"Noblesse oblige – but not in the stock market, because the
tape is not chivalrous and moreover does not reward loyalty." - Edwin Lefevre an excerpt from Reminiscences of a Stock Operator
Technical analysis is the stock market voodoo. It is the use of stock charts which present historical stock price movements in an effort to extract an understanding of where the stock price may go in the future. Using anything from a simple ruler and pencil to complex computer generated buy and sell signals the technician places his bets based on the chart movements in the hope that the pattern will repeat itself and he can extract a profit from the trade.
While to many this is gambling, to the technician it is an art form and speculation. Particularly if you consider the market is efficient and everyone has access to the same information, the only edge is to be better at chart analysis than the rest of the pack. For this reason high frequency traders try to get as close to the source of the data as possible (literally next door if possible) so that they can receive the data a split second before everyone else. With their computers humming that millisecond can make all the difference between profit and loss on a trade.
My technical trading relies more on momentum than millisecond trades. To me the more that you trade the less you make as all of your profits are eaten by the fees and slippage. Given this perspective I have taken a look at the markets and I must say I may have to dive in again as there seem to be some clear momentum trends unfolding that could make me a lot of money. I will limit my analysis to the stock market for this blog but I have my eye on numerous other markets which are exhibiting signs of breaking through resistance and support barriers.
When looking at a chart of the S&P 500 it is good to look at differing time frames. For example the 15 minute chart may be showing a good day while the daily chart is bearish and the weekly chart is also bearish but the monthly chart is bullish. This is the technicians dilemma, which chart should have the most weight? Personally I find the monthly chart to be a good overview of the macro circumstances while the 15 minute chart is just a quick look at the daily action. Outside of these I spend most of my time on the daily and weekly charts.
So starting with the monthly chart it appears that the recent bull run from 2009 is running out of steam. While the trend is still intact it is perilously close to breaking down. Factoring in that we are in the weak season for trading as typically markets struggle during the summer months and, on the surface, it appears that the market resilience may overcome the struggles of Europe. That said the macro economic environment is still far from averted so at these levels it can easily see a retracement to the 1,025 mark from 1,362 today.
The weekly chart is less bullish as the chart broke the 20 week moving average and has rebounded but on light volume. Certainly the news from Europe this morning was good but in all honesty it is still a temporary fix but it may allow the market to maintain its momentum for the next few weeks.
The weakest of the charts is the daily chart which has viloated the 200 day moving average a number of times recently only to recover on some hope of economic improvement. The housing data out of the United States is certainly encouraging and I am hopeful that it can turn into a decent trend but unless the employment picture can change relatively quickly which looks doubtful this might be a temporary blip.
Overall the picture (outside of today's rally) is weak and if there is a violation of the 20 month moving average on the monthly chart I would expect that there will be a lot of downside to the market. For this reason I feel it might be a time to get ready for a momentum trade but I am afraid to say that the setup appears to be to the downside.
Friday, June 29, 2012
Friday, June 22, 2012
Overly Optimistic - Again!
"One's task is not to turn the world upside down, but to do what is necessary at the given place and with a due consideration of reality." - Dietrich Bonhoeffer
Once again the Federal Reserve's perspective of reality is proven to be warped to the upside. This week they released their most recent findings after the FOMC meeting and they were not pretty. All of their projections were cut and to be honest I believe that they are still way too high. The frustration that I have with them and their projections is that rather than being based on the reality of the state of the global economy they seem to be basing their projections on what they are "hoping" will happen. For you long time followers of this blog you will know by now that as far as a trader is concerned the worst four letter word in the English dictionary is "hope". "Hope" is always a last resort and is normally followed by sh#t, f*%k and the rest of the four letter word vocabulary when the event turns out to be something other than what you were hoping for.
So let's take a look at the most recent changes to the Fed's Economic Projections:
Let's start with GDP growth. Two month's ago it was projected to be 2.4% to 2.9%, now it has been revised down to 1.9% to 2.4% a 20 percent reduction! As you all know I believe that this year we will do around 1.5% so I believe that they are still at a minimum 20 percent too bullish even after the reduction. Looking forward somehow they magically believe that regardless of the problems in Europe and the rest of the world that by 2014 we will be humming along at 3.1% growth. Good luck with that projection! I would agree with them if we were spending our money on fixing the economy, but just printing money has not and will not work as they have no control over where it ends up. Had we spent $3 trillion on "shovel ready" projects, by now our roads, bridges and other infrastructure projects would be world class and we would have far lower levels of unemployment and, I would be bullish. But we haven't and still they believe it will work - amazing.
So let's turn to the unemployment rate. As you can see the rate is rising! So much for kick starting the economy. Also how do you propose getting the economy restarted without either help from outside the US in the form of growing exports (this will not happen as weakness abounds around the globe and the dollar is strengthening on the back of Euro weakness) or from lowering unemployment so that there is demand for goods and services from the local population? As our government does not have any shovel ready projects and as the horse has left the building without taking the cart with it (we printed the money and did not use it to create jobs) it seems that we will stagnate for the foreseeable future. Also you can clearly see that unless GDP growth exceeds 4% little will happen in the way of reducing the unemployment level as the number of new entrants into the workforce will more than offset any job growth at levels less than 4 percent.
The good news is that inflation is coming down, however it is looking more and more likely that we will end up in a deflationary spiral much like Japan and this will lead to low interest rates for a very long time. The bad news is that without inflation the debt burden remains stubbornly high in relationship to the asset levels and this will result in further expenditure on lowering debt levels at the consumer level resulting in even more debt at the government level (the only way to reduce both levels is to have a large budget surplus and a high savings rate and we have neither!). Higher government debt will lead to enormous problems later and will continue to crowd out the private sector slowing growth further.
Looking at global trade for signs that the global economy is beginning to turn for the better prints a very bleak picture. My two favorite barometers of global trade are copper prices and the bulk shipping rate index. As you can see from the charts below, neither of them are showing any global strength.
So why anyone thinks it is a good time to invest in the stock market right now is beyond me. There is no magic wand to wave so be prepared for numerous downside shocks to the market and low interest rates for a long time to come. Hunker down and explore alternatives to the stock market.
Once again the Federal Reserve's perspective of reality is proven to be warped to the upside. This week they released their most recent findings after the FOMC meeting and they were not pretty. All of their projections were cut and to be honest I believe that they are still way too high. The frustration that I have with them and their projections is that rather than being based on the reality of the state of the global economy they seem to be basing their projections on what they are "hoping" will happen. For you long time followers of this blog you will know by now that as far as a trader is concerned the worst four letter word in the English dictionary is "hope". "Hope" is always a last resort and is normally followed by sh#t, f*%k and the rest of the four letter word vocabulary when the event turns out to be something other than what you were hoping for.
So let's take a look at the most recent changes to the Fed's Economic Projections:
|
2012
|
2013
|
2014
|
|
|
Change
in real GDP
|
1.9 to 2.4
|
2.2 to 2.8
|
3.0 to 3.5
|
|
April
projection
|
2.4 to 2.9
|
2.7 to 3.1
|
3.1 to 3.6
|
|
Unemployment
rate
|
8.0 to 8.2
|
7.5 to 8.0
|
7.0 to 7.7
|
|
April
projection
|
7.8 to 8.0
|
7.3 to 7.7
|
6.7 to 7.4
|
|
PCE
inflation
|
1.2 to 1.7
|
1.5 to 2.0
|
1.5 to 2.0
|
|
April
projection
|
1.9 to 2.0
|
1.6 to 2.0
|
1.7 to 2.0
|
|
Core
PCE inflation
|
1.7 to 2.0
|
1.6 to 2.0
|
1.6 to 2.0
|
|
April
projection
|
1.8 to 2.0
|
1.7 to 2.0
|
1.8 to 2.0
|
Let's start with GDP growth. Two month's ago it was projected to be 2.4% to 2.9%, now it has been revised down to 1.9% to 2.4% a 20 percent reduction! As you all know I believe that this year we will do around 1.5% so I believe that they are still at a minimum 20 percent too bullish even after the reduction. Looking forward somehow they magically believe that regardless of the problems in Europe and the rest of the world that by 2014 we will be humming along at 3.1% growth. Good luck with that projection! I would agree with them if we were spending our money on fixing the economy, but just printing money has not and will not work as they have no control over where it ends up. Had we spent $3 trillion on "shovel ready" projects, by now our roads, bridges and other infrastructure projects would be world class and we would have far lower levels of unemployment and, I would be bullish. But we haven't and still they believe it will work - amazing.
So let's turn to the unemployment rate. As you can see the rate is rising! So much for kick starting the economy. Also how do you propose getting the economy restarted without either help from outside the US in the form of growing exports (this will not happen as weakness abounds around the globe and the dollar is strengthening on the back of Euro weakness) or from lowering unemployment so that there is demand for goods and services from the local population? As our government does not have any shovel ready projects and as the horse has left the building without taking the cart with it (we printed the money and did not use it to create jobs) it seems that we will stagnate for the foreseeable future. Also you can clearly see that unless GDP growth exceeds 4% little will happen in the way of reducing the unemployment level as the number of new entrants into the workforce will more than offset any job growth at levels less than 4 percent.
The good news is that inflation is coming down, however it is looking more and more likely that we will end up in a deflationary spiral much like Japan and this will lead to low interest rates for a very long time. The bad news is that without inflation the debt burden remains stubbornly high in relationship to the asset levels and this will result in further expenditure on lowering debt levels at the consumer level resulting in even more debt at the government level (the only way to reduce both levels is to have a large budget surplus and a high savings rate and we have neither!). Higher government debt will lead to enormous problems later and will continue to crowd out the private sector slowing growth further.
Looking at global trade for signs that the global economy is beginning to turn for the better prints a very bleak picture. My two favorite barometers of global trade are copper prices and the bulk shipping rate index. As you can see from the charts below, neither of them are showing any global strength.
Friday, June 15, 2012
Can The Euro Last?
"This crash is not going to have much effect on business." - Arthur Reynolds Chairman of the Bank of Chicago 24 Oct 1929
As you can tell from the above quotation, I do not believe that the Euro will last. To me it is almost impossible to keep it together. The facts seem to point to the obvious that either Europe needs to go back to individual currencies or at best split into a couple of currency baskets. The reasons are simple:
Eventually (and I think that eventually will be relatively soon and probably before the end of next year) economics will win out over politics and no matter what political posturing is presented, the Euro will have to change. This will be dumped on the politicians through market forces. Personally I believe that this will push parts of Europe into a depression and this will have repercussions around the globe. Germany, Britain, China and the United States will be pushed into a severe recession due to the fallout of this mess and the ensuing financial crisis. To think that the United State will escape unscathed is a mistake as our banks and economy are heavily reliant on a fully operational Europe.
Depending on how deep the crisis in Europe goes will determine if there is a shift (at least temporarily) to closer ties between Asia, South America and the United States from the current Europe/US union. Interesting times are ahead and this certainly warrants an air of caution particularly with the Greek election occurring this weekend and a time to take exposure out of the markets.
As you can tell from the above quotation, I do not believe that the Euro will last. To me it is almost impossible to keep it together. The facts seem to point to the obvious that either Europe needs to go back to individual currencies or at best split into a couple of currency baskets. The reasons are simple:
- The only way (barring some miraculous discovery of massive oil reserve or some technology) in the short term to make an uncompetitive economy competitive is to depreciate the value of its currency. Once a currency is depreciated fully, the country's products are automatically priced to compete. Furthermore imports become so expensive that locals are forced to buy goods produced locally. This insulation protects local companies from imports, allowing them to gain local market share and slowly but surely things start to turn around.
- Piling more debt onto already over leveraged nations is a sure fire way to disaster. Without repairing the internal structural problem of a balance of trade it is only a matter of time until the borrowing nation once again runs out of cash that was lent to it.
- The more that is borrowed the higher the cost of the debt. As we have seen, interest rates are spiralling higher in weaker nations in Europe and this eats quickly into the budget increasing the deficit and weakening the country further.
- Political differences will not in our lifetime be put to bed. These are countries that have disputed borders, fought wars against each other and had a history of centuries of conflicts and disagreements. Until all of these political ideologies are put to bed and a common political platform is set, there will be no possible way for the currency to survive in its current state as politicians will try to push their separate rather than unified agenda on a diverse group of nations.
Eventually (and I think that eventually will be relatively soon and probably before the end of next year) economics will win out over politics and no matter what political posturing is presented, the Euro will have to change. This will be dumped on the politicians through market forces. Personally I believe that this will push parts of Europe into a depression and this will have repercussions around the globe. Germany, Britain, China and the United States will be pushed into a severe recession due to the fallout of this mess and the ensuing financial crisis. To think that the United State will escape unscathed is a mistake as our banks and economy are heavily reliant on a fully operational Europe.
Depending on how deep the crisis in Europe goes will determine if there is a shift (at least temporarily) to closer ties between Asia, South America and the United States from the current Europe/US union. Interesting times are ahead and this certainly warrants an air of caution particularly with the Greek election occurring this weekend and a time to take exposure out of the markets.
Friday, June 8, 2012
The Waiting Game
"There is more to life than increasing its speed." - Mahatma Gandhi
A trader is inherently impatient. Sitting on your thumbs (in order to prevent trading just for the sake of trading) is a skill that is hard to learn. Once learnt I ahve found that there are very few able to implement the rule but it is these moments where overtrading can break your portfolio. As Tiger Woods once said, "You can't win on Friday but you can lose." This is a good summary of where the market is now. There are a lot of major events about to happen and to trade now is to take unnecessary risk (unless you are an avid day trader and close out all positions before the end of each day). Taking a gamble on the outcome of a Greek election and Europe's reaction to it are, in my view, pure folly. You may as well take your money and head to Vegas. For what it's worth I think you would win on red!
Seriously though the Federal Reserve Chairman yesterday essentially said he was waiting and watching, Europe is not giving much indication of what they would do if the Greek elections result in a vote against Euro participation (in fact as the Greeks have disallowed any polling it is complete speculation as to the outcome) and Spain is sure to need a bailout package but the terms and conditions of that are unknown and certainly will be influenced by what happens in Greece.
So all eyes are on the Greek election for June 17th and the resulting fallout and there is little that can be done in the interim other than close out and wait or spend loads of time and energy speculating on the future and then trying to protect your portfolio against any potential shocks. As I have mentioned before, this is a costly exercise and not just in financial terms but also emotionally.
So what do I believe is the outcome? To be sure I feel that regardless of what their decision is that a mess will result. Stay in the Euro and their future looks bleak as the austerity needed will result in a severe contraction and leaving the Euro will result in a severe contraction. Leaving the Euro could have catastrophic consequences for the rest of the Euro countries as the bandits will smell the prize and will surely hammer the other weakened economies by dumping the bonds into an already fragile market pushing the sovereign yields of Spain, Portugal, Italy and even France through the roof. The result of this would certainly push Europe into a deep recession and could even move it to a depression. If Greece stays in the Euro it may buy the Euro countries time but without some kind of a plan in place for the future of the Euro short work will be made of whatever stimulus plan comes out of Brussels. The result will be just another kick of the battered can a little further down the road and this is becoming less and less of an option as (any 10 year old will tell you) a battered can does not go as far as a new one.
So if I were to place a trade I would be looking to short the bonds of Greece, Spain, Portugal and Italy and use those proceeds to buy into the US treasuries. Now that may seem to be the craziest trade in the world (which is why I do not plan on taking it), but it makes sense. There is no reason to believe that US interest rates will suddenly fall from here, in fact I believe that the 10-year note will move to below 1% in the near future. The reason for the trade is not that I want to earn 1.5% on my money for 10 years but that if the Euro collapses or Europe enters a very severe recession the increased price in these bonds will give me a windfall plus I should make a ton more money of the increased strength in the dollar.
As more and more people around the world seek safety this will continue to drive the yield on the US 10-year note down and strengthen the dollar. While this is certainly not consensus if it does play out it will enable the US to continue to strengthen its economy in an effort to weather the storm coming from across the Atlantic.
A trader is inherently impatient. Sitting on your thumbs (in order to prevent trading just for the sake of trading) is a skill that is hard to learn. Once learnt I ahve found that there are very few able to implement the rule but it is these moments where overtrading can break your portfolio. As Tiger Woods once said, "You can't win on Friday but you can lose." This is a good summary of where the market is now. There are a lot of major events about to happen and to trade now is to take unnecessary risk (unless you are an avid day trader and close out all positions before the end of each day). Taking a gamble on the outcome of a Greek election and Europe's reaction to it are, in my view, pure folly. You may as well take your money and head to Vegas. For what it's worth I think you would win on red!
Seriously though the Federal Reserve Chairman yesterday essentially said he was waiting and watching, Europe is not giving much indication of what they would do if the Greek elections result in a vote against Euro participation (in fact as the Greeks have disallowed any polling it is complete speculation as to the outcome) and Spain is sure to need a bailout package but the terms and conditions of that are unknown and certainly will be influenced by what happens in Greece.
So all eyes are on the Greek election for June 17th and the resulting fallout and there is little that can be done in the interim other than close out and wait or spend loads of time and energy speculating on the future and then trying to protect your portfolio against any potential shocks. As I have mentioned before, this is a costly exercise and not just in financial terms but also emotionally.
So what do I believe is the outcome? To be sure I feel that regardless of what their decision is that a mess will result. Stay in the Euro and their future looks bleak as the austerity needed will result in a severe contraction and leaving the Euro will result in a severe contraction. Leaving the Euro could have catastrophic consequences for the rest of the Euro countries as the bandits will smell the prize and will surely hammer the other weakened economies by dumping the bonds into an already fragile market pushing the sovereign yields of Spain, Portugal, Italy and even France through the roof. The result of this would certainly push Europe into a deep recession and could even move it to a depression. If Greece stays in the Euro it may buy the Euro countries time but without some kind of a plan in place for the future of the Euro short work will be made of whatever stimulus plan comes out of Brussels. The result will be just another kick of the battered can a little further down the road and this is becoming less and less of an option as (any 10 year old will tell you) a battered can does not go as far as a new one.
So if I were to place a trade I would be looking to short the bonds of Greece, Spain, Portugal and Italy and use those proceeds to buy into the US treasuries. Now that may seem to be the craziest trade in the world (which is why I do not plan on taking it), but it makes sense. There is no reason to believe that US interest rates will suddenly fall from here, in fact I believe that the 10-year note will move to below 1% in the near future. The reason for the trade is not that I want to earn 1.5% on my money for 10 years but that if the Euro collapses or Europe enters a very severe recession the increased price in these bonds will give me a windfall plus I should make a ton more money of the increased strength in the dollar.
As more and more people around the world seek safety this will continue to drive the yield on the US 10-year note down and strengthen the dollar. While this is certainly not consensus if it does play out it will enable the US to continue to strengthen its economy in an effort to weather the storm coming from across the Atlantic.
Friday, June 1, 2012
Currency Wars
"If you can keep your head when all about you are losing theirs, it's just possible that you haven't grasped the situation." - Jean Kerr
Just in case you haven't grasped the situation, currency wars are in full force. They have been raging for years but now things are starting to come to a head. So while there is no blood being shed those who are supposedly allied during war are happy to fight one another on the currency front. So what is a currency war and how does this affect anything?
Let's start with an example. Country A has a strong economy with a budget surplus (the government spends less than it takes in through taxes), a healthy banking system, low interest rates and a stable currency. This safety attracts investment from abroad and with this investment asset prices start to rise. At first the rise is manageable but then speculators show up and prices start to accelerate. The central bank now has a choice to make - let the rising prices (inflation) continue or fight them by raising interest rates. Most central bankers try to contain inflation so they increase interest rates. The direct impact of this is to strengthen the currency making their exports less attractive to outsiders while imports decrease in local prices. This weakens the economy and the government slumps to a budget deficit and starts to print money to pay their bills.
Once debt reaches a high level the government has another dilemma - how does it pay down the debt while not capsizing the ship it is trying to salvage? The normal solution is to let the value of the country's currency drop which expands exports, curbs imports and stimulates GDP growth through the resulting inflation pressures making the debt burden (whose value remains fixed) drop of as a percentage of the country's GDP. Voila, debt as a percent of GDP falls to a manageable level restoring the country's credit rating and the cycle starts again.
As an aside, this is why Greece cannot get themselves out of hot water as they are tied to the Euro and cannot depreciate their currency to help with growth. Furthermore the problems at Spain, Protugal, Italy and Ireland will continue down the same path unless the Euro drops significantly in value. The beneficiary to their problems is Germany which has seen its position strengthen due in large part to the Mark (their original currency) weakening (in relative terms) when it was converted to Euros as it was now tied to these weaker economies.
As can be seen in the European example above the problem to this is that while one country is the beneficiary of currency depreciation others fall victim to its weakness. Their economies feel the negative effect of a strengthening currency and try to put a stop to their country's currency appreciation. Now what if everyone around the globe has massive debt burdens and they all try to weaken their currency at the same time? This is the situation that we are in today and the result is all out currency war. Everyone is trying to depreciate their currency and someone has to lose. At present the loser is the United States whose currency has been the direct beneficiary of global weakness and this is starting to show up in the United States' anemic GDP growth rate.
Today payrolls were once again weak and once again JP Morgan and the other investment bankers lowered their expected growth rate for the US to 2.0% from 3.0%. I stated earlier this year that I believed that we would grow by 1.5% but even that is looking optimistic at present. The problem is that while a stronger currency is not in and of itself a problem but it needs to be based on strong economic fundamentals. If it is not (as is the current situation in the United States) it will result in slower growth, an increase in the country's debt burden and eventually to an inability to pay (this is the Greek situation). While the UNited States is a long way from this state of affairs, to think that the market will expand from here is to not have grasped the situation.
Just in case you haven't grasped the situation, currency wars are in full force. They have been raging for years but now things are starting to come to a head. So while there is no blood being shed those who are supposedly allied during war are happy to fight one another on the currency front. So what is a currency war and how does this affect anything?
Let's start with an example. Country A has a strong economy with a budget surplus (the government spends less than it takes in through taxes), a healthy banking system, low interest rates and a stable currency. This safety attracts investment from abroad and with this investment asset prices start to rise. At first the rise is manageable but then speculators show up and prices start to accelerate. The central bank now has a choice to make - let the rising prices (inflation) continue or fight them by raising interest rates. Most central bankers try to contain inflation so they increase interest rates. The direct impact of this is to strengthen the currency making their exports less attractive to outsiders while imports decrease in local prices. This weakens the economy and the government slumps to a budget deficit and starts to print money to pay their bills.
Once debt reaches a high level the government has another dilemma - how does it pay down the debt while not capsizing the ship it is trying to salvage? The normal solution is to let the value of the country's currency drop which expands exports, curbs imports and stimulates GDP growth through the resulting inflation pressures making the debt burden (whose value remains fixed) drop of as a percentage of the country's GDP. Voila, debt as a percent of GDP falls to a manageable level restoring the country's credit rating and the cycle starts again.
As an aside, this is why Greece cannot get themselves out of hot water as they are tied to the Euro and cannot depreciate their currency to help with growth. Furthermore the problems at Spain, Protugal, Italy and Ireland will continue down the same path unless the Euro drops significantly in value. The beneficiary to their problems is Germany which has seen its position strengthen due in large part to the Mark (their original currency) weakening (in relative terms) when it was converted to Euros as it was now tied to these weaker economies.
As can be seen in the European example above the problem to this is that while one country is the beneficiary of currency depreciation others fall victim to its weakness. Their economies feel the negative effect of a strengthening currency and try to put a stop to their country's currency appreciation. Now what if everyone around the globe has massive debt burdens and they all try to weaken their currency at the same time? This is the situation that we are in today and the result is all out currency war. Everyone is trying to depreciate their currency and someone has to lose. At present the loser is the United States whose currency has been the direct beneficiary of global weakness and this is starting to show up in the United States' anemic GDP growth rate.
Today payrolls were once again weak and once again JP Morgan and the other investment bankers lowered their expected growth rate for the US to 2.0% from 3.0%. I stated earlier this year that I believed that we would grow by 1.5% but even that is looking optimistic at present. The problem is that while a stronger currency is not in and of itself a problem but it needs to be based on strong economic fundamentals. If it is not (as is the current situation in the United States) it will result in slower growth, an increase in the country's debt burden and eventually to an inability to pay (this is the Greek situation). While the UNited States is a long way from this state of affairs, to think that the market will expand from here is to not have grasped the situation.
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