Around 8 am, with gold near flat and silver down 50 cents (silver has been under-performing the last few days), I took my eye off for the market thinking that we were headed for a rather quiet day. then, in the background i heard "did silver just rally 50 cents?". I figured the question-asker had probably misread the board, but he hadn't. With silver trading flat and gold now up 13 dollars, it was the beginning of our first major buying day in a while. As I walked off the floor to my office I saw the headline that there was a coordinated global effort to help extend swap lines to European banks who have seen dollar liquidity dry up. In essence, the amount these struggling Euro banks would have to pay is now less to borrow dollars to help fund their operations. Naturally the markets reacted positively to such news (and continued to move higher, closing near the highs) as it helps to provide a lifeline to suffering banks. But why did it happen today?
Some rumors spread that perhaps there was a European bank that was on the brink of collapse. If such a collapse had really been imminent, shouldn't this temporary band-aid be viewed as a bad reminder of our situation? A few things to keep in mind before getting too excited.
1) This helps the banks. It doesn't help the Euro sovereign nations. They are of course connected, but countries' debt problems remain just the same.
2) Central Bankers approved this concept. Ben and the boys are probably a fair bit more well similarly aligned than say Maxine Waters (God help us all if she heads the Financial Serves Committee) and fellow congresspeople. Thus, this swift action, while encouraging, did not require legislative approval. Don't forget what happened the day America's congress convened to pass (and didn't) TARP the first time around (Dow -777).
3) As Dennis Gartman pointed out on CNBC's Fast Money, the Euro rally was not what it might have appeared. Euro/Dollar went higher, but the Euro was weaker against all other currencies.
The S&Ps rallied to nearly 1250, the level at which we would be flat on the year. I have posited before that a rally into the positive could cause a massive influx of buying by hedge funds who are down on the year looking to chase returns before redemption period comes out. It is a lot worse to say you lost money in an up year, than to say you lost money in a year in which the markets sold off. While it was overshadowed, all US data today was extremely encouraging. Still, I would like to see us hold above that level (1250 S&P) before I became convinced that this was a real bull market. If you believe like I do, that the swap arrangement was due to an impending bank collapse, then bare in mind just how quickly things can turn sour.
Wednesday, November 30, 2011
Tuesday, November 29, 2011
Dec-Feb futures spread blow out
Tomorrow is first notice day for gold december futures. For those less familiar, first notice day is when those who are long futures contract for the expiring month become eligible to take delivery. Most traders will spread out if they are long December futures, by selling the December they are long and buying some further out month. February is the new active contract, so most spreads done are Dec-Feb. Around noon today I looked at the Dec-Feb futures spread and saw that it was 4.90 bid at 5.00. This is well wider than I had ever seen, so I had to check with one of our traders to see if I was looking at the right thing. His response? "Wow, yea you are, I've never seen it this wide". An hour later, it was as wide as 6.5 (it may have gone a little wider but that is as wide as I saw). I wasn't really sure what it meant, just that the few seasoned traders who were offsite that I mentioned the spread to responded with an exclamatory "WHAT?". So what does this mean?
My friend Howie, who has been on the floor for some time gave me a pretty interesting explanation. I will do my best to paraphrase what he said.
For simplicity's sake lets take the spread at 6 dollars. That is a 2 month spread. So, if you were to extrapolate that to a year, you are paying an annual 36 dollars. Gold trades at approximately 1700 dollars currently. So take the 36 dollars you'd be paying, and divide it by 1700. You get approximately 2.1%. The U.S. ten year yields less than 2%. So, subtract out storage/insurance costs and you'd effectively be getting the same yield by selling the spread (buying December and selling February futures), and taking delivery, over only a two month period.
Howie's conclusion? There is a real drought of liquidity. Traditionally, anytime the spread got this out of whack the bank would just step in and do the trade mentioned above.... especially if you factor in where interest rates are. Why aren't they stepping in? Tough to know. Perhaps the banks are trying to keep as much cash on hand as possible given the macro backdrop. In any event, such action is peculiar, and is worth noting, and paying attention to when February futures expire in two months.
My friend Howie, who has been on the floor for some time gave me a pretty interesting explanation. I will do my best to paraphrase what he said.
For simplicity's sake lets take the spread at 6 dollars. That is a 2 month spread. So, if you were to extrapolate that to a year, you are paying an annual 36 dollars. Gold trades at approximately 1700 dollars currently. So take the 36 dollars you'd be paying, and divide it by 1700. You get approximately 2.1%. The U.S. ten year yields less than 2%. So, subtract out storage/insurance costs and you'd effectively be getting the same yield by selling the spread (buying December and selling February futures), and taking delivery, over only a two month period.
Howie's conclusion? There is a real drought of liquidity. Traditionally, anytime the spread got this out of whack the bank would just step in and do the trade mentioned above.... especially if you factor in where interest rates are. Why aren't they stepping in? Tough to know. Perhaps the banks are trying to keep as much cash on hand as possible given the macro backdrop. In any event, such action is peculiar, and is worth noting, and paying attention to when February futures expire in two months.
Wednesday, November 23, 2011
Happy Thanksgiving
I was told by my mom that she has only one request for the thanksgiving dinner table; "don't talk about Occupy Wall Street". Oh but it will be so hard. As I sat down to write, I looked up at my muted TV to see the CNBC headline "Occupy Wall Street Protests cost cities 13 million dollars"; how ironic. I would love to say that I've matured to the point where I'll manage to withhold commenting, but if someone else initiates, I'll have no choice but to participate in the open dialogue.
The biggest news of the morning, and unquestionably the reason for the sell off today was a very pour German bond auction. While the German Bunds have been the safest in the EU, today's auction indicated the markets' sense that Germany is still an E.U. nation with a risk profile that makes petty yields unattractive to investors.Tack on to that the first Chinese PMI (industrial measure) contraction for the first time since 2009, you have a pretty ugly picture. And, JP Morgan came out saying that they are underweight the commodities space.
I can't say that the underweight from JPM doesn't make sense. If Chinese industrial growth is too slow, then it will curtail the demand for commodities. However, I cannot speak to the outlook for China, as even if I were well versed in the economy, who really knows what is real and what is government fabricated over there. The Bund auction fiasco is actually also bearish for commodities in dollar terms, because the dollar becomes even more of a safe haven play. Eur/USD had held near the 1.35 level, but as I write is trading 1.3335 (front month contract).
One thing i have heard repeatedly over the last few days is the concern traders have about the fact that the US markets are closed tomorrow for Thanksgiving when Europe is open. It shows just how Euro-driven the world is right now when we see Americans nervous about being unable to get out of positions because "Europe is open". The Atlantic truly is starting to seem more like a small pond.
I don't think that people will have to much to fear in the way of news jolting markets tomorrow. We have sold off a great deal since I began getting bearish in my last two posts. I continue to think negatively, as I believe that encouraging political action will only take place following enough pain to force politicians' hands. As such, we dip before we rise. However, This move has gotten about 60 points down on the S&P from the 1225 level (where I started getting bearish). markets are currently off their lows, and Friday will likely be a low volume day. Of course, you never want to be short a quiet market. The greatest reason I am not panicked about tomorrow is just how much bad news came out today. The market absorbed the bad headlines rather well today, and more headlines such as bad German auctions and poor industrial production in China, will be tough to top.
A Happy Thanksgiving to you and yours
Ben
Monday, November 21, 2011
Just ask Alexis de Tocqueville
Today was special in that it appears American, not European news may have had a strong hand in the day's sell off. America's "super-committee", a bipartisan group of congressmen and women charged with coming up with a way to reduce 1.5 trillion of our deficit in a decade, has made it clear we'll just have to wait. The following statement was released today by members of the committee.
"We have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee's deadline"
While S&P has since said that it won't view this inaction as cause for another rating downgrade of the United States, the fear was certainly there in the markets. This should really not surprise us of course. Even the most super-duper of our pathetic congress will not negotiate and make concessions, because it is indeed their political careers that matters most to them. In an election year, it is best to find ways to blame the other side for their role in making no progress, and use it to establish campaign platforms. I just finished watching an Obama press conference, and true to form, he did just that.
Alexis de Tocqueville, the 19th Century French writer who wrote about American democracy would likely have a few comments to make about this congressional situation were he to be around today. While he has been dead for over 150 years, some of his comments about American politics (and bare in mind Tocqueville was a great admirer of America) seem like they could be made today.
Here are a few quotes I found from goodreads.com, that I find enjoyable:
______________________________________________________________________
"I do not know if the people of the United States would vote for
superior men if they ran for office, but there can be no doubt that
such men do not run."
“There are many men of principle in both parties in America, but there is no party of principle.”
“The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.”
____________________________________________________________________
I have chosen to write about this today for a few reasons. First, I find it fascinating that through all the time and progression of our country, such comments could still be so relevant. Tocqueville wrote when slavery was still legal in the U.S., just to give a sense of how young of a nation the U.S. was when he wrote. Secondly, I find the fact that his quotes are so pertinent to be an indication of how hard it will be for us to break our habits. We would all love to believe that our congress will find ways to make cuts, and that we will find a way out of all of the challenges we face. And one day we will, but it won't come without the proper amount of pain that causes us to break the ways that have gotten us to this point. Our deficit issues are borne largely out of the relationship self interested voters and self interested politicians have for short term gratification. As bills come due, eventually the pain of reality will set in. If Alexis de Tocqueville could make observations about our government that ring so true today, I think it is fair to say that old habits won't be dying easy.
When I wrote my last post, I said that we would likely see a near term sell off because of Fitch's negative commentary on Eurozone debt. We have sold off, and now, near 1185 on the S&P sit in the middle of the range high to low from the years highs to lows. Short term bounce? Perhaps, perhaps not. But the outlook has to remain negative because of what we are seeing in governments across the globe. There is an inability to act in concert to try to take on the problems of the world. The failed experiment that is the European Union of course suffers from individual nations' economic/cultural interests differing while sharing a single currency that cannot be all things to all participants. America has no such issue (there are differences between states, but they are not nearly the differences Eurozone countries have) and still it seems cannot act swiftly to help stem the crisis before us. Like in 2008, we will find that until we are pushed to the brink and forced (a Lehman like event, even if it takes on a different form) to deal with our debt woes, we will go on voting in the same duds we call our leaders, and they will continue to make unrealistic and unrealizable promises.
Does it strike you as funny that on a day like this where the US news is so negative that investors flee to buying US treasuries? If that isn't an indication of how cockamamie things are I am not sure what is. But this is not an indication of market insanity, or irrationality. Comparably, U.S. treasuries probably do deserve to be a safe haven. It is rather a reminder of how dire our situation is, and that soon, barring a miracle, there will not be any place to hide. The founding fathers, contrary to widespread public thinking, purposely chose to create the system of American government to make progress hard to come by. This, understandably, was the safeguard against tyranny. Now however, we are in a tough spot, because we need more progress from our government, but history tells us that the pain will come before the jubilation.
The counter-argument to this pain before gain scenario I have laid out is that of stimulus. What if tomorrow the US and Europe came out with stimulus plans to boost all economies. Even if they were to be unsustainable, the markets, particularly the equity markets should have a field day. That is the risk of being in cash (and hence missing the move up). As the New York Lotto slogan used to go; "Hey, you never know". But bear in mind, that with national debt reduction requirements looming and the inability to reinvigorate the economy through lowering interest rates (we're past that) the number of tools that we have for stimulus are ever-more limited. What policy-maker, no matter how short sighted would use up the tools they have at their disposal now and not save them for a slightly rainier day? Perhaps Tim Geithner, but thankfully, no one listens to him anyway.
I am more than happy to miss an end of year rally of 10% to the upside to protect what money i have as all of the charts begin to break down. Lots can change, and perhaps with the prospect of sideline money coming to the table come January 1st will derail this thesis assuming we are able to coast for a while. For now however, it is far more prudent to stay short, or just out. As for gold? Everything I can see going on as far as money printing in Europe should be bullish for gold. If the dollar continues to be a safe-haven however, its purchasing power makes gold less attractive. I think the time will come when gold makes new highs into the 2000s and perhaps beyond. For now however, it is far too correlated with the stock market, and I would not become bullish unless my outlook for stocks is wrong, or we begin to see divergence between the way gold and stocks trade.
"We have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee's deadline"
While S&P has since said that it won't view this inaction as cause for another rating downgrade of the United States, the fear was certainly there in the markets. This should really not surprise us of course. Even the most super-duper of our pathetic congress will not negotiate and make concessions, because it is indeed their political careers that matters most to them. In an election year, it is best to find ways to blame the other side for their role in making no progress, and use it to establish campaign platforms. I just finished watching an Obama press conference, and true to form, he did just that.
Alexis de Tocqueville, the 19th Century French writer who wrote about American democracy would likely have a few comments to make about this congressional situation were he to be around today. While he has been dead for over 150 years, some of his comments about American politics (and bare in mind Tocqueville was a great admirer of America) seem like they could be made today.
Here are a few quotes I found from goodreads.com, that I find enjoyable:
______________________________________________________________________
"I do not know if the people of the United States would vote for
superior men if they ran for office, but there can be no doubt that
such men do not run."
“There are many men of principle in both parties in America, but there is no party of principle.”
“The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.”
____________________________________________________________________
I have chosen to write about this today for a few reasons. First, I find it fascinating that through all the time and progression of our country, such comments could still be so relevant. Tocqueville wrote when slavery was still legal in the U.S., just to give a sense of how young of a nation the U.S. was when he wrote. Secondly, I find the fact that his quotes are so pertinent to be an indication of how hard it will be for us to break our habits. We would all love to believe that our congress will find ways to make cuts, and that we will find a way out of all of the challenges we face. And one day we will, but it won't come without the proper amount of pain that causes us to break the ways that have gotten us to this point. Our deficit issues are borne largely out of the relationship self interested voters and self interested politicians have for short term gratification. As bills come due, eventually the pain of reality will set in. If Alexis de Tocqueville could make observations about our government that ring so true today, I think it is fair to say that old habits won't be dying easy.
When I wrote my last post, I said that we would likely see a near term sell off because of Fitch's negative commentary on Eurozone debt. We have sold off, and now, near 1185 on the S&P sit in the middle of the range high to low from the years highs to lows. Short term bounce? Perhaps, perhaps not. But the outlook has to remain negative because of what we are seeing in governments across the globe. There is an inability to act in concert to try to take on the problems of the world. The failed experiment that is the European Union of course suffers from individual nations' economic/cultural interests differing while sharing a single currency that cannot be all things to all participants. America has no such issue (there are differences between states, but they are not nearly the differences Eurozone countries have) and still it seems cannot act swiftly to help stem the crisis before us. Like in 2008, we will find that until we are pushed to the brink and forced (a Lehman like event, even if it takes on a different form) to deal with our debt woes, we will go on voting in the same duds we call our leaders, and they will continue to make unrealistic and unrealizable promises.
Does it strike you as funny that on a day like this where the US news is so negative that investors flee to buying US treasuries? If that isn't an indication of how cockamamie things are I am not sure what is. But this is not an indication of market insanity, or irrationality. Comparably, U.S. treasuries probably do deserve to be a safe haven. It is rather a reminder of how dire our situation is, and that soon, barring a miracle, there will not be any place to hide. The founding fathers, contrary to widespread public thinking, purposely chose to create the system of American government to make progress hard to come by. This, understandably, was the safeguard against tyranny. Now however, we are in a tough spot, because we need more progress from our government, but history tells us that the pain will come before the jubilation.
The counter-argument to this pain before gain scenario I have laid out is that of stimulus. What if tomorrow the US and Europe came out with stimulus plans to boost all economies. Even if they were to be unsustainable, the markets, particularly the equity markets should have a field day. That is the risk of being in cash (and hence missing the move up). As the New York Lotto slogan used to go; "Hey, you never know". But bear in mind, that with national debt reduction requirements looming and the inability to reinvigorate the economy through lowering interest rates (we're past that) the number of tools that we have for stimulus are ever-more limited. What policy-maker, no matter how short sighted would use up the tools they have at their disposal now and not save them for a slightly rainier day? Perhaps Tim Geithner, but thankfully, no one listens to him anyway.
I am more than happy to miss an end of year rally of 10% to the upside to protect what money i have as all of the charts begin to break down. Lots can change, and perhaps with the prospect of sideline money coming to the table come January 1st will derail this thesis assuming we are able to coast for a while. For now however, it is far more prudent to stay short, or just out. As for gold? Everything I can see going on as far as money printing in Europe should be bullish for gold. If the dollar continues to be a safe-haven however, its purchasing power makes gold less attractive. I think the time will come when gold makes new highs into the 2000s and perhaps beyond. For now however, it is far too correlated with the stock market, and I would not become bullish unless my outlook for stocks is wrong, or we begin to see divergence between the way gold and stocks trade.
Wednesday, November 16, 2011
Abercrombie and ......
That ugly beast above is the ANF (Abercrombie & Fitch) 10 day chart. Charts like this remind me why i try not to waste brain matter while "experts" make investment recommendations on retailers. Predicting retail sales and consumer trends is no easy business, and this type of chart makes me wonder why I would ever participate in such a hard to predict area when this kind of risk is on the table. I would rather try to focus on what I can know, and how best to put that knowledge to use. For instance, if new information on sovereign debt were to come to light from say, a rating agency, that might pique my interest. Fitch, the rating agency, not the retailer (though I am about as interested in what they have to say as I am in wearing A&F's clothes) can take credit for today's late day sell off. So why doesn't this get me intellectually curious to hear what they have to say? Because they are not saying anything new.
"Fitch's current outlook for the industry is stable, reflecting improved fundamentals at most banks combined with ratings lower than at pre-crisis levels. However, risks of a negative shock are rising and could alter this outlook,"
This causes the market to sell off?! Anyone with a 56k dial-up modem and a morsel of interest knows that the bond yields have done nothing but blow out. Italy 10 year over 7%, and the other peripherals spreads all widening is not news. I even commented to a friend this morning about how well the market seemed to be holding up given the news that was out. The morning note he had sent me had bullet points showing that Unicredit, the Italian bank was looking for ECB funding, followed by talks of growth concerns in Japan, and and the potential inability of Chinese developers to pay off loan interest. While we were lower, given what looked like important NEW news, I thought we held in pretty well. Then all of a sudden Fitch (where were the rating agencies pre- last financial crisis by the way?) warns of contagion if the Eurozone does not get its act together soon. I have to wonder if I started a rating agency, and came out with a statement on how cheaper labor in underdeveloped nations poses a risk to job growth in the United States, if the market would react the same way.
All negativity aside for a moment, it is hard not to pay attention to this news. Not because it is news, because, I repeat, it assuredly it is not. Rather, for some reason the markets seem to care. Maybe it was a convenient excuse to try to stop out some longs; but either way, the market cared. After the US rating was downgraded in August, what happened? We tanked (see August 5th graph), and there was nothing that was news then. It was simply a reiteration of known information by the big bad rating agencies. If human psychology hasn't changed, I see no reason to think this time should be any different. A nice short term dip is likely in the cards.
Monday, November 14, 2011
yaaaaaaaawn
Today would've been a nice day to just not bother opening the markets. There is absolutely no volume, and no news to speak of on this late fall Monday. Over the weekend, Silvio Berlusconi resigned as Italy's Prime Minister, and Mario Monti has been nominated to replace him. Monti is an economist by trade, who serves in the Italian senate. Greece's new PM is Lucas Papademos, whose background at the ECB also makes him a more finance savvy leader than his country had previously. While we go nuts over every headline, this should bring some, however minimal, comfort to the world. At least these countries are putting people in positions of power who have a clue as to how this whole economics thing works. While there will be no pretty way to work through the European debt woes, it is better to have people who realize what is at stake, how we may have gotten here, and perhaps even some ideas of how best to get out. It may seem pathetic, but in a world of economically clueless career politicians (thank you John Huntsman for addressing the Italian debt issue by discussing how bond prices move inversely to yields), it is nice to see some relatively capable minds at the helm.
Former convicted lobbyist Jack Abramoff has been back and about and recently did an interview with CNBC. He has a a new book that he is promoting, and as such a few grains of salt are probably necessary when digesting his words. Nonetheless, in the interview Abramoff discussed how it is perfectly legal for senators to trade stocks based on the closed door political information they have. It is not insider trading in the way we might think, because such knowledge is not privileged knowledge about a public corporation. In other words, there is a difference between knowing Google's earnings, and knowing that there might be an economically stimulative plan forthcoming. Take a moment to think about which information is actually more important in today's market. Of course good earnings drive the market, but stimulative politics could mean even more. We have seen the effect that economic stimulus has on the markets, and to know such information in advance would be an enormous advantage (hard to see how you could lose if you just put on short duration trades). Perhaps there is a hidden positive in all this. If doing something in congress enables congressmen to trade... then maybe it will actually give them an incentive to do something.... but I won't hold my breath.
Former convicted lobbyist Jack Abramoff has been back and about and recently did an interview with CNBC. He has a a new book that he is promoting, and as such a few grains of salt are probably necessary when digesting his words. Nonetheless, in the interview Abramoff discussed how it is perfectly legal for senators to trade stocks based on the closed door political information they have. It is not insider trading in the way we might think, because such knowledge is not privileged knowledge about a public corporation. In other words, there is a difference between knowing Google's earnings, and knowing that there might be an economically stimulative plan forthcoming. Take a moment to think about which information is actually more important in today's market. Of course good earnings drive the market, but stimulative politics could mean even more. We have seen the effect that economic stimulus has on the markets, and to know such information in advance would be an enormous advantage (hard to see how you could lose if you just put on short duration trades). Perhaps there is a hidden positive in all this. If doing something in congress enables congressmen to trade... then maybe it will actually give them an incentive to do something.... but I won't hold my breath.
Thursday, November 10, 2011
I'll cut 3 government agencies....
As I sat at dinner with my dad last night I was disappointed to realize that I had forgotten to record the republican debate on CNBC. I understand that it might seem nerdy to be so entertained by these debates, but honestly, after what happened last night how can you not. I came back to see the already famous Rick Perry blemish where he vowed to eliminate 3 government agencies.... but could only remember two. O well, 66% is passing on most grade scales I am familiar with.
The first instinct we likely all have is "Perry is done"; its over. It seems hard for me to keep a straight face and say otherwise. But let us not forget, that there was a Texas politician who spent 8 years in the White house, with multiple blunders that can compete with the Perry brain freeze. "The legislature's job is to write law. It is the executive branch's job to interpret law". This George W. Bush comment in 2000 puts more doubt in one's mind about his ability to pass government 101 than Perry's blunder might. Perry is not as affable as Bush, and doesn't have the political minds around him or family history that Bush did. Still, to say "he's done" given just how many painful forehead slapping moments we went through with Bush, might be premature.
I made my short term bearish call on gold 2 days ago when we were trading around 1790. As I write, we are 35 dollars lower, and made a low about 20 dollars lower than that during today's session. My technical expert friend told me this afternoon that we needed to hold above 1761 to see upside. Having climbed rather impressively from 1737 to 1763 during the session, we ended up settling 1759.6; right near his number. While letting your shorts run has been successful for the last few days, I would want to cover any shorts going into tomorrow's trading session. It is not that I think we are going higher. In fact I think we probably have some more room to the downside. But I have found that trying to trade on Fridays with expectation of similar market moves from the week is a solid losing formula. Volume tends to be lighter, and it is too easy to get stopped out in what generally becomes a rather range bound market. Flatten out, see how the day plays out, and see what the market tells you as the day goes on.
In a brief moment of speculation, I have to think that some rather large player may have been liquidating the last few days. The post settlement 20 dollar drop from two days ago still does not seem to have any fundamental basis. In today's action, we saw gold collapse violently to the downside, dropping over 50 dollars peak to trough on a day where the equity markets held in positive territory. Lessons to be taken? Whether or not it makes sense, moves like the 20 dollar drop the other day in an otherwise quiet environment have to serve as warning signals. Trying to "be right" about the market is a losing concept in such scenarios. Also, the fact that puts were catching a bid as gold approached new medium term highs (puts were catching a better bid than calls as we approached 1800 for the first time in 2 months) was a tip that it was better to place bets to the downside.
Tuesday, November 8, 2011
Perhaps a quick breather for the Gold Bull
During yesterday's session gold behaved pretty normally given market conditions. On Monday, in typical gold fashion, December (front month) futures made a high of 1799.9. Yesterday (Tuesday) it made a high of 1799.8, only to retrace before eventually breaking through 1800. What was interesting was the end of day action. Volume had been light the whole day, and as settlements came out around 1:45 pm just below 1800 gold started to come off. It has not been uncharacteristic for gold to make moves higher or lower after settlements come out, but at its trough (post settle) gold made a new low on the day near 1779... a near 20 dollar drop. For the kind of volume that had traded, and the relatively contained intraday moves, this was quite surprising to me. It is true that the low volume while reaching a high that we experienced today (we are at the highs since September in gold) is reminiscent of the volume we saw when gold made all time highs before falling off a cliff. This is worth bearing in mind, though I do think it is worth considering that the equity market volume has also been very light as of the last two days. The low volume across markets makes me take the light volume we saw in gold at the top with a grain of salt, when otherwise it might set off sell warning signals.
Still I cannot say that my short term outlook for gold has not turned more bearish. In the middle of the day I was thinking to myself about all of the people who become wrapped up in "what the market is supposed to do" and how their steadfast feelings can only be hurtful at times like this. Then, I caught myself saying the same things post settlement. I called friends seeing if there was any news out that I was unaware of. At the time, it looked like Berlusconi was going to be resigning... I couldn't really see how this would be so bearish for gold. The Euro rallied on that news, meaning weaker dollar, so unlikely that should cause a sell off at all, let alone a 20 dollar sell off. Then I learned that the Chinese 2 and 10 year bond yields had become inverted (generally indicates possible recession ahead). So I thought I had found my reason. But it turns out copper, which has its price tied more to the Chinese economy than either gold or silver was not making new lows as gold was. And the equity markets? They were making new highs on the day.
Today was one of those days where I just have to admit I have not the slightest clue as to what caused this divergence, as very little that I can see in the news or trading action can help me explain it. As such, while I think that the Euro situation is very bullish for gold, I cannot help but take this afternoons price action as a short term bearish signal for gold. As successful traders have often told me, you have to look at what the market is telling you. This is a short term move at this point, and as such it is a short term call. And while the bull in me would love to buy the dip and say it is unwarranted, prudence tells me it is better to be flat to short this market.
Monday, November 7, 2011
Its the bonds stupid.....
Amid the volatile equities markets, and all of the hoopla surrounding whether or not "this time is the real one", it is easy to forget the indicators that stare us right in the face. As Europe's demise has been the main focus of the market's attention, many of us (including hedge funds of late I'm told) have decided to stand on the sideline while allowing the others (and algorithms of course) to wage battle on each other. For those who are not hiding money under the mattress (which I'm convinced yields more than the 6 month CD I have), you might look at the macro picture, and see where equities fit in. A reasonable first question to ask is "do I think things are getting better?". "Yes" would seem to say that being long equities makes sense, and "no" or "I have no clue" would seem to suggest staying away. But for now, the market is telling us the answer is no. All you have to do is look at the sovereign debt spreads in Europe. Through the recent rallies and occasional encouraging news, the bonds in these countries have seen waning demand. In my simple mind, I am willing to accept this as all the information I need to have for the time being that the economic situation in Europe is still incredibly dire.
So how is it that equities can perform in such an environment? Inflation, inflation, inflation. It is true that big Ben Bernanke has continued to say that inflation targets are met, and that prices are not spiraling out of control. There is room for debate about that, but it is rather clear that the policy options of intervening governments leave the door open for inflation. In the US rumors continue to swirl about a potential QE 3. Even if not, zero interest rates are unquestionably here to stay. In Europe, while the EFSF is not supposed to be taking ECB printed funds, Euros are still likely to be printed. And, today we learned that China is injecting 1 trillion RMB into its banks. More liquidity is stimulative and leads to inflation. While China has made moves to keep interest rates high to keep its hot economy in check, injecting liquidity into the banks can be nothing but inflationary. Bottom line, equities benefit from an inflationary environment as bonds suffer decreased real interest rates (the interest you receive in inflation adjusted terms).
Thus it is important to remember to keep an eye on the bond markets, and not assume that rallies in equities are indicative of confidence in the ability of struggling countries to combat their debt woes. If that were truly the belief, you'd see the bonds rally. Of course gold also benefits from inflation, but it is more likely than equities to get a "safety" bid, if panic sets in. As such, while playing the stock market from the long side is one way to take advantage of the likely inflationary environment to come, gold's added safety clause makes it even more attractive.
So how is it that equities can perform in such an environment? Inflation, inflation, inflation. It is true that big Ben Bernanke has continued to say that inflation targets are met, and that prices are not spiraling out of control. There is room for debate about that, but it is rather clear that the policy options of intervening governments leave the door open for inflation. In the US rumors continue to swirl about a potential QE 3. Even if not, zero interest rates are unquestionably here to stay. In Europe, while the EFSF is not supposed to be taking ECB printed funds, Euros are still likely to be printed. And, today we learned that China is injecting 1 trillion RMB into its banks. More liquidity is stimulative and leads to inflation. While China has made moves to keep interest rates high to keep its hot economy in check, injecting liquidity into the banks can be nothing but inflationary. Bottom line, equities benefit from an inflationary environment as bonds suffer decreased real interest rates (the interest you receive in inflation adjusted terms).
Thus it is important to remember to keep an eye on the bond markets, and not assume that rallies in equities are indicative of confidence in the ability of struggling countries to combat their debt woes. If that were truly the belief, you'd see the bonds rally. Of course gold also benefits from inflation, but it is more likely than equities to get a "safety" bid, if panic sets in. As such, while playing the stock market from the long side is one way to take advantage of the likely inflationary environment to come, gold's added safety clause makes it even more attractive.
Friday, November 4, 2011
Everyone Forget the Silly Fiction (EFSF)
It was on October 14th in "Timmy Talks" that I wrote the following.
While Europe has bought itself time, and continues to give more promises of grand plans for which there is no evidence, Geithner provided no reasons to make an onlooker believe that such a plan really exists. Rather, he seemed to indicate how undefined the plan is as it currently stands. Even if we don't have influence over the IMF that we fund, it would seem reasonable to me that the secretary of the treasury might have some concept of what is going on there. Perhaps others feel as uncomfortable as I do when watching Geithner, which makes me wonder if everyone completely missed how disconcerting that interview was.
On that day, I decided to listen to Tim Geithner's monotonous answers, in hopes to find clues about the future in Europe. Today, it seems that that whole interview was nonsense. This morning, Angela Merkel stated that at the G-20 was unable to come to any understanding as to how the IMF would be used to fund the EFSF. Of course this has a tint of political posturing, but think about what this means. As previously mentioned, under German law, the EFSF cannot be funded by ECB money printing. That leaves the IMF, the private sector and China to help. China isn't rushing to help... why would they? If i were China I'd rather wait until desperation time when they will get more in return for providing funding...China isn't out there to make friends. O wait... Euro countries could pool their own money for the bailout...ha! If we don't see any progress on the IMF front, then we may have to see the situation become far more dire before we see any other potential financiers of the EFSF step in.
Enjoy the weekend,
Ben
While Europe has bought itself time, and continues to give more promises of grand plans for which there is no evidence, Geithner provided no reasons to make an onlooker believe that such a plan really exists. Rather, he seemed to indicate how undefined the plan is as it currently stands. Even if we don't have influence over the IMF that we fund, it would seem reasonable to me that the secretary of the treasury might have some concept of what is going on there. Perhaps others feel as uncomfortable as I do when watching Geithner, which makes me wonder if everyone completely missed how disconcerting that interview was.
On that day, I decided to listen to Tim Geithner's monotonous answers, in hopes to find clues about the future in Europe. Today, it seems that that whole interview was nonsense. This morning, Angela Merkel stated that at the G-20 was unable to come to any understanding as to how the IMF would be used to fund the EFSF. Of course this has a tint of political posturing, but think about what this means. As previously mentioned, under German law, the EFSF cannot be funded by ECB money printing. That leaves the IMF, the private sector and China to help. China isn't rushing to help... why would they? If i were China I'd rather wait until desperation time when they will get more in return for providing funding...China isn't out there to make friends. O wait... Euro countries could pool their own money for the bailout...ha! If we don't see any progress on the IMF front, then we may have to see the situation become far more dire before we see any other potential financiers of the EFSF step in.
Enjoy the weekend,
Ben
Wednesday, November 2, 2011
Q.E.stions for Big Ben
The main news on the docket today was an earlier than usual FOMC (Federal Open Market Committee) meeting ahead of a Ben Bernanke speaking appearance. The first headline as always is the what the Fed decides to do with interest rates.... and as usual the answer is nothing; they will keep them near zero. But the Fed announcements still hold meaning, as the language used in the release is scrutinized in search of any indication of future Fed policy decisions. One of the key things investors look for is any sort of tip off on whether or not the Fed intends to do quantitative easing. Quantitative easing(QE) is when the Fed goes out and buys up U.S. treasuries (longer dated, which in turn makes their yields lower). With lower rates, theoretically, it becomes cheaper to finance various purchasing/business activities, thus making Q.E. stimulative for the economy. The purchasing of these securities requires money printing, which is potentially inflationary.
There was no explicit mention that QE would be used, but 'mid 2013' was explicitly used as the earliest time the Fed could see an interest rate environment not marked by extremely low rates (ie they're not raising rates for a long time). A low interest rate environment forces people to put money into riskier assets to get a return, which is stimulative. The real world sad implication of this is that grandma, who retired with enough money to rely on a fixed income, is now forced to take riskier bets to get the same returns she would've pre-near zero interest rates. The Fed continued to remain tempered on their description of the economy's progress, which some view as an indication that they have not taken using QE as a tool off the table. Also, for the first time, a Fed governor dissented with the Fed decision from the Dovish side (saying that the Fed should be more accommodating in its monetary policy). In the past there have been dissents saying that the Fed needed to raise interest rates, but this dovish dissent is an encouraging sign that QE may still be used in the case of a stalling economy.
The Fed reiterated its commitment to reinvest the interest from the asset backed securities it holds. In the Q&A Big Ben stated that inevitably the goal is to have the fed balance sheet with treasury securities only (not asset backed securities). Currently however the Fed invests in these asset backed securities (more specifically mortgage backed securities) because it helps aid the struggling housing market. The focus on the housing market makes sense, because it is the driver of so many jobs. Think about all of the jobs created from home building. Building a house requires material companies to obtain the necessary materials, construction workers to build, architects to design, interior designers to design, banks to provide financing, and inevitably workers to help with the upkeep (I'm sure I'm missing plenty of other jobs). The problem is that the housing market was a bubble. Is it prudent to try to "restore" the housing market, when you would simply be restoring a bubble? We are trying to grow our way out of the situation, and hence it is necessary to have the job- producing housing market healthy. At the same time, it is critical to realize the catch 22 that we face with respect to balancing overextending the housing market, and keeping it churning to boost employment. Tough job Mr. Bernanke, I certainly don't envy the task in front of you.
Europe:
Yesterday, the Greek Prime Minister reneged on his parliament's vote for an austerity package that would appease and guarantee temporary funding from the EU. Stating that the vote would be put to a public referendum (let the people decide). I had suggested that the only explanation I could think of, was that he was using this as a temporary appeasement to the Greek people so that they would not squash him in this Friday's vote of confidence. Since the referendum wouldn't be for months, he could gain the vote of confidence, and then renege on his people the same way he did on the EU. But Ah! The EU did something intelligent! Dow Jones just reported that the EU told Greece that they would not receive any funding until the referendum vote took place. So, if my suggestion was indeed the prime minister's intent, he will now have to win confidence without money guaranteed....no easy task. I won't even venture a guess on how or when this will come to a head, but it is an extremely critical point, and one that I think is not being talked about nearly enough (today at least). If Greece were to overturn its parliament-passed (easily passed by the way) austerity package, then default would be back on the table. Were that to be the case, mama Merkel's crafty move to ensure the Greek Credit Default Swaps weren't triggered would be in jeopardy. That scenario would be nothing short of explosive.
There was no explicit mention that QE would be used, but 'mid 2013' was explicitly used as the earliest time the Fed could see an interest rate environment not marked by extremely low rates (ie they're not raising rates for a long time). A low interest rate environment forces people to put money into riskier assets to get a return, which is stimulative. The real world sad implication of this is that grandma, who retired with enough money to rely on a fixed income, is now forced to take riskier bets to get the same returns she would've pre-near zero interest rates. The Fed continued to remain tempered on their description of the economy's progress, which some view as an indication that they have not taken using QE as a tool off the table. Also, for the first time, a Fed governor dissented with the Fed decision from the Dovish side (saying that the Fed should be more accommodating in its monetary policy). In the past there have been dissents saying that the Fed needed to raise interest rates, but this dovish dissent is an encouraging sign that QE may still be used in the case of a stalling economy.
The Fed reiterated its commitment to reinvest the interest from the asset backed securities it holds. In the Q&A Big Ben stated that inevitably the goal is to have the fed balance sheet with treasury securities only (not asset backed securities). Currently however the Fed invests in these asset backed securities (more specifically mortgage backed securities) because it helps aid the struggling housing market. The focus on the housing market makes sense, because it is the driver of so many jobs. Think about all of the jobs created from home building. Building a house requires material companies to obtain the necessary materials, construction workers to build, architects to design, interior designers to design, banks to provide financing, and inevitably workers to help with the upkeep (I'm sure I'm missing plenty of other jobs). The problem is that the housing market was a bubble. Is it prudent to try to "restore" the housing market, when you would simply be restoring a bubble? We are trying to grow our way out of the situation, and hence it is necessary to have the job- producing housing market healthy. At the same time, it is critical to realize the catch 22 that we face with respect to balancing overextending the housing market, and keeping it churning to boost employment. Tough job Mr. Bernanke, I certainly don't envy the task in front of you.
Europe:
Yesterday, the Greek Prime Minister reneged on his parliament's vote for an austerity package that would appease and guarantee temporary funding from the EU. Stating that the vote would be put to a public referendum (let the people decide). I had suggested that the only explanation I could think of, was that he was using this as a temporary appeasement to the Greek people so that they would not squash him in this Friday's vote of confidence. Since the referendum wouldn't be for months, he could gain the vote of confidence, and then renege on his people the same way he did on the EU. But Ah! The EU did something intelligent! Dow Jones just reported that the EU told Greece that they would not receive any funding until the referendum vote took place. So, if my suggestion was indeed the prime minister's intent, he will now have to win confidence without money guaranteed....no easy task. I won't even venture a guess on how or when this will come to a head, but it is an extremely critical point, and one that I think is not being talked about nearly enough (today at least). If Greece were to overturn its parliament-passed (easily passed by the way) austerity package, then default would be back on the table. Were that to be the case, mama Merkel's crafty move to ensure the Greek Credit Default Swaps weren't triggered would be in jeopardy. That scenario would be nothing short of explosive.
Tuesday, November 1, 2011
The MF'ing global scenario
As I walked on to the floor of the COMEX this morning I saw a table with two exchange employees with a list. I asked what they were doing. It turns out they were checking if members cleared exclusively with MF Global, and if they did, then they would be denied entry to the floor. As I rode the elevator back to write this piece on trader got on, clearly a bit frazzled and unable to remember what floor he was going to. after two guys who knew him chided him a bit, he took a deep breath out saying "long day for me boys". "I can only imagine" one of the two responded. The frazzled trader then glibly said "I wish you could".
I doubt too many people sit around feeling bad for commodity traders, but take a moment if you will to consider what a small independent trader is experiencing as a result of this whole situation. First, for those unaware, here are the basics of the MF Global situation.
Last week they reported dismal earnings, which started to raise questions about the bets they had on. It turns out that MF made big bets gone bad in Europe, so much so that it caused them to file for Chapter 11 bankruptcy. MF Global's CEO is Jon Corzine, former head of Goldman Sachs, as well as, more recently, former governor of New Jersey. Following the bankruptcy filing, the CME group (the exchange) said that it no longer recognized MF Global as a guarantor for traders on the floor who used them as their clearing firm. Clearing firms extend leverage to their customers, and are responsible for monitoring the risk within customer accounts to ensure that customers have enough margin (cash collateral effectively) to satisfy the risk in their accounts.
Set aside the notion that every trader drives an expensive sports car and has a vacation home in the Hamptons. Many traders on the floor come to work every day trying to grind out a living; a highly stressful one at that. Those who clear with MF global are sitting somewhere, watching their position move, with no ability to take off risk. Their accounts are frozen. When dealing with commodities and options on those commodities, moves can be swift and unforgiving. A trader's career can literally be made and broken in a day. In volatile markets like these, it is hard to feel anything but sympathy for the traders unable to manage their own risk at a time like this. Moving a position/ receiving approval at a clearing
Currently, the MF Global books are missing something like 700 million dollars. MF Global (literally as I write) has admitted to using client money to help fund the trades that they were doing principally (using company money to put on trades). These funds are of course supposed to be segregated, and commingling client money to fund principle trades is among the most egregious crimes that such a company could commit. Bear in mind that whatever the "missing money" number is cannot account for the un-quantifiable amounts lost because traders could not hedge gamma/ take off risk while their accounts were frozen.
As if this is not enough, what are the greater implications of this MF'in situation? I just woke up from trying to read through a document on the implementation of the Volcker Rule. Apparently, on October 11th, The Fed and FDIC approved it. We are entering a world of law implementation that I am quite unfamiliar with at this point (I didn't know the Fed would have to approve anything as an independent agency). Anyone who can comment, please do. But to make the simple point, the Volcker rule restricts the ability of commercial banks to trade their own books. MF was not a commercial bank, so it would not have applied to them. But let's not be so caught up in technicalities as to dismiss the ammo the MF situation has given to Volcker Rule proponents. While I know the shedding of prop desks began years ago and hence there is a discount already built in, be wary that talk of curtailing a bank's ability to take on proprietary risk can only be bad for their stock prices.
Subscribe to:
Posts (Atom)