Friday, September 30, 2011

Portfolio Upate: Long Natural Gas

Our fund just bought some Natural Gas contracts. Gas prices on NYMEX are down about 25% since they peaked in early June. We got negative sentiment, increased levels of shorts and a possible technical bounce at support from March 2011 bottom. Essentially, this a trade because it is very unprofitable to hold Natural Gas in the long run, due to heavy contango in the futures forward curve.

Natural Gas has little or no correlations to other major assets, which is what I am looking for when going long in the current turmoil. Correlation coefficient with S&P is at 0.1%, with the Treasuries at -0.2%, with the Dollar at 0.0% and with Gold at 0.0%. All in all, this is a trade based on possible squeeze on Natural Gas negativity.

Trade: NYMEX Natural Gas
Opened: 29th of September 2011
Related Link: N/A
Risk: POFC 1.3%
Return: ROR +0% (Still Open)

Chart Of The Day

Today's chart of the day focus is on China, despite its currency theme. Basically, while everyone is too busy talking about Greece, EFSF, Italy, PIIGS, EU Banks and all sort of other "obvious" stuff - a surprise is brewing in the East. It seems that the current "conditions" (quote of the day below) indicate that China could be a large disappointment leading into 2012. It seems that various markets that depend on China including Copper, Coal, Soybeans, commodity currencies, Asian exporter's currencies, mining stocks, European luxury retailers, Macau casino stocks, Hong Kong property and many others are signalling that not all is well in China!
Next few charts of the day will focus on these markets and today we start with commodity currencies above. US Dollar seems to have failed to make a new low below the 2008 panic, against Loonie and NOK. This shows strength. At the same time, USD vs Aussie and Kiwi are setting up "bull traps" against commodity bulls (guys like me), as they fail to remain below 2008 panic lows. Luckily, I have been in cash for a long time expecting a move similar to this, as the US Dollar is now in the process of flushing out shorts and many weak hands.

I still hold an opinion and have already for a long time, that the US Dollar is "toast" in the long run and remains in a secular decline which started in 2002. Having said that, currently we are in a counter trend correction in this very long term move and I also happen to own some US Dollars and short precious metals (also considered currencies), with a plan to buy some more Dollars on pullbacks. Remember... the Dollar has rallied during every single US recession since the 70s.

Quote Of The Day

Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities. ~ Jesse Livermore

Tuesday, September 27, 2011

Equities: Sentiment Overview - Part I

Note: First of all, I want to say that I have received a lot of emails in regards to what sentiment indicators are saying and if we have bottomed in the stock market. So instead of answering each one of them individually, I thought it might be better for me to cover all the topics over the coming days with a sentiment and breadth two part write up. Second of all, some have even questioned why I am not as optimistic on stocks, as my last article was called Stocks: Crisis Still To Come. Basically, I cannot just pay attention to indicators, but also real world events. One of these real world events - away from the technical side of the market - would be a crisis default event in EU. Another would be the Chinese property crash.

Sentiment is extremely negative - that is for sure - so some of you will definitely be inclined to buy here. I cannot offer any advice other than the following: personally, I will not be buying any stocks myself just yet. I plan to open some positions on Agricultural commodities very shortly instead. But since majority seem to be more interested in equities, despite knowing that we are still in a secular long term bear market, I will cover the equity market indicators. One thing I can say is that if I had to choose between equities, bonds or cash - I would choose to buy equities as of today. Finally, Part I will cover sentiment and Part II will cover breadth (later in the week). There are a lot of indicators to get through so lets start...

Volatility Index
The VIX measures the implied volatility of near term at the money S&P 500 options. VIX will typically rise when the market drops and fall when the market rises, and while this is not always the case the correlation is clear - high volatility signals that a bottom is near. Currently the VIX has been trading above 30 for over two straight months and above 40 on and off for about a month and half. Previous spikes indicate that this type of volatility is not sustainable. From a contrarian point of view, this is the first indicator that is signalling a wash out and a buying opportunity - at least for a strong multi-month rally.

Sentiment Surveys
The Advisor & Investor sentiment is a model consisting of readings from several popular investment surveys. The components of the indicator, thanks to SentimenTrader, are the four most-popular surveys - Investor Intelligence, AAII, Market Vane and Consensus. I have placed a three month moving average on the readings to make sure signals can be trusted a lot more. Currently, we have just entered a buy signal territory, but that does not mean sentiment can't remain bearish for even longer, just like it did in 2002 or 2008. So be careful here.
The Investor Intelligence sentiment survey is conducted weekly and the bearish reading of the survey is one of the indicators I give most attention. The survey is based on 140 advisors aka "market pros" and their stance on the market, which can be either bullish, bearish or neutral. Two weeks ago, this reading hit just shy of 41% bears. This is the most bearish reading since March 2009. What does that mean?

According to my own statistical data study, which dates back to the 1980s, bearish readings of 40% or higher usually lead to gains of between 4% to 8% on average, three to six months from now. This indicates a good probability of a decently strong rally. Other studies show a similar picture. For example, dating back to the start of the Investor Intelligence data in 1969, a reading of 40% bears or higher returns on average:
  • 5.1% six months from now and positive 68% of the time;
  • 16.4% one year from now and positive 82% of the time;
  • 31.0% two years from now and positive 94% of the time.
An old proverb says that that in one's blindness, one can mistake a few trees for a whole forest. I am referring to super bearish market analysts, who down-play the state of the current negative sentiment. They say that things can and will get much worse. They say VIX will spike to a million and sentiment surveys will make new record lows, never ever seen before. I would say have a beer, buddy. I do agree that "anything" can happen, but markets are a probability play and right now probability is in the bulls favour. Consider the following:
Jonathan Wilmot is a managing director and chief strategist at Credit Suisse who is a great investor and a pure contrarian. He has developed his own sentiment indicator through his career and currently this little beauty is signalling the worst ever bearish readings since the early 1980s.

Mark Hulbert is another great contrarian analyst that I respect very much and read all the time. He also runs his own sentiment surveys for stocks, bonds and gold, that tracks the performance of hundreds of investment newsletters. His team monitors these "market pros" on daily basis to figure out who is bullish, bearish or neutral; and also what kind of exposure they recommend for their clients.

As of 23rd of September, the Hulbert Stock Sentiment showed readings of -12%. That means "market pros", who get things wrong majority of the time (god bless them), are now recommending their clients to be -12% net short equities. Funny that, when in May 2011, these same "market pros" were recommending exposure of +67% net long. Other noticeable bottoms include July 2010, where the exposure recommendation was -16% net short and March 2009 at -20% net short.

Hedge Fund Performance
There is this myth within the market place that hedge funds are smart money. Yes, maybe 5% are, but 95% are as good at timing the market as any of the other "market pros" from the newsletter advisory side mentioned above (god bless them all). Therefore, I like to track hedge fund performance each month, as reported by the Hennessee Group.
The indicator in the chart above is solely my own, however I presume a lot of investors with common sense understand that forced liquidations by any "institutional money funds" is a great buying signal. My own indicator is basic, but not perfect. It states that large winning streaks by hedge funds usually lead to trouble, while heavy losses usually lead to opportunities. Currently, we have a buy signal in place, but that does not mean liquidation will stop right here right now.
One of my favourite indicators is in the chart above. It has less to do with who said what, where and when; and everything to do with who bought what, where and when. Therefore, one should pay close attention to it. From 1st of September to 8th September, Merrill Lynch Fund Managers Survey polled a total of 286 panelists with US$831 billion of assets under management. What was the result?

Investors held the most cash in three years this month amid the biggest equity sell-off since October 2008, a month after Lehman Brothers Holdings Inc. went bankrupt. Investors are also underweight equities and admit to having the shortest investment time horizon ever (since December 2001 when the survey started). We are now at the lowest level of risk appetite seen since March 2009. According to my own chart above, we now have a buy signal in place. Finally, where are investors fleeing to apart from cash? The survey says: Bonds.

Options Positioning
Most equity option contracts are bought to open, and not sold to open.Therefore, most of the volume represents purchases. Therefore, heavy volume in put contracts shows fear, while heavy call volume shows optimism. In the chart above, I have placed a 21 day (one trading month) moving average to filter through the noise. Compared to December 2010, where readings hit a bullish 0.51 ratio, today we have readings above 0.70s. Could things get worse, like in 2008, where investors bought even more puts? Sure they can. Having said that, a buy signal is given above 0.8 in this indicator, and that was reached around early August.

Corporate Insider Activity
The chart above is from the Technical Take blog. The basics of this indicator comes down to this: insider selling is not as important because insiders sell company stock for any number of reasons. However, insiders typically buy only because they believe their stock will rise. This is what we saw in the early part of August; while Dumb Money was buying puts and the rest of the headless chooks went on about a deflationary world end - Insiders went on a buying spree similar to that of November 2008 and March 2009. From my experience of following the markets, you can be contrarian against many different market participants, but you do not want to bet against these guys. When they buy en masse like they did in early August, they are hardly ever wrong. Last weeks InsiderScore report stated:
“Sentiment remained Neutral as the number of buyers fell -8% week-over-week and the number of sellers increased 29%. Buyers were still in the lead, outpacing sellers 6-to-5, but there was an obvious lack of conviction on both sides of the trade. As was the case the prior week, no sector or industry flashed a strong signal in either direction and though there was some actionable buying and selling on acompany-level, there was little common ground – outside of acautiously neutral play area – to be found amongst insiders. We should see a measurable decrease in insider trading volume this week as companies begin to close their trading windows and insiders start getting forced to the sidelines until after their companies ’respective earnings announcements. “
One could assume that insiders used the recent open window to buy a huge amount of stock during the sell of in August, prior to the reporting season. Do they know something we don't? Are earnings risks to the downside like many believe or could they now be to the upside? Follow the money I say!

Earnings Analysts
You probably should not believe a word these guys say majority of the time. I don't - that is for sure! They just yap and yap about how stocks are cheap, earnings are great and the future is always bright. They have ridiculous targets on stocks 365 days of the year. Having said that, most investors, fail to understand how to use this group of Wall Street "experts" to their advantage.
Majority of the time you should disregard any earnings talk these guys do. But, when they finally start capitulating on their perma bullish outlook, like we can see in the chart above, you should sit up and pay attention. That is usually when stocks start to bottom and this is usually a time when they have egg on their faces. Looking at the chart above, earnings revisions have fallen very dramatically in Europe and aren't too far away in US and Asia either. To a certain degree, pessimism is similar to the 2002 bear market, but not as bad as the thumping of a lifetime markets received in 2008.
In the US, commodity sectors like Materials and Energy have been beaten down in recent weeks. The question now is have these commodity stocks fully discounted a slowdown coming from Asia? I am not so sure about that and this is one of my main worries - disappointment in the Asian economies. Nonetheless, it seems that analysts are definitely capitulating in the commodity space.

Technical Analysts
Technical Analysts are just as bad as Earnings Analysts. However, at least they track the price, which is a leading indicator, instead of earnings or economy which tends to lag. The problem with technical analysis, in my opinion, is too many strategists try to predict things. Personally, I use technical charts to see what has happened as opposed to predicting what will happen. I use economic cycles and conditions for that and not charts.
Now, you must have seen a chart similar to the one above about a hundred times in the recent weeks. If you haven't, you must be living in a bear cave and have failed to come out. A few days ago on CNBC we had four technical analysts and all of them predicted we are going another 20% to 30% lower. If you are a bull, you have to feel good about that type of a thing, because these guys all herd and sound like parrots. Having said that, the basics of technicals in the chart above state that we haven't yet retraced 50% of the the last bull market since March 2009.

I personally think a test of 1040, which was last Augusts low before QE2, could mark a strong bottom and at least set us up for a powerful rally. New highs above 1370? I am not so sure about that, but I'll discuss that later. On the other hand, super bears think we are heading down to March 09 lows of 666 and then even lower in the coming months.

Equity Valuations
I don't really pay attention to forward P/E ratios. However, for those that do, here are some charts for regional equity indices. I do have to admit that if you believe earnings will not fall dramatically and the economy will not enter a recession this year, then valuations on forward basis "look" as cheap as March 2009. However, the key word here is "look"...
Personally, I prefer looking at long term valuations that tend to average a few cycles and remove the noise and volatility of earnings and price. As can bee seen in the chart above, these are Market Cap vs GDP, Q Ratio and CAPE 10. For me, equities remain in a secular bear market and from the valuations above, are just not cheap enough for a long term buy and hold - that is why I stick with commodities. Having said that, equities are much much cheaper than they were in 2000 and while valuations will adjust further to the downside, equities do not necessarily need to move down as well. They can move sideways like in the 1930s and 1970s. As a matter of fact, they can even adjust to the upside if money printing accelerates.

Fund Flows
I could make a fair argument from the chart above, which tracks ICI mutual fund flows against the S&P 500, that during this secular bear market in equities - which started in March 2000 - prices have pretty much gone sideways (nominally) and yet the sentiment has changed dramatically. Mums and dads aka retail investors are just not "feeling it" anymore and the whole buy and hold strategy that their financial planner told them to do in 1999 is now out of the window. They have been selling hard and fast since 2007. Unlike the huge monthly inflows during the Technology Bubble, today we see huge monthly outflows of the same amount. How times have changed...

Having said all that, usually when outflows reach $20 billion on a bi-monthly streak, like we saw in September 2001, October 2002, March 2008, October 2008, May 2010 and in the last few months - market gets ready to put in a bottom. Basically, as a contrarian, when retail investors "leave", you want to "arrive".
There are many different traders, investors, strategists, analysts and experts of skill within the market environment. It is a melting pot with the goal to make money. Keeping that in mind, if Corporate Insiders are one of the smartest groups out there, than Rydex traders have to be the complete opposite. If the English vocabulary failed to invent a word that was worse than “dumbest”, then Rydex traders would be the closest phrase available. These guys are hilariously wrong all the time. They are actually dumber than the dumbest - if that makes sense. Rydex traders, on averages, get all the bets wrong, all the time. The chart above, thanks to SentimenTrader, explains the rest. If you are feeling bullish... bet against these guys and you'll make money at least for a rally!

Of course, there are a few smart cookies between all of you now thinking... where has all this money gone, if it left the stock market? Great question. The answer is fixed income aka bonds. Mums and dads aka retail investors aka consensus aka dumb money (plus their Rydex friends), are now in agreement with deflationists that the best place to park your money is in bonds. Rydex traders are jumping over each other to buy some Treasuries. I am actually considering a short right here tonight! Remember Bob Farrell's Rule which states that the public buys the most at the top and sells the most at the bottom? Looks like the majority don't remember.

Annualised Returns
It seems that after a 30 year bond bull market, where yields have gone from 16% in 1981 to sub 2% in 2011, the public has been piling in en masse (as already discussed above). This is why I keep stating that in a choice between equities and bonds, equities will do better from here on out. If you clue your eyes 10 years from now, you will be in profits with stocks and totally ripped out with Bonds, sitting in an alley like a homeless person with Bernanke next to you. Also, remember that during the worst conditions of the Great Depression around 1937, when the deflation argument must have been in full force, was the actual bottom of equity underperformance relative to bonds. In other words, contrarians who bought equities when the news was awful got rewarded. Is this time around going to be different?

When the VIX index spikes, seasonality usually leads us to a final top around October. That would mean market indices could also place a bottom around October too. This is not a Golden Rule or a Holy Grail, but majority of the time bear markets or strong corrections do bottom into October. History proves this to be the case in 1957, 1966,1974, 1990 and 2002. Prior to WW2, there are also many examples, but you get the point: respect history and respect Octobers!

We have forced liquidating for Western Equities, Emerging Market Equities, Emerging Market Currencies, Industrial Commodities, Mining Companies, Agricultural Commodities, Energy Commodities, Commodity Currencies, Eastern European Currencies, High Yield Bonds, and anything else risky. On the other hand we have accumulation of US Dollars and Governments Bonds. However, contrarians should do the opposite for now, but it all comes down to a matter of timing. Note: I have to admit that I am one of those who plans to accumulate more US Dollars in due time.

Volatility has been high for months; sentiment surveys are extremely negative; hedge funds are losing money; institutional cash levels are high; dumb money is loading up on puts; insiders were buying heavily last month; analysts are now capitulating; valuations are attractive if you believe in Asian demand & growth; mums and dads exiting; Rydex dumb money is also panicking (god bless them); seasonal weakness is ending in October; and finally equities offer value against bonds and cash.

The bottom could either be here already for some sectors or coming sometime next month with a possible retest of the 1040 support for the whole index. But the question now is, are we going to rally from September / October to a new high above May 02nd at 1370 on the S&P 500? Or will Asian economies including China disappoint in 2012?

Monday, September 26, 2011

Commodities: Gold Enters A Bear Market For An Hour

Gold and Silver, amongst other assets, crashed during Asian trade, which is morning for us here in Australia. At one point in time, Gold almost touched it's 200 day moving average at $1,520. Silver touched $26 during Australian midday.

Who would have thought that Gold would beat the S&P 500 into a bear market, when a month ago it was making new records as stocks were tanking! Is anyone buying or selling anything on this Monday morning? What is your guys view on where markets are heading for the next few days or weeks? I'll be interested to here everyone's opinions. =]

Sunday, September 25, 2011

Weekly Recap: September 2011, Week IV

It has been a very interest week to say this least. If you have been long Treasury Bonds or the US Dollar, you have done well. However if you shorted any of the metals and especially Silver, you should be over the moon! Out of the major currencies, Aussie and Kiwi Dollars really felt the force of gravity as well. Finally, the Portfolio Page has also been updated.

Enjoy the rest of your weekend!

Saturday, September 24, 2011

Chart Of The Day

A gentlemen by the name of Chris Puplava, that I highly respect and follow, recently wrote in his weekly newsletter:
All in all, the above factors suggest that the US economy is either in or slipping into another recession. Our firm’s own recessionary probability model is nearing the key 20% threshold mark in which a recession has occurred every time the 20% level is exceeded. Given we were at 19.5 for August, it appears a reading north of 20% is a given for September or October, which appears to be the month that the next recession will begin in the US.
That quote takes us to todays chart of the day above. Basic cycle shows us that we are now somewhere between market sell off and potential early stages of central bank reflation. On the other hand, I know a lot of smart super bears out there think that the next recession will be so huge that equity and commodity markets will crash to about 80% lower than we are currently. 

The stage between bear market, global recession and reflation in 2008 took a long time, but my opinion is that central bankers and governments have learned their lesson since than. What might push the central bankers like Bernanke over the edge into expending their monetary base - in other words printing more money, as opposed to just twisting it from short term to long term bonds - is just one negative quarter of GDP growth in both Eurozone and the US.
At that point, the money printer will be back to his usual tricks - deforestation the Amazon. Remember... history has always showed us that money printing never leads to prosperity, but just higher commodity prices, especially agriculture and precious metals!

Friday, September 23, 2011

Stocks: Crisis Still To Come

My last update on the stock market was at the end of August (Article: Stocks: More Selling To Come). Recently, the blog has mainly focused towards currencies and credit market movements - and rightfully so. It seems majority of the fast passed action is currently there. We have seen credit markets across the globe signal warning signs: crisis ahead! That usually gives boost to the almighty King Dollar (source: CNBC), the worlds greatest currency (sarcasm all around).

Greenback has spiked in the insane fashion against global currencies like Mexican Peso, Turkish Lira, Polish Zloty, South African Rand, Singapore Dollar, Korean Won, Russian Rubble, Indian Rupee, Brazilian Real and many others. It is not just the majors like Euro or Pound that are weak. Generally speaking, a broad Dollar strength is signalling unwinding of carry trade of positions. These investments, that are now being reversed, usually bet on global growth outside of US or Japan. Obviously a global slowdown is now being priced in. Therefore, investors should understand the warning signals of both credit and currency markets: there is more selling to come.

Why do I say that? I'll give just a few main reasons for today.

1. This crisis is to do with EU Debt and we still haven't had any defaults - just can kicking. Therefore, once we see Greece default and the market test many other PIIGS countries as well as the whole Union, than we can know if they have or have not passed the test. My opinion is that defaults in the EU will lead to further Dollar rally, at which point I plan to buy all the Euro and short all the Dollars that I can - the US crisis will be up next!
2. A lot of has been made about bearish investor sentiment this week, as we can see in the chart above. Sentiment in the chart above tells us that we should have a contrarian point of view and not overact to the current fear, however bearish sentiment can stay extremely bearish for a prolonged period of time during bear markets. From a contrarian point of view I am very bullish in opinion, as I do not think we are repeating 2008 like some ultra bearish deflationists, but nonetheless I remain 96% in cash and 4% short with high leverage.

3. Instead, I think that we are on the road to capitulation and most likely closer to the bottom than most think. I wrote about contrarian signals in a Two Part write up (Articles: Stocks: Contrarian Signals Part I & Stocks: Contrarian Signals Part II). These unorthodox tools are not used for timing perfect bottoms, but do let us now that over the next month, two or three a great buying opportunity is going to present itself, similar to that of October 2002 and March 2009.
However, the road to final capitulation is always mixed, as we can see from the chart above of my own Crash Analogue. VIX spikes to extreme levels usually occur during the later phases of a crisis and signal the start of the end. I like to call this a lead up to final capitulation. Usually you have minor or a major crisis capitulation, and currently we are at the crossroads. However, my opinion is that  global central banks as well as governments have learned a lot since 2008. Therefore, I wouldn't get too bearish as we are going to see them print, print and print so more until they run out of trees.
4. Global economy is weakening. Leading indicators everywhere are now showing what the stock markets have already been discounting for months now. The biggest optimism, which needs to be shaken out, is the analysts outlook towards earnings. As we can see from the chart above, S&P reported earnings and US Consumer Sentiment are at a huge discount. I do acknowledge that larger and larger portion of S&P 500 companies earn their profits in the Emerging World, but nonetheless, analysts are still overly bullish.

Summary: More weak hands have to be shaken out, EU default is on its way, more GDP revisions are to come as global growth slows, more earnings downgrades are needed, more job losses are coming, more of this and more of that... etc etc etc, you get the point. However, as the market goes lower, less and less individual components of the index are making new lows signalling breadth divergence has started. That is not a good time to be adding shorts or even opening new ones.

On top of that, I personally would not listen to the current super bearish opera of deflationists who state that the current sell off is just the beginning as the stocks will crash below March 2009 lows. I read newsletters of very smart bears which I respect a lot, but it is difficult for me to get bearish on equities when I see the 10 Yr Yield at 1.7% and true old statistical CPI, not BLS fraudulent figures, north of 10%!

Besides, these super bears usually get louder and louder as we approach the bottom and their arguments of fear, deflation or world coming to an end, start to sink with the publics opinion - in other words their view becomes consensus. Having said that, one would not be too smart to buy any risk asset right now, if history is any guide. The default in EU is still to come so our fund remains 96% cash, with some slight short positions.

Thursday, September 22, 2011

Chart Of The Day

It is a sea of red out there! As we sell of hard in all risk assets, Treasuries and the US Dollar (Article: Currencies: Is The Dollar Rally Real?) seem to be the only gainers. Silver is down the most out of any asset class (Article: Portfolio Update: Short Silver), at one point almost 9%! 

Palladium, Copper, Crude Oil and Sugar (Article: Commodities: Sugar Futures Tumble, But Long Term Prospects Great!) are not too far behind - all down at least 5%!

Quote Of The Day

"Bull markets in commodities should not distract us from the fact that spikes in prices are followed by collapsing prices. This observation has nothing to do with being a “commodity bull” or a “commodity bear”, but with historical facts.
When commodity prices are low, no new production capacities are built and eventually shortages drive prices higher. When commodity prices are high, new production capacities come on stream and alternate ways of production are invented which subsequently drive down prices. Now for some commodities, the supply response is relatively short. If there is a soybean shortage which causes prices to increase, farmers can respond within one or two planting season. That is why agricultural commodities fluctuate widely within brief periods.
Whereas for agricultural prices the supply response is relatively short, for industrial commodities it is very long. Say there is a shortage of copper. It will take a very long time (12 – 20 years) until the mining industry will open new mines. Therefore, the industrial commodity cycle will tend to last longer than the agricultural cycle. However I would like to emphasize that at some point, prices for industrial commodities will also collapse and this irrespective of how much money our friends at central banks around the world will print." ~ Marc Faber

Portfolio Update: Fertiliser Investments Stopped Out

Just a quick update on our portfolio fund. The investment toward agriculture through fertiliser producers (write up and discloser of companies yet to come) which were bought on August 19th - the second low relative to the 09th of August - have now been stopped out for a slight profit of a couple of percent. 

One of the main rules in the way we run our investment fund, is to make sure that no winning investment ever turns into a losing one. Moving stop losses towards and/or slightly above entry level is very helpful tool for that, once in profit. This trade will be counted as a "break even" despite a slight win.

Trade: Global Fertiliser Producers
Opened: 23rd of August 2011
Related Link: N/A
Risk: POFC 33.3%
Return: ROR +1.5% (Stopped Out)

Since I've started this portfolio theme on the blog, we currently have no longs for the moment. Cash levels now stand at 96%. There are a few shorts making us money on the downside, and even though these trades have minimal risk compared to the overall fund, their return is so far very good. I will be updating the portfolio data properly on the weekend.


US Dollar has totally exploded to the upside against the Singapore Dollar.

Poll: Bernanke Twists, Market Tumbles!

The Federal Reserve will replace $400 billion of short-term debt in its portfolio with longer- term Treasuries in an effort to further reduce borrowing costs and counter rising risks of a recession. 
The central bank will buy bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after a two-day meeting. 
The Fed left unchanged its pledge to keep the benchmark interest rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook stays “subdued.” The central bank has kept the target federal funds rate for overnight interbank loans in a range of zero to 0.25 percent since December 2008. 
The risk assets didn't like the news as there was more hope for the Fed to maybe expand its balance sheet. There was quite a sell off in everything from stocks to commodities and foreign currencies. US Dollar and the Treasury Bonds gained substantially.
The survey poll conducted over the last couple of days showed that majority of you thought that FOMC will do some kind of Operation Twist. That was very well signalled prior to the meeting and there was no surprises.
However, asset classes did not perform as majority thought they would. Stocks and commodities declined, while the US Dollar and Treasuries rallied. Quite interestingly, there was only one vote for bonds to rally.
There seems to be a strong division within the Fed ranks as well, as can be seen from the chart above. Bloomberg:
The FOMC vote was 7-3. Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Charles Plosser of the Philadelphia Fed voted against the FOMC decision for a second consecutive meeting. They “did not support additional policy accommodation at this time,” the Fed statement said today.

Tuesday, September 20, 2011

Chart Of The Day

With FOMC meeting starting today, I thought it was appropriate to stay with yesterday theme and survey poll. Today's Chart Of The Day shows the insane growth in US M1 Money Supply. On top of that M1 and M2 is exploding globally and not just in the US. I am failing to see all this deflation everyone is on about, apart from US house prices - but that has been obvious for years now.
Deflationists point to bond yields in their defence, but I am not so sure about that argument. It looks like Mr Bernanke is secretly printing more and more money to bail out the banking system. Bloomberg:
Dealers Add Treasuries in Biggest Buying Spree Since ‘07 
Wall Street’s biggest bond traders are stockpiling Treasuries at the fastest pace since 2007 on speculation the Federal Reserve will announce a plan this week to buy longer-term debt to spur the faltering economy. 
The 20 primary dealers held $15.1 billion of Treasury securities due in more than one year as of Sept. 7, up from a $75 billion bet against the debt on May 6, Fed data show.
Since the public is against further TARP programs, crook bankers run out buying as many Treasuries as possible and than their partner in crime, Helicopter Ben buys it of them at higher price, in a program known as Quantitate Easing. It is like a rigged casino!

So why do we than pretend deflation is in the global economy? Price of food is higher than years ago. Price of energy is higher than years ago. Price of building material is higher than years ago. Price of steel is higher than years ago. Price of health care is higher than years ago. Price of education fees are higher than years ago. Price of all types of services from doctor fees to mechanic fees are higher than years ago. Price of parking tickets, metro tickets and speeding fines are higher than years go. Prices of stocks and bonds are higher than years ago. Even the phoney CPI is now coming close to 4%, but in all reality actual inflation and money supply is growing at above 10%.

Can't we just be honest and say that the banking sector is bust and needs a total bail out?Isn't this just a transfer of wealth from poor honest savers to over indebted bankers?

Monday, September 19, 2011

Poll: Federal Reserve Meeting

What is the most important event this week? US Housing Starts? No. Home Sales? No. Weekly Jobless Claims? No. Obamas speech on the Buffett Tax? No. European Union & IMF address on Greek bailout receivership? Possibly. Federal Reserve Open Market Committee Meeting? Definitely.

Starting on Tuesday morning, the crisis-special two day meeting will end on Wednesday. It seems everyone is now eager to see what Bernanke has in store for all us investors. So instead of speculating too much on what I think, I thought I ask you guys what you thought instead through a new survey poll.

Since these meetings sometimes tend to be important inflection points, I thought of running a second poll on top of the first one and asking you boys and girls what you think will happen to various asset classes from macro point of view, once the meeting finishes. Note that for the second poll, you are allowed multiple answers.

Have your say on the right side of the blog and thank you for voting! ----->

Chart Of The Day

Couple of weekends ago, I discussed the weakness of global currencies (Article: Currencies: Foreign Currencies & Precious Metals Look Exhausted!), but by the end of the article I did give a warning signal that, from the short term perspective, the market sentiment seems to be heavily one sided against the Euro for the time being.
Today's Chart Of The Day looks at the current amount of speculators net short the Euro as of last Tuesday (reported by COT last Friday).

Last Monday morning in Asian trade we experienced a gap down in the Euro Dollar exchange rate and afterwards shorts got heavily squeezed throughout the week. Furthermore, this morning we have déjà vu in Asian trade as the Euro Dollar gapped down again. 

This time around, the gap is much much bigger, and usually gaps get filled. Therefore, I expect a correction in the US Dollar all across the board and against other majors as well. Having said that, I still remain long the US Dollar against some currencies & precious metals.

Sunday, September 18, 2011

Weekly Recap: September 2011, Week III

As we count down to more EU turmoil, I thought I post a video link from YouTube from the recent meeting between Sarkozy and Papandreou. Enjoy!

[Further Update]
From now on, every weekend I will be updating the portfolio page.

Saturday, September 17, 2011

Commodities: Sugar Futures Tumble, But Long Term Prospects Great!

Late last month, I closed a huge long Sugar position I was carrying in my portfolio (Article: Portfolio Update: Profit Taking On Sugar). The prices were only couple of percent away from the 52 week highs, conditions were favourable as Sugar market was in a demand / supply deficit and the news was very fundamentally good. So why did I do it? At the end of August I closed at 30 cents and stated my reasoning as follows:
It was Marc Faber who first taught me that when a price of an asset fails to make a new low on unfavourable news, it could be starting to price in more favourable conditions. The same is true for an asset that fails to make a new high under very favourable conditions. I think the bulls have completely priced in recent supply shortages out of Brazil and we could experience quite a large correction.
Fast forward almost a month and it seems that Sugar is now changing its medium term trend from bullish to bearish and the correction I saw, is now upon us. The news last night was as follows:
A triple whammy of weak Chinese auction prices, a rare upgrade to Brazilian production hopes and an retightening in Europe's import policy gave sugar futures their worst losses in six months. The revision ended a long run of downgrades which have been a big factor in driving sugar futures up by more than one-third in the last four months.

Furthermore the source said that results from the latest Chinese auction of 200,000 tonnes of sugar from state reserves, while not yet published, showed prices, which have topped 8,000 remninbi a tonne previously, falling in some areas below 6,000 remninbi per tonne. The EU is expecting a significantly better beet harvest this year, with early yields in France, the region's top producer, coming in 24% higher than in 2010.
Here is the updated chart which was previously posted in late August in the portfolio update (Article:Portfolio Update: Profit Taking On Sugar):
As we can see the trend is now showing signs of a reversal in the short to medium term. I was contemplating shorting Sugar yesterday, however, I have recently opened up a decent amount of traders in the portfolio and I prefer not to over trade or over expose myself to risk. Bears will point to a technical formation where the Sugar price in the recent rally failed to make a new high when compared to the February 2011 peak of 34 cents. My reply to these these bears is not to worry so much about the short to medium term technicals, but study Sugar's conditions. So lets get into it...

Sugar's Conditions
Global Sugar demand is expected to soar up to 50% by 2030, with huge under-investment on the supply side, since The Global Financial Crisis of 2008, leading to deficits and shortages. As the price of Crude Oil and other energy commodities rise, this puts even more pressure on Sugar (or Corn), which is also used for ethanol purposes. Therefore, the 50% increase in demand might be just the starting point as Oil/Gasoline go higher in the coming years.

The global market is expecting Brazil to deliver the supply for half of that 50% increase demand, however the largest producer of the Sugar in the world is starting to show signs of supply side crisis. Brazil's Sugar industry is in a very poor state as we saw with its 2011-12 production setting its first decline in Sugar cane output in at least a decade. Furthermore, the number of new Sugar mill openings is expected to drop to only five... from a huge 30 three couple of seasons ago.
What we have on our hands in under-development, under-investment and very low historical prices when adjusted for inflation - chart above. A perfect recipe for a huge bull market in Sugar for years to come. The truth of the matter is, it is not just Sugar, the whole Agriculture is completely depressed. It has been the worst industry for over two decades.

Lower prices and very bad margins are the reason we have under-investment in the first place. No sane entrepreneur will ever invest into an industry where he will lose money. Of course, the cure for lower prices, is low prices... which have for 10 years now, creating very very low incentives to build up supplies. This, obviously, leads to huge shortages. At the same time technological break throughs have discovered many new uses for Sugar, while the rise of Asia has increased demand by millions and millions of tones per year creating deficits in recent times.
When a global crisis happens, no business can get funding, let alone a Soybeans planter, Cotton farmer or a Sugar cane grower. What most super bears, who point to deflation and total collapse of all prices, do not understand is that even if demand in commodities falls, supply can fall even more, and therefore we have shortages on our hands creating a bull market. We haven't increased the global arable land since the last commodity bull market in 1970s. The population and its wage growth has increase enormously. Where is the extra Sugar going to come from?

In 1930s Agriculture we had a collapse in demand and yet under-investment in the supply side let to an even bigger collapse, therefore creating shortages. We experienced a huge bull market and one of the best industries while the whole world was in depression. In 1970s Agriculture was one of the best industries while the whole world was in stagflation, and the demand side totally collapsed with high interest rates and high inflation creating constant recessions. However, once again supply side investment collapsed faster, and shortages built up. Sugar rallied from 2 cents to 66 cents - a real bull market!
And the same will now happen in 2010s, while the whole world is in defaults and bankruptcies. Even if demand falls dramatically, supply side is totally depressed and soon we will have no Sugar at any price. Average age of farmers around the world is between 55 to 65 and in same countries much much older. Young people are not studying agriculture or willing to be farmers. Instead they all want to own they our hedge funds and be the next George Soros. Young people are not helping build supplies of any Agricultural product to divert the up and coming price spike crisis... they are actually helping to create it by studying law, accounting, business or trying to be famous on TV (American Idol or whatever else is "cool" right now)!

You see, it doesn't matter if Greece defaults, the world will still use Sugar or Cotton or Wheat or Corn. It doesn't matter if Chinese property bubble pops, the Chinese will still consumer Sugar at a faster rate than before. Unlike the US housing bubble, most Chinese do not have a bank account, credit card or a home loan. They will not be affected by the crash. But they will keep consuming Sugar, just like today! It doesn't matter if we have deflation in housing all around the world or deflation in debt around the whole Western World. What does matter is that every crisis sets lower and lower amount of investment into these industries and totally depresses supplies. We are now setting ourselves up for a repeat of the famous food crisis of 1974 and any further credit problems in Europe or US will be the final nail in the coffin for supply side investment!

I am very bullish on commodities, especially agriculture, so it pays to be trading with the long term trend and not against it. I will be following the Sugar market, its conditions of demand / supply, investor sentiment, speculator positioning, technicals and media news very closely in the future for those who are also interested in investing somewhere else other than stocks and bonds.

Friday, September 16, 2011

Credit: Greek Charts Of Warning

In my last Credit blog post (Article: Credit: The Pressure Is Building...) I stated that we had imminent signs of default in the EU zone and that contagion will be the name of the game. Glance at some of the important credit market charts below:
Greek 1 Yr at over 150%...
...2 Yr at over 75%...
... and 10 Yr at over 25%. But you, I and the market already know all this!
Back in the day Eurozone politicians called hedge fund managers who speculated against the Greek debt through CDS crazy. Looks like the gentlemen who went long Greek CDS at 100 beeps do not look that crazy anymore? 5000 beeps and counting!

Gordon Brown was on Bloomberg earlier. This is what he had to say:
“In 2008, governments could intervene to sort out the problems of banks. In 2011, banks have problems, but so too do governments. The euro area problem is now moving to the centre, the euro cannot survive in its present form, it’s going to have to be reformed dramatically. We are, I think, at an hour to midnight in the way that we look at this issue.””
The Dollar is in demand now as we should already know by my recent article on currencies (Article: Currencies: Is The Dollar Rally Real?). I think Gordon Brown is also advising his best friends to buy the Dollar against the Euro and the Pound.

On the other hand, I am bullish on risk assets, however I am not buying anything yet. We have signs of capitulation in certain places and as every day passes by more signs are shown to all of us. Some commodity companies on my watch list look great. Having said that, I think that no matter what earnings state, no matter how well company revenues are, no matter what sentiment is saying, no matter what technical analysis or breadth readings are showing, no matter what the long term trend is... in my opinion, until the credit markets settle down, we just aren't there yet.

Greece needs to default. Hopefully the politicians do not kick the can down the road again for a few months. If they do, than the risk asset rally will be false. Do not get suckered into it! Having said everything above, please don't think the world is about to end like these investment banks:
Hahahaha! I cannot help but laugh at some of the garbage these guys send to clients on daily basis. It gives Hollywood a run for its money.

Chart Of The Day

We currently have about half of the S&P 500 companies yielding more than the 10 Year Treasury Note. We also have Headline Inflation at 3.8% and Core Inflation at 2.0%, which makes the whole US Yield Curve, from the 1 Month Bills to the 30 Year Bond, yield negative real interest rate.

Quote Of The Day

"I can give this rule: In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction. A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask it for reasons or explanations." ~ Jesse Livermore