Summary
Stock market in a secular bear market.NO argument there. Priced in hard assets the bear is going to be much worse than what anybody can dream of.

A very interesting way to look at the CRB index. I would like to point out the gross margins for many of those commodities (barring Gold) were negative at the bottom. That is, that most producers were making huge losses at the bottom. That is what puts a floor under prices.

This is an interesting take on decoupling. While I am in the "decoupling" camp. My belief is simply that many of the emerging economies will outperform on a relative basis, but they will have a hard time performing on a absolute basis if the US has a complete collapse.

Next up, he looks at the fiscal situation of Canada versus the US. While I have stressed this time and time again, and I completely agree with Rosenberg on this, the dependence of Canada on the US will continue to weigh on its performance.
Rosenberg goes on to explain a couple of key differences between US and Canadian banks and their housing markets
Finally Rosenberg acknowledges that the US may indeed devalue the dollar.

Is this capitulation by the last bear standing? Hardly. He is saying that US stocks are still in a secular bear market. His points about decoupling are being attacked by our resident idiot at incorrectglobaleconomicanalysis.blogspot.com. However, Rosenberg is making the simple point that emerging Asia will grow faster than the US. Will they be able to deliver double digit GDP growth while the US collapses? No. Can they grow at a rate that is 5%+ higher than the US GDP change rate? Absouletely.
His thesis about commodities is completely aligned to my own thinking over the longer term.
I am impressed that as a chief strategist of a major money manager, he is able to say that stocks are in a secular bear market while commodities are in a secular bull market.

Bernanke test runs helicopter drop

2009-09-24T17:02:00.000-07:00

In an effort to prove that his word is his bond Bernanke completed his first helicopter drop of money.
http://www.mercurynews.com/ci_13401750?source=most_viewed

Shower of $100 bills in Sunnyvale:

Recycling station's workers recover

$3,200

Amid the crushed soda cans, plastic bags and soiled cardboard, a shower of $100 bills started raining from the ceiling.

Workers at the Sunnyvale recycling station ran giddily about early Tuesday morning, catching the cash and stuffing the money inside a plastic bucket. They had even found a body among the hundreds of thousands of tons of recyclables sorted at the SMaRT plant over the years. But a shower of cash? Never.

"It just kept coming," Geronimo Martinez, 57, a supervisor at the station, said Wednesday, "more and more. It was crazy. I thought at first it was a joke."

All told, they retrieved $3,200 — and now Sunnyvale police are sorting out the mystery of how dozens of Ben Franklins ended up in the trash.

The Bull market in Gold

2009-09-17T21:08:00.000-07:00

(All charts are from http://www.goldprice.org/. These are long term charts and do not run to present day but are the best ones I could find to discuss the bear market in Gold.)

Robert Prechter recently did an "in-depth" analysis of Gold and Silver. You can download his entire booklet here.
In the eBook, Prechter notes "All the huge gains in gold have come when the economy was expanding".
Mish countered in his blog by saying that : "All the huge losses in gold have come when the economy was expanding."
While Prechter went on to conclude his usual cash will be king and Gold and Silver will be buyable after they fall about 99.83%, Mish went on to conclude that Gold does well during environments of Credit-Stress (Stagflation, hyperinflation, or deflation), whereas direct inflation has zero correlation with Gold.
While on the surface their arguments make sense (as much sense as Prechter's arguments usually make), it is appalling to see that both our geniuses forgot the most important component of analysis of Gold Prices. The underlying currency.

When one makes arguments about the Gold Price and one does it while ignoring every currency in the world except the almighty USD, it shows how important the average American feels. Even the ones that think the US is doomed.

Here is the long term chart of the price of Gold in USD. This is what everyone is referring to when they mention the price of Gold. However why would anyone really care what less about 5% of the world is paying for a particular commodity ( I use that term loosely, please no hate mail on that)? We will get back to that later.
Next we have the price in CAD and AUD. Two exceptionally strong currencies in the past few years. However when you see the price of Gold in those currencies things look radically different than our previous chart.

In CAD, the price of Gold never went below $400 CAD for any significant length of time right until the bear market ended. In fact if you bought Gold in CAD in 1977 and held till the end of the bear market you would have made 4X your investment. Not exactly phenomenal returns but decent.

In AUD, the price of Gold was even more interesting. It peaked a whole 9 years later. 1988 at almost $700AUD an ounce, eclipsing its 1980 peak by 14%. From that peak, the bear market in AUD price of Gold was quite shallow in both terms of time and price.

Next we look at the price of Gold in Indian rupees. This is a critical piece of the puzzle. Ever wonder why Indians buy that much Gold? Wonder no more.

Wave 21 of 89 Prechter?

It is always a bull market for Indians. The 1980 "peak" price is a small short term blip. By 1992 the price had doubled from the 1980 high and currently is almost 10 times as high (48,000 INR). Having looked at the largest consumer it would only be fitting to next look at the largest producer. South Africa.

Any Fibonacci Retracements coming based on Elliot Wave Analysis? Come on Bob you should be able to call a 2000 year peak on that chart

In Rands, the bull market has been even stronger than the one in INR. In fact, there has hardly been any long term pause.

So what gives?
My take is that in 1980's US was a developed country offering very high real rates of interest. That combined with high productivity let to an absolute boom in USD levels versus other currencies. That strength fed on itself as more and more developing countries starting hoarding USD as a reserve currency. The net result was an exceptionally strong currency, specially when compared to currencies in the developing world. This effect was even more pronounced as the USD was extremely undervalued in 1980 compared to other currencies.
That along with coordinated sales from the central banks and short sales from many others, resulted in a very strong bear market for the price of Gold in USD terms. So while Prechter tries to fit his 5 wave theory on the Gold price, he forgets that he is measuring it in an atrocious currency going forward. Had Prechter been raised in India and kept marketing his Gold price peak theory he would likely been sent straight to the looney bin. Mish's analysis that Gold does well during Credit Stress also overlooks the currency aspect. By that standard South Africa and India have been under "Credit Stress" for 40 years straight at least. Since they did not have Hyperinflation or Deflation or Stagflation (Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time) that analysis belongs in the garbage bin. Both countries averaged high real GDP growth and one can certainly not use the word "Stag" to describe the situation. Finally, Mish continues to make inane comparisons between Japan and the US. By most measures he describes, Japan underwent the same "Credit Stress" during the 90's as the Govt tried to fight deflation, similar to what he ascribes Greenspan to have done during the early 2000's. The result. From 1990 to 2000 the Gold price in Yen was cut in half.
Yes indeed Mish. Credit Stress is what causes the Gold price to go up.
It is important to note that during that entire time, although we had Monetary deflation in Japan, the CPI was virtually flat over the 10 year period and Gold lost 50 % of its value. So much for Gold making purchasing power gains during deflation.

Gold is another currency, along with all the others. As can be seen it has outperformed every currency by a wide margin since the US (and hence the world due to linkage) went off the Gold standard in 1971. Has it outperformed every asset class in every currency since then? No. But it has played its part and earned at least a 5-10% role in every portfolio in every country (although nobody currently allocates anywhere close to that on average). Analyzing Gold in USD only is another symptom of delusions of grandeur that quite of few Americans suffer from. In all Gold analysis, ignore the currency factor at your own peril.

Ken Fisher Endorses More Debt as a way of increasing asset prices which would allow even more debt

2009-09-17T07:28:00.000-07:00

In an absolutely flabbergasting interview which needs to be seen to be believed, Ken Fisher endorses more debt for Americans because our Return on Assets is extraordinarily high.

"The conventional wisdom is that Americans are struggling to crawl out from under a mountain of debt that will restrain growth and weigh down the economy for decades.

As this chart shows, the US debt-to-GDP ratio recently soared to an all time high of 370%, meaning that for every $1 of output we produce, we have borrowed $3.70. This compares to a long-term debt-to-GDP average of about 150%.

Last time we went on a massive debt binge, in the 1920s, our debt-to-GDP ratio hit a relatively mild 250%, and we spent the better part of two decades (and the Great Depression) working it off. Many economists think the same thing will happen this time around.

But they're wrong, says Ken Fisher, CEO of Fisher Investments ($35 billion under management), in a wildly contrarian view.

The U.S. has too little debt, not too much, Fisher says. The U.S.'s return on assets is high and interest rates are low, so our borrowing capacity is much higher than our current debt levels.

Also, Fisher says, you have to look at the U.S. in the context of the world, because the U.S. is only 25% of world GDP. The world is way under-leveraged, so one country's particular debt-to-GDP ratio doesn't matter."

Firstly, the world is not a single economy, otherwise Zimbabwe would have never been bankrupted by their money printing. As far as the US debt to GDP ratios go, I could see it as a logical argument (within reason) for a country that actually produced something. If we keep stacking up debt for just consumption sooner or later the piper has to be paid. All we are doing now is borrowing more, resulting in higher asset prices and using those higher prices to argue that we should borrow more.

Even in the former case, it is a dangerous strategy. A great example would be the Natural Gas companies. They felt they could borrow to infinity at 5-7% and produce phenomenal returns on assets. Turns out they forgot that NG prices can fluctuate. Everybody assumed that everybody else would cut back drilling just in time. Nobody did. Now a bunch of these companies will likely go under in the next year.

Additionally Henry Blodget brings up a great point that what if interest rates go higher. How exactly will the debt be serviced? Apparently the US Govt has hired Ken Fisher as an advisor as we are on track to go to 600% debt to GDP just for US Govt according to Eric Sprott.

Do you feel lucky punk? Do ya?

2009-09-13T12:57:00.000-07:00

Commercials continued to pile on short positions aggressively while Speculators are charging ahead full steam.

GOLD - COMMODITY EXCHANGE INC.                                       Code-088691
FUTURES ONLY POSITIONS AS OF 09/08/09                        
-------------------------------------------------------------- NONREPORTABLE
    NON-COMMERCIAL         COMMERCIAL          TOTAL         POSITIONS
-----------------------------------------------------------------------------
LONG   SHORT  SPREADS   LONG   SHORT    LONG   SHORT    LONG   SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF 100 TROY OUNCES)                       OPEN INTEREST:      451,713
COMMITMENTS
251,708   27,032   48,382   84,842  355,639  384,932  431,053   66,781   20,660

CHANGES FROM 09/01/09 (CHANGE IN OPEN INTEREST:     67,010)
 44,909    4,734    4,296    2,688   56,777   51,893   65,807   15,117    1,203

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
  55.7      6.0     10.7     18.8     78.7     85.2     95.4     14.8      4.6

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:      336)
   207       60       56       40       54      271      149

The situation in silver is just as extreme.

SILVER - COMMODITY EXCHANGE INC.                                     Code-084691
FUTURES ONLY POSITIONS AS OF 09/08/09                        
-------------------------------------------------------------- NONREPORTABLE
    NON-COMMERCIAL         COMMERCIAL          TOTAL         POSITIONS
-----------------------------------------------------------------------------
LONG   SHORT  SPREADS   LONG   SHORT    LONG   SHORT    LONG   SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF 5,000 TROY OUNCES)                     OPEN INTEREST:      116,421
COMMITMENTS

 48,685    7,783   16,597   26,175   82,576   91,457  106,956   24,964    9,465

CHANGES FROM 09/01/09 (CHANGE IN OPEN INTEREST:      9,750)
 6,441      -32    1,905   -1,819    6,526    6,527    8,399    3,223    1,351

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
  41.8      6.7     14.3     22.5     70.9     78.6     91.9     21.4      8.1

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:      166)
    81       32       31       34       33      133       80

However sentiment in USD is nowhere close to that seen in bottoms. In fact the Speculators are just beginning to give up and join the short side of the party.


U.S. DOLLAR INDEX - ICE FUTURES U.S.                                 Code-098662
FUTURES ONLY POSITIONS AS OF 09/08/09                        
-------------------------------------------------------------- NONREPORTABLE
    NON-COMMERCIAL         COMMERCIAL          TOTAL         POSITIONS
-----------------------------------------------------------------------------
LONG   SHORT  SPREADS   LONG   SHORT    LONG   SHORT    LONG   SHORT
--------------------------------------------------------------------------------
(U.S. DOLLAR INDEX X $1000)                          OPEN INTEREST:       38,153
COMMITMENTS
 9,842   16,469    2,185   23,550   14,515   35,577   33,169    2,576    4,984

CHANGES FROM 09/01/09 (CHANGE IN OPEN INTEREST:      7,802)
 1,269    6,214      -16    7,390     -183    8,643    6,015     -841    1,787

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
  25.8     43.2      5.7     61.7     38.0     93.2     86.9      6.8     13.1

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       74)
    18       40        6        9       11       31       54

USD looks like it is breaking down from a Head and Shoulders pattern.

Overall Take: While short positions by Commercials in the precious metals are at extremes, one must remember that the largest rally in the precious metals bull market took place precisely when such was the case. Should the USD accelerate to the downside, we could see $1500 USD plus in Gold and $25 USD plus in Silver quite quickly. A lot of Gold stock newsletters are extremely under invested and most favor a "correction" before Gold crosses $1000 permanently. As such sentiment is overall quite balanced and the small investor is mostly out ( "We will have deflation and Gold will go to $700/oz while Dow goes to 3000, that is when I will buy" and yes they will ring a bell at that bottom too). I am in the fortunate position that I have bought much lower and I do not chase prices, so I am on the sidelines. Still, if I were to bet I would say that the odds favor a breakout.
If for no other reason than simply because Gold and Silver are insurance policies and when Katrina and Rita hit, the cost of insurance went up for the entire coast line not just for New Orleans. Similarly today, the huge derivative bets made by banks around the world are going to bankrupt some country soon as they step in to assume liabilities. Will it be the US? Most likely as they are already on their way with the kind of debt being churned out. It could be the UK or any other country. Regardless, precious metals will rise significantly.
One thing that would reinforce my opinion that we are already there would be to see the USD and stock market start moving down together. As long as the inverse corelation between those persists I am at least partially skeptical of large breakout in Gold and Silver.

USD sentiment analysis

2009-09-08T21:21:00.000-07:00

"Act as I do, not as I say. "

While Prechter rattles on about the sentiment in the USD, I find his comments amusing for 3 reasons.
1) His Exotic Fibonacci art has been wrong for so long prior to 2007 , yet people quote him like he is the next messiah.
2) He completely ignores fundamentals. 3 days prior to Lehman Collapse I am sure we had more than 99% bears on the stock and guess what? It went to zero (well almost, the common keeps trading for some reason :) ). So has many a stock in the past year with negative sentiment all the way down. Sentiment is a useful gauge within a run for where pauses may occur, but it should not be used as anything but a minor guide point.
3) Lastly, his analysis of sentiment itself is quite wrong.

He cites just 3% were bullish on the USD. I am not sure who exactly he asked, maybe the guys in his office who are plotting Dow 400, maybe he asked a few Zimbabweans what they thought of the dollar without specifying it was the USD he was talking about, but in any case actions speak louder than words. He should watch where people place their bets as everyone is trying to out- contrarian the other.

U.S. DOLLAR INDEX - ICE FUTURES U.S.                                 Code-098662
FUTURES ONLY POSITIONS AS OF 09/01/09                         |
--------------------------------------------------------------| NONREPORTABLE
   NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(U.S. DOLLAR INDEX X $1000)                          OPEN INTEREST:       30,351
COMMITMENTS
8,573   10,255    2,201   16,160   14,698   26,934   27,154    3,417    3,197

CHANGES FROM 08/25/09 (CHANGE IN OPEN INTEREST:      3,034)
2,698   -3,429       53     -168    6,947    2,583    3,571      451     -537

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
 28.2     33.8      7.3     53.2     48.4     88.7     89.5     11.3     10.5

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       77)
   23       38        6       10        8       36       50

This is the COT chart (from CFTC data) from my previous post on the same subject. As you can see, the large speculators are are slightly bearish on the dollar. Interestingly, the little guy (small speculator) has a bullish bias on the USD.
Whichever way you slice and dice it, there is no extreme sentiment. To give an example of "extreme sentiment", look at October 2008 where we had Speculators long a whopping 34,000 contracts, or about 22 times what they are currently short. That was a sentiment extreme.
There is hardly a strong bearish bias now. In fact DailyFx analysis suggest that in light of the recent trend USD bullishness is at an extreme.

From the article,
US Dollar Index: The 13 week index is at 100, indicating a bullish sentiment extreme. Bullish sentiment extremes occur at tops so favor the downside.

While I felt sentiment was neutral on an absolute basis, the COT data on a rolling 13 week basis, suggests that USD sentiment is quite bullish! The article seems to suggest that the British Pound and the Euro are favored on a sentiment basis.
So while the USD may rally or not, do not part with your metals because of some garbage about sentiment. Specially if it comes from one of our two favorite snake oil salesman.

The Chinese have no choice but to keep buying the Grade A American Crap? Part 2

2009-09-08T00:33:00.000-07:00

Part 1 can be read here
Back then I was responding to some insanely stupid posts coming from Mish's blog about China supporting US budget deficits with the resolve a dishonored Samurai.
My conclusion was

To keep this ratio up they will have to purchase over 1 trillion USD Net of Bonds, just this year. Bloating their US Bond holdings by over 125% in one year.

There was no way in my mind that this could be done. Based on the TIC data, which is old news by now, China reduced its holdings of US treasuries by over 25 Billion in a single month. As I mentioned in my earlier post China will need to buy over 1.75 Trillion USD worth of US Treasury bonds to allow a US debt to be funded in the absence of monetization. So they need to purchase at least 140 billion USD worth every month. Now they sold over 25 billion in June. Their current run rate for 2009? A whopping 6 billion of purchases a month.
What kind of insanity is it to think China will or is coming to the rescue of the US?
Have the deflationists been drinking straight out of the sewer?

Here is another tip for them. Add the cumulative increase in all countries treasury holdings from the same data, add the amount "officially monetized" and now subtract this number from the actual issuance of new Treasuries in 2009. Most of the rest is the backdoor printing. We all know that US savings rate of 6% is a complete lie ( an anomaly based on extra handouts from the Government) and no one here is buying that many Treasuries.
More interestingly, foreigners are on schedule to buy exactly 1/10th of the US issued debt in 2009 and 2010. That is from being buyers of over 50% in good times. Pray, who is going pick up this 40%? ( Hint: it is 40% of a much larger number and no, the planet Youranus is not an acceptable answer.)

The pig is back

2009-09-07T10:53:00.000-07:00

http://news.yahoo.com/s/afp/20090906/hl_afp/healthfluusuniversity_20090906183917

SAN FRANCISCO, California (AFP) – Some 2,000 students at Washington State University have reported symptoms of swine flu, university officials said, in one of the largest reported outbreaks of the virus on a US college campus.

The west-coast school last week instituted a blog to help provide information to students about the sudden and dramatic spread of the A(H1N1) virus on campus just days into the new school term.

"We estimate that we have been in contact with about 2,000 students with influenza-like illness in the first 10 days of our fall semester," the latest online posting said.

"At this time of year, we would typically only see a handful of patients with influenza-like illness. Health care providers in the local community have also seen WSU students with influenza-like illness, but we have no way of knowing how many.

This is potentially quite serious. However it appears that the virus has not mutated in a bad way yet which might be good news.

The overwhelming majority of our patients have had mild symptoms and are usually better in three to five days," the university said.

None of the WSU cases have been fatal. There have been 593 swine flu-related deaths in the United States, however, second only to Brazil which has recorded 657 deaths.

Sentiment on the USD moves to neutral

2009-09-04T23:21:00.000-07:00

U.S. DOLLAR INDEX - ICE FUTURES U.S.                                 Code-098662
FUTURES ONLY POSITIONS AS OF 09/01/09                         |
--------------------------------------------------------------| NONREPORTABLE
    NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(U.S. DOLLAR INDEX X $1000)                          OPEN INTEREST:       30,351
COMMITMENTS
 8,573   10,255    2,201   16,160   14,698   26,934   27,154    3,417    3,197

CHANGES FROM 08/25/09 (CHANGE IN OPEN INTEREST:      3,034)
 2,698   -3,429       53     -168    6,947    2,583    3,571      451     -537

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
  28.2     33.8      7.3     53.2     48.4     88.7     89.5     11.3     10.5

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       77)
    23       38        6       10        8       36       50

This is a very bearish sign as sentiment has moved to neutral without producing any meaningful bounce in the USD. As can be seen, both major groups of traders are now neutral. Speculators had been quite bearish for sometime but perhaps they heard Prechter's immortal words "The USD will rise because people will lose faith in the Federal Reserve" and got scared. In any case the risk of a strong counter trend rally in the USD is diminishing and time is running out for the USD to produce a meaningful bounce.

Congressman Pete Stark and Dennis Kneale order DNA test to see if they are related

2009-09-03T07:11:00.000-07:00

In every generation there is born a true Keynesian.
He alone will stand against the monetarists and the Austrian economists.
He is the Chosen One.

The year is still not done but we are seeing competition for moron of the year heat up.With quotes like
"The more debt we owe, the richer we are."
"Debt works in a different way at the federal level than at an individual level."

Congressman Stark has a new zen way to approach difficult questions about debt.
"There is no debt. There is only wealth. Open your heart (or get the fuck out as he said) and you will see all the wonders that are on the federal sheet. Now repeat after me "Life is my oyster."

In related news MIT rescinded Pete Stark's bachelor's degree.

Email: ispeakofspeak@yahoo.com

Gold "It is my time now" part 2

2009-09-02T19:04:00.000-07:00

On Wednesday May 13th 2009, feeling particularly adventurous I called for a Gold Rally. Since then Gold has done ok but has vastly underperformed our local casinos (also known as the S and P 500 and the Nasdaq). However that should soon change ( or may already have changed).

From an even older post of mine

What I find unusual is that a lot of permabears are now embracing gold.If their thesis that the S and P is headed dramatically lower is correct then they are in for rude surprise in case of Gold. If the S and P is going lower then I think Gold is going to crash. I mean literally breaking through all supports till $750 or even $650.
The reason is the chart above. Look at how far above the 200 day moving average the ratio is. Add in the pessimism on the S and P and optimism on Gold. This is about as expensive as gold is going to get for some time in terms of S an P. So unless the S and P has a dramatic rally it is curtains for the nominal price of Gold. If S and P drops another 30 % then Gold will probably break even $600 in the short term. I covered my shorts on Gold as I think the more likely situation is a nice rally in the S and P with gold holding above $850.That would allow the ratio to correct. More importantly it correct in time rather than price which would allow its moving averages to catch up.
Below is the chart , which at the time had me quite nervous about Gold.

However now things are quite different. MACD looks read to turn and the ratio now has a lot of room to run on the upside.

While sentiment on the dollar is quite bad, in the Gold camp there is a consenus that counter-trend rally will materialize in the USD AND that this will knock Gold out of its place back to the $800's. Sentiment on Gold is quite neutral to slightly bearish among the newsletter writers. Could the biggest Gold move happen without the majority of Gold bugs ( which is still a very small percentage of the general population) on board? I would say that is highly likely. Like Pavolov's dog market participants extrapolate into infinity whatever Mr.Market does in the short term. Gold and Stock market rallying together for 8 weeks ? Will happen forever. Hence Gold will get crushed if the market goes down. Gold going up only when the dollar goes down. Will happen forever. Hence Gold will get crushed if the USD goes up.

Do not get fooled if a USD rally materializes. If Ben withdraws the printing presses he will only have to come back with even more later on. Also, USD may rally simply because others have turned on their presses even faster. Regardless, Gold will rise.

Obama promised change, the market may just deliver it.

Markets likely to remain Rational longer than AIG can remain Solvent

2009-09-01T12:27:00.000-07:00

The multi-day rally in the poker de jour (AIG) has come to and end. While the IBD crowd is celebrating the Cup and Handle breakout,

it pays to have a longer term prospective

The madness in the market continues to amuse and amaze me.
There is no way AIG is worth a fraction of what it trades for (even after today's fall) , yet the markets do not care.

In this regard it seems impossible that AIG will be able to completely pay back the US govt.
From WSJ

In May, AIG said it planned to "accelerate" that process for one of the units, American International Assurance Co., which sells life insurance in Asia. AIG hired lead underwriters in June, and the IPO was scheduled for the first quarter of 2010; it was expected to raise more than $5 billion.

Similarly, in July, AIG said it planned to accelerate the IPO for the other unit, American Life Insurance Co., known as Alico, which also sells life insurance overseas.

It isn't clear how much the businesses are worth, but their value has been eroded by the financial crisis and AIG's problems. In February, AIG was said to be valuing AIA at $20 billion to $40 billion.

In the interview, Mr. Benmosche said current estimates for what the businesses would fetch were too low.

"That kind of price talk is ridiculous," he said, without specifying what he considers a fair price. "I've told the government that if we have to sell them right now, we may not be able to pay back what we owe

Now let us take that as a prime example of mark to fantasy. Taking the midpoint of that estimate means AIG may have marked up its assets by as much as 500%. In a world where financial companies are leveraged 30:1 and a 5% error can wipe you out, how is that for a reality check. The AIG chief believes that the good ol days of 2007 are going to be back, however the IPO markets are likely to stay Rational longer than AIG can stay Solvent.

Natural Gas Companies Insist on raping themselves to death.

2009-08-30T12:23:00.000-07:00

The past few have seen the stock market discount an extremely rosy future.

However one commodity was not privy to the recovery party.

I had posted my thought about NG some time back over here. My conclusion was

So while the stocks may go higher they are not a no-brainer. In conclusion this proves that in the market there are usually no perfect setups. If the curve flattens out or NG stocks get cheaper compared to the commodity I might reconsider, but for now I am staying on the sidelines as there is no easy way to make money here.

Back to today. While I am getting more bullish on NG compared to then, investing has become even harder. NG producers and NG drillers have rallied while the commodity has gotten killed.
More importantly the entire bunch of US NG producers are giving Dennis Kneale a run for his money intellectually.

Here from the Chesapeake Energy presentation.Click on image for sharper picture.

As you can see, the top 20 producers are producing 6.5% more gas than last year ( I do not know here the 8.3% comes from, probably the average of % change which does not correspond with the overall average). This increased production is not even hedged, so why the hell would they insist on producing more except for the fact that they like to look like utter morons (very rich utter morons) telling everyone look we increased production 8%, while realized prices are down over 60%. Yeah..
All hype aside the US economy has contracted by at least 8% in total from last year. So we have a 15% discrepancy between supply and demand, assuming the rest of producers are in the same boat which they more or less are.
Making 6 assumptions,
1) Normal Winters for 2009 and 2010
2) No hurricane hits
3) CEOs realize they were wrong and stop raping their companies by producing more and more of a commodity that is increasingly not needed at present.
4) Rig Count averages current rig count for all of 2010.
5) 2% GDP growth in 2010.
6) Canadian exports to the US decline by 20% due to decreased production.

Except for 2), these are all optimistic assumptions for Natural Gas prices. Even in this case, I see that it is highly unlikely that NG prices would average over $6.50 for 2010. The 2010 Strip is at $5.66, so there is upside potential but again not a no-brainer. I would watch the data very closely. Just seeing CHK's latest investor update is downright scary. They are planning 8% plus growth in 2010 as well. That, with their depleted rig fleet.
A lot of the smaller unhedged guys are going to be out of business pretty soon if prices do not improve. The data bears watching. At some point the depelted rig count will start bringing down production. Until then even buying the "generational low" prices at the end of this filling season may turn out to be a big disappointment in 2010, if production keeps ramping up and demand keeps going down.

Better than expected consumer confidence data makes everyone feel even better

2009-08-27T17:01:00.000-07:00

With a Huge upside surprise on the consumer confidence numbers I decided to find out what was really behind these incredibly bullish numbers. So I interviewed a Wall Street Analyst ( name withheld by request).
MS: What is your take on the CC numbers?
WSA: Oh they were incredibly bullish, at a reading of 54 it seems the common person no longer wants to kill himself. He just wants to tear of a limb or two or perhaps drown his sorrows in Cocaine.
MS: Wait...you are saying these are bad numbers?
WSA: Don't be silly..of course not. These are positively amazing numbers.
MS: But you just said..
WSA: Look this is an expectations game and Tis the season to beat...and beat we did. Besides that beat will further raise Consumer confidence
MS: How so?
WSA: It is quite simple...When the consumer realizes that the average person is feeling better than he is, then it is as they say "Game on Motherfucker. You think you can be more cheerful than me asshole? " You see as a people we are quite competitive.
MS: So better than expected Consumer confidence will further boost future numbers?
WSA: Yes!
MS: But what caused the numbers to come in better than expected?
WSA: Well a few things...a lot of people who do not have a job no longer have phone lines, a few have committed suicide whereas others are just plain depressed to speak to anyone. This is obviously having a great positive impact on our survey results.
MS: But even then, what exactly do the consumers have to be optimistic about?
WSA: Are you a communist?
MS: Me, no...why?
WSA: Well then stop talking tripe. People have a lot to look forward to. Just not the usual things.
MS: The usual things?
WSA: Yeah, see people are no longer worried about losing their job because they have none. They are no longer worried about losing their credit, because they have none. They are no longer worried about their home equity..
MS: Because they have none?
WSA: No as a matter of fact..because it is negative.
MS: But how do these not so bad numbers impact the economy?
WSA: Well, the consumer looks at the stock market going up and his net worth creeping into the positive territory and guess what? He gets the courage to max out his last credit card. That sends a jolt through the economy as leverage kicks in and we consume a few more months of future consumption.
MS: But does that not have to end at some point?
WSA: Unless the world is coming to and end at some future date, we will always have some future consumption which can be done today. And if the world is coming to and end, well then no one will care.
MS Thanks for your time...I think.

Sherlock Holmes and the Case of the Three Elephants in the room.

2009-08-23T19:11:00.000-07:00

The expression "elephant in the room" refers to a situation where something significant is going on, it's on everyone's mind and impossible to ignore -- like an elephant in the room. But nobody talks about the "elephant" because nobody knows what to do about it.

The talk about a sustained recovery has now reached a fever pitch. Third quarter GDP in all likelihood will come in at a positive 3.5% plus. Consumer confidence while dismal has improved from the lows. Corporate Bond Rates, LIBOR Rates, First time unemployment claims have all come in significantly. The stock market has cheered this "recovery" with one of the biggest rallies of the century. "Better than expected" earnings have made everyone believe that the worst is over.

However the mystery of the Elephants in the room has to yet be solved.Elephant 1: I am the only elephant in the room.
Elephant 2: That is not true,my psychologist tells me that we need to acknowledge one another.
Elephant 3: That is fine by me, hey can you point me to where I can find some of these "Green Shoots" which everyone is talking about?

The US Treasury Market

In my opinion the US Treasury holds the entire key to the US recovery. The US will issue record amounts of debt, both in nominal terms and as as percentage of GDP for the next 2 years at least. It is the funding of this paper that will determine a good portion of the recovery. As the saying goes "There are no Bad Bonds only Bad Bond Prices". I have no doubt this paper will be accepted by the market (for now). The question is at what rate? At current rates or any higher, US Treasury rates will create a great headwind for the economy. There are a few reasons for this.
1) Funding of all short term paper is compared to the US Treasury note and Bond rates. Higher the rates for UST, higher the rates for everything else. This will be a huge burden on a lot of heavily indebted companies. Interest costs suck from earnings and higher interest costs go, the less is the promise of earnings.

2) The mortgage market operates as a spread from UST's. Although the spread can contract or expand, the mortgage market would get devastated if UST rates moved substantially higher. Bringing with it, a whole new set of foreclosures and another bank bailout. Bernanke has tried to influence this market directly with purchases of Fannie and Freddie debt but to no avail. Mortgage-UST spread has gone vertical. The spread and the absolute rates both need to come in if there is to be any hope of stabilization.

3) Finally there is Commercial Real Estate (CRE). Another monster forming beneath the Hell mouth. Lower the "Risk Free" rate (bet you at least giggled at that), higher the chance that banks will do something stupid like refinance CRE mortgages coming due.

Treasury rates have already gone much higher than Bernanke would have liked. Now with balanced mutual fund money managers buying the recovery theory, selling at the long end could really pick up steam. Benny will try to nip this in the bud. From my perspective there will only be a recovery in the economy if majority of the market participants do not believe there ever will be one, but corporations and individuals believe that there will be one. A very, very, difficult scenario. That would create a mass flight to Treasuries, lowering interest rates enough to stabilize the relevant markets. At the same time individual and business spending picks up to actually deliver the real recovery. This is going to be a nasty tightrope act for Bernanke as he has to make sure that foreigners do not pull the plug from either market (stocks or bonds). So far Bernanke has not called in the heavy guns. He continues to talk about a recovery. The plan here (assuming he has one) would be to allow firms to issue vast amounts of equity for debt and encourage consumers to and businesses to spend. Still, I would watch the long bond rates (TLT) very closely. Unless it rallies soon over 100 this recovery is in serious doubt.

The US Dollar

The USD in 2009 has done what the Japanese Yen did for the past 5 years before that. It became the symbol of the market's love for "risky assets". Achieving a high inverse correlation with virtually all other asset classes (except bonds) the USD became the whipping boy on every large up day and altar of solace on every down day in the stock market.
While all the King's Men are likely to be happy with the USD decline, it is unlikely that they would be taking "Delight in Disorder". The USD decline has to be managed and and done in parts.
Expect the Fed to Jaw-Bone it every time there is a long one direction move in the USD. The recent public withdrawal from QE and Trichet's emphasis on a Strong Dollar policy (meaning " It is our time to print dude, change your cartridges till then") are suggestive that the authorities are worried about it.2014,Bret(t)on Woods Agreement III :
USD no longer FIAT
1 Million USD exchangeable for 12 cracker packets.

The other worrying aspect of a weaker dollar is the very high inverse correlation of oil to it. While Benny would certainly like inflation, he definitely would not like it in oil. With the US importing 70% of its daily needs, a rising oil price would squash a recovery faster than Benny unloading his balance sheet on the market. This is particularly true as oil rises over $80/barrel. The economy could withstand $100/barrel oil in 2007, but now the effects of even $70/barrel are quite deleterious.
Benny will have the defend the USD because of this, perhaps at a higher point on the USD index than he would have liked, simply because of this.
Medium to longer term the USD presents more of a challenge. The Fed will have to choose between acknowledging one of the first 2 elephants. Either the USD goes down or UST rates go up significantly. Either the FED monetizes another 1.5 trillion of UST's over 2 years or 10 year Bond rates go over 6%.
It is truly moronic that deflationisits fail to even consider the supply and demand of Treasuries in their analysis. The market simply cannot absorb the kind of paper being thrown at it without higher rates. Regardless of how low CPI seems, by incorporating housing prices in California into it. If supply and demand or monetization did not matter, the Govt could simply print up enough money to employ everyone. Hey if they can do it at 3% interest rates I guarantee we will have a recovery. Shorter term, personally as well as in the funds we continue to be long TLT.

3) The supply for commodities

One of the most significant headwinds we see for non-commodity stocks is the price of commodities over the medium term. While it is nice to rejoice in lower prices for every commodity under the sun for the time being, it will definitely not last. It is important to note in this regard that World GDP will likely contract much less than 10% peak to trough, even if this a full blown depression. The supply for most commodities will likely decline much more than that over 3 years.
I see a perfect storm brewing on the supply side for a lot of commodities. For agricultural commodities it is decreased fertilizer application coupled with decreased arable land. For oil it is mature basins with decreased capital spending. For the some of the base metals and uranium it is outright lack of projects.
This combined with increasing growth in Asia will significantly strain supplies at some point. The only question is at what point. I am in the camp that it will occur in different commodities at different times rather than as a "commodity super-cycle" move we saw in 2007-2008. To date we already seen 2 commodities, cocoa and sugar, make all time new highs. Here in short order we expect the following commodities to be particularly likely to make new highs in 3 years or less. Wheat, Rough Rice, Oil, Uranium and Natural Gas. Agricultural commodities are particularly attractive as although the US makes up 20% of the world GDP, it does not consume 20% of the world's food. Emerging Asia has a much stronger impact on this. Most investors will have a hard time catching these rallies as they will be sheltered in cash. The supply-demand imbalance will get critical quite quickly and result in moves like this.

On the issue of supply constraints in commodities, I am appalled by the US Govt's dilly dallying on alternative energy. Peak oil is here and now and whenever growth resumes, world GDP will face a serious hurdle as it approaches its previous peaks as oil supply will in all likelihood be lower at that point. Current prices although improved from the bottom, will not support the required investment.
On another related note, I am bearish on copper prices relative to the whole complex and I doubt we will see new highs in copper prices unless we have a total collapse in the USD.

Overall with regard to commodity prices, any recovery thus faces four serious hurdles that threaten to derail it.
1) Profitability of corporations will be hurt as further costs cuttings is now virtually impossible. Rising commodity prices will allow zero leverage to GDP.
2) The effect on the psyche of a really battered consumer. The American dream is long dead and it is hard to inspire people to spend additional dollars on worthless products as necessities get more expensive.
3) All cases of moderate to severe inflation are extremely toxic to the stock market. Barring a direct move to hyperinflation, we will have a much lower stock market and a much much lower stock market in real inflation adjusted terms. Raising capital is going to be quite difficult and chalk another hit for consumer mood.
4) The housing market could take another serious hit as oil prices rise over $100/barrel. Suburbia is already suffering its biggest decline and with 50% of mortgages expected to be underwater in 2 years, high gas prices might be the last straw on the camel's back in the context of someone deciding to walk away from their home.

Sidebar:Inflation or Deflation

Inflation is not only the expansion of money supply, but it is the expansion of money supply relative to goods produced, an important concept missing from most discussions of the topic .Those focusing on US monetary and credit aggregates are missing the big picture. Considering that supply of most commodities and products are down anywhere from 5-25%, while GLOBAL monetary aggregates continue to expand at a rapid clip, there can be nothing but inflation once the excess inventories are eaten up. A year on year change of prices can be very misleading in this regard. Specially now as we are comparing last year's peak prices.While another strong move down in the stock market will hurt the commodities, as everything is now moving in sync, I fully expect the lows on the CRB to hold even if the lows in the stock market are taken out by a large margin.

The Solution:

At this point I believe it is unlikely that anyone has a clue about the real extent of the problem, let alone the exact solution.
However there are 5 things that are quite necessary (though definitely not sufficient ) for an eventual recovery.

1) Get rid of all illegal immigrants. All of them . Kick them on their asses if necessary. America is for Americans and for LEGAL Immigrants. We are getting to the point that Americans will take up any job available. Kicking out those illegals might create upwards a 2 million jobs for Americans over time. The savings for the Govt spending will be tremendous as the parasites stop their leeching from all systems.

2) Stop all of these useless "Stimulus" spending exercises and focus on mass transportation, in the US. Owning General Motors makes it hard for the US to do, but that is what needs to be done. In this context if the entire $800 billion of stimulus was spent on mass transportation the results would have been truly amazing in the long run.

3) Move all derivatives to an exchange with day to day cash movement. That includes JPM's hoard. At multiples of current world GDP, they represent a huge systemic risk. Additionally quadruple margin requirements for every commodity trading for all speculators. Genuine users of the commodity could have lower requirements. In this era oil could easily jump over $15/barrel (In case of an attack on Iran let us say) in a single day. In such a case all individuals short oil futures would be wiped out and the excess money lost would come out of the firms' capital or require another bailout. If it is genuine oil producers at least delivery of oil can be assured and they would also likely arrange for additional capital to be brought in.

4) Get budget deficits to under 7% of GDP. This will prevent a full scale flight from the dollar and also not crowd out other borrowers. If the US Govt does wish to run budget deficits north of 10%, they should be done through direct tax cuts rather than implementing "shovel ready" projects.

5) Mark to Market! All the major banks will likely go under with this. However there is no avoiding this pain now. The subsequent liquidation wave, and fire-sales that follow will make someone reach, it just will not be Jamie Dimon.

Abby JOSEPH Cohen sees S and P at 1100 by year end, The Second Stimulus "Cash For Wankers"

2009-08-20T06:49:00.000-07:00

The Obama administration following advice from Goldman Sachs, has decided to pass a second stimulus package to target the "Sin" industry to prevent job losses in that sector. Titled "CASH FOR WANKERS", this package will give rebates for anyone buying American Made Porn DVDs or magazines.
Barney Frank said that this package was extremely necessary as the Porn Industry was now flat on its back. "I have proved time and time again that I will bend over forwards to help the porn industry just as I did for Fannie and Freddie. This shows our commitment to the last truly American product to still be around. This is even more vital now as my committee contributed significantly to the destruction of the second last i,e housing." A White House spokesperson said that this package was timely, large, throbbing and would stimulate the private sector very well.
Prominent Blogger Mike Shedlock however said the plan, like every other thing coming (pun intended) from the White House would be a floppy failure. " They would just be pulling demand forward. What are they going to do for an encore?" Other Critics pointed out that instead of stimulating domestic demand, the White House should focus on selling our Porn abroad.
"There is a growing class of Chinese workers who now only work 16 hours a day instead of 20 to make ends meet. At the end of a hard day's work they would like nothing better than to sit back and watch 2 wholesome girls express their passion for each other" said Larry Kudlow on CNBC. "We should be selling to China instead of complaining about their currency manipulations" he added.
While the Democrats hailed this as a success for the middle class, the Republicans were upset that sex-toys, which are more popular among married couples, were not included in the bill. They were trying to pass their own bill to provide rebates for pregnancies carried to term. They argued that it would lead to a whole new generation of "Boomers" which would solve many of economy's problems. The bill was being drafted under the Title "No Fucked Up Idea Left Behind."

Abby JOSEPH Cohen sees S and P at 1100 by year end, in time to celebrate the second coming of Christ

2009-08-18T07:58:00.000-07:00

U.S. stocks have entered a new bull market, and the S&P 500 index could rise as much as 10 percent from current levels by the end of this year, Goldman Sachs strategist Abby Joseph Cohen said on CNBC on Thursday. Cohen added "Even though the economy is in sorry shape and job losses abound, we think the market is looking forward to the second coming of Christ. Based on Proprietary Black Box/Flash Trading models, Goldman predicts that it will be sometime between December 23 -December 27 of this year. The world will rejoice and economic ills will disappear. We expect hospitality and leisure to do well as people flock to America to witness this historic event. As we have exclusive rights to his entire stay and all events he attends, Goldman stands to make a large profit. Although we worship the other side, we felt it would be unwise to let such an opportunity go by without ripping you off. We have never let sentiment, religious feelings or for that matter, morality, gets in the way of making profits. Goldman should make at least $50 a share this year and we have a price target of $666 on our stock. Those profit numbers exclude the gain from call options at a strike price of $500 on Goldman stock bought from AIG last year when Goldman trading under $60 a share. Goldman bought those options at $100 million, and if the price target is achieved AIG would be liable for 4000 Trillion or 80- times the world GDP. Clearly they will need another bailout, otherwise our executives will not be able to put kruggerrands in stripper's thongs, I am sorry, I meant the whole system will collapse. Those numbers also exclude the profit Goldman would make by selling 4000 trillion of US bonds to the world. Although clearly upbeat at the prospect of raping American taxpayers so quickly again, she ended on a dour note. Sin stocks ( Casinos, Porn, Tobacco) should suffer as the second coming makes people realize the folly of their ways.Full Disclosure: Goldman as a company is net neutral. We are short everything that our clients are long and long everything they have shorted. "

Buying the Swissie against the Australian Dollar.

2009-08-16T12:13:00.000-07:00

Sentiment levels in the USD have reached a short term extreme. A reversal is highly probable. However my dislike for the dollar prevents me from going long it. I have decided to play it using another currency pair. The Swiss Franc tends to strengthen in times of economic uncertainty and has definitely better fundamentals than the USD. The Australian dollar has had a remarkable run against the USD (and also against almost every other currency) because of the perception that Australia may raise interest rates. I think in the short term the likelihood of that is zero. The Central Bank is gaming the market here and the market is pricing in 75 Basis points of hikes over the next 6 months. Unwinding of that expectation may smash the currency.

Besides the COT structure is very very favorable for this pair. The COT shows futures and futures options positions for a currency pair vis a vis the USD. However one can extrapolate sentiment for any currency pair using the data. Looking at AUD:USD.

AUSTRALIAN DOLLAR - CHICAGO MERCANTILE EXCHANGE                      Code-232741
FUTURES ONLY POSITIONS AS OF 08/11/09                         |
--------------------------------------------------------------| NONREPORTABLE
    NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF AUD 100,000)                           OPEN INTEREST:      106,896
COMMITMENTS
57,276    8,430      163   22,134   87,447   79,573   96,040   27,323   10,856

CHANGES FROM 08/04/09 (CHANGE IN OPEN INTEREST:        384)
   976   -1,460        0     -133      879      843     -581     -459      965

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
  53.6      7.9      0.2     20.7     81.8     74.4     89.8     25.6     10.2

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       52)
    25        7        1       12       11       38       18

Commercials are short a whopping 87447 contracts.
For comparison, this was the positioning when the AUD was close to a bottom in November.

AUSTRALIAN DOLLAR - CHICAGO MERCANTILE EXCHANGE                      Code-232741
FUTURES ONLY POSITIONS AS OF 11/18/08                         |
--------------------------------------------------------------| NONREPORTABLE
    NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF AUD 100,000)                           OPEN INTEREST:       63,207
COMMITMENTS
 6,661   12,451      273   45,776   35,573   52,710   48,297   10,497   14,910

CHANGES FROM 11/11/08 (CHANGE IN OPEN INTEREST:     -2,583)
  -653   -3,467      -82      507       97     -228   -3,452   -2,355      869

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
  10.5     19.7      0.4     72.4     56.3     83.4     76.4     16.6     23.6

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       37)
     9       12        2        7       13       18       25

Now for the Swissie.

SWISS FRANC - CHICAGO MERCANTILE EXCHANGE                            Code-092741
FUTURES ONLY POSITIONS AS OF 08/11/09                         |
--------------------------------------------------------------| NONREPORTABLE
    NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF CHF 125,000)                           OPEN INTEREST:       32,801
COMMITMENTS
10,962   10,999       85    8,164   14,851   19,211   25,935   13,590    6,866

CHANGES FROM 08/04/09 (CHANGE IN OPEN INTEREST:     -9,422)
-10,379    4,170       -1    5,347  -13,593   -5,033   -9,424   -4,389        2

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
  33.4     33.5      0.3     24.9     45.3     58.6     79.1     41.4     20.9

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       35)
    11       10        1        8        9       20       19

SWISS FRANC - CHICAGO MERCANTILE EXCHANGE                            Code-092741
FUTURES ONLY POSITIONS AS OF 11/18/08                         |
--------------------------------------------------------------| NONREPORTABLE
    NON-COMMERCIAL      |   COMMERCIAL    |      TOTAL      |   POSITIONS
--------------------------|-----------------|-----------------|-----------------
LONG  | SHORT  |SPREADS |  LONG  | SHORT  |  LONG  | SHORT  |  LONG  | SHORT
--------------------------------------------------------------------------------
(CONTRACTS OF CHF 125,000)                           OPEN INTEREST:       43,937
COMMITMENTS
 5,740   19,329      571   25,109    6,737   31,420   26,637   12,517   17,300

CHANGES FROM 11/11/08 (CHANGE IN OPEN INTEREST:      4,044)
   914    4,347       66       60   -2,976    1,040    1,437    3,004    2,607

PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
  13.1     44.0      1.3     57.1     15.3     71.5     60.6     28.5     39.4

NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS:       46)
     9       20        5       11       12       22       35

COT structure is neutral to slightly bearish. Comparing this to the Swiss Franc Bottom in November we see that the sentiment in AUD is far more extreme than it is in the Swissie. Also the recent pace of commercial short covering in the face of slightly lower CHF:USD rates suggests that Commercials do not expect significant weakness in the CHF. COT positioning is useful only at extremes. I think we are at one now for this pair.
Short AUD:CHF 0.8928

FOFOA Nails it!

2009-08-15T11:28:00.000-07:00

In an absolutely astounding artcile FOFOA nails why Prechter style Deflation will never happen.

Robert Prechter is out and about today talking about the deflationary depression, with stocks, commodities and real estate all falling together. He says that we are just coming off a top the likes of which have not been seen in 200 years. He says that the best way to ride this out is in the "safest possible cash equivalents".

Basically, he sees this next major down-leg in the depression taking stocks, commodities and real estate down another 85%. He says that oil will ultimately fall to between $4 and $10 per barrel! The danger in making a prediction like this is while it may be fundamentally sound, it is still denominated in the dollar, a piece of paper with shaky credibility.

Think about this for a minute. The average retiree on Social Security receives about $1,100 per month, or $13,000 per year. This is a dollar denominated promise. If the crash from top to bottom is 90% or more as Prechter predicts, this would give each and every Social Security recipient the equivalent purchasing power of $130,000 per year when purchasing real estate, the stock market or even commodities. Basically everything.

.....Virtually everyone with an income or cash savings will see their purchasing power rise ten-fold!

....The problem with this view is that the real economy right now cannot even afford to deliver real economic goods at TODAY'S dollar purchasing power, let alone another 800% rise in purchasing power, with Ben printing new ones the whole way there.

The Entire article can be read here.

On a related note, Prechter, prior to 2007, has been wrong on everything ( yes every call he has made for almost 2 decades). How such a person can remain in business that long is astounding. It would be like me making a$100/Barrel call for oil since 1980 (when it reached $40) and being vindicated 28 years later.

Shorter term I agree with him that the dollar bearishness is growing quite loud and chances of a significant rebound are high.

The Fed DID NOT come out swinging

2009-08-12T11:42:00.000-07:00

Fed Minutes

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Fascinating. They seem to be telling the market that they are done with their QE experiment. It will be interesting to see the reaction of the long bond to this over the next few days. The Fed has now got themselves into a corner. If the Long Bond falls rapidly they will have to abruptly shift course and say "Sorry not done with the QE yet." This may will also reveal exactly how few buyers are out there in the absence of the Fed.

They are hoping that their Lack of Monetization actually sparks a long Bond rally. Just as their declaration of monetization in the first place actually caused a sell off over the next few weeks.

There was knee jerk rally in the USD after the announcement. After all, lack of printing is cause for celebration. Bernanke has now thrown down the Gauntlet to dollar and treasury bears. This is going to be fun.

I bought the puts near the highs on the SPX today. I am holding till tomorrow at least to see how things pan out.

The Fed may really come out swinging

2009-08-11T16:38:00.000-07:00

With apparent "Green Shoots" appearing everywhere, the FED may decide to really come out swinging tomorrow. The FED has two problems at its hands. Well actually it has a bazillion problems. But the two most important ones are
1) Funding the US deficit
2) Preventing Commercial Real Estate from Morphing into another Titanic style disaster. Foreclosures can touch just one time and last for a lifetime...Sorry I digress.

To take care of 1 it has to manage the decline in the USD (cannot go like a rock in the pond, otherwise too many people would dump UST's) and keep Treasury rates low (same concept here, if people find that their safe haven is pretty toxic).

For 2, it has to keep interest rates low and improve the economy.

My guess for the language tomorrow is going to be out and out negative for the stock market. The FED may choose to Jaw-Bone in one of two ways. It could say that the economy is much weaker than what everyone is pricing in and that should send people fleeing to Bonds ( "OMG the sky is so like collapsing so we so have to buy some US Treasuries and stocks are sooo yesterday"...You know how these money managers think).
Alternatively they could come out and do some serious tough talk on inflation to put some impetus in the Bond market while doing less collateral damage to the stock market ("OMG the FED is going raise interest rates by 0.000025% in a year and destroy inflation. I am soooo in love with US Treasuries even though no Foreign Investor seems to want them." )
In either case I think stocks should take some hit. I am leaning towards option 1 and am betting with way out of the money August QQQQ puts. It is a very small risk for a potentially large reward.

Time to sell Central Fund of Canada (CEF and CEF.A)

2009-08-08T08:11:00.000-07:00

The central Fund of Canada (CEF and CEF.A) has been an excellent vehicle for holding on Gold and Silver. With an even distribution between the two and extremely low expenses, it has been a Gem for those wanting genuine exposure to Gold and Silver outside the US. However it is now time to sell this.
Sell and reinvest the proceeds in equal dollar amounts of GTU.UN (Central Gold Trust) and SBT.UN (Silver Bullion Trust) . At last check CEF. A was trading at a 12% premium to Net Asset Value. Whereas, GTU.UN trades at a 3.6% premium and SBT.UN trades at a 1% premium (when you buy the stock and equal amount of outstanding warrants).
This 10% difference in premium is unwarranted given that they are all managed by the same company. On a large investment ( let us say $50,000) that equates to getting an extra 2.5 ounces of Gold and about 160 ounces of Silver exposure. Plus you can tailor you Gold Silver ratio's to your own taste. For example if you believe in Hyperinflation down the line or Ted Butler's excellent work you can have a greater expsure to Silver. If you believe in erotic tales about the central Banks backing their currency with Gold (while Silver languishes) then you can have a larger exposure to Gold.
All of this advisable only if you have a very low cost of trading in Canadian stocks (or have a huge exposure to this fund) and have a high cost basis in CEF, so you do not realize the capital gains. I believe most of the public investing in these do not have one or both and hence the discrepancy. However over time as new money gravitates towards the indivdual etfs rather than the combined one, the difference will narrow.

BLS Pulls out Kryptonite to Kill the Shorts ...Bond Market Does a Remy Zero

2009-08-06T20:07:00.000-07:00

The Bureau of Labor Statistics decided that the whisper number from Goldman Sachs was probably their best bet about what really happened last month. 247,000 Jobs lost.
That was the equivalent of them pulling out Kryptonite to destroy the last remaining shorts. However the Bond Market decided it wanted to sing a new rendition of Remy Zero.

While I have been saying for some time, that barring a complete collapse, there is not much more room to fire people (With Government and Health Care stable there is not that much room to keep firing), the real problem is the elephant in the room. The Bond market. That is the only market the Fed should care about. Because that is the only market which means anything, The Bond Market is the market that has backstopped everything. The biggest problem that the US has now is how they are going to sell their 7.5 Trillion USD worth of Debt over the next 3 years.
In the immortal words of "Disclosure".
"Solve the Problem."Everything else is noise.
And that means the stock market has to go down hard to make people buy more treasuries.

Dennis Kneale is the greatest fucking moron since John Keynes

2009-08-02T17:52:00.000-07:00

For the past few weeks I have given Dennis Kneale the benefit of the doubt. I felt it was just his extremely irritating voice that was setting off my nerves. But after watching this video clip, I am convinced. Dennis Kneale is going to be the last nail in CNBC's coffin. Anyone with any sense at CNBC should get this moron of the air.
His entire argument is
1) Stocks are going up , hence you are wrong and everyone is right.
2) You are missing the move because you seem to be so focused on hard numbers.

Dennis is arguing that people should be buying stocks because they are going up. Dennis , buying stocks because they are going up is like saying that you want to climb a mountain because it is there. Both can prove to be fun for a while and also get extremely dangerous if you are unprepared.

Dennis has also been chastising bloggers for telling the truth about the economy, that it is in very sorry shape and it would be worse if not for Government intervention. Dennis's compass is the stock market. Because it is going up things must be Hunky Dory. Dennis you are making the same mistake that hormonal teens make. You are confusing your dick with your brain. Buying stocks because the economy is improving and buying stocks because you expect a greater moron to buy it from you are two completely different animals. One involves careful analysis while the other involves flying by the seat of your pants. Furthermore citing that stocks went up 65% between 2002 and 2007 is a useless exercise as neither the bears nor the bulls bought at the exact bottom and sold at the exact top. Most people made far less than that unless you are talking about the traders at Goldman Sachs. Getting clues about the the economy from the stock market is a dicey exercise. Simply because contraction and expansion ins earnings multiple is responsible for the bulk of the stock market move in bull and bear markets and not the actual changes in earnings. Lastly using a stock market that is going up as a gauge of the economy has worked rather nastily when the currency goes to hell. Have you seen the Zimbabwe stock market recently?

However Dennis was not yet done proving that some of us have not fully evolved from our primate ancestors. In an authoritarian manner he said "Mike, I do not see the Correlation between the selling of Treasury Bonds to the Chinese and buying Japanese Cars." That is because you have been living on the dark side of the moon you fucking lunatic. Treasury Bonds are the way to finance our new Cash for Clunkers program. Just like they finance every other stupid, useless exercise the US Govt comes up with. I feel sorry for Michael Pento. He was trying to make sense which clearly is a no-no on CNBC.

A watched currency never crashes?

2009-08-01T20:37:00.000-07:00

The USD took another beating on Friday as month end position squaring took it to 1 year lows. Within 30 mins the Swiss Franc and the Euro moved up more than 1% against the USD. What was unusual about this move was that the stock failed to move up and celebrate the USD descent. In fact it closed lower. More interestingly even the Japanese Yen exhibited significant strength against the USD. As we have seen in the past few months Japanese Yen tends to strengthen or weaken against other currencies in tandem with the USD.

The month end move may signal that the Fed may be monetizing a lot more than meets the eye. The end result may be a lot more dollars in clients accounts (foreign investors) that need to be converted into home currencies. That might also explain why the CAD remained relatively weak as it is a very small player in the the UST market. This is just theory at this point , we have to see further how it plays out.

As the chart shows it is now or never for the USD. We are at important support levels. However sentiment levels are at extremes and a crash seems unlikely as all the morons trading this still are associating a lower USD as a sign leverage is coming back to the system. There is virtually no talk of the US Govt spending money way beyond what anyone is ready to sponsor.
Meaning the USD seems to be going down for all the wrong reasons.

Still it is fun to see that Denninger can finally see the difference between deflation and inflation on one hand and hyperinflation on the other.
http://market-ticker.denninger.net/archives/1278-Uh-Oh....-GDP-Interpretation.html

SO you are no longer marketing the theory that everyone else is worse of than us Denny Boy?
This is another John Kerry moment for Denninger. At least Mish is consistent.

Back to the USD. The sentiment indicators, the committment of traders report on the USD and the precious metals scream caution. Now would not be the time for a levered bet against the Greenback. I am closing for Short USD: Long NOK and Short EUR: Long NOK positions. We got 4% plus moves in both which is decent for a currency trade.Just because I am not betting on a collapse does not mean I would go long this.

Gold Bugs and Silver Haters?

2009-07-27T20:04:00.000-07:00

There is an increasing legion of writers who prefer Gold over Silver. Nothing wrong with that. To each his own. However I see more and more forecasts that Gold will rise further and faster than eTOYS immediately after its IPO, while Silver will look more or less like eTOYS 2 years after its IPO.Before I go any further let me clarify, under a massively deflationary outcome (which I do not expect) Gold:Silver ratio could spike over 100. Unlikely, improbable, but possible. Under a scenario where Governments hoard Gold to back currencies, the above scenario has ZERO chance of occurring.

To start with Silver has been the major monetary metal in history, not Gold. To have any backing of currencies with Gold, where Silver could be ignored makes zero sense. Throughout the times when Gold and Silver both, have been used as money,the Gold:Silver Ratio ratio never moved higher than 15. In fact at times it was a low as 4:1 (Ming Dynasty), or even at 1:1 (In Ancient Egypt).

The idea of backing a currency with Gold is not because Gold has some magical properties. It is simply because of characteristics which Gold possesses. I have discussed them in detail here.
http://ispeakofpeak.blogspot.com/2009/05/why-hell-would-you-gold-when-you-can.html
To summarize, Platinum and Silver both possess the same qualities in abundance and in many ways are actually superior to Gold.

Now let us envision a scenario where a major currency was suddenly backed by Gold. For the purposes of this example we are going to assume all prices in Today's dollars without any hyperinflation effect.

To back any major currency with Gold the price of Gold would have to rise to at least $20,000 an ounce. At that price all the Gold in the world would be worth about 90 trillion dollars ( or about 3 US budget deficits). Assuming Silver stays at an lowly $15 an ounce, the Gold Silver ratio would be over 1300. More interestingly the market cap of all the Gold in the world would be 5200 times greater than the market cap of all the Silver since there are less than1 billion Silver ounces compared to 4 Billion Gold ounces.

At this point one of three things WILL happen bringing the ratio back in Sync.
1) Assuming the Gold in existence is evenly distributed, 1 out of 5200 individuals would need to change his/Her mind to buy all the Silver by selling his/her Gold. Central banks could do it, rich individuals could do it. Certainly China, who realizes that if it ever wants to see its citizens achieve an improved lifestyle it will need Silver, (it is more important than oil in terms of its applications), could easily exchange it. However any attempt to do so would send the price soaring bringing it in alignment with its Sister metal.

2) Currently at around $1000 an ounce 70% of Gold demand is for Jewelery. That comes to around $60 billion annually. At 20 times the price (in real terms) that demand is going to virtually zero. Unless people want to show off their newly purchased jewelery along with a microscope to examine it. Not to mention how dangerous it would be to wear any significant amounts of it if Gold were priced that high in real terms.
This $60 billion would naturally gravitate towards Silver. The Silver market is pretty much spoken for in terms of its numerous industrial applications. Since the amount used is so small this area is virtually price insensitive (not that it matters since Silver is Just $15/oz in our scenario).
The Jewelery demand is about 150 million ounces a year. It is into this market that $60 Billion is going to flow. THAT Market will set the final price. If $60 billion flows into Silver annually we will see the price set at $400 an ounce.
If people will accept $20,000 an ounce for Gold they should have no problem with a 1:50 ratio (which BTW would still mean that Silver will OUTPERFORM).

3) Finally somewhere between Scenario 1 and 2 playing out Silver will lose its biggest drawback. That it is too cheap and a bulky store of value. As it crosses $250/oz people will envision it as Gold beginning its historic run. By then every investor would be well aware of Silver's supply demand fundamentals and rarity compared to Gold. At $250 an ounce it would be a great compact store of value. Investment demand would skyrocket (it would be dead for Gold with Central Banks doing all the heavy lifting).

Silver is one of the greatest investment opportunities of our time. At current rates of extraction we could see severe Silver shortage within 7- 10 years even without additional investment demand. Looking even further out, 15-20 years from now, the economies of India and China will be significantly larger and consuming vast amounts of Silver. While new supplies of Silver are virtually non-existent. Even as an investment in the growth of the world economy Silver is preferable to stock market Mutual fund purchases on a regular basis.

The Fed has a Game plan Part II

2009-07-25T09:36:00.000-07:00

As it has been raised time and time again, about how inflation will be controlled because the banks are not lending out money, I decided to blog about it.
At the risk of repeating myself a thousand times, Inflation is a monetary phenomenon, hyperinflation is a currency phenomenon. Big Difference.
The US banks have absolutely nothing to do with this. It begins with foreigners buying less of UST bonds. Bond rates start rising and threatening the nascent recovery. Bernanke is forced to monetize more and more. At that point one foreign bank will deviate from the herd and start dumping the dollar, exchanging USD for anything of value even if what they are exchanging it for may be overvalued right now. Does that sound like some country we know?
Then others will join in. Thinking "let the rest of the morons hold this shit together". We cannot have 60,80% (pick a number) of our reserves go to zero. The dollar devaluation starts pushing up asset prices.
The Fed hopes to stop this at the exact point when home prices have risen enough. The Fed has one major problem here...The last bubble busted will be take the longest to reinflate. So no Mish housing is not the best bet on Hyperinflation. However if he does manage to increase home prices then he needs to stop it before it the dollar goes to hell.
The only way the Fed can convince foreigners (remember we are talking about foreign holders not domestic banks which you can control with interest rates and reserve changes) is to stop monetizing. In the absence of that, bond rates will shoot up over 8% as the US continues to issue more and more toxic debt.Home prices get bludgeoned lower and 80% US treasury revenues are used in paying off interest.
Again leaving the US with 3 choices,
Default,
Devaluation
Hyperinflation.
Option 1 would lead to massive deflation as the debt market for US bonds would permanently close and the US govt would have to live within its means. It would somehow be rendered possible in the short term (long term Social Security and Medicare liabilities would mess things further) due to the fact that they would not have to pay a half a trillion USD plus in interest. But they would still have to cut spending enormously compounding woes of a troubled economy. The major problem with this is all the US holders including pension funds and Govt agencies holding US debt. Still this is a scenario where we have deflation and US bonds go to zero. I have been saying that we can have deflation but it will only happen if there is zero ( or very limited) intervention and US treasury bonds the savior of all these morons (deflationists) goes to zero.

2)Devaluation 30-50% at one time. This would also be tricky ( yeah all roads lead to hell) . The idea being to push up assets prices to the point debt can be supported. This is the best case scenario. It would be a shock to the system and the bankers who would know about this in advance, would be positioned to benefit enormously. The point is that it is best done now rather than after interest rates rise as outlined above.

3) Hyperinflation would entail monetizing and printing of all the debt. Again, if they have to do that why let interest rates rise and the world get more crazy. Better to do it now when the world still looks like it is in one piece.

Notice Bank reserves have zilch to do with anything.

The Fed has a Game plan.

2009-07-23T22:19:00.000-07:00

After repeatedly saying that the Fed's balance sheet is the best thing since sliced bread (Link), The Fed has now come clean about how it will manage inflation in the long run.

As first detailed in an editorial he penned Tuesday in The Wall Street Journal, Bernanke laid out a number of measures that could make up part of the central bank's eventual exit strategy.

The main tool is the Fed's ability, granted by Congress last fall, to pay interest rates on the balances held at the central bank by depository institutions. Paying more on those reserves would likely push up market rates, as well, he said.

In addition, the Fed could drain liquidity from the system through reverse repurchase agreements, selling securities from the central bank's portfolio with an agreement to buy them back later, said Bernanke. If necessary, the central bank could also sell its holdings of long-term maturities outright.

"In sum, we are confident that we have the tools to raise interest rates when that becomes necessary to achieve our objectives of maximum employment and price stability," he said.

Pretty Impressive stuff. Still, Riddle me this Bernanke...What securities are you going to sell outright?

The level 3 mark to fantasy assets that you bought at 10 X the price that should have been bought at? You going to unload those at 10 cents on the worthless dollar you paid? Or you want to sell treasury bonds? hmmm...When the US sells 2 trillion USD worth of bonds in a year the only way they can manage it is by the FED buying 900 Billion of it ( nope do not buy the official numbers), and still interest rates go UP, so when the US sells 2.5 Trillion USD of this garbage and the FED is a NET Seller....Well you better hope there is life on Mars because Bernanke's plan is out of this world.

Regardless of whether the FED can implement the interest on reserves theory, the FED's ability to contract its balance sheet is akin to that of the Fed raising interest rates to 14% to save the currency...zero.

Trades update

2009-07-14T06:47:00.000-07:00

Covered AUD:CAD short position. Was a good trade.

Observing the rally from the March lows I have come to the conclusion that some of the worst stocks with the poorest fundamentals have gone up more than stocks with much better prospects.
I am initiating a couple of paired trades to try to capitalize on this.

Long Diamond Offshore (DO), Short Schlumberger (SLB).
Quite simply DO has its revenues locked in for the all of 2009 and 2010. SLB on the other hand is still greatly dependent on North American Natural Gas drilling which will recover at the earliest in April 2010. Both stocks have moved up well from the bottom but SLB looks expensive here at 25 times 2009 earnings (which will likely get revised lower). DO on the other hand at 8 times 2009 earnings with great visibility into 2010 looks like it has better prospects. Also its significant dividends (over 10% yield) offer good proetction on this trade.

Long Nobel (NE) Short Oil States International (OIS).
Similar Thesis sans the dividends. While OIS is nowhere near as expensive as SLB, the analysts continue to price in a recovery in Natural Gas drilling, sooner than it will happen. Mind you Natural Gas prices can go up a lot, even up to $5.00 MCF ( a 60% increase from here) without changing the drilling prospects for it. Only at prices over $7.00 MCF do I expect drilling to make a comeback.

The risks in the first trade are small as SLB is extremely liquid and a short squeeze is unlikely. Also it is more likely to make an acquisition than be taken over. OIS presents some takeover risks (the most likely candidate being SLB). Unfortunately, unlike Goldmann Sachs, whose trading results are usually 18 Sigma deviations( i.e. 3, 6 Sigmas or 666..I wonder what that could mean?) away from that of us mere mortals, that is some of the risks we take when we trade. The unknown.

Scotiabank and the Real Silver

2009-07-08T05:23:00.000-07:00

Some time ago Ted Butler put ScotiaBank CEO on notice. In an exchange of emails he warned that ScotiaBank was dealing in Illegal activities if it was involved in maintaining the giant short position on the Comex.
Scotiabank never confirmed or denied the allegations but said that their paper promises were well hedged. Ted Butler's original article can be read here.
http://news.silverseek.com/TedButler/1187727404.php
Since ScotiaBank is the by far the largest dealer in precious metals in Canada I decided to look into these allegations.
The first thing I did was to call ScotiaBank and ask them about their Silver Certificates.
This was my conversation reproduced as closely as my memory allows.
MS:What is the current price for Silver Certificates?
Agent: $13.30 Bid $14.00 USD ASK. (Silver was trading at $13.65 at the time)
MS: What is the minimum amount?
Agent: 500 ounces.
MS: So when I purchase this..do you go out and buy the exact amount and store it?
Agent: Our Silver Certificate is backed by Silver Bullion in our Vaults.

This gave me pause for thought. Exactly how much bullion was being stored in ScotiaBank's vaults?
MS: So you mean you do not purchase it?
Agent: It can be exchanged for Physical Silver (nice dodge there).
I decided to move on, since his answers were going in a circle.
MS:What are the annual storage charges?
Agent: 60 cents per 50 OZ per year.

That sounded ridiculously cheap. Probably because they were not storing it, I thought.
MS: what are the charges for conversion to Physical Silver?
Agent: 30 cents per ounce plus bar charges which range from $3 per ounce for 1 ounce bars to zero for 1000 ounce bars.

WOW! $3.00 per ounce! You can get Canadian Maple leafs for less than that on the retail market. Not to mention they charge you a transportation charge as well as premium over spot for the certificate.

I ended the conversation there. I decided to look at ScotiaBank's annual report to see if I could some idea of how much of this "Precious Metal" stuff they were actually selling.
Found quite a few surprises.
Gold and Silver certificates are listed as liabilities of the bank (which they are). I mention this as not all 5 of the major Canadian Banks disclose this on their annual report (CIBC is the only other which does, and it has 1/10th the dollar value of certificates).
Interestingly, from Oct 31st 2007 to Oct 31st 2008 their liabilities of Gold and Silver Certificates decreased by about 300 million CAD. During that period that average price of Gold increased slightly, while the price of Silver dropped about 6% (all in CAD). Of course the total number of ounces of Gold and Silver liabilities is not revealed anywhere. That said, one can run various scenarios of what happened during that time to try to estimate how much exactly of their liabilities is due to Silver and how much due to Gold.
The reason I am stressing this is because if as Ted Butler Implies, ScotiaBank is heavily short Silver futures, their Silver ounces short position through Certificates, would further complicate their lives in the event of a sudden currency devaluation (most likely that of the USD).
I am not going to give the long details of my assumptions and simultaneous equations, but I came up with a MEAN of 150 Million ounces of Silver short (the rest of the value being Gold ounces). But surely it is backed by bullion in their vault. Hey the guy told me so.
So I looked for whether they said they had any bullion in their vault. I was pleasantly surprised as well as horrified at the same time.
Surprised because they list the Precious metals under Cash equivalents. Finally a bank that knows true money when it sees it! I was shocked because of what happened to their position.
Their position declined by almost 50%! In the face of flat prices,

Please Click on images for sharper view. ScotiaBank decreased their position by half. Now we have 5.6 billion CAD worth of certificates being backed by 2.2 Billion CAD worth of metals. Assuming that the ratio of Gold and Silver is the same in certificates and their vault.
This is an atrocious travesty. ScotiaBank has sided with the Short position on the precious metals by "Unbacking" their metals certificates. Interestingly, they were not always such crooks. In 2004 they actually had more precious metals than the ounces sold on certificates. So while the precious metals in the vaults are at the levels in 2004 their precious metals liabilities have increased by over 150%!

So I sent their investor relations an email
Dear Sir/Madam,
As a large shareholder I have been extremely concerned about ScotiaBank's Liabilities regarding Gold and Silver.
As I see on your balance sheet that Precious metals as assets declined dramatically (from $4 Billion to $2.4 billion) while certificates liabilities declined from about $6 Billion to $5.6 Billion.
My questions thus are, as of Oct 2008
1) What is the break up of these assets and liabilities in terms of Gold and Silver ounces?
2) What kind of counter-party risk is ScotiaBank exposed to in hedging the remaining position?
3) Will ScotiaBank be able to produce the necessary Silver ounces should certificates be redeemed for Silver rather than cash?
Respectfully,

As one can imagine I got no response. Yeah they did not buy my bluff about being long the stock, but considering that 90% plus of share certificates are held in the street name, they would have no way of knowing. In any case they should have responded but missed another chance to come clean.

I also checked their derivatives for a short position on Gold and Silver. Unfortunately, they are lumped with other categories making it impossible to tell. Regardless, ScotiaBank is holding a substantial short position on both Gold and Silver. They might be hedged by the OTC market but I doubt any of the counter parties will be able to put up enough CAD or locate the metals if USD crashes. For those holding ScotiaBank Gold or Silver certificates, I think it may be time to redeem or take delivery. For those wanting some form paper Gold/Silver, consider Central Canada fund, or its Silver only counterpart which is going public soon. Other alternatives would include, the Swiss ETFs for Gold and Silver, Sprott Bullion Fund or GoldMoney.com.

Otherwise your fate is likely to be that of Lars discovering that his Girl was never really there.

Taken from Lars and the real girl.

Gold (en) Crosses

2009-07-05T13:56:00.000-07:00

I was looking at the chart of Gold in Canadian Dollars (obtained by dividing GLD by $CDW , the Canadian Dollar index) and I noticed something very interesting. In the past three years all major moves of Gold in Canadian dollars began in the November December Time frame> In each case it was preceded immediately by the 50 day moving average crossing the 200 day moving average (Golden Cross). I am looking for a relative outperformance by Gold versus Stocks right away, although nominal highs for Gold in USD maybe some time away.

Swedish Bombshell

2009-07-03T21:48:00.000-07:00

Currencies do not float..they just sink at different rates. Perhaps the people in Sweden needed a more loud and clear message. With interest rates approaching zero and bubbles deflating everywhere, The RisqueBank (really that is their name) decided that the Swedish Krona had already lived a long and happy existence. So they decided to send it into oblivion by making interest rates on deposits NEGATIVE 0.25.

This level of stupidity is expected from the Fed, but apparently there are others who believe that they can make cash trash, at an even faster pace. Clearly this is psychological warfare. But they are playing with fire. They can have banks runs within days. A currency collapse is unlikely but they have made it possible. While one could argue it is a very small amount (-0.25%), and that they can reverse it with one baby step, it does not change the fact that they are sending a vociferous message to everyone that CASH is not savings vehicle.

AUD/CAD and Corn

2009-06-28T23:55:00.001-07:00

Going Short AUD versus CAD. The strength in AUD looks overextended here. A pullback in the market could help my cause, as AUD correlation the stock market is running really high.
Also Long Corn futures and Short S and P futures.
Should be an interesting week.

Eric Sprott nails it.

2009-06-26T06:20:00.000-07:00

Eric Sprott is one of the best Fund managers in Canada. His Flagship fund has beaten the Canadian Stock Index by about 24% points annually in the last 10 years. There is not a single fund in the US with anywhere close to that record.
I was surprised to learn that at the end of last quarter Sprott had about 60% of his fund in Gold, Silver or Cash.
http://www.sprott.com/docs/FinancialReports/Quarterly_Summary/2009Mar31_CdnE.pdf
More interesting was his breakdown of the US debt holdings here
Unlike the other Deflationists living in their marijuana cloud, Sprott is good at basic math about US debt.
I am putting up some key statements from his report.
In fiscal 2009, the United States must find buyers for almost
three times the debt that was issued last year.....

They (The Foreign Investors) collectively purchased $564 billion last year, and the US will require them to increase their purchases to $1.6 trillion in 2009. Thus far, they have only purchased $465 billion to March 2009, which is halfway through US fiscal year - and well behind the pace needed to triple last year’s purchases....

Next, we examine ‘State and Local Governments’ (#4). As you have probably already heard, the majority of State governments are in serious financial trouble. The latest estimates show income tax revenues down a whopping 26% from last year. The State of California, which represents the 10th largest economy in the world, is currently on the verge of collapse from economic stress. Seeing as how they were net sellers of US debt last year, we will assume, given their difficulties, that they will be net sellers this year as well - so no help here....

It may not surprise you to learn that the largest percentage owner of US debt is the United States Government itself....

This net selling by US Government trust funds adds to the total amount of debt that needs to be marketed, so instead of facing a $2 trillion debt marketing problem in 2009, the US now has a debt marketing problem that is well in excess of $2 trillion....

So, after all this, it should be clear by now as to who is going to cover the difference this fiscal year. As the lender of last resort, the only purchaser left is the Federal Reserve. In 2008 they were net sellers of almost $300 billion of bonds, but in the first half of this fiscal year they have been buyers of almost $280 billion of bonds. The Federal Reserve is the lender of last resort and must support the market for US debt. The policy ‘solution’ that the Federal Reserve implemented in March 2009 is called ‘Quantitative Easing’. Given our projections above, this was not an option for them, but a necessity...

Anyone who still believes that domestic demand (in the absence of Quantitative Easing AKA Money Printing) is going to buy this boatload of crap needs a one way ticket to the asylum.

USD sentiment

2009-06-23T12:49:00.000-07:00

Looking at CFTC reports one can draw the conclusion that sentiment towards the dollar is now becoming bearish. While COT reports suggest sentiment mildly bearish, some other reports suggest the investing community is still neutral or bullish on the dollar.
I pulled up the net assets of the Euro Currency shares. This is a small ETF (FXE) which is largely used by retail investors to gain currency exposure. I found it interesting that its assets peaked almost a year back.

06/17/2008

$ 155.44

$ 2,036,213,889

back then the Euro was at 1.5544 versus the dollar. How are we doing today on this ETF?

06/22/2009

$ 138.81

$ 631,563,812

About 65% less assets. Suggesting Joe six pack is not that woried about his exposure to the USD.

I also looked at assets at the recent bottom in the EURO and I found that there has been steady growth but hardly enough to suggest the crowd is piling in. The Bulk of the increase is due to appreciation of the EURO itself.

03/02/2009

$ 125.90

$ 553,958,381

I think this indicator would be useful to asess Retail sentiment going forward.

Today another shellacking on the USD produced no fun for the stock market.
If oil keeps mutiplying the effects of dollar weakness ( I do not think it will for long) it is hard to see how the market can use USD weakness as further eveidence of "green shoots."

For Deflationists all truths are inconvenient-2

2009-06-21T00:37:00.000-07:00

After the biggest worldwide collapse in economic demand ever, deflationists have little victory to claim by traditional measures. I had previously written about this here. Revisiting this 2 months later, I see that very little has changed.
In spite of tougher year on year comparisons (remember the commodity boom was in full throttle by this time last year) we have yet to see some serious CPI deflation. The table below represents more than 85% of the money in whole world.
The most spectacular deflation was a China at 1.5%. I know that most countries on that list have always understated inflation by a huge magnitude. If you do not believe that then you probably work for the Government as a bureaucrat.
So most likely actual CPI inflation is higher than what is reported. Below we see 4 countries going negative (all barely). 8 have positive year on year CPI. Germany is at the flat line. This is the point of maximum pain (for the inflationists) as far as YOY comparisons. They will get a lot easier (meaning it will tougher to get negative CPI numbers) as we go into the next 2 quarters.

Global Economics

Country	GDP	CPI	Central Bank Rate	Money Supply
	(Y/Y%)	(Y/Y%)	(%)	(Y/Y%)	Aggregate
Australia	0.3	2.5	3.00	15.01	M3
Brazil	1.27	5.53	10.25	35.56	M2
Canada	0.0	0.4	0.25	12.77	M3
China	6.1	-1.5	5.31	25.43	M2
France	-3.2	0.1	1.00	2.72	M3
Germany	-6.9	0.0	1.00	6.16	M3
India	5.8	7.81	6.00	20.72	M3
Japan	-9.7	-0.1	0.10	-0.26	M4
Mexico	-8.2	6.17	5.25	15.17	M4
Russia	1.2	13.2	12.00	11.86	M2
South Korea	-4.30	2.735	2.00	9.13	M3
Spain	-3.0	-0.2	1.00	1.98	M2
Switzerland	-0.1	-0.3	0.25	3.41	M3
United Kingdom	-4.1	2.3	0.50	17.72	M4
United States	-2.5	-0.7	0.25	9.05	M2

Source: Bloomberg
(As of 06/02, Updated monthly)

Now, I can see the deflationists pouring out that usual retarded comment "Inflation is first and foremost a monetary phenomenon." Not that I disagree, but it is extremely foolish to focus only on the denominator in this equation. I could just as easily have said " Inflation is first and foremost a "goods produced" phenomenon." And I would be just as right.
Take an example of a country which doubles its money supply while tripling its goods produced. Will that country have any kind of inflation? No. Today we have a situation where the production of most goods has fallen of a cliff while money supply (see last column in the chart above) has exploded. That is a perfect recipe for high inflation. For those wishing to bring up credit destruction please read this. Although high inflation is possible and likely in the world over the next few years, The US faces a unique situation which makes currency destruction and hyperinflation possible.

Prechter's 10 things to do and not do during deflation

2009-06-20T10:04:00.000-07:00

http://www.financialsense.com/Experts/ewave/2009/0619.html

Robert Prechter had been so wrong for so long on so many things that he was almost forgotten till 2008. Then he was back with a vengeance. 2008 and 2009 "vindicated" him. The stock market crashed and commodities nose-dived. Suddenly he has a fan following the size of a small country.
I have been following him since 2004. Only because I find it fascinating that someone who has been wrong for so long can still make money by selling subscriptions. Now he is trying desperately to hook in the last bunch of subscribers.
That said his recent article is quite interesting as in spite of my opposing views on deflation I still agree with 8 out of the 10 things he mentions. Below are the two which I do not agree with.

9) Should you invest in commodities, such as crude oil?

Short Answer: Mostly NO

Long Answer: Pay particular attention to what happened in 1929-1932, the three years of intense deflation in which the stock market crashed. As you can see, commodities crashed, too.

You can get rich being short commodity futures in a deflationary crash. This is a player’s game, though, and I am not about to urge a typical investor to follow that course. If you are a seasoned commodity trader, avoid the long side and use rallies to sell short. Make sure that your broker keeps your liquid funds in T-bills or an equally safe medium.

There can be exceptions to the broad trend. A commodity can rise against the trend on a war, a war scare, a shortage or a disruption of transport. Oil is an example of a commodity with that type of risk. This commodity should have nowhere to go but down during a depression.

Let me ask you guys something. If when oil was $30/bbl, I start predicting it will go down, and finally it does do that albeit never breaching my $30.bbl start point, does that make me right?
Fascinatingly, Robert Prechter is stupid enough to use Elliot Wave to predict Geology. "Peak oil is a theory used to "hook in" people at the end stage of a bubble." according to him. It is very interesting that our other famous deflationist Mish actually believes in Peak oil, while arguing that in the short to intermediate term demand destruction will trump effects of peak oil.
At this point I would argue that supply for most commodities will faster than their demand does, creating ripe conditions for a bull market.
For the stout believers in Elliot Wave check out Prechter's predictions on Gold for the last 4 years. He has been so wrong for so long it is laughable. Every time he gets something wrong he alters his wave count and makes a statement that "If Gold goes over so and so I will change my mind". Actually he only changes the wave count predicts another new low for gold each time. How is that working for you Bob?

10) Should you invest in cash?

Short Answer: YES

Long Answer: For those among the public who have recently become concerned that being fully invested in one stock or stock fund is not risk-free, the analysts’ battle cry is “diversification.” They recommend having your assets spread out in numerous different stocks, numerous different stock funds and/or numerous different (foreign) stock markets. Advocates of junk bonds likewise counsel prospective investors that having lots of different issues will reduce risk.

This “strategy” is bogus. Why invest in anything unless you have a strong opinion about where it’s going and a game plan for when to get out? Diversification is gospel today because investment assets of so many kinds have gone up for so long, but the future is another matter. Owning an array of investments is financial suicide during deflation. They all go down, and the logistics of getting out of them can be a nightmare. There can be weird exceptions to this rule, such as gold in the early 1930s when the government fixed the price, or perhaps some commodity that is crucial in a war, but otherwise, all assets go down in price during deflation except one: cash.

Here Prechter's argument is beyond stupid. He argues (elsewhere) that the Federal Reserve will NOT be able to create new money because people will lose faith in the Federal Reserve. Now it depends on how you define faith, but no-one in their right mind has any "faith" left in the Federal Reserve. Still they have created trillions in new money in the last year. If he is talking about people losing faith in the USD then that Bobby Boy is not Deflation but Hyperinflation.
In any case how can you lose faith in the Federal Reserve while having increasing faith in their currency? That is like saying "My doctor sucks but his medicine is an elixir." if the currency the Federal reserve creates magically keeps gaining power then "faith" in them will increase exponentially over time.

His entire article is still worth reading and you will find many similarities between the end outcome, be it deflation or hyperinflation.

The US has a 2.5% chance of NOT undergoing hyperinflation...WooooHoooo

2009-06-16T21:03:00.000-07:00

I am getting sick and tired of hearing about Japan. No really. All of Japan's deflation and monetization which did not result in Hyperinflation.

Why is everyone focusing on the 1 country (Japan) which did not have hyperinflation rather than the 39 countries that did when they abused the printing press in the 20th century? No seriously, do the odds of 40:1 look so appealing to the deflationists? Sure it can happen but to insist on it based on one fucking example out of 40 is ridiculous.

The one thing that prevented the Yen from collapsing was a very strong current account surplus which kept demand for the Yen strong. What exactly are the foreign investor going to exchange USD for? Booze and prostitutes as Marc Faber says? I would add unsold homes to that list.
Most people also forget that most of Japanese bonds could have been funded with internal demand in the absence of monetization albeit at a slightly higher interest rate. Not the case here. That may seem like a trivial point but it is not. Ask most banks today. They would like to lend to customers who need it the least. Nobody wanted to run from the Yen because of that simple fact. The whole world's savings and that of this universe and two other parallel ones are not enough to fund the US Govt deficits over the next 10 years.
Finally Japanese monetization came in the face of a very happy and sanguine world economy. We here have the worst world-wide recession with trigger happy investors everywhere (although noticeably less nervous lately). That increases the likelihood of destruction of the dollar.

Trades update:
Still short the market and long bonds. Also long DBA short IFN. If the US market is on a cloud of complacency, the Indian market is in the outer stratosphere. I like the Ag futures here and I think it is a good paired trade.

We all fall down

2009-06-16T12:32:00.000-07:00

Irrespective of my short term views on the Long bond and the stock market, I think the hour draws near when all three creations of the US (USD, TLT and SPY) will fall together. Already we are seeing a lot of divergences between readily acceptable trends for example the USD is down today but the markets are getting no boost.

When this does occur it will be a painful mess. You want to be in stocks of other countries but more importantly you want to be in tangibles such as Precious metals.
There is the outside chance that the Fed will set a fixed target for the long bond and monetize everything in excess of that. Who knows whether they are that stupid, but if it does happen I am unsure as to the consequences. The Bond market is a vent for inflation expectations. If it is left to its own devices, sure we could have deflation. If interest rates rise (over 6-7%) and the Fed does no more monetization then it will deflate the very essence of America. The question is, will that occur?

Market done climbing wall of worry, now floating on cloud of complaceny

2009-06-10T06:38:00.000-07:00

The stock market's ignorance of the Bond market is due to performance chasing. Although the economy was improving prior to the Bond market rout it now looks like downward pressure on home prices has resumed in full earnest.
It all hinges on the ability of the US to sell its bonds and the ability of the Fed to overtly monetize it. Now Mish, where is this domestic demand for bonds which will compensate for the lack of foreign demand? Mind you, he made that stupid statement before the FED announced its intentions to monetize, which is 300 BN of domestic demand. So all that additional domestic demand has not replaced foreign disdain for bonds. Those who bought the long bond at the peak have lost 12 years of interest can counting.
The PPT better focus on bonds rather than on having fun with the stock market. Not that I believe that they can make a difference in the long run, but hey they are going to try.
Moving to the short side. Short SPY and IFN today. Looking to short crude on a spike. Maybe short Crude long NG.

And we have this
http://news.yahoo.com/s/ap/20090611/ap_on_he_me/un_un_swine_flu

GENEVA – The World Health Organization held an emergency swine flu meeting Thursday and was likely to declare the first flu pandemic in 41 years as infections climbed in the United States, Europe, Australia, South America and elsewhere.

Health officials from Scotland, Indonesia and Thailand said the agency would declare a swine flu pandemic — a global epidemic — on Thursday after a teleconference with leading flu experts. Officials at U.N. missions in Geneva also said they expected the imminent announcement of a pandemic.

WHO spokesman Thomas Abraham said only that the emergency meeting began at noon in Geneva and WHO member nations would be informed of the result. WHO Director-General Margaret Chan was holding a press conference at 6 p.m. (1600 GMT, noon EDT).

"It is likely in light of sustained community transmission in countries outside of North America — most notably in Australia — that level 6 will be declared," Scotland's Health Secretary Nicola Sturgeon told Scottish lawmakers, adding it would be Thursday.

Indonesian health minister Siti Fadilah Supari said she had been notified by WHO that "today will be declared to be phase 6."

Phase 6 is WHO's highest alert level and means that a swine flu pandemic is under way. The last pandemic — the Hong Kong flu of 1968 — killed about 1 million people. Ordinary flu kills about 250,000 to 500,000

The Chinese have no choice but to keep buying the Grade A American Crap?

2009-06-09T18:30:00.001-07:00

In an online poll, 87 percent of respondents said they considered China's dollar-assets unsafe, reflecting public opinion that is opposed to the government's policy of buying US bonds, the Global Times reported. The remaining 13% have got to be illegitimate children of Geithner.

It is not like me to bite on an all too easy opportunity to take on a retarded point and crush it. But this one called for it (see title).
Apparently the Chinese have no choice but to keep buying US junk (Treasuries).
Currently the US will issue over 2.0 Trillion USD worth of Bonds over 1 year. That is net. Including the rollovers it will issue over 3.5 Trillion. That is the official line. My estimate is for over 4.0 Trillion total (2.5 trillion net). Over the last 2 years the Chinese have purchased close to 40% of US bonds. To keep this ratio up they will have to purchase over 1 trillion USD Net of Bonds, just this year. Bloating their US Bond holdings by over 125% in one year. But wait...we are not done yet. The rest of countries are in no position to step to the plate here. Many of them have troubles of their own and last year's record Treasury Bond purchases from the Middle East were only possible because of $100+/Barrel oil. With our Bench lineup retired or hurt or just plain unwilling to play in round 2 of "Who wants to be a Trillionaire (sponsor)?, China will have to buy close to 60% of this garbage. Ditto for 2010. China will be a proud holder of over 3.5 trillion USD of Bonds in 2 years. Now this is not a misconception, the Chinese are generally better at math than Americans. I am sure that they can see this as plain as day. I am even more sure they are not running around to their bosses saying "Sir..I figured out a way to solve our 800 Billion USD problem. We will make it a 3.5 trillion USD problem in 2 years and at that point we will sell the bonds and buy General Motors."

Now, I am not saying they will not buy bonds but for them to make an impact on the US economy they are going to have to blow themselves to hell. And what about in 2011? Can they keep buying at this rate?
Here is an idea...The US accounts for 20% of their export market. If that shrinks by 50%, China can make up the difference by stimulating domestic demand with 2.4 trillion USD worth instead of buying this crap.
So no. They do not HAVE to buy this crap. Anyone who is brain dead enough to suggest otherwise needs to start reading my blog regularly.