Wednesday, June 27, 2012

Precious Metals Update

Topics Covered
  • PMs update on technicals, sentiment, breadth, seasonality and more
Overview
The selling pressure has stopped for now as risk assets and safe havens continue to move in a sideways pattern. It seems that the S&P 500 has experienced a stronger rebound rally than other risk assets, while commodities like Crude Oil and Gold have been struggling. Agriculture seems to be taking off, despite abundance of bears calling for lower prices. Safe haven assets like US Dollar and Long Bond have paused their vertical rise and have entered corrective mode. The bottom line still remains the same: investors have been selling risk due to possibility of a disorderly default in Eurozone, triggered by Greece as the first domino, followed by a Spanish and Italian contagion. At the same time, Asia and especially China is slowing down meaningfully. At present, bearish trades still remain crowded, but not as much as they were at the start of the month.

Economic Data
Nothing new to report. Refer to the side menu for previous articles.

Equity Markets
Nothing new to report. Refer to the side menu for previous articles.

Bond Markets
Nothing new to report. Refer to the side menu for previous articles.

Currency Markets
Nothing new to report. Refer to the side menu for previous articles.

Commodity Markets
Public Opinion on Gold, which is a select group of sentiment surveys, fell quite hard once again this week. Having said that, a strong contrarian buy signal from bearish extreme levels usually occurs as readings drop below 50% bulls and we aren't quite there just yet. Another major point I would like to put forward is that Gold's bearish sentiment has been trending downwards since August 2011, similar to the way it was trending downwards in 2008. Eventually, we will have no bears left and from those negative extremes a new cyclical bull market will be born.
Public Opinion on Silver, which is a select group of sentiment surveys, fell once again this week similar to Gold. However, unlike Gold, Silver's sentiment is now once again sending a strong contrarian buy signal from bearish extreme levels, which usually occurs as readings drop below 35% bulls. Another major point I would like to put forward is that Silver's bearish sentiment has not recovered towards a neutral / median position (60% bulls) since February of this year. Prolonged bearish sentiment can create super strong short squeezes and amazingly powerful rallies, last of which we saw in January and February 2012 for Silver after a similar downbeat mood.

As a side note, the global economy is weakening and the European situation is worsening. It is possible to have a crash occur from very negative sentiment and oversold technical conditions. Therefore, if Gold and Silver do not hold $1530 and $26 support levels properly, a break below these levels could crash the price and create a wash out capitulation bottom.
Futures positioning in Gold, tracked by the COT report, has been increased over the last three weeks. Having said that, positioning is currently as low as March 2009 but not as low as it was during June/July 2007 nor October 2008.
Futures positioning in Silver, tracked by COT report, has been quite flat over last the three weeks. Furthermore, positioning is currently lower than October 2008, March 2009 and June / July 2007. There just aren't any bulls left on Silver. Technically, based on weekly closes, both Gold and Silver are currently sitting on a very important support level - $1,530 and $26 respectively. A break below these levels, could see further cuts in net long positioning and quite possibly in dramatic fashion.
Option positioning in the Precious Metals sector is not confirming Public Opinion sentiment surveys featured above. Currently, we seem to have a lot more Calls than Puts on both Gold and Silver. From a contrarian point of view (at least in the short term), we could therefore experience further selling in these two assets. As a side note, Put Call options ratio is not the best predicator of future price actions and should be weighted lower in priority than the Public Opinion or COT reports.
Price wise, Gold and Silver remain in a downtrend, which is a series of lower lows and lower highs on a closing basis. This can be seen in the chart above. During a downtrend, excessive inflows into GLD ETF seem to be a strong contrarian signal of optimism which tends to be met with more selling. While we are witnessing slight outflows this week, we do not have panic similar to that of late September or late December 2011 just yet.
Furthermore, it is also interesting to see that despite constant lower prices, PMs bulls remain hopeful of higher prices and refuse to sell their GLD physical holdings in similar fashion to previous corrections. One reason behind this is Bernanke's promise that he will do more QE down the road. Another reasoning behind this is most likely due to a slow bleeding sell off unlike in September 2011 and December 2011, when a mini-crash in prices most likely triggered large amount of stop losses for hedge funds. They say downtrends slide on a slope of hope so beware!
Short Interest ETF positioning in the Precious Metals sector is not at very extreme levels to indicate a contrarian buy signal just yet. Having said that, the data is lagged and only valid until 01st of June 2012, so there is a possibility that more short interest was engaged since than. During a late December 2011 bottom in Gold @ $1,530 short position reached 22 million shares, while Silver @ $26 short position reached 26.5 million shares. Today, we have 18.7 million shares sold short on GLD and only 14 million sold short on SLV. Defiantly not as bearish and therefore not as strong of a contrarian signal as last time we traded around these levels.
Gold mining shares have been absolutely decimated in recent quarters. We are currently extremely oversold according to the Summation Index, % of Stocks Above 200 MA and % of Stocks @ 52 Week Lows. All three major long term breadth components are indicating that the bear market is either already over or is very close to being so, after a final capitulation occurs. One major technical development that has not yet occurred is a brake out on the upside from a downtrend in Cumulative AD Line, as well as the actual price itself. Until we get those confirmations, the downtrend might persist and retest recent GDX lows.
Furthermore, Bullish Percent Index - another measure of Gold miners breadth - has been signalling that the overall Precious Metals sector its extremely oversold for a prolonged period of time. As already stated above, these type of signals usually point to a major bottom forming, but if the current supports break down, one final selling wash out could also occur. Regardless of the outcome, both events should be bought as we are most likely close to the end of a cyclical bear market.
Since Gold, Silver, Platinum and PMs mining companies have high degrees of correlation, it is good enough to just follow Gold's seasonality. Most PMs bulls already know this, but majority of the time over the last 5, 15 or 30 years Gold has a tendency to bottom around the middle of the year and start advancing into August and September. Majority of the gains occur in the month of September, which was a completely opposite outcome to what happened in 2011. Let us hope this time around we move back to proper seasonal patterns, giving us traders the edge to front-run the price (doesn't always work). Finally, let us move onto some long term charts:
We are currently still in a cyclical bear market correction during a longer term PMs secular bull market. Comparing the current price action to that of the 1970s price action, we can see that Gold and Silver are definitely not in a bubble or overvalued in a huge speculative mania. Gold would have to reach levels higher than $7000 and Silver higher than $150 to match the 1970s secular bull market gains.
On top of that, Gold's rise is also definitely undervalued relative to stock bubbles in the last two decades too. While a lot of investors claim that Gold has outperformed stocks bonds and real estate over the last 10 years, in my opinion they are mistaken to think that Gold is overvalued. This is perfectly seen in the chart above. Something interesting occurs when we forward the overall picture back to the days of the last Gold bubble, late 1970s and into early 1980s - all of a sudden, relative to stocks and bonds, Gold is extremely cheap could easily spike enormously from these levels.

I truly believe that Gold and Silver are very smart investments for years to come and I expect a major mania to occur sometime within the next several years. The only time one should plan on selling their Gold and Silver holdings is at the final vertical spike. All other sell offs, consolidations, cyclical bear markets and corrections (minor or major) should be used to accumulate more of the Precious Metals. That is what I plan to do and will continue from a month to month basis as my fund receives new inflows.

Credit Markets
Nothing new to report. Refer to the side menu for previous articles.

Trading Dairy Update
  • Fundamental Outlook: I believe that we approaching another bear market as the recovery loses steam. I am not sure if politicians can hold it off until elections in both US and Germany pass, but 2013 and 2014 will most likely be bad years. US GDP has grown 5 quarters at around 2% or lower which is stall speed. Over the last 60 years, whenever the economy grows at subpar levels it has always entered a recession. At the same time earnings and margins are at record highs, so I expect that they will mean revert. During recessions since the 1950s, earnings tend to fall on average by 25%, so a drop to $70 from current levels in earnings could take the S&P 500 down below 1,000 points (P/E = 12 * $70).  Cash levels in money market funds are as low as 1998/99 and 2006/07, so I believe investors are extremely exposed to risk assets. Corporate credit spreads are very narrow relative to economic fundamentals, so I expect they will widen dramatically in due time. Recessions occur every 3 to 4 years of expansion during secular bear markets, so in 2013 or 2014 we are overdue for a slowdown (but it could be much earlier).
  • Current Positioning: I've positioned myself towards long PMs especially Silver (large position in my fund) and plan to accumulate more, because I believe central banks will continue to print money and devalue currencies whenever the economy gets worse. Furthermore, investors were recently heavily exposed to US Dollar, so from a contrarian point it also makes sense. On the other side of my book, I want to hedge my longs by being short stocks, especially the much loved Consumer Discretionary and Technology sectors. Furthermore, I also want to be short high yielding risk bonds like emerging market bonds and junk bonds, as I think spreads here will widen dramatically during a recession. Finally, I want to be short Asian & Commodity export currencies as I believe CBs will cut rates as global economy slows.
  • Asset Watch-list: On the long side, commodities still remain on my watch list. These include Commodity Indices (GCC / RJI), Brent Crude (BNO), Precious Metals (CEF, SLV, PSLV) and Agriculture (RJA / MOS). I believe commodities are very oversold right now especially Crude Oil's and Silver's sentiment. I have not done anything on the long side just yet apart from the positions I already own and will not do anything until I hear stronger action response from the Fed. On the short side, Tech sector (XLK) & Discretionary sector (XLY) are on my list of stock shorts. I am also looking at Emerging Market bonds (EMB) and Junk bonds (HYG) as a potential short as well. Finally, a major short in due time will be US Treasury long bonds (TLT), but I believe we are just not there yet. I have not done anything on the short side just yet but I am slowly gearing up to open some shorts for the first time since 2008. However, I am still hesitant to enter major shorts prior to US and German elections.

Sunday, June 24, 2012

Global Business Activity Contracting

Topics Covered
  • Global business activity continues to contract
  • No confirmation for further highs in a bull market
  • Corporate credit spreads continue to widen
Overview
The selling pressure has stopped for now as risk assets and safe havens continue to move in a sideways pattern. It seems that the S&P 500 has experienced a stronger rebound rally than other risk assets, while commodities like Crude Oil and Gold have been struggling. Safe haven assets like US Dollar and Long Bond have paused their vertical rise and have entered corrective mode. The bottom line still remains the same: investors have been selling risk due to possibility of a disorderly default in Eurozone, triggered by Greece as the first domino, followed by a Spanish and Italian contagion. At the same time, Asia and especially China is slowing down meaningfully. At present, bearish trades still remain crowded, but not as much as they were at the start of the month.

Economic Data
Economic data has been weakening meaningfully relative to economist's expectations in every major global region, according to the Citigroup Economic Surprise Indices. Previous instances where economic data disappointed on similar scale, have led to central bank intervention and it is definitely possible we might see that occur again prior to both the US and German elections. Having said that, previous "money printing programs" have only helped the private sector business activity modestly at best, while we have not been able to reach escaped velocity within the current business expansion. In other words, the expansion has failed to become self sustaining. Therefore, ever summer economy weakens, global investors start asking if we are edging closer to another recession?
In China, the HSBC manufacturing index weakened to a seven month low in June, even though the nominal decline was quite small, it confirmed the weakness in both the OECD leading indicator as well as the national PMI. Export orders continued to drop, which signals that China is now being affected by the Eurozone recession and furthermore inventories also increased, signalling that current global demand remains very weak.
In Germany, business confidence continues to deteriorate with ifo German Business CEO Confidence Index moving to new 52 week lows. Relative to other Eurozone indicator, German economy and its private sector with strong export ties, still remain decently robust and growing. But from the recent readings above, it seems that even Germany is now becoming affected by the Peripheral European (PIIGS) recession. Decoupling is always a dangerous word to use in the investment world.
In United States, the Philadelphia Fed General Activity Index dropped substantially to minus 16.6. This is now the lowest reading since August 2011. To put this reading into perspective statistically, this was the 46th worst reading of the 390 monthly readings since July 1980. Regardless of its nominal reading, what concerns me even more is that we now have a major divergence between Wall Street and Main Street, as we can see in the chart above. In other words, there is a major disconnect between the stock market and the economic fundamentals. While stocks have been moving steadily north due to central bank intervention, business activity has been moving steadily south. Eventually, the stock market always moves back towards fundamentals, and further the disconnect between the two, more volatile the move. So let us focus on the stock market.

Equity Markets
The Federal Reserve disappointed investors this week with no balance sheet expansion and only twisting about quarter of a trillion dollars worth of short term Treasuries. Nonetheless, the equity market in the US has still managed to recover decently well from the low levels we saw at the start of June. Many investors are now asking themselves if we will rally further towards 1,400 or are we about to resume a downtrend which started in April?
Intermediate and long term bottoms are usually created during capitulation stages, which are perfectly seen in the chart above. Every time the VIX index spikes above 40, we tend to put in some type of a bottom from which stocks stage a powerful rally. Contrary to that observation, recent 10% correction in the S&P 500 did not see a major volatility spike, therefore it is very difficult to argue that we have formed a very significant bottom at the start of June around 1,266. This is also confirmed by the lack of new monterey stimulus by the Fed (so far) as well as weakening global economy.
Furthermore, US equities seem to be the only major risk asset that have managed to put in new bull market highs in 2012, as can be seen in the chart above. All other major equity indices, risk currencies, commodities and high yielding bonds have failed to better their May 2011 highs and furthermore have also retraced 100% of the Operation Twist and LTRO monetary stimulus programs. In the US, small caps represented by the Russell 2000 have also failed to confirm new 2012 bull market highs that S&P 500 has accomplished.

They say that bear markets slide a slope of hope, so could it be possible that the cyclical reflationary bull market, that started in March 2009, has actually ended last year in May, while majority of investors still seem to remain bullish? Are we all blinded by the outperformance S&P 500 is staging, not to see the rest of the global risk assets trending downwards? And finally, how long can US equities remain in an uptrend on their own?
These are the type of questions I ask myself from week to week as I follow new developments within the economic and market environment. Current business activity is once again slowing as discussed above, global risk assets are disappointing investors, and finally the US equity market breadth is acting rather weak (as we can see in the chart above). The strong rally we witnessed earlier this year was accomplished on very narrow market breadth and bearish divergence. As a matter of fact, market breadth has been narrowing more and more since the cyclical bull market started in March 2009 - a sign of age and maturity. Therefore, there is an above average probability that we could be forming some type of a significant top heading into 2013. It is important to monitor the price in coming weeks and more importantly, monitor what the credit markets are telling us.

Bond Markets
Nothing new to report. Refer to the side menu for previous articles.

Currency Markets
Nothing new to report. Refer to the side menu for previous articles.

Commodity Markets
Nothing new to report. Refer to the side menu for previous articles.

Credit Markets
Just like many risk assets that continue to deteriorate over the recent months, corporate bond spreads also find themselves signalling a similar risk off theme. In the chart above, we can see that Moody's BAA spreads over equal maturity Treasury Bonds, remain elevated above its 200 MA and more importantly continue to widen. It is looking more and more probable that credit markets are pricing in some type of a default event in coming months and quarters, most likely out of Greece. 

The question still remains if Bernanke, Draghi and Co can once again kick the can down the road by engaging into QE3? In today's market environment, the worst things tend to become, the better they tend to become for risk assets (at least for awhile), due to constant central banks money printing and government deficits, which kick the can down the road every so often. While it is most likely probable some type of "can kicking" will occur once again prior to US as well as German elections, I would be very worried about the current fundamental backdrop and would emphasis that markets are starting to lose patience.

Trading Dairy Updates
  • After FOMC decision to extend Operation Twist, which disappointed the market (as discussed in Wednesdays post), I hedged my core Silver position by about 25%. Trade was executed as Silver broke the short term triangle as discussed in previous posts. I am also still holding onto core Silver position from late December 2011 bottom at $26 as I know that sentiment is very bearish  and that PMs have strong fundamentals going forward, linked together with huge net long positions in the US Dollar.
  • Risk assets still remain on my watch list for some shorter term bullish rebound trades. These include Brent Crude (BNO), Commodity Indices (GCC / RJI), Precious Metals (GLD, SLV, CEF, PSLV, etc) and Agriculture (RJA / MOS). I believe commodities are very oversold right now and should at least bounce soon. I have not done anything major just yet and will not do anything until I hear stronger action from the Fed.
  • Global bear market is approaching as the recovery loses steam. I will compile a watch list of assets to short as we get closer to the US / German election, as it is possible that things still hold together until than. I think good shorts going forward are equities (record profit margins), risk currencies (more easing by CBs ahead), corporate and junk bonds (spreads to widen), while good longs are volatility (VIX to spike), CDS (protection from default) and safe haven currencies (to benefit from risk off flows). However, I regard commodities very oversold and bonds very overbought.

Wednesday, June 20, 2012

It Is All About The Fed & The Dollar!

Topics Covered
  • It is all about the Federal Reserve and the US Dollar direction
Overview
The selling pressure has stopped for now as risk assets and safe havens both move in sideways patterns. It seems that the S&P 500, Crude Oil and Gold are now in a rebound rally of some type, however rallies in certain risk assets have been much stronger than in others. On the other hand, safe haven assets like US Dollar and Long Bond have paused their vertical rise and have entered corrective mode.

It seems we are entering a period of mean reversion but the bottom line still remains the same: investors have been selling risk due to possibility of a disorderly default in Eurozone, triggered by Greece as the first domino, followed by Spain and Italy contagion effect. At the same time, Asia and especially China is slowing down meaningfully. At present, bearish trades still remain crowded, but not as much as they were at the start of the month.

Economic Data
Nothing new to report. Refer to the side menu for previous articles.

Equity Markets
Nothing new to report. Refer to the side menu for previous articles.

Bond Markets
Nothing new to report. Refer to the side menu for previous articles.

Currency Markets
Here in Asia, we are awaiting the FOMC just as much as traders in Europe or US are. Instead of going out for a drink after work with a few mates (which sometimes gets out of hand), majority of us will be glued to our seats, awaiting Bernanke's speech, which might (or might not) change the direction of the US Dollar and therefore a lot of other asset classes in the global macro world.
Consider the chart above. US Dollar bull market started in early May 2011, two months before QE 2 program ended. It has since been trending in a slow upward motivation of higher highs and higher lows - your typical uptrend or bull market according to the Dow Theory. Furthermore, simple and basic upward trends usually resemble two basic features:
  1. Majority of the time price remains above the 200 MA
  2. Price climbs by respecting an uptrend line, using it as support
As much as I am a US Dollar bear (and have been for a very long time on fundamental basis), I have to admit and conceive that we are most likely not yet at the final top. Why do I say that? Well, consider the second chart above. Over the last several years, US Dollar rallies have ended with panic spikes that trigger "major catalysts". Currently, we have not yet seen a price spike, nor have we seen a "major catalyst". Pretty simple in theory, but not necessarily correct.

Therefore, technically we can so far conclude that the US Dollar trend is bullish and that we have not seen any major panic price spikes that tend to be of terminal nature. In case one is wondering what a terminal movement within a trend is - it is a vertical rise based on strong emotions of either greed or panic (in this case panic) that is not sustainable. These occurred in 2008 and 2010 on the second chart above.

Let us move along and see how the Dollar is doing globally. Because the US Dollar Index is constructed in such a way that it only follows six major currencies (all of them Developed Economies) and heavily weighted towards the Euro, I consider it a flawed tool. It is pretty much similar to following an index of only 6 stocks heavily weighted towards Apple instead of S&P 500 as a whole. Therefore, I much rather follow broader measures like the Trade Weighted Index or even better, US Dollar breadth across the whole world including Commodity Exporter and Emerging Market currencies. * Note: precious metals like Gold, Silver and Platinum are also counted as global currencies.

So what I did is construct my own US Dollar Breadth Barometer, seen in the table above.Looking at performance of the US Dollar across the globe, in the table above. it tracks the technical strength of the US Dollar against European currencies, Commodity currencies, Eastern European currencies, Asian currencies, BRIC currencies and other GEM currencies from Latin America and Africa. Looking at the current data, we can conclude two simple points:
  1. US Dollar has been weak in recent weeks as it has experienced a correction after such a powerful performance in May. Dollar price is above its 5 MA against only 11% of global currencies and above its 20 MA against only 18% of global currencies.
  2. US Dollar has been very strong in both the medium and long term trends. Dollar price is up above its 50 MA, 100 MA & 200 MA against at least 70% of global currencies and in some cases almost 100%. That signals very strong breadth and not just Euro strength only.
Moving along let us look at some Emerging Market currencies vs the US Dollar, but this time in a chart format since the start of 2008, when the global debt crisis started to intensify.
First of all, Eastern Europe has been the most affected area since the global crisis started. Currencies within this area of the world have experienced major volatile swings in bullish and bearish directions. Markets would panic and the Dollar would spike, which would be followed by policy reaction where the Dollar would sink very fast again. So if this seems to be the template, what is the current price telling us?

The US Dollar has been in an uptrend against majority of these currencies since at least early May of 2011. While the bull market trend is ageing and most likely closer to the end, we have still not seen a major price spike, similar to that of Lehman '08 event or the Greek Bailout '10. What makes me think it will happen again? There is just about 100% certainty that Greece will eventually default, and it seems the Dollar spike could occur as that event plays out in up-and-coming months or quarters.
Commodity Exporter currencies resemble similar pattern since 2008, as can be seen in the chart above. While the S&P 500 has made new higher highs in April 2012, no major global currency has confirmed this outcome. All global currencies including BRIC currencies, that are considered as risk assets, have failed to exceed their peak of May and July 2011. In other words, the US Dollar bull market continues to create a risk off environment. So how close are we to a top?
That question is very difficult to answer. However, it is definitely possible to argue that there are way too many US Dollar bulls as of late. It was only a few weeks ago that the Dollar Public Opinion hit a new record in optimism. That means, more bulls than at any time during Lehman Brothers panic of late 2008 and Greek Panic of middle 2010.
It is also definitely possible to argue that, sentiment survey's aside, investors are actually putting their money where their mouth is and have now racked up record bullish bets on the US Dollar via COT futures positioning. It is more than 3 standard deviations away from the mean, which I would consider "extremely and insanely bullish".

So how could we summarise the current US Dollar conditions?

Today a meeting of FOMC heads, including Ben "money printer" Bernanke, Janet "negative interest rates" Yellen, William "Dovish" Dudley and Charles "I agree to all & any type of money printing" Evans will all be voting in favour of some type of action. Furthermore, they have an easy setup and a huge chance to squeeze the "living lights" out majority of market participants who are record long the Dollar. However, the question is will they? While anything could happen, my view is they most likely will not engage into a major program. On the other hand, the situation in Europe is getting out of hand with Spain and Italy in crosshairs again. The crisis is intensifying into its final stage and things are now getting serious. Can kicking is just about done.

Like I stated at the beginning of the article, over the last several years, US Dollar rallies have ended during panic spikes that trigger "major catalysts". Maybe this time around, a major catalyst will be a Greek default, which in my mind is just abut a 100% portability sometime in the next few months or quarters. Therefore, the Dollar could correct in the short term on Fed action, but the final spike might still be in the cards as Eurozone crisis intensifies. Finally, maybe Ben might have something to say about all this, but if we do not get a strong QE program right here, the US Dollar bull market might not be over yet.

Finally, as a disclosure, I am positioned towards major Dollar squeeze with a large core Silver position (for awhile now) and few shorter term long trades from Agriculture & Energy commodities.

Commodity Markets
Nothing new to report. Refer to the side menu for previous articles.

Credit Markets
Nothing new to report. Refer to the side menu for previous articles.

Trading Dairy Updates
  • I have purchased some small exposure towards Brent Crude Oil (BNO) and Mosaic Fertiliser (MOS) earlier in the week. I also purchased some Silver (SLV) too, but for now it seems to be acting a lot weaker than others, so I have closed it at BE point.
  • I am also still holding onto core Silver position from late December 2011 bottom at $26. Strong PMs fundamentals going forward and huge net long positions in the US Dollar are some of the main reasons.
  • Risk assets still remain on my watch list for some shorter term bullish rebound trades. These include Brent Crude (BNO), Commodity Indices (GCC / RJI), Precious Metals (GLD, SLV, CEF, PSLV, etc) and Agriculture (RJA / MOS). I believe commodities are very oversold right now and should bounce soon. I have not done anything and will not do anything until I hear from the Fed.
  • I am waiting for an equity & currency market rebound first, before engaging into some shorts, as I believe a global bear market is here. I will compile a list of assets to short as we get closer to the US election.

Off Topic

I've decided to add an extra post or two per week, which will be tiled "Off Topic". Hopefully something to make you laugh or interest you while you go through all the financial mumbo jumbo on this website. Shout out to my brother for sending me this one:

Gold digger writes on a forum:

What am I doing wrong?

Okay, I’m tired of beating around the bush. I’m a beautiful (spectacularly beautiful) 25-year-old girl. I’m articulate and classy. I’m not from New York. I’m looking to get married to a guy who makes at least [a] half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don’t think I’m overreaching at all.

Are there any guys who make 500K or more on this board? Any wives? Could you send me some tips? I dated a businessman who makes average around 200 – 250K. But that’s where I seem to hit a roadblock. 250,000K won’t get me to Central Park West. I know a woman in my yoga class who was married to an investment banker and lives in Tribeca, and she’s not as pretty as I am, nor is she a great genius. So what is she doing right? How do I get to her level?

Here are my questions specifically:

- Where do you single rich men hang out? Give me specifics- bars, restaurants, gyms.
- What are you looking for in a mate? Be honest guys, you won’t hurt my feelings.
- Is there an age range I should be targeting (I’m 25)?
- Why are some of the women living lavish lifestyles on the Upper East Side so plain? I’ve seen really “plain Jane” boring types who have nothing to offer married to incredibly wealthy guys. I’ve seen drop dead gorgeous girls in singles bars in the East Village. What’s the story there?
- Jobs I should look out for? Everyone knows — lawyer, investment banker, doctor. How much do those guys really make? And where do they hang out? Where do the hedge fund guys hang out?
- How you decide marriage vs. just a girlfriend? I am looking for MARRIAGE ONLY.

Please hold your insults — I’m putting myself out there in an honest way. Most beautiful women are superficial; at least I’m being up front about it. I wouldn’t be searching for these kind of guys if I wasn’t able to match them — in looks, culture, sophistication, and keeping a nice home and hearth.

------------------

Hedge fund manager replies: 

Dear Pers-431649184,

I read your posting with great interest and have thought meaningfully about your dilemma. I offer the following analysis of your predicament. Firstly, I’m not wasting your time, I qualify as a guy who fits your bill; that is I make more than $500K per year. That said, here’s how I see it:

Your offer, from the prospective of a guy like me, is plain and simple a crappy business deal. Here’s why. Cutting through all the B.S., what you suggest is a simple trade: you bring your looks to the party, and I bring my money. Fine, simple. But here’s the rub — your looks will fade and my money will likely continue into perpetuity … in fact, it is very likely that my income increases but it is an absolute certainty that you won’t be getting any more beautiful!

So, in economic terms, you are a depreciating asset and I am an earning asset. Not only are you a depreciating asset, your depreciation accelerates! Let me explain: you’re 25 now and will likely stay pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. By 35, stick a fork in you!

So in Wall Street terms, we would call you a trading position, not a buy and hold … hence the rub … marriage. It doesn’t make good business sense to “buy you” (which is what you’re asking) so I’d rather lease. In case you think I’m being cruel, I would say the following: if my money were to go away, so would you, so when your beauty fades I need an out. It’s as simple as that. So a deal that makes sense is dating, not marriage.

Separately, I was taught early in my career about efficient markets. So, I wonder why a girl as “articulate, classy and spectacularly beautiful” as you has been unable to find your sugar daddy. I find it hard to believe, if you are as gorgeous as you say you are, that the $500K hasn’t found you, if not only for a tryout. By the way, you could always find a way to make your own money and then we wouldn’t need to have this difficult conversation.

With all that said, I must say you’re going about it the right way. Classic “pump and dump.” I hope this is helpful, and if you want to enter into some sort of lease, let me know.

Tuesday, June 19, 2012

Trading Dairy Update

  • I have purchased some small exposure towards Brent Crude Oil (BNO), Mosaic Fertiliser (MOS) and Spot Silver (SLV) last night in US trade. I think Oil is very oversold, Agricultural companies like Mosaic have been slaughtered in the last 18 months and finally, Silver might be ready to break its short term triangle on the upside.
  • I am also still holding onto that core Silver position from late December 2011 bottom at $26.
  • Risk assets still remain on my watch list for some shorter term bullish rebound trades. These include Brent Crude (BNO), Commodity Indices (GCC / RJI), Precious Metals (GLD, SLV, CEF, PSLV, etc) and Agriculture (RJA / MOS). I believe commodities are very oversold right now and should bounce soon.
  • I am waiting for an equity & currency market rebound first, before engaging into some shorts, as I believe a global bear market is here. I will compile a list of assets to short as we get closer to the US election.

Monday, June 18, 2012

Global Fund Managers Dash For Cash

Topics Covered
  • Sharp decline in global growth expectations
  • Consensus outlook remains for Chinese soft landing
  • Fund managers see further QE by both Fed & ECB
  • Cash balances jump to third highest level on record
  • Managers commodity exposure very under-owned
Overview
Today's post specifically focuses on BofA Merrill Lynch Fund Managers Survey. It is one of the best contrarian indicators I know within the market space, as Merrill Lynch surveys about two to three hundred funds every month to get a consensus outlook. This month, the survey period was from 31st May to 7th June 2012, with an overall total of 260 panellists with $689bn AUM. Out of the overall total, 82 are Institutional Funds, 24 are Hedge Funds, 56 are Retail Funds and 26 were other. More than 66% of all funds manage over 1 billion dollars. Fund managers are asked to focus on global growth, inflation, profits expectations, asset class and sector weighting positions, plus variety of other questions regarding risk and exposure. Enjoy.

Economic Data
The survey reported that "global growth expectations fell sharply from +15% to -11% this month, the largest MoM drop since Aug’11. This suggests new orders to inventories ratio will roll over." The chart above, which I've edited, shows that majority of the time economic slowdowns or recessions intensify with below net 40% of managers expecting weak growth ahead. Currently we aren't close to those readings yet, but since this is not an normal economic cycle based on strong fundamental growth (like 03 - 07), an external surprise shock out of Eurozone could easily derail growth in an instant.
The survey also reported that net percentage of managers thinking that the Chinese growth will improve fell towards neutral levels this month, but without a sharp decline. Merrill Lynch writes that "despite weakness in global growth expectations, fund managers have not yet discounted a materially weaker Chinese economy, as investors are still overweight China." Major Chinese growth recoveries occur when we see close to net 40% of managers expecting the growth to improve and unfortunately we aren't close yet.
Chinese economic outlook by fund managers remains quite bullish or even complacent by some standards. A net percentage of managers who think China will experience a “hard landing” edged higher to a net 16% from 9% last month. But, the overwhelming consensus is that 81% of investors still think “soft landing", engineered by the government, will be the main outcome. I am not so sure I can agree with 81% of fund managers on this one...
Interestingly the sharp drop in growth expectations also showed a sharp drop in inflation expectations too. The report went onto say that "a net 14% expect inflation to fall in the next 12 months, a deflationary signal. But the good news is that this paves the way for policy easing." Usually, when major expect deflation as the main outcome, it tends to put a intimidate top in bond prices and a bottom in commodity prices.
Such a dire outlook on global growth has managers tilting towards further central bank stimulus measures. The survey went onto to report that "expectations for additional quantitative easing rose sharply in June, particularly in Europe. A net 73% expect more ECB QE within next 4 months (up from 46%). 44% expect Fed QE3 within next 4 months (up from 31%)." Finally, Merrill Lynch went onto to summarise the overall global growth outlook by stating the following:
"Sharp decline in global growth expectations (+15% to -11%); global profits outlook also deteriorated,; only 5% of investors see 'above-trend' growth next 12 months; big rise in QE expectations; in next 4 months 73% expect ECB QE & 44% now expect Fed QE3"
Equity Markets
Fund managers continued to raise cash in June. Managers weightings towards cash allocations jumped sharply higher this month towards a net 39% overweight, which is up from a net 28% overweight last month. We are now much higher than the typical one standard deviation of extremes in fear. Furthermore, average cash balances remained jumped towards 5.3%, from 4.7% last month. From a  contrarian point of view, reading above 5.0% should be considered as a major buy signal. In 2008 the cash balance reading peaked at 5.5% in December. In 2011 the cash balance reading peaked at 5.2% in August. Both proved to be close to a major bottom in all risk assets, including equities.
The survey went onto show that managers equity weightings have been modestly reduced towards an slight underweight position in the month of June. Merrill Lynch stated that "equity allocations turned negative for the first time in 7 months, consistent with only 5% of investors believing there will be above-trend global growth over the next 12 months." So in other words, while equity managers are not yet in full panic mode, they are edging pretty close at this point, with very high cash positions and very low equity exposure. Finally, Merrill Lynch went onto to summarise the overall risk outlook by stating the following:
"Cash balances jump to 5.3%, third highest level on record after 3/2003 & 12/2008; 5.3% equals a buy signal ML Survey trading rule; First Equity underweight in 7 months; Risk Index plunges to 30, lowest since 9/2011; key to note investor perceptions of liquidity conditions turn negative for first time since ECB’s LTRO, so expect more policy catalysts."
Bond Markets
While the Merrill Lynch survey showed that managers are dashing for cash, that was not the only is not popular safe haven investment right now. Bond allocations once again rose in June, just like it rose in May as well. A net 23% are now underweight bonds, up from a net 33% underweight last month and a net 48% of fund managers two months ago. Despite a powerful and historical rally in the Bond market, majority of fund managers still seem to be only modestly exposed to this asset class, even with ongoing Eurozone worries.

Currency Markets
Nothing new to report. Refer to the side menu for previous articles.

Commodity Markets
The survey also showed that fund managers reduced their allocation to commodities for the fourth month in the row. A net 8% of fund managers are now underweight commodities sector, as opposed to net 2% underweight in May. This is now the lowest exposure level since February 2009.
Commodity sectors are extremely oversold due to a cyclical huge bear market in commodity prices. Fund managers survey showed that global materials sector weighting is currently 2 standard deviations underowned relative to the ten year history.

Similarly, global energy sector weighting is currently 1.5 standard deviations underowned relative to the ten year history. If the commodity sectors are under-owned and oversold, one might ask is popular investments with fund managers? The answer is all the overbought sectors like consumer discretionary and technology. Think vertical prices rises from Apple to Starbucks (chart below).
Finally, Merrill Lynch went onto to summarise the overall commodity outlook by stating the following:
"Death of Commodities; allocation to Commodities plunges to lowest since Feb'09; investors running massive UW of Materials & Energy; commodity investor hold large cash positions."
Credit Markets
Nothing new to report. Refer to the side menu for previous articles.

Trading Dairy Updates
  • I have closed all shorter term trades (including options) from SPY to SLV to RJA. However, I am also still holding onto that core Silver position from late December 2011 bottom at $26.
  • Another Monday another gap up, followed by a sell off. Risk assets still remain on my watch list for some shorter term bullish rebound trades. These include Brent Crude (BNO), Commodity Indices (GCC / RJI), Precious Metals (GLD, SLV, CEF, PSLV, etc) and Agriculture (RJA). I believe commodities are very oversold right now and should bounce soon.
  • I am waiting for an equity & currency market rebound first, before engaging into some shorts, as I believe a global bear market is here. I do not want to short commodities, as they are in a secular bull market and relatively cheap to equities.

Thursday, June 14, 2012

Spain & Italy Moving Closer To The Edge

Topics Covered
  • Silver price presents a good trade setup, but in which direction?
  • Spain and Italy are moving closer towards the edge of the cliff
Overview
The selling pressure has stopped for now as risk assets and safe havens both move in sideways patterns. It seems that the S&P 500, Crude Oil and Gold are now in a rebound rally of some type. Sentiment reached extreme negative levels on all of these asset classes over the last several weeks. On the other hand, safe haven assets like US Dollar and Long Bond have paused their vertical rise and have entered corrective mode as those trades become overcrowded.

It seems we are entering a period of mean reversion but the bottom line still remains the same: investors have been selling risk due to possibility of a disorderly default in Eurozone, triggered by Greece as the first domino, followed by Spain and Italy contagion effect. At the same time, Asia and especially China is slowing down meaningfully. At present, bearish trades remain very crowded.

Economic Data
Nothing new to report. Refer to the side menu for previous articles.

Equity Markets
Nothing new to report. Refer to the side menu for previous articles.

Bond Markets
Nothing new to report. Refer to the side menu for previous articles.

Currency Markets
Nothing new to report. Refer to the side menu for previous articles.

Commodity Markets
Technically, Silver is presenting a good trade opportunity right now. Over the last few days the price has gone dead quite and is now most likely ready to break out in either direction. The chart above shows important technical levels to watch including important technical lines, like the major downtrend line which started in May 2011, as well as the smaller minor downtrend line which started in early March 2012. COT positioning has been reduced to very low levels in recent weeks and Public Opinion is also very low. Both of these indicators tell us that Silver's upside has more potential and/or probability, but the question is always about timing.
I purchased Call options on various Silver ETFs in both middle and end of May, but have recently closed them because the bounce I expected from the $26 support has not been as "vigorous" as I initially thought. Another reason I have closed these Calls, is because the consensus investors, or as I call them Dumb Money, have been accumulating Calls over Puts on both Gold and Silver as well. Some of the people I have read comments from quote "Rothchild's buying" as the reason to buy Gold and Silver right now - now that is quite creative. While options positioning is not a major red flag, it still warrants caution, as I prefer to be a on the minority or contrarian side. If the price was to break in either direction from the recent triangle, I am willing to participate in a trade.

Credit Markets
As you have most likely already heard, Spanish 10 Yr yields have now exceeded 7% for the first time since Euro was introduced in 1999... and this comes less than one week after the bailout. In other words, markets have lost patience and recovery rallies based on intervention (LTROs, Twists, Bailouts) are now buying less and less time. The chart above shows a worrying picture of short term funding costs for both Spain and Italy. These rates are much much more important than the rates on the 10 Yr bonds. I am afraid that both of these large economies, which are already in a recession, are now moving towards the edge of the cliff.
At the same time, Dollar funding costs have not yet started to increase substantially. The chart above shows no major Dollar liquidity problems within the market environment right now, as 3 month Euro Dollar swaps are hovering around 54 basis points. Nothing as dramatic as we saw during October 2008 or October 2011. This leads me to a conclusion the Draghi's LTRO has reduced the financing needs for the time being.
Finally, currency swap spreads over two years, which are a great barometer of systematic risk within the banking system, remain very low in the United States, while still very elevated in Europe. Readings of 83.35 basis points (current EU level) resemble 2008 type outcome scenarios and warrants great caution ahead. Having said that, recent price movements seems to be quiet positive over the short term, which makes me conclude that the LTRO has postponed the banking problems in the EU for now. 

Trading Dairy Updates
  • Summary: my further action depends on political and central bank intervention. During market panics, authorises also panic. It is not until they start to panic, that they actually do something about current problems, which usually take form of some type of reflation policy. However, weak action will make me reduce my longs substantially and rebalance my portfolio towards net short exposure. Italy and Spain are once again moving towards the edge of the cliff, which is a real worry while Asia is now in a meaningful slowdown.
  • I have closed all shorter term trades (including options) from SPY to SLV to RJA. However, I am also still holding onto that core Silver position from late December 2011 bottom at $26.
  • Greek election and G20 on the weekend, followed by FOMC meeting early next week all provide some forms of catalyst to move oversold and over bearish risk assets in either directions. I'm currently sidelined trading until further clues.
  • Risk assets still remain on my watch list for some shorter term bullish rebound trades. These include Brent Crude (BNO), Commodity Indices (GCC / RJI), Precious Metals (GLD, SLV, CEF, PSLV, etc) and Agriculture (RJA). I believe commodities are very oversold right now and should ounce soon.
  • I am waiting for a market rebound first, before engaging into some shorts, as a believe equity bear market is here.

Tuesday, June 12, 2012

Trading Dairy Update

  • I have closed all SPY Calls at the open as already posted in the comments section of previous blog post yesterday morning. I do not own any other equity positions in my portfolio.
  • I have closed all SLV Calls and other positions at the open as already posted in the comments section of previous blog post yesterday morning too. However, I am also still holding onto that core Silver position from late December 2011 bottom at $26.
  • I still own a very small position in Agricultural commodities through RJA ETF last week. I haven't done anything else major in this sector just yet.
  • Risk assets still remain on my watch list for some shorter term bullish rebound trades. These include Brent Crude (BNO), Commodity Indices (GCC / RJI), Precious Metals (GLD, SLV, CEF, PSLV, etc) and more Agriculture (RJA). I believe commodities are very oversold right now and should ounce soon.
  • I am waiting for a market rebound first, before engaging into some shorts.

Monday, June 11, 2012

Industrial Commodities Ready For Rebound


Topics Covered
  • A quick check up on current equity market breadth
  • Investors pushing bullish Dollar bets to another record
  • Industrial commodities could be ready for rebound
Overview
The selling pressure has stopped. It seems that the S&P 500, Crude Oil and Gold are now in a rebound rally of some type. Sentiment reached extreme negative levels on all of these asset classes over the last several weeks. On the other hand, safe haven assets like US Dollar and Long Bond have paused their vertical rise and have entered corrective mode as those trades become overcrowded.

It seems we are entering a period of mean reversion but the bottom line still remains the same: investors have been selling risk due to possibility of a disorderly default in Eurozone, triggered by Greece as the first domino. At the same time, Asia and especially China is slowing down meaningfully. Spain has now asked for a bailout loan, while China has cut interest rates for the first time since 2008 - both events confirming that we are moving towards another crisis. Having said that, at present, bearish trades remain very crowded.

Economic Data
Nothing new to report.

Equity Markets
It has been awhile since I've looked at the internals of the US stock market, so let us focus on two short term measures and also two medium term measures to better grasp what Mr Market might have in store for us over the coming weeks.
Early last week, the S&P 500 put in a short term bottom around 1266. From their onwards, the market staged a rally as it became short term oversold. Percentage of stocks within the S&P making 50 day new lows spiked on Monday and than receded as the market rallied. Spikes that exceed 4 standard deviations usually signal a show term or even an intermediate term bottom. What was very interesting to see was that despite S&P making new lows, the % of stocks making 50 day new lows did not confirm the movement. Bullish divergence like that, usually signals a bear trap is in store.
Similar outcome occurred in the percentage S&P of stocks trading below RSI 30 - trading at oversold readings. While the S&P 500 RSI went below 30 in both middle of May and than at the start of June while the price made lower lows, the percentage of stocks becoming oversold created a bullish divergence. In other words, there were less stocks oversold in early June than in middle of May, despite a lower low. From the short term perspective, this too usually signals some type of a rebound and that is what we got for the rest of the week.

These two shorter term signals are precisely why I added to my SPY Calls last week, as I thought a bear trap was in the making, at least from the short term perspective. Now, let us focus on the medium term outlook:
The percentage of S&P stocks trading above 50 day moving average became oversold twice over the last several weeks. Since than we have started to recover somewhat in price, but that recovery is still very muted in breadth expanding. Currently less than ⅓ of all S&P components trade above their respective 50 day MAs and even if further rally was to occur, I do not expect the breadth to move back towards 80% range (overbought levels).
Similar picture is occurring with the NYSE Summation Index, which is currently at very oversold readings on historical basis. In other words, breadth is beaten down just as badly as we saw during May 2010 flash crash and during August 2011 stock market crash. A rebound should be in the cards now, but the question is will it be of corrective nature, before further downside?

While one could argue that a potential for further upside remains, one could also argue that during downtrends, breadth can remain very surpassed and beaten down for extended periods of time. Since I am never a fence sitter, personally I'm in the camp that further rebound is in the cards for now. However, my outlook is that a bear market has now started and on any rebound I want to engage into short activity. If equal or new highs are to be printing in coming weeks, I want to short the risk markets aggressively.

Bond Markets
Nothing new to report.

Currency Markets
I do not want to flog this issue like a dead horse, as I have covered the currency sentiment extensively in previous weekly posts, but it is definitely worth noting that we now stand at three consecutive weeks where currency investors have added to record bullish Dollar bets. The US Dollar Index has broken the resistance to the upside, but only marginally, so the question is weather it is a real or a false breakout?
To help us answer that question better, we have the Australian Dollar chart above. Currency investors have turned extreme pessimistic here, as they have also racked up three consecutive weeks of record bearish Aussie Dollar bets. However, it is worth noting that while the overall Trade Weighted Dollar Index broke its resistance, the Australian Dollar does not confirm such movements by holdings its primary support.

I definitely believe that there is a potential for a universal risk asset rebound if the US Dollar was to weaken from here. Sentiment on the greenback is extremely optimistic and the move in May is most likely now overdue to correct. One of the primary beneficiaries should be the Aussie Dollar, where a huge short squeeze could be in order, at least for several weeks to come.

Commodity Markets
Talk surrounding Chinese hard landing has once again increased. The economic data coming out of China has been disappointing to the point where authorities have now cut interest rates for the first time since 2008. This confirms that not all is well with the economy. Official GDP figures show that China is still growing very strongly, but I do not believe that. 

Domestic consumption is slowing considerably, Iron Ore and Copper imports declining substantially year on year, Crude Oil demand has also fallen dramatically in recent quarters, cement production is flat and so is electricity production. All in all, it is difficult to make a case that Chinese economy is actually growing at all, when one does not use official government data. 

Therefore, it should not come as a surprise that Copper has sold off hard recently, while Crude Oil has lost more than one quarter of its value in the last several months. On top of that, both industrial commodities, which are a great barometer of global growth, have failed to make new highs together with the S&P 500 in April of 2012. This is one of the major reasons I have turned bearish in recent times and expect further downside surprises out of Asia and especially China.
However, in the meantime I'd argue that selling is overdone and we are now overdue for a rebound. Crude Oil has experienced its longest weekly losing streak in 13 years, while all measures of sentiment have become depressed in recent times, including DSI readings hitting single digit bulls in the chart above.
At the same time, DSI for Copper has also hit single digits recent, COT positions have turned extremely net short by hedge funds, while the Public Opinion has completely collapsed towards bearish levels we have not seen in the May 2010 flash crash and the 2008 Lehman crash.

Therefore, as contrarians, we have to take into account the possibility of US Dollar experiencing a corrective period in the direct time ahead, which should enable all risk assets from S&P 500 to Emerging Market equities and from Australian Dollar to Crude Oil and Copper to stage some type of a rally too. Consecutive weekly losses from GEM equities, to Crude Oil and many other risk assets should reverse for the time being. How long that rally will last, we will have to wait and see. Personally, my outlook is that a global bear market has now started and the main trend is down.

Credit Markets
Nothing new to report.

Recommendations
  • Summary: my further action depends on political and central bank intervention. During market panics, authorises also panic. It is not until they start to panic, that they actually do something about current problems, which usually take form of some type of reflation policy. However, weak action will make me reduce my longs substantially and rebalance my portfolio towards net short exposure. Italy and Spain are once again moving towards the edge of the cliff, which is a real worry while Asia is now in a meaningful slowdown.
  • I still own SPY Calls purchased in middle of May, and also purchased some more Calls on the SPY ETF early last week. I do not own any other equity positions in my portfolio.
  • I also still own SLV Calls purchased in middle of May, and I also added to that by buying some more SLV ETF positions early last week. I am also still holding onto that core Silver position from late December 2011 bottom at $26.
  • I bought a very small position in Agricultural commodities through RJA ETF last week. I'm expecting the Agricultural bull market to resume eventually (best demand and supply fundamentals of any asset class). But, I haven't done anything major just yet.
  • Other assets on my watch list for some shorter term bullish rebound trades include Continuous Commodity Index (GCC / RJI). I believe commodities are very oversold right now.
  • It is too early to talk about shorting anything yet, as I am waiting for a market rebound first.