I have spoken to a lot of people over the last few months regarding our Fixed Rate Deposits (http://www.fixedratedeposits.com/) and it is apparent that there is a clear case of poor analysis when it comes to determining the risk of a product. Assessing risk is difficult at best and sometimes almost impossible, but in the main it is relatively easy to compare products and get a clear sense of whether the added return validates the increase in risk.
A risk assessment starts with the least risky asset of all the United States T-Bill. This is a highly liquid note and has the full faith of the United States Treasury behind it. At present that is worth something and as long as the perceived security is there then it holds its place as the least risky of all assets. At present the one month T-Bill is yielding 0.03% or basically nothing.
From this low level rates start to increase with risk. For an indication the 10-year T-Bond is currently yielding 3.18%, so a lot higher return for a lot longer term. As the longer term means a higher probability of not being paid back the risk is higher. Some may argue that there is still no risk as the investment has the full faith backing of the US government, but we have seen just how much of a mess can be created in just a few years, so I would say that there is a higher risk associated with the longer term and this is reflected in the increased rate.
So the higher the risk the higher the return? Not in all cases. There are many cases where the risk is far higher than the return and other cases where the return is far higher than the commensurate risk. The latter investment is what every investor strives to find and what I strive to create. So with the basis of the above two rates from the US Treasury we will now go to the next step of risk analysis - a comparison of four products and our Fixed Rate Deposit.
The first comparison is to a bank Certificate of Deposit. The bank rate for a two year CD is around 1.50%. Compare this to our current two year rate of 4.00% and it would appear that the risk should be a lot higher for the Fixed Rate Deposit. The bank comes with FDIC insurance to $250,000 ($500,000 if you are a couple or a trust) and the backing of the financial institution itself. The Fixed Rate Deposit has the backing of the schools and the funds protecting it. I would argue that the risk profiles are similar as the Fixed Rate Deposits has never had a default in over 8 years while banks are failing left and right and the FDIC is pretty much insolvent. Furthermore I would contend that most banks are insolvent as they are not required to mark the assets on their balance sheets to market. Hence a mortgage that is current but attached to a house that is worth less than the mortgage is considered a performing loan and listed at par. If the mortgage was marked to market it would have to be written down to the value of the property and this would instantly (in my opinion) make most US banks insolvent instantly. The Fixed Rate Deposit investment has the backing of very solvent and highly profitable institutions.
International banks are offering higher rates than those on-shore. Banks in the Philippines and other emerging economies can offer rates of 2.5%. While these banks are US based they are still subject to sovereign risk. So while the investment may be held in dollars, if there is a coup or a nationalization of the the banking system these assets could be lost. Certainly countries such as Australia and New Zealand are considered safe bets, but I would steer away from the South East Asian rim, South America, the Middle East and Africa. Once you strip those away you are back to poor rates of return in developed countries.
Now on to another comparison. I have had money managers mention that they receive higher rates than the rates on the Fixed Rate Deposits. One investment is an exchange traded fund (ETF) with the ticker CEW. CEW is made up of a basket of emerging country currencies. This basket of currencies has provided a return to investors of roughly 5% per year. As it is an ETF there is daily liquidity but you are really dealing with fire here. Remember 1997? Contagion spread throughout the world and emerging country currencies fell like stones. If this ever happens again (and I predict that it will) these investors will all run for the exit at the same time and will drive the value of this ETF through the floor. Is this huge risk worth 1% more? I think not and certainly it is not an investment that I would consider for my safe money.
The final comparison is structured note products that are in vogue at present. These investments yield around 7 to 8% however there are a lot of caveats. First is the underlying collateral of the asset. These notes sell puts against various markets. Typically the puts are sold way out of the money but the product is open to risk. As you now know a put is an option that allows the seller to sell their position in a stock or an index at a preset price. If the market falls below that price then the seller of the put transfers ownership of that index across to the buyer and the buyer is on the hook for the asset at the preset price. Now these options are sold well below the market but should the market collapse the owners of the structured note could get wiped out. Second are the large commissions that are paid to the brokers of the structured notes. No wonder they peddle them so hard and even sell them as "risk-free". This is hardly a risk free investment especially when you consider that the term of the note. These notes typically have a relatively long term hold on them. If you wish to exit there are fees and penalties that will eat up any gains, so the owner of the note has to sit and wait for 6 to 12 months and hope that the market continues higher or risk losing their entire investment. Certainly a much greater risk than anything I have to offer and in my opinion not worth the extra 3%.
These are just four examples of different styled investments. Each has a different risk profile and each has a different rate of return. As an investor you need to carefully analyze the risk of the investment before committing to the investment based on the sales pitch. If after careful analysis you are comfortable with the investment then proceed, but make sure that you compare your proposed investment with other investments to really understand the risk of each and the proposed return and strive to invest in those with the least risk and the greatest return.
Thursday, May 19, 2011
Wednesday, May 11, 2011
A Headline
Yesterday was not a good day for stocks. At the time I began writing this the market was down more than a percent for the day but one headline really caught my attention, "Noted earlier that the Dollar Index was flirting with its 50 ema/sma near midday. The Dollar paused allowing for a midday reprieve in equities but new highs in the Dollar in recent trade has led to fresh session lows for the major indices. If the Dollar Index can't hold above these averages (75.24/75.28) it could relieve some of the downside pressure on stocks."
So what does that mean? The Dollar strengthened causing it to rise up to the 50 day moving average line. This line is merely a summation of the previous 50 days of the index divided by 50. The line represents a technical indicator and something that market technicians watch and use to determine the strength or weakness of the market. In this case the Dollar had been getting pounded and was finally bouncing off its lows. This rise in the Dollar was the cause of the correction in the stock market.
The part that is disturbing is that the headline called for a continued crash in the Dollar in order to support stocks by saying that "if the Dollar Index can't hold above these averages (75.24/75.28) it could relieve some of the downside pressure on stocks." Essentially the stock market rise is a factor of the Dollar weakness. Now I do not disagree with this statement in the least, in fact I agree that the weak Dollar caused by the Federal Reserve policies and money printing has benefited the stock market. If and when the money printing stops the market will crater. The sad part to the article is that market participants filled with greed and fear are hoping that this line in the sand (the 50 day moving average) holds and pushes the Dollar down again so that they can temporarily benefit from a continued rise in the price of their stocks.
This is about as short sighted as I have ever witnessed and highlights the fickleness of human nature. We are wired to win regardless of the consequences. Small short-term victories with serious long-term consequences are more desirable than short-term pain with a long-term outcome that is very favorable. This is highlighted by this headline. Let the Dollar burn so that we can make a few more bucks! The long-term consequences of this strategy are dire.
Inflation is already here and is starting to feed into even the Federal Reserve's measure of inflation the core inflation rate which strips out the increase in the price of food and energy. A continued decline in the Dollar will continue to feed the inflation level and this will result in pain at the household level. Already spending on retail items is falling as consumers cut spending on discretionary items in order to pay for groceries and gasoline. Driving the Dollar lower will raise these prices even more and will cut consumer spending further.
It is impossible to have a recovery in housing until the consumer can save, get out of debt and get a loan. They need jobs and a low rate of inflation to be able to acquire these assets and the current policies are making it all but impossible. The consumer is madly trying to pay off excess debt, save, get a job, find financing and earn enough money to keep up with the rise in prices. All in all the short-term vision of propping up the stock market at the expense of everything else is going to end in far more pain than letting the market correct now.
Stop the printing, work on the actual problem of getting people employed by creating a fundamentally strong economy with a strong currency. Earn the trust of the world again by running an austere government with a fiscally responsible and independent reserve bank that looks upon the strength of the Dollar as part of its policy rather than as the scape goat. Change these policies and I believe that we can once again have a strong economy with long-term prosperity. Implementing this would come at the cost of severe pain in the stock market as the security blanket of money printing has to be removed however, right now we have the ability to remove it ourselves in a controlled manner. If we continue the current policies at some point in the not too distant future the market will loose its footing and will crater on its own in an uncontrolled manner creating far more havoc than what we have had to deal with up to now.
As it is almost guaranteed that there will not be a change in these policies until the inevitable happens, protect your investments with put option or sell your winners but whatever you do add some level of caution to your investments. For those of you with cash looking for great rates of return with minimal risk give me a call or review our website on www.fixedratedeposits.com.
So what does that mean? The Dollar strengthened causing it to rise up to the 50 day moving average line. This line is merely a summation of the previous 50 days of the index divided by 50. The line represents a technical indicator and something that market technicians watch and use to determine the strength or weakness of the market. In this case the Dollar had been getting pounded and was finally bouncing off its lows. This rise in the Dollar was the cause of the correction in the stock market.
The part that is disturbing is that the headline called for a continued crash in the Dollar in order to support stocks by saying that "if the Dollar Index can't hold above these averages (75.24/75.28) it could relieve some of the downside pressure on stocks." Essentially the stock market rise is a factor of the Dollar weakness. Now I do not disagree with this statement in the least, in fact I agree that the weak Dollar caused by the Federal Reserve policies and money printing has benefited the stock market. If and when the money printing stops the market will crater. The sad part to the article is that market participants filled with greed and fear are hoping that this line in the sand (the 50 day moving average) holds and pushes the Dollar down again so that they can temporarily benefit from a continued rise in the price of their stocks.
This is about as short sighted as I have ever witnessed and highlights the fickleness of human nature. We are wired to win regardless of the consequences. Small short-term victories with serious long-term consequences are more desirable than short-term pain with a long-term outcome that is very favorable. This is highlighted by this headline. Let the Dollar burn so that we can make a few more bucks! The long-term consequences of this strategy are dire.
Inflation is already here and is starting to feed into even the Federal Reserve's measure of inflation the core inflation rate which strips out the increase in the price of food and energy. A continued decline in the Dollar will continue to feed the inflation level and this will result in pain at the household level. Already spending on retail items is falling as consumers cut spending on discretionary items in order to pay for groceries and gasoline. Driving the Dollar lower will raise these prices even more and will cut consumer spending further.
It is impossible to have a recovery in housing until the consumer can save, get out of debt and get a loan. They need jobs and a low rate of inflation to be able to acquire these assets and the current policies are making it all but impossible. The consumer is madly trying to pay off excess debt, save, get a job, find financing and earn enough money to keep up with the rise in prices. All in all the short-term vision of propping up the stock market at the expense of everything else is going to end in far more pain than letting the market correct now.
Stop the printing, work on the actual problem of getting people employed by creating a fundamentally strong economy with a strong currency. Earn the trust of the world again by running an austere government with a fiscally responsible and independent reserve bank that looks upon the strength of the Dollar as part of its policy rather than as the scape goat. Change these policies and I believe that we can once again have a strong economy with long-term prosperity. Implementing this would come at the cost of severe pain in the stock market as the security blanket of money printing has to be removed however, right now we have the ability to remove it ourselves in a controlled manner. If we continue the current policies at some point in the not too distant future the market will loose its footing and will crater on its own in an uncontrolled manner creating far more havoc than what we have had to deal with up to now.
As it is almost guaranteed that there will not be a change in these policies until the inevitable happens, protect your investments with put option or sell your winners but whatever you do add some level of caution to your investments. For those of you with cash looking for great rates of return with minimal risk give me a call or review our website on www.fixedratedeposits.com.
Monday, May 2, 2011
Sell in May and Go Away
The old trader's adage of sell in May and go away looks like it will be a good axiom to follow this month. Although the market continues to spiral ever higher there are some serious headwinds and these are going to have to be dealt with during the lowest trading volume months of the year.
Typically when summer arrives trading volumes on the major exchanges diminishes. Traders tend to take holidays and relax more and overall trading volume becomes lighter and volatility picks up. Stocks can gyrate madly about with little or no reason other than there is little volume in the market or the stock. This is a dangerous time to trade as moves in any direction can be magnified hence the axiom to go away and wait for a more "normal" market to return later in the year.
For those of you with substantial gains in your portfolio thus far this year I would definitely take some profit and even think about locking down the positions with put options or covered call contracts. My reasons are many but following I will delve into just a couple.
One last thing to think about when you are planning your next investment - how much longer will the rest of the world support these levels of debt?
Typically when summer arrives trading volumes on the major exchanges diminishes. Traders tend to take holidays and relax more and overall trading volume becomes lighter and volatility picks up. Stocks can gyrate madly about with little or no reason other than there is little volume in the market or the stock. This is a dangerous time to trade as moves in any direction can be magnified hence the axiom to go away and wait for a more "normal" market to return later in the year.
For those of you with substantial gains in your portfolio thus far this year I would definitely take some profit and even think about locking down the positions with put options or covered call contracts. My reasons are many but following I will delve into just a couple.
- Banking Index (BKX) is showing signs of rolling over. When the banks start to trend down that is normally an early signal that there are problems in the overall market. On a more granular level it is often said that as goes Goldman Sachs so goes the market and a review of the GS chart shows that the market could be in trouble.
- Global growth is slowing. Two of the metrics that I look to for a clue as to the strength of the global markets are copper and the Baltic freight rates. Copper is a base material that is used throughout the world. As copper prices are determined by demand and supply, a weak copper price shows weak demand. Weak demand points to slower economic growth on a macro-economic basis. For a graphical view of this click on the following link to see the current monthly futures chart http://www.danielstrading.com/resources/quotes-and-charts/quotes.php?page=chart&sym=HGK11
- Tied to this indicator is the demand for shipping as indicated by the Baltic Freight Rates. This shows the level of demand for dry bulk shippers around the globe. These boats transport the raw materials needed to keep economies going and so a lower Baltic Freight Rate points to weaker demand for all raw materials. For a clear view of how this rate has performed click on the following link but needless to say it is not looking very promising. http://investmenttools.com/futures/bdi_baltic_dry_index.htm
- Finally the Federal Reserve has stated that they will end their open market purchases on time and will not extend their purchases for the time being. How long they actually stop is anyone's guess, but without the support of the Federal Reserve I would think that the market rolls over. A lot of people seem to already be buying treasuries expecting some sort of market draw down in the near future. The support for treasuries seems to be stronger than what the Federal Reserve can provide on their own. A look at the chart of the ten year T-Bill shows the support for treasuries over the last few weeks http://www.danielstrading.com/resources/quotes-and-charts/quotes.php?page=chart&sym=ZNM11
One last thing to think about when you are planning your next investment - how much longer will the rest of the world support these levels of debt?
Monday, April 25, 2011
Gold - Where From Here?
Gold broke to all time highs this week and along with silver look firmly entrenched in a secular bull market. The gold bugs see gold at $2,000 or more an ounce and the gold haters see it as another bubble and one that will burst soon. So who will win? It is my humble opinion that both are going to be right, however to remain short gold right now is suicide.
A look at what drives gold prices is in order. Over the years gold has been known as a hedge against inflation and dollar weakness (as you have seen in previous blogs these two go hand in hand) and as an indication of fear. Fear both for markets around the world collapsing and fear of change. Certainly all of these factors are at play in the current market environment and so the gold bugs expect gold to continue to press to new highs for the foreseeable future.
The bear argument is that you cannot eat gold, you cannot use gold for anything other than as an ornament or as a piece of jewelry and so gold in essence is a useless store of wealth. People dig it out of the ground, collect it and let the dust settle on it but in effect there is no value to it other than that perceived by the market. As the market is fickle it is just a matter of time until the metal falls precipitously taking with it another set of gold bug dreams.
Certainly ever since man discovered the precious metal centuries ago, there has been a fascination with the metal that surpasses any true logic. However that fascination has not ebbed in hundreds of years and I do not foresee any change to this attitude any time soon. Gold is held widely and the central banks of the world continue to stockpile the metal. The simple laws of supply and demand mean that the price should continue to appreciate for the near term. Added to this is the fact that while gold has moved to all time highs there has been little fanfare regarding this price. Previous bubbles have typically been met with much press while this gold rise garners little attention.
I still do not see the crazy hysteria associated with a bubble. Typically there is the end game where everyone talks about gold, buys gold and the price rockets into orbit climbing to new highs on increasing volume daily. This is not happening so for now I believe that the price of gold and silver will continue higher. Furthermore as the dollar continues to weaken there will be continued demand from central banks to hedge against the move and increasingly they are turning to gold. As such the fundamentals that drive gold higher are in place and I expect those to remain intact for at least the next six to twelve months.
That said, once gold mania is rife it will then be time to exit any gold positions and look for a way to short the commodity. One thing I will warn is that bubbles can take prices to levels that no-one would ever have believed. This is a dangerous place to be short as many a trader has lost his shirt trying to pick a top. Rather wait patiently on the sidelines until the market is clearly in a downturn before initiating any short positions. Believe me there will be plenty of time to make money betting against gold once the bubble bursts. You do not have to try to time this at all.
So for now I believe that gold will march higher. I see that the price is being based on as solid a foundation for gold as I have ever witnessed and I would expect that to remain intact. Outside of the commodity trade I am skeptical of the market and see no reward to risking your investment dollars so as always if you need a place to park some cash let me know and I will provide you more detail on my fixed rate deposits.
A look at what drives gold prices is in order. Over the years gold has been known as a hedge against inflation and dollar weakness (as you have seen in previous blogs these two go hand in hand) and as an indication of fear. Fear both for markets around the world collapsing and fear of change. Certainly all of these factors are at play in the current market environment and so the gold bugs expect gold to continue to press to new highs for the foreseeable future.
The bear argument is that you cannot eat gold, you cannot use gold for anything other than as an ornament or as a piece of jewelry and so gold in essence is a useless store of wealth. People dig it out of the ground, collect it and let the dust settle on it but in effect there is no value to it other than that perceived by the market. As the market is fickle it is just a matter of time until the metal falls precipitously taking with it another set of gold bug dreams.
Certainly ever since man discovered the precious metal centuries ago, there has been a fascination with the metal that surpasses any true logic. However that fascination has not ebbed in hundreds of years and I do not foresee any change to this attitude any time soon. Gold is held widely and the central banks of the world continue to stockpile the metal. The simple laws of supply and demand mean that the price should continue to appreciate for the near term. Added to this is the fact that while gold has moved to all time highs there has been little fanfare regarding this price. Previous bubbles have typically been met with much press while this gold rise garners little attention.
I still do not see the crazy hysteria associated with a bubble. Typically there is the end game where everyone talks about gold, buys gold and the price rockets into orbit climbing to new highs on increasing volume daily. This is not happening so for now I believe that the price of gold and silver will continue higher. Furthermore as the dollar continues to weaken there will be continued demand from central banks to hedge against the move and increasingly they are turning to gold. As such the fundamentals that drive gold higher are in place and I expect those to remain intact for at least the next six to twelve months.
That said, once gold mania is rife it will then be time to exit any gold positions and look for a way to short the commodity. One thing I will warn is that bubbles can take prices to levels that no-one would ever have believed. This is a dangerous place to be short as many a trader has lost his shirt trying to pick a top. Rather wait patiently on the sidelines until the market is clearly in a downturn before initiating any short positions. Believe me there will be plenty of time to make money betting against gold once the bubble bursts. You do not have to try to time this at all.
So for now I believe that gold will march higher. I see that the price is being based on as solid a foundation for gold as I have ever witnessed and I would expect that to remain intact. Outside of the commodity trade I am skeptical of the market and see no reward to risking your investment dollars so as always if you need a place to park some cash let me know and I will provide you more detail on my fixed rate deposits.
Friday, April 22, 2011
Employment Reports
The Current Employment Statistics (CES) survey, conducted by the Bureau of Labor Statistics (BLS), is a monthly survey of more than 400,000 business establishments. The CES program provides estimates on employment, hours, and earnings by industry detail for the Nation, States, and metropolitan areas. The CES is widely considered one of the most timely and accurate economic indicators published by the Federal Government. In fact this is one of the most followed indicators and can provide major swings in the market due to the weight that analysts place on these numbers.
The theory is that a strong employment report points to a growing and strengthening economy. It is hard to argue otherwise as employment forms the basis of the economy and the consumer makes up two thirds of annual expenditure in the United States. So to say that this indicator is not important is erroneous. To rely completely on this number as gospel is also problematic due to the adjustments made by the births and deaths calculations.
The BLS attempts to adjust their numbers to reflect businesses that "die" and businesses that are "born". Their argument has some merit as their monthly surveys lose companies that go out of business that month as they stop reporting. Furthermore they are unable to find the new companies in a timely manner so they make an adjustment for these births and deaths. It is also important to know that companies that report their numbers to the BLS do so voluntarily so there is also a good chance that a company that stops reporting may still be in business. As an example the person who was reporting may have been laid off and no-one has picked up the reigns again. This will have the effect of skewing these adjustments but for this blog we will not dig too deeply into that side of the equation.
So how big are these adjustments and are they seasonal. For March of this year the government reported an upbeat employment report of the creation of 216,000 jobs. This exceeded projections and sent the markets into orbit. Digging deeper though you will see that 54% of those jobs or 117,000 were concocted by the BLS's computer birth/death model. Even more amusing (to me anyway) was that 21,000 new construction jobs were "created" and the next strongest category was the hospitality industry. Amusing because in the same month the Commerce Department reported the largest monthly drop in US new housing starts since 1984, down 20.8% year over year. I guess all the new companies are doing remodels!
These seasonal adjustments from the BLS will result in additional employment "strength" in April and May as the normal BLS adjustment is over 200,000 jobs added during those moths. Based on the stronger than normal adjustment in March we could see even stronger adjustments in these months which would really add fuel to the fire. That is why this week's weaker than expected initial claims numbers are even more surprising. In fact the last two weeks reports are starting to show a trend toward a weakening labor market rather than (as the BLS numbers are indicating) a stronger employment market.
Despite all of this trickery the fact remains that the unemployment rate continues to form a massive drag on the economic recovery even after the trillions of dollars that have been thrown at the problem. So while the market continues to run higher it is beginning to become more and more obvious that the "recovery" is more a function of stimulus money flooding into the market than a recovery on solid economic footing. As such it is a very dangerous market and becoming more so with every rally.
If the market is being held aloft by stimulus money then how much longer can they keep this going? On the other hand to be short this market is crazy as the Federal Reserve seems committed to printing money for the foreseeable future. It is a conundrum and not a market to be trifled with. If they are forced to stop printing the market will roll over but until then the shorts are going to be squeezed and that hurts. Currently we are seeing some weakness in the market as quantitative "guessing" number two runs out of allotted cash in a month. However, if another round of quantitative "guessing" is announced then we could continue to rally. My guess is that the Federal Reserve will initially stop the printing presses to see if their policies have taken hold. Once they see the drop in the stock market they will quickly realize that their policies have been in vain and they will be forced back into printing to salvage the one market that is "proving" that their policies are working.
My advice is to stay on the sidelines and keep your powder dry. Once the Federal Reserve stimulus ends for good and the safety net is removed (and this will happen) the market will fall precipitously. Chasing the market at this junction is not smart investing and will get you into trouble. Rather seek to earn a modest rate of return and remove the downside risk. One such investment is my Fixed Rate Deposits which provides you with a great rate of return and limited risk allowing you to wait for the dust to settle.
The theory is that a strong employment report points to a growing and strengthening economy. It is hard to argue otherwise as employment forms the basis of the economy and the consumer makes up two thirds of annual expenditure in the United States. So to say that this indicator is not important is erroneous. To rely completely on this number as gospel is also problematic due to the adjustments made by the births and deaths calculations.
The BLS attempts to adjust their numbers to reflect businesses that "die" and businesses that are "born". Their argument has some merit as their monthly surveys lose companies that go out of business that month as they stop reporting. Furthermore they are unable to find the new companies in a timely manner so they make an adjustment for these births and deaths. It is also important to know that companies that report their numbers to the BLS do so voluntarily so there is also a good chance that a company that stops reporting may still be in business. As an example the person who was reporting may have been laid off and no-one has picked up the reigns again. This will have the effect of skewing these adjustments but for this blog we will not dig too deeply into that side of the equation.
So how big are these adjustments and are they seasonal. For March of this year the government reported an upbeat employment report of the creation of 216,000 jobs. This exceeded projections and sent the markets into orbit. Digging deeper though you will see that 54% of those jobs or 117,000 were concocted by the BLS's computer birth/death model. Even more amusing (to me anyway) was that 21,000 new construction jobs were "created" and the next strongest category was the hospitality industry. Amusing because in the same month the Commerce Department reported the largest monthly drop in US new housing starts since 1984, down 20.8% year over year. I guess all the new companies are doing remodels!
These seasonal adjustments from the BLS will result in additional employment "strength" in April and May as the normal BLS adjustment is over 200,000 jobs added during those moths. Based on the stronger than normal adjustment in March we could see even stronger adjustments in these months which would really add fuel to the fire. That is why this week's weaker than expected initial claims numbers are even more surprising. In fact the last two weeks reports are starting to show a trend toward a weakening labor market rather than (as the BLS numbers are indicating) a stronger employment market.
Despite all of this trickery the fact remains that the unemployment rate continues to form a massive drag on the economic recovery even after the trillions of dollars that have been thrown at the problem. So while the market continues to run higher it is beginning to become more and more obvious that the "recovery" is more a function of stimulus money flooding into the market than a recovery on solid economic footing. As such it is a very dangerous market and becoming more so with every rally.
If the market is being held aloft by stimulus money then how much longer can they keep this going? On the other hand to be short this market is crazy as the Federal Reserve seems committed to printing money for the foreseeable future. It is a conundrum and not a market to be trifled with. If they are forced to stop printing the market will roll over but until then the shorts are going to be squeezed and that hurts. Currently we are seeing some weakness in the market as quantitative "guessing" number two runs out of allotted cash in a month. However, if another round of quantitative "guessing" is announced then we could continue to rally. My guess is that the Federal Reserve will initially stop the printing presses to see if their policies have taken hold. Once they see the drop in the stock market they will quickly realize that their policies have been in vain and they will be forced back into printing to salvage the one market that is "proving" that their policies are working.
My advice is to stay on the sidelines and keep your powder dry. Once the Federal Reserve stimulus ends for good and the safety net is removed (and this will happen) the market will fall precipitously. Chasing the market at this junction is not smart investing and will get you into trouble. Rather seek to earn a modest rate of return and remove the downside risk. One such investment is my Fixed Rate Deposits which provides you with a great rate of return and limited risk allowing you to wait for the dust to settle.
Tuesday, April 12, 2011
Oil and the Market
Just a few days ago oil reached $112 a barrel. I have been harping on inflation for a while but even I was shocked to see that gasoline prices are above $4.55 a gallon here in San Diego. That hurts. Regardless of this fact the stock market continues to trend higher. This cannot continue. Oil prices feed into everything and every business is affected by this increase to some degree.
On the one side you have oil companies and oil service providers. Certainly they are the major benefactors of these price increases. On the other side you have transportation companies that are trying to pass along the massive increase in their variable expenses to an already strapped consumer. Furthermore you have a consumer that is unable to find a job and now has to pay 30% more to fill their tank up with gas. This will bleed into their budget and squeeze the life out of a recovery.
So when does the market wake up and reflect this in the price of stocks? Certainly these prices do not feed into the market immediately. Oil prices are notoriously volatile and so the market will discount this for a while and certainly it has for the past year. However oil prices did not reach $112 a barrel overnight. This process has been developing for over a year as back then oil prices were less than $50 a barrel and have increased over 100% since.
At present the market remains resilient as market participants continue to buy the rhetoric from the Federal Reserve that inflation is under control. However, with earnings season upon us the proof will be how well companies have handled the increase and what effect is has on both their margins and their outlook. Sustained oil prices above $100 a barrel will squeeze the consumer and companies and will shave at least 1% off GDP growth. This will derail the recovery and will undermine the stock market advance.
So how sustainable are the current oil prices. Remember that when oil prices advanced to $147 a barrel in July 2008, they quickly fell back to below $50 a barrel six months later. That said the damage was done and the market fell with the drop in oil prices. The high in the price of oil interestingly corresponded with the bursting of the bubble in real estate. I believe that there is a correlation between the two to some degree as the massive increase in oil prices took the consumer to the edge and assisted in breaking the bubble (not that it would not have broken anyway).
The point is that back then the housing bubble and the energy price was driven by a massive influx of capital from loose credit. Back then the credit given was to the consumer who used it to finance housing purchases and this fed into a frenzy that drove the trade deficit into a massive negative. Fast forward to today and the consumer is still trying to get out from under the massive blanket of debt. The economy is still weak and in the place of the consumer we have the Federal Reserve who is buying all the junk that the banks and the consumers held. In order to buy this junk it is printing massive amounts of cash and pumping it into a fragile system. The market has reacted by debasing the US dollar and driving the prices of all commodities higher. The main difference between the two stories is that when the ship sinks this time it is not the US consumer that will go down but the credibility of the Federal Reserve and with it the markets of the world.
For an alternative to investing in the market I have created a Fixed Rate Deposit that pays you an excellent rate of return on your investments while providing safety, security and liquidity. Contact me for an overview of our Fixed Rate Deposits offering investors rates of 2.25% to 4.00% on 3-month to 2-year CD-styled investments.
On the one side you have oil companies and oil service providers. Certainly they are the major benefactors of these price increases. On the other side you have transportation companies that are trying to pass along the massive increase in their variable expenses to an already strapped consumer. Furthermore you have a consumer that is unable to find a job and now has to pay 30% more to fill their tank up with gas. This will bleed into their budget and squeeze the life out of a recovery.
So when does the market wake up and reflect this in the price of stocks? Certainly these prices do not feed into the market immediately. Oil prices are notoriously volatile and so the market will discount this for a while and certainly it has for the past year. However oil prices did not reach $112 a barrel overnight. This process has been developing for over a year as back then oil prices were less than $50 a barrel and have increased over 100% since.
At present the market remains resilient as market participants continue to buy the rhetoric from the Federal Reserve that inflation is under control. However, with earnings season upon us the proof will be how well companies have handled the increase and what effect is has on both their margins and their outlook. Sustained oil prices above $100 a barrel will squeeze the consumer and companies and will shave at least 1% off GDP growth. This will derail the recovery and will undermine the stock market advance.
So how sustainable are the current oil prices. Remember that when oil prices advanced to $147 a barrel in July 2008, they quickly fell back to below $50 a barrel six months later. That said the damage was done and the market fell with the drop in oil prices. The high in the price of oil interestingly corresponded with the bursting of the bubble in real estate. I believe that there is a correlation between the two to some degree as the massive increase in oil prices took the consumer to the edge and assisted in breaking the bubble (not that it would not have broken anyway).
The point is that back then the housing bubble and the energy price was driven by a massive influx of capital from loose credit. Back then the credit given was to the consumer who used it to finance housing purchases and this fed into a frenzy that drove the trade deficit into a massive negative. Fast forward to today and the consumer is still trying to get out from under the massive blanket of debt. The economy is still weak and in the place of the consumer we have the Federal Reserve who is buying all the junk that the banks and the consumers held. In order to buy this junk it is printing massive amounts of cash and pumping it into a fragile system. The market has reacted by debasing the US dollar and driving the prices of all commodities higher. The main difference between the two stories is that when the ship sinks this time it is not the US consumer that will go down but the credibility of the Federal Reserve and with it the markets of the world.
For an alternative to investing in the market I have created a Fixed Rate Deposit that pays you an excellent rate of return on your investments while providing safety, security and liquidity. Contact me for an overview of our Fixed Rate Deposits offering investors rates of 2.25% to 4.00% on 3-month to 2-year CD-styled investments.
Tuesday, April 5, 2011
OMG
Apologies to everyone for the title but I just am flabbergasted at the latest minutes just recently released from the Federal Reserve's last meeting. These were just released today and really sum up the level of incompetency at the Federal Reserve. I quote from their minutes: "With longer-term inflation expectations remaining stable and measures of underlying inflation subdued, members anticipated that recent increases in the prices of energy and other commodities would result in only a transitory increase in headline inflation."
TRANSITORY!! Obviously the buffoons at the Federal Reserve do not drive to work or eat. Maybe their food is paid for by the treasury who continues to spend our tax dollars on whatever it pleases with little or no regard for the economic consequences. For those of you who have followed my blog you will know that I believe that inflation is here and it is here to stay until such time as we stop felling trees to print more dollars.
Oil is now well above $100 a barrel and was recently quoted at $108. Gold has broken to multi-year highs and silver is at multi-decade highs approaching $40 an ounce. It was only a year ago that oil was below $50 a barrel and gold was below $1,000 an ounce. Furthermore the grains are spiralling into uncharted territory as corn, wheat and soybeans are all trading near their highs. Ask any mother at the grocery store and you will be told in no uncertain terms that the price of food is out of control. This is not a transitory problem but a real problem that will result in much pain to the consumer.
This pain will undermine any form of growth and to me the best option that we have at present is stagflation. The worst option and, in my opinion the most likely scenario, is that we will enter another recession. Could this turn into a depression? I believe that there is more than a small probability of this occurring. Keep your powder dry as the impending outfall will occur in the coming years. How can it not with such great leaders at the helm? For those of you into short term trading there is more than a small probability that the market will rally as liquidity is increased (courtesy of the Federal Reserve) and yields on short term treasuries come under pressure.
For those of you willing to stay in cash the options are limited. Fortunately I have created a short term investment that blows the yields at the treasuries and the banks away. For more information regarding this product let me know and I will be happy to help you earn some much needed return on your cash balances while limiting your exposure to the risks of a market based on false fundamentals.
TRANSITORY!! Obviously the buffoons at the Federal Reserve do not drive to work or eat. Maybe their food is paid for by the treasury who continues to spend our tax dollars on whatever it pleases with little or no regard for the economic consequences. For those of you who have followed my blog you will know that I believe that inflation is here and it is here to stay until such time as we stop felling trees to print more dollars.
Oil is now well above $100 a barrel and was recently quoted at $108. Gold has broken to multi-year highs and silver is at multi-decade highs approaching $40 an ounce. It was only a year ago that oil was below $50 a barrel and gold was below $1,000 an ounce. Furthermore the grains are spiralling into uncharted territory as corn, wheat and soybeans are all trading near their highs. Ask any mother at the grocery store and you will be told in no uncertain terms that the price of food is out of control. This is not a transitory problem but a real problem that will result in much pain to the consumer.
This pain will undermine any form of growth and to me the best option that we have at present is stagflation. The worst option and, in my opinion the most likely scenario, is that we will enter another recession. Could this turn into a depression? I believe that there is more than a small probability of this occurring. Keep your powder dry as the impending outfall will occur in the coming years. How can it not with such great leaders at the helm? For those of you into short term trading there is more than a small probability that the market will rally as liquidity is increased (courtesy of the Federal Reserve) and yields on short term treasuries come under pressure.
For those of you willing to stay in cash the options are limited. Fortunately I have created a short term investment that blows the yields at the treasuries and the banks away. For more information regarding this product let me know and I will be happy to help you earn some much needed return on your cash balances while limiting your exposure to the risks of a market based on false fundamentals.
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