Monday, June 15, 2009

One Thing At A Time

Mondays can be rough. Today was one of those Monday's. Either I need a 4 day work week or I need the day to be 30 hours long instead of 24. Not likely!

Bearer Bond Media Note
I am not going to let this story die off, so i will try and find at least one mention of it daily.

Clusterstock's Joe Weisenthal was on the Glenn Beck show and did a small discussion. See video here.

Inflation/Deflation - Another View
An interesting take over at Accrued Interest on the -flation debate:
FED: Deflation? Over My Dead Body
But will we see CPI print below zero? Only if the Fed fails. In other words, sustained deflation remains a remote possibility. But sustained Fed interference in the markets in attempt to avert deflation is a strong probability.
So the bet should be not on deflation outright, but on the fallout from attempts to fight it. Weaker dollar. Higher commodities. Low short-term rates (including buying 2-year bonds as opposed to holding cash). Flat yield curve. Lower mortgage rates (at least from here).
That's is how I'm playing my deflation view.

I left a comment chiming in that would it be possible for deflation to take hold AND have a weaker dollar? An interesting thought experiment. The author seems to be closely aligned with my theorem that in the course of peeing their pants about deflation, the FED will cause all kinds of other damage trying to stop it. Leading to inflation! Eventually.

Dick Bove Sighting
I have spilled pixels on Dick Bove many times over the past 2 years, so I thought I might give the guy some more attention:
Dick Bove: Bank of America Faces “Horrific” Loan Losses (BAC)
"In the second quarter, (Bank of America's) position as the largest lender in multiple sectors of the American financial system will haunt the company as its losses expand," Bove said.
Nonetheless, Bove rates the company a buy, and raised his price target to $19 (from $14). He expects the price-earnings multiple on the stock to rise, and thinks confidence in the bank and its management are improving. This reminds us, of course, of our thesis from this weekend: the government’s guarantee against bank failure is driving up stock prices.

As an investor I try very hard to isolate companies who will "be haunted by expanding losses" and then load up on their stocks. NOT!

One Thing at a Time
Markets took a hit across the board today, with losses reaching their worst sizes since April. There was a ton of noise out there today, so I want to touch upon some things I was looking at.

It seems almost like the same players that are responsible for the two month gunning of futures right before the market close are unable to do two things at once. Today mission number 1 was to get a dollar rally. Helped by the Russian communication (so soon after the 135 Billion in bearer bonds was reported) that the US dollar was King Chit of Turd Mountain (KSTM) spurred the buck higher on the day. Of course a higher dollar is bad for stocks, oil, metals, well everything so everything fell.

As far as specifics, I will likely be stopped out of my SPY position taken a while back if there is further weakness. I have removed stops of my buys of SLV, GLD, and PAAS even though they are looking a bit weak here. Yes, I am a metals addict.

I should know better, and Tim Knight lowers the boom with Broken GLD:
"My precious metals shorts have done well for me; GLD now has broken a major trendline. Precious metals could be in serious trouble now."

Tim is a sharp player and I respect his call. Still, this is the 17th time in the past year that GLD and SLV have broken down on their way to zero and yet they still hang tough. We will see.

It seems the relationship between the dollar and stocks/commodities/metals has become super sensitive. The dollar only moved up from mid 79's to low 81's on the index so the aggressive move on the other end seems a bit overdone.

This relationship is a major contributor to my view that the dollar will have to weaken for any stock rally to continue. There will be one day wonders where the concentrated efforts to push it up occur, but the general market puking reaction will snuff that out.

It is a wild interconnected mess we have here. Balancing the buck and foreign interest in it with the need for a recovering market is a delicate dance. The folks in charge of the music think they can do this without a serious dislocation in one or more of the parts. Who has such a high opinion of their own abilities? From 10 years ago:

I submit the Committee to Save the World. Rubin and Summers are once again at the helm, and while Greenspan has since sailed on, we now have Ben Bernanke in the same position as Greenspan in this picture: The public face while the two behind him hold knives to his back.

I am sure this will all work out well.

Have a good night.

19 comments:

getyourselfconnected said...

That cover shot gives me chills, and not the good kind.

Anonymous said...

GYSC

Getting Bucky off the floor probably isn't as important as getting intrest rates down. Benny and the inkjets can't be happy about this.
http://www.bankrate.com/funnel/graph/

Kevin

getyourselfconnected said...

"Betty and the Inkjets", total classic!
Kevin,
you are on a tear!

Anonymous said...

You have identified all of the key points. And what a mess it is! Building a mental model for investment decisions is no mean feat at this juncture. There are times when I think that Bernanke is just crazy enough to wreck the dollar in a vain attempt to prove his ridiculous and varied anti-deflation theses. They (the fed) have the power to prevent the boom, but not the bust - a simple fact forever lost on academic dreamers like Bernanke and Krugman.

If the deflationist theory is correct - at least in the short term, say the rest of '09 - the dollar index will go up. Put UUP on your watch list. Also, I would expect gold to go up as well, but that may be delayed until the bank/business/municipal defaults start to heat up.

One thing is certain: we are about to find out (over the next few years) just how many dollars the rest of the world can absorb. The USD probably looks damned attractive to, say, a Latvian who has only lats in their bank account.

GawainsGhost said...

You know, many years ago I got into an argument with my father about probabilities. My point was that when you flip a coin there is an equal probability that it will fall heads or tails. But there is also an infinitely small probability that it will land on its edge, that is, fall neither heads nor tails. Even if the odds are infinity to one, given infinity, it must occur at least once.

My father, who was a brilliant systems analyst and an astute mathematician, told me I was insane, but he could not refute my argument.

I bring this up in the context of the inflation-deflation debate. Which will it be? Well, there is a third possibility not being considered. Stagflation.

This is considered an impossibility in Keynesian economics, but anyone who remembers the 70s knows it is in fact a very real possibility.

Over at Ludwig von Mises Institute, Robert Murphy argues convincingly that we are headed into a period of hyperdepression, a mix of hyperinflation and a serious recession in real output, and that "the economy will be in the toilet for a decade."

Well worth a close read and serious consideration.

http://mises.org/story/3488

Anonymous said...

N.Y. Gasoline Surges to Eight-Month High as Floor Trading Opens
http://tinyurl.com/n7nbb7

Uh-Oh
I have to admit I'm getting a kick out of watching this.

Disclosure I have no direct oil related holdings other then the ones that Hussman may have in his funds
Kevin

Anonymous said...

Gawainsghost,

What's a good stagflation with out wage and price controls? Wage increase seem to be nonexistent for now.

Kevin

GawainsGhost said...

Indeed, Kevin, indeed.

But the salient point remains. If an economic theory states that something--stagflation--is impossible, and it does in fact occur, does that not invalidate the economic theory?

This goes to the scientific method I discussed earlier. A theory is a hypothesis supported by evidence. But once new evidence emerges that contradicts the hypothesis, any theory, no matter how firmly entrenched, must be discarded, and a new theory formed.

But, unfortunately, as Mark Twain observes, history does not repeat itself, but it does rhyme.

These guys, Rubin, Summers, Paulson, Bernanke, Geithner, Krugman, et all--may they all rot in hell--are making the same mistakes and pretending that will solve the problem of their own creation. That would be the creation of their own failed economic theory. No amount of contradictory evidence can convince them that their theory is wrong.

Besides, what do think handing Chrysler and soon GM over to the UAW is but wage and price controls? Or government caps on executive compensation, for that matter.

I mean, we can't allow the lesser two of the big three to go through a legitimate bankruptcy--that would void the union contracts and allow the new company to slash wages to where they are competitive with non-unionized manufacturers and restructure overly generous pension benefits. And we can't have that.

The Austrian school advocates sound monetary policy and rails against government intervention and fraud. But we're seeing more of the latter than the former.

Sigh. Oh, well, as long as the world doesn't end before I get to spend thousands of dollars to go see the Dallas Cowboys lose another football game.

Anonymous said...

GawainsGhost,

I'm the kind of person that thinks the more people think something will never happen the more likely that eventually it will.

While your example of the UAW may be true my daughter is a member of the California correction officers union and they are working a couple of days a month without pay in lieu of a debased reimbursement in the future. Not all unions are created equal.

Clover goes to the gable wall and brings Benjamin with her. She asks Benjamin to read for her what is on the gable wall. All the commandments are gone, and all that is written there now is “All animals are equal, But some animals are more equal than others.”

Animal Farm by George Orwell

Kevin

Stagflationary Mark said...

GYSC,

"I am sure this will all work out well."

I have no doubt it will work out.

It's sort of like taking economic exlax for economic diahorrea. Something is bound to happen, lol.

Sorry about the imagery!

GawainsGhost said...

George Orwell was a prophet. I personally consider 1984 and Animal Farm as two of the greatest books written in the 20th century, right up there along with Gone With the Wind and The Great Gatsby.

That said, you're right. Some unions are more equal than others. But what can you do? The powers that be exist to perpetuate their fraud.

In my business, what with stricter lending, mortgage rates rising and fewer buyers able to qualify for a loan, how am I supposed to be able to sell a home?

This when inventory is high and foreclosures are skyrocketing. Prices are falling, but what's the point of that if no one can qualify for a mortgage to buy a home at rock bottom prices?

This is a debt crisis. Plain and simple. I'd be worried about it, if I had any debt, but the point remains that the entire borrow and spend economy is at its unfortunate end. Which is bankruptcy.

Stagflationary Mark said...

Kevin,

"I'm the kind of person that thinks the more people think something will never happen the more likely that eventually it will."

"Something" certainly happened!

I'm playing off of an inside joke between Kevin and me. See the following link. Hahaha!

http://illusionofprosperity.blogspot.com/2009/06/wisdom-of-pandit-musical-tribute.html

Anonymous said...

GawainsGhost

"how am I supposed to be able to sell a home?"

Apparently they are still not affordable to the average Joe. I view that as 2.5x of ones income with a nice down payment to go along with it.
Also we need 5 million outsourced jobs manufacturing things to return to the US, whether a devalued dollar will help in this regard as imported prices rise I don't know. I believe U3 unemployment will be over 11% by September.

"This is a debt crisis."

Nope what has been a financial crisis has morphed into a political crisis and the boys in charge have thrown a significant portion of the population under the fascism bus.

Maintaining the status quo is job number one.

Kevin

Anonymous said...

Mark,

Roubini, who rose to prominence for predicting the global credit crisis, tore down the "green shoots" theory that a rebound is imminent, saying there was a significant risk of a "double-dip" recession where the economy expands slightly only to begin contracting again.

"In addition to green shoots there are also yellow weeds," he told the Reuters Investment Outlook Summit in New York.
http://tinyurl.com/mbnehr

Who would have thought that "someting" might be yellow weeds?
I don't knowe maybe yellow looks green when one is wearing rose colored glasses, I don't have amy of those but if anyone does could you verify that for me?
LOL

Kevin

Stagflationary Mark said...

Kevin,

I lost my rose colored glasses while siinging the blues. Sorry.

getyourselfconnected said...

All,
had an after work function to attend, so no post tonight. Who needs a post with all the great comments anyways?

Roubini today said gold looked "toppy", unless there is another dip into deep recession, unless there is high inflation, unless geopolitical issues arise, and unless some other unforseen circumstances occur then yes he does not like gold here. Place your bets.

Anonymous said...

My bet is this: a dozen DX futures hedged with 2-4 ZG futures. It is not out of the question that they both go up. Alternately, the gold protects against being wiped out by unforeseen dollar events.

The same bet is replicated in my IRA using a mix of UUP calls, GLD shares, and GDX calls with '09 strikes in early fall and winter.

When considering the various 'flation scenarios, one must keep in mind the primary variable that cannot be painlessly extinguished, has never been higher, and is a distinct feature of deflationary spirals alone: peak debt.

getyourselfconnected said...

Anon,
it is my work week bed time, and the options you just layed out are a bit beyond me at this soporific part of the evening. It seems fully hedged, but I always wonder about hedging: If you protect the downside and upside, is your retur not 0? Gotta place a bet in one direction at some point.
Still,
very interesting ideas. You must be a real trader and not a hack like me!

Anonymous said...

I prefer to think of it as probability assessment rather than hedging. While I believe we are in for dollar strength, that could be wrong, possibly very wrong. If the dollar does get gutted by some massive sell-off, it is reasonable to assume that gold goes up. I lose, but I don't get wiped out. Very important, that.

As of now, the dollar and gold are trading in a somewhat inverse correlation. I structure to capture dollar gains while accepting possible gold losses. Being weighted to the former more than the latter results in a positive return of say 20-100% in a few months...or weeks...on dollar strength. Such fun.

If the fed is running out of anti-deflation bullets as I believe they are (or perhaps a little deflation pain is required to placate foreign bond buyers!) - then both gold and dollars go up for a spectacular double whammy gain. ;-)

A real trader? Actually, I am a failed scientist. I lacked the discipline to complete a study of microbiology.