Thursday, 20 June 2013

Is this a Summer Sale or a Sinking Whale?

June 20 2013 -- Well I have been saying for some weeks, raise cash and get ready for a summer pull back. Well you got one starting now, but we don’t catch falling knives so let see where this goes, wait to buy -- but not today. Today the S&P 500 index dropped below the 50-day moving average. However, I am more concerned that the market rose up on low volume and now volume is picking up going down, that’s a bad sign. I had mentioned a few weeks ago that the world has “caught a cold” and that global markets are sinking. The US does get a large part of its GDP from exports, so that figures in to the mix. I mentioned that the current highs in the stock market are not rational based on only 2% US growth, so the US markets must be raising out of fear of investing in anything else. The Markets have been hitting new highs from “hits” of economic heroin from the federal reserve, in the form of 85 billion a month in bond buying. I also warned the fed would taper that bond buying and that would give us our summer pullback. All going according to plan but . . . Two new things have come up; credit markets in China and treasury yield are rising.

I was worried about this way back in 2007. China’s corrupt officials use their power to get banks to make bad loans to build factories and apartment buildings the market does not need. Of course these projects are built on land owned by the same corrupt officials and then the project creates a source of bribes and kickbacks to those officials.  As I said this has been going on long time, I have been talking about it since 2007. However, now the seeds of destruction appear to ready for harvest. China PMI data is out and it looks bad. The latest China PMI figures show a 9-month low in manufacturing, but that is only the surface. Here is a Wall Street Journal story on Steel overproduction,  and the Financial Times has one too. I had mentioned before about factories shutting and industrial development land in China being returned to farming. If you read Pop Goes the Commodity Bubble you know what I think of communist party accounting, chances are the truth is worse than reported.

Bankers had been calling for the central bank to ease the pressure and a few investors had even predicted that it might cut interest rates. Instead, the People’s Bank of China (PBOC) ordered a thorough implementation of the new “mass line education” campaign launched this week by President Xi Jinping – a campaign that in its propaganda-style and potential scope carries echoes of the Mao era.

But what is really the problem is this. Twenty months ago China created a credit default swap (CDS) market, like the US has. A CDS market allows players to bet up or down on the viability of a debt. This has forced risk managers to look long and hard at just how bad the lending picture is in China. Word is getting out that as of last week, China’s banks stopped lending to each other and credit default swaps have started to widen. Wednesday night the overnight lending rate in China shot up. This is a lot like what sunk Lehman Brothers. And it is the same warning signs only this time it is in China that we have a liquidity squeeze. The PBoC is like China’s federal reserve. They have been trying to get these loans under control for sometime now but greed being what it is, they have been making many one-time exceptions – all the time.  The recent liquidity tightening however is on another level. The seven-day repo rate tripled in two weeks, overnight rates soared more than a third in one day, and intra-day rates were as high as 30 per cent. The PBOC may need to step in like the US, Europe and Japan and bail out the Chinese financial system. The trouble is the previous mentioned governments could borrow money easily, not so simple for China. Especially with many lenders still nursing the scars of the 1998 bond default by Russia.

I strongly recommend you watch this video from the Wall Street Journal. This bit on CNBC is not bad either. 

So the play here is the one I have been talking about for over a month go short China with an ETF called FXP. It goes up when China goes down:

Rates Rise 
Now there is bad news here too. The yield on the 10-year US treasury is raising and the US Federal Reserve is not really in control of it right now. It’s the bond traders, they keep pushing the rate up, in anticipation the fed will need to. The result is that is you bought TBT when I recommended it here a few weeks ago you would be up over 15% already – that is a great return!

My DVY hit its trailing stop a week ago and that is a good thing. As I said you had to be in this bull market because it could have continued up. The bull is not even dead yet, it might still recover in a few days, but it was a good time play a conservative play like DVY and see what happens. However by playing conservative the downside was mild and we are still mostly in cash so we are ready to buy bargains as they appear.

Two factors are causing the price of gold to tumble. One is a sharp jump in the U.S. Dollar. The other, and probably more important reason, is the jump in U.S. bond yields Gold is priced in dollars, a strong dollar makes gold look cheaper. Gold, however, is also impacted negatively by rising interest rates. The reason is that gold is a non-yielding asset. As a result, bullion becomes more competitive when yields are falling, and especially when they're at record lows. Gold has benefited from quantitative easing because it also weakened the dollar and raised false inflation expectations. (read here: Inflation? What Inflation?)

There is also a rumor that China has been selling some gold this week from it treasury to raise cash and more pressure is coming on the world gold market. I am still short gold and you should be too. I hope you bought HGD as I recommended last week.

I also have short gold futures on the NYMEX exchange. 

My Game Plan
So now is the time to watch the markets, wait for the up-tick and be ready to buy US equities if we start to recover from here. Otherwise continue to ride the slide in global markets and commodities. Short China, Short Gold, long cash.

Sunday, 16 June 2013

June 16 2013 Weekend Market Comment

June 16 2013 – In the past the saying “Sell in May and go away” did not mean there would be a sharp sell off like there was the prior three years. It just said that summer markets a slow and often end up flat overall. Many of the major players on Wall Street are at the summer cottage or pool side parties and the trading thins out. Markets on low volume often have a notable pull back followed by a summer rally then they enter the dangerous period from mid Sept to Mid October as big money mangers return. These fall months every few years are often where major sell offs happen. The effect is so pronounced that there are those who only play the markets from Halloween until May 1. We had a tiny pull back at the end of April, this year and we have the same pattern again. 

Lets look at our signs, first off the VIX is up as more uncertainty returns. VXX is an ETF that goes up as the VIX does.  I sold my VXX at a nice 20% profit this week as we passed 18 on the VIX. - Always by overconfidence and sell fear. 

(click any graphic to enlarge)

The YP primary sell indicator is below zero again. 

We are also seeing similar warnings from the NYSE % above 50-day chart. 

Most troubling of all is the NYSE new high low indicator. This has not rolled over since late 2012. This indicator shows number of stocks hitting new highs vs new lows.

You might recall this graph from my article called Buy Now? If this is a mild pull back it is not hard to see where the next green arrow will go and then this pull back will be a buying opportunity. But wait for it to turn, don’t get in now.    

But that is the problem, we have sold off a bit, and I am sure next week this sell off will continue. The real question is mild pull back like April or strong pull back like many summers? Well there are some clues and I have selected a strategy but no one knows the markets will do with 100% certainty; anyone who tells you otherwise is an idiot.

First off mild or strong you should be already on the right side of the market because I have told you for a few weeks now to play conservative. The markets are only off 1% this week, but you played conservative, with lots of cash, no new high flyers and broad stable ETFs so you got hit less than most.

Also since things are so uncertain here, you don't need to play here right now. Cash is a position too. What is clearly weighing on the market is the global market is falling apart, you know last week I said the World has caught a cold.  So I play that -- EUM is an inverse ETF that goes up when emerging market go down.

FXP is an inverse China ETF

Gold continues to sell off consider HGD on the Toronto exchange.
You might ask why HGD and not DUST. Well the problem is dust is a 3X ETF these "Juiced" ETFs these are volatile and not for long term holds. Read more here. Or you can watch this video of a guy reading out numbers.

Funny Stuff . . .
I was sent this video this week, really very funny, but while you watch this remember these two countries are nuclear powers. 

 Have a happy Fathers Day. 

Saturday, 8 June 2013

June 8 2013 Weekend Market Comment

June 8 2013 – There was a small bounce back this week as the Non-Farm Payroll number shows better growth than expected. It is almost as if the market is beginning to accept that it will soon be facing a world without economic stimulus. The numbers were precisely what the market wanted; some improvement but not so much that taper talk would again dominate the discussion. Shares shot up.

This graph shows the daily price action on the equal weight S&P 500, and the blue line is the 50-day moving average, as you can see it bounced right off it. The only thing you might worry about now is that at 64 (about 1675 on the S&P500) you can see we will hit the dreaded double top, and a bigger summer sell off might yet be with us. (?)

Even former Federal Reserve Chairman Alan Greenspan chimed in, saying that the central bank should taper now, even if the economy isn't ready. He should know, his long running, late 1990's cheap money policies, helped fuel the 2008 crash. 

"Bond prices have got to fall. Long-term rates have got to rise. The problem, which is going to confront us, is we haven't a clue as to how rapidly that's going to happen. And we must be prepared for a much more rapid rise than is now contemplated in the general economic outlook. We're still well below the [rate] level we normally ought to be at this stage. The consequence of that is that when the bond market begins to move we may not be able to control it as well as we'd like to. And that has a lot of ramifications with respect to all sorts of markets."—Alan Greenspan

It is exactly this trend that makes the TBT trade work. This week, after a tiny pull back, it worked very well.
Gold after a brief rally to “feed the ducks” continued on its path lower.

What Works Now
Well everything was up Friday, but one day does not make a turn around. 
From my recommended list, 

Community Health Systems

Electronics for Imaging

Health Management Associates

Norbord Inc (Canada)

Forget Facebook, the hot stock on the internet now is TripAdvisor. 

There is lots of others turning up this week, if you think the worst is over, you might look at:

  PSMT, BK, V,  LLY, 
  BIDU, RENN. (caution these are volatile) 
Global ETF

If you want a quick trade consider Canadian Auto Parts manufacture Magna. The stock should  rise on better than expected sales right up to Aug 9th when they release earnings. Dump it before then. $65.88 is your stop loss.

What is NOT Working Now
It is important to not put all your eggs in one basket. Any one company can have a surprise. Last week news came over the wires on one of my favourite recommends, Iron Mountain. I said previously to buy this on a pull back, well forget that. 

Shares of Iron Mountain Incorporated (IRM) fell 15 percent on Friday on concerns that the company’s REIT conversion would fall through. The Internal Revenue Service is scrutinizing the firm’s plans to convert into a real estate investment trust (REIT). The IRS says it wants to study whether the company’s server warehouses constitute real estate. 

This is still a great company, but now is not a time to rush in. As you know we don't try to catch "falling knives". But you should keep it on your radar. 

One country specific EFT that was a consistent winner has turned into a dud. That last bright spot in Europe, Turkey. This country fell from 5% a year growth darling to, "I can't get out of here fast enough", as protesters spooked investors. It is not just last month's Turkish youth rioting in the streets, that kind of thing is controllable. What is new is the common man has joined in banging pots out their windows, long into the night. It is a sort of rage like the 1976 movie Network, "I'm as mad as hell and I'm not going to take this anymore" grass roots protest.   

Did You Know . . . 
This week $7 billion flowed out of emerging market ETFs. Thats the biggest weekly outflow since 2011 

Feeling Guilty?. . .
Cambridge sociologist Geoffrey Ingham says; In all Indo-European languages, words for “debt” are synonymous with those for “sin” or “guilt”, illustrating the links between religion, payment and the mediation of the sacred and profane realms by “money.” For example there is a connection between money (German Geld), indemnity or sacrifice (Old English Geild), tax (Gothic Gild) and, of course, guilt.

Spotlight on a sector: Airlines
Oil is still holding up, but long term I believe as supply increases, it will drop from here. One day, not now, if we do see a period of lower fuel costs you might look at a group of stock that I truly loathe, Airlines. Other people make money in Airlines but I always just get crushed along with the luggage.

Southwest Airlines
What can I say – Herb Keller you're a genius and you built the most imitated airline of all. So here is to your baby Southwest and it ‘s two wan-be imitators

This low cost Irish airline is revolutionizing low cost airfare in Europe. Profits are strong because European Airlines are so uncompetitive. This company has made a name for itself in bad service and outrageous extra charges for things like luggage. Passengers grumble and they curse but they line up to get tickets. That said, 40 euro to go anyplace in Europe is a bargain too good to pass up.
Typical customer opinion -- "I know Ryanair are not your ideal model of customer friendliness. I am used to being treated like shite and just getting on with it. I never choose to fly with them if I can help it but if you want to go to Stanstead, then you do not have a choice as they have elbowed everyone else out to remove competition. Recently they did away with all check in desks. You have to check in-online. That is ok, BUT, they have a time limit of 4 hours. If you check in after that, you have to do it in the airport. Guess what the charge for that is? €70! I just tried to check in on-line 3.5 hours before departure. They really are utter utter ***ts. This is a sly nasty spiteful way of ripping people off."  – Mr Des Higgens 

Since 1996 This Canadian low-cost carrier provides scheduled and charter air service to 86 destinations in Canada, the United States and bits of Mexico and the Caribbean. In 2012, WestJet carried 17,453,352 passengers, making it the ninth-largest airline in North America by passengers carried.

Westjet service levels have been dropping in the last 5 years, but it does not matter since its only competitor, Air Canada, is bloated from years of government bailouts, incompetently managed and unionized to the hilt. For a worse flying experience than Air Canada you would need to fly Aeroflot.

Sunday, 2 June 2013

June 1 2013 Weekend Market Comment

June 1 2013 -- WOOSH Big Sell Off -- Well if you had a three-martini lunch on Friday and went home early, you got a rude surprise this weekend when you reviewed your portfolio. Unless of course you have been listening to me about not opening new positions, raising cash and playing safe. The Dow plunged over 200 points mostly in the final hours of trading. Even more bizarre is that the Toronto exchange should have been right there with it – it was only about half as bad.

It all began when the Wall Street Journal declared that the dreaded Hindenburg Omen had arrived. You can read about the indicator in the Wikipedia. In fact they had to stretch the numbers even to make that work.  I have seen these things before and all it really says is “hey we are overbought -- so volatility is up”, well duh, we know that. You can read in the second paragraph of "Buy Now?" where I had laid out lots of concerning overbought indicators before this blimp showed up. But the “now what” is the question. We were over bought before every major crash and we were overbought before every minor pullback, that became a buying opportunity. So the pundits are telling you that from here the markets will fluctuate. Really? Go figure?
(as always click on any graphic to enlarge it) 

Div Crush
The jump in bond yields during the month of May contributed to heavy selling of dividend paying stocks -- mainly telecom, utilities, and REITS.  But hey -- did I not say DVY the dividend ETF was a safe hiding spot? Yup I did, and you will see the sell off in DVY was not hit as strong as the broad market and this weekend investors are rethinking the whole risk reward number.

The World has Caught a Cold
Emerging markets have not been the place to be for a while. As you recall from Pop Goes the Commodity Bubble what did work, no longer will. Boy did we get a dose of that in May. China is down 10% and it is dragging Brazil Russia and Australia with it. Currency traders are all short the Auzzy dollar, and miners have been crushed. With gold in a great unwind and miners striking, the South African rand is the weakest among emerging market currencies that saw significant drops in value against the U.S. dollar this week. The rand reached the lowest value in four years as poor economic data and labor market tensions weighed on sentiment.  During the last five months, commodity prices fell -4% while the U.S. Dollar Index gained 4%. Emerging market ETFs are off about 4% in May alone.

However the baby is out with the bathwater, many solid global economy ETFs sold off last week in nations with no commodity exposure. After the pull back look seriously at buying the dips in the Philippines and Germany.

Japan Was No Help This Week
The last straw that upset the market this week was wild swings of volatility in Japan. For some time now we have been riding the DXJ trade, which we dumped a few weeks ago as the trade got too crowded. This week the Nikkei index had big 5% swings, often in after hours trading. One reporter on TV said this was a mystery; well it is no mystery at all.

Japan's experiment dubbed by the economist magazine “Abenomics”. By a QE like process, Japan is weakening the Yen.  Even though this does boost Japanese exports and stock prices it also makes imports more expensive.   But Japan’s youth unemployment is high. Also labour Unions in a nation that avoids conflicts, seldom strike and wage demands are often slowly phased in. What global investors figured out in Japan, is that consumer prices are rising, but wages are not. That is not the inflation they wanted, it’s the most dreaded of all economic conditions – stagflation.

Like the whole world, only more so, what Japan needs is a “Paris Hilton” gluttonous spending spree. What they are getting is a scared ultra-conservative population hoarding wealth in gold coins and savings accounts.

The Mad Hatter Tea Party is Almost Over 

Meanwhile back in the USA Ben Bernanke continues to try stuff a dormouse into a Teapot. We have entered into this bizarre world where market volatility is backstopped by Fed reserve policy.  If economic news shows a stronger economy, the market quivers at the thought of the Fed taking off the QE economic training wheels. On bad news the market will rally in a “In Ben We Trust” boom of exuberance.

If I sit quietly my cat often will come visit me, curly up to drain off my body heat. If I pet the cat gently, she purrs with satisfaction. However if I gently hold her in place and restrict her movements I get a low growl, ears pull back, followed by darting glances, then an explosive pounce out of my arms and indignant saunter off to freedom. The more the Fed insist on controlling market volatility the more explosive the reaction will be when animal spirits do return to the open market.

This coming Friday the US report Non-farm Payrolls and Wall Street will react, probably the opposite way it should. Perhaps we will not see it in this report, but clearly America’s employment picture is brighter. Bloomberg news reports some 78% of jobs from the boom years of 2007 are back. At the current rate of acceleration over 90% of jobs will be back by January 2014. In Dallas, there has been 200% job growth from 2006 and it is not all energy, much of it is tech, services and manufacturing.

Volatility is the New Normal
We have been enjoying this ride so far this year with stocks marching ever upward. But the truth is the VIX hates to be too low too long. When the VIX was down almost 12 a few weeks ago I mentioned I was buying VXX as a hedge and because the VXX was cheap. Things have gone well so far on that. It pays to buy volatility when it is on sale.

But There is a Catch
As volatility returns to the market next week, there may be a short-term return to bond buying. This could hurt our TBT trade, but I believe in the long run TBT is the best bet. So you can play this two ways,  if you are a trader you could step out of TBT for a while, if you are buying and holding -- TBT still works long term. TBT is up 6% in the past few weeks since I recommended it.

Solar Sunburn Coming  
Amazingly since January 4 out of the top 5 top performing U.S. ETFs are related to clean energy -- gains mostly coming from Solar Stocks. Years ago these stock rose because of breakthroughs in technology making these panels nearly in line with the cost of diesel engine based electricity production. However the 2013 boom is coming from government market manipulation as many nations are subsidising solar projects and the EU slapped a big tariff on Chinese solar panels. Many US solar firms are abandoning hard core manufacturing, stopping R & D and relying on offshore sub-assemblies but are making a killing on the installation and maintenance contract business.  

But the party may already be over for clean energy solar equities. As I said before we are soon to be swimming in oil. With fracking, steam recovery, horizontal drilling and other new drilling technologies dramatically increasing oil production, cars being far more fuel-efficient, Americans driving less, plus trains and ships converting to natural gas power we may not have to be so careful with hydrocarbon energy soon. Blow number one will come if oil declines to $66 a barrel. Read The new Momentum . Also with success come scrutiny, with the US government knee deep in sequester cutbacks, clean energy subsidies look like an easy target, in light of the eye-popping profits being made in Solar.

What Works Now
Well frankly CASH, I have been 50% in cash for weeks now. It is always great to have some dry powder for bargain hunting. For those of you  in Canada, for god sake get some US dollars. The days of the Canadian Peso are returning and parity will not be here forever. The current exchange rate is a gift from the market, the Canadian dollar is headed the way of the Australian dollar -- soon.

Of course, our key indicators are all rolling over, Here is the 50 day Overbought indicator. Now almost 1/2 the NYSE is below the 50 day moving average. Notice MACD went below zero this week.

After the Pull Back consider these three super stocks to pick up on a bargain

CYH Community Health Systems

Micron Technology

Norbord - Canada's top stock super star

Also after a pull back look at Canadian pipelines, CP rail and a good deal on getting back into Iron Mountain.

If this sell off gets going don't forget to buy HDGE

An ETF for All Seasons.
Perhaps not exactly today, but one day when this correction bottoms you might be asked this. What would you buy if you could just buy one security for a buy and hold investor for a 20-year time horizon? Consider ticker VT, this is Vanguard World Stock ETF. It really is the whole world in one low fee ETF. It tries to reflect the performance of the FTSE Global All-Cap Index, which includes both developed and developing market stocks. It is very diversified, holding nearly 4000 equities around the globe, Emerging Markets 14.1%, Europe 22.9%, Pacific 12.4%, Middle East 0.3% and North America 50.3%. It has a modest expense ratio of 0.22%, a 3% dividend and it is up 28% this year. Granny please listen, this is way better than a bank CD.

Saturday, 1 June 2013

Golden Fleece

June 1 2013 -- A friend asking what I thought, sent me this graph showing a coming turnaround in gold. My answer was, “not much”. Anyone who reads my writings should know I see no future for Gold. 

Predicting future movement with charts is called technical analysis. I am schooled in it, and I learned chart interpretation from John Murphy and Art Hill -- the best in the business. I even display charts all the time in my blog. That said, any honest technician would tell you that charts are always “trumped” by fundamentals. For example the night before Sept 11 2001 you could draw all the charts you want, of course the next day once those plane hit, the stock market behaves completely differently - immediately.

The lines drawn on this chart above are called a fib retracements, and it is true that some magic number like “half way back” also called a 50% retracement, can create attractive buying opportunities. A nice line at the 38.2% magic number is coming up. It is logical that anything that sells-off, takes a breather, it finds buyers at some price and the price goes up for a bit. But this buying will be short lived if the fundamentals do not hold. There must be many people buying gold if the price is going up. That is fundamentals.

For example, once fraud was revealed at Nortel and at Enron nothing was going to save the stock. Buy even when it was all falling apart, as they fell, there were technicians drawing charts that predicted a turn-around. Those charts were made without regard for the idea, the firm's accountants lied, the shareholders sold all the shares, the party is over. (Enron chart right) Both those stocks went to nothing and both firms stopped existing. No one buys film for cameras any more -- is it any wonder Kodak is gone. Draw all the lines you like -- fundamentals always trump technicals.

I don't doubt gold will rise a little bit here for the next few weeks. In fact it is important that is it does. Big Wall Street firms, like Goldman Sachs run the price up now and then to bring in someone to buy. It is called "feed the ducks" read "suckers" who buy bad investments from their big clients who need to unload big positions. Right now HSBC has more gold than any private organization has ever held for sale. George Soros one of the world biggest funds and many hedge funds holding gold are down some 20% this year and are rotating out of commodities into stocks. Literally trillions of dollars in gold must find suckers to buy it.

Gold has for a million years has never been worth more than $400 except for one brief bubble when I was becoming an adult. For the last 11 years out of fear of inflation gold has shot up to $1,800. But read here why there is no inflation. Mostly due to buying by one hedge fund called the Paulson fund. Paulson is out of money and losing investors. Read about Paulson here. The great buying spree is over. Now there is nothing to do but sell the useless stuff and very few people are buying. Russia puts on a brave face nibbling here and there, Azerbaijan is buying a bit too and so is Mexico. Allow for buying of 1 metric ton of Gold for these nations, and 3 tons for gold coins and jewellery. Meanwhile reserve second in size to the US gold reserves are being dumped. 2000 Metric tons of Gold is being sold now and there are no buyers, except the guy who made this chart.  Like peeing in the preverbal ocean. Read about it here.

Fancy charts bamboozle, but even an eight year old could look at my simple chart below and see where Gold is going. 

Read my old postings -- it is all there…