Printing Money Causes the Wrong Kind of Inflation

November 18th, 2010

The Great Correction…still in business…

The latest news suggests that we’ve been right all along. Housing starts are down a surprising 12% – with house prices still soft or falling in most areas.

Jobs? Forget it. Joblessness continues to be a major headache…with no significant relief in sight.

And both consumer and producer prices are flatter than expected. In fact, the core CPI reading is at a record low. For all the talk of “inflation” – there isn’t any. Ben Bernanke is right, at least about “core” inflation. Prices for people who neither eat, nor travel, nor heat their houses are flat.

Yes, dear reader. We’re in a great correction. We just don’t know what it intends to correct. Not yet.

“US inflation moves close to zero,” says the BBC.

And here’s Bloomberg, with the details:

The cost of living in the US probably rose for a fourth month in October, led by higher gasoline and food prices that aren’t filtering through to other goods and services, economists said before reports today.

The consumer-price index increased 0.3 percent after a 0.1 percent gain the prior month, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department report. Excluding food and fuel, so-called core costs may have increased 0.7 percent from October 2009, matching a record low. Another report may show housing starts last month fell to the lowest level since July.

We were watching the descent of consumer prices this past spring. It looked like the CPI would approach zero by the end of the summer…and then head into negative territory.

But then, with all the excitement around quantitative easing, we kind of lost track. The feds were printing money intentionally, right out-in-the-open and without even a “sorry” or an “excuse me.”

Everyone knew it was “inflationary.” And it was – to the extent that it inflated the monetary base. But it didn’t inflate consumer prices. Why not?

“It’s the economy, stupid.”

When an economy is de-leveraging you get a phenomenon that John Maynard Keynes described as “pushing on a string.” You can push money into the system. But the other end of the string…where you find consumer prices…doesn’t move.

And now, it looks like Keynes was right. The Fed is pushing in $600 billion. Consumer price increases are still going down.

So we might be tempted to think that the feds can push on the string all they want; they’ll never get consumer prices to rise.

But it’s not that simple. It may be true that you can’t increase consumer prices simply by putting money into the banking system. But the Fed is now going one step further. It’s funding the US budget deficit – practically the whole thing. That frees all the money that would have gone into US Treasuries to go elsewhere. Where? Darned if we know.

But just look at cotton prices. And gold. And farmland in Iowa and Indiana. Farmland yields (not crop yields…financial yields, from renting out the land) are at an extreme low. Prices have been bid up – thanks to record low interest rates and record high agricultural output prices.

And look at prices of Indian stocks. They’re selling near record levels too.

All over the world, prices are going up – especially in emerging markets, where economies are growing fast.

But in America, consumer prices – when you take out food and energy – are going nowhere.

Just what you’d expect in this strange correction.

Bill Bonner

for The Daily Reckoning

Printing Money Causes the Wrong Kind of Inflation originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Printing Money Causes the Wrong Kind of Inflation




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Rationalizing the Fight Against Deflation

November 18th, 2010

“A cynic,” Oscar Wilde famously remarked, “is one who knows the price of everything, but the value of nothing.” A Federal Reserve Chairman is not so different.

Ben Bernanke seems to know the seasonally-adjusted, hedonically refined, government-calculated price of everything, but he seems incapable of determining the real-world value of a banana…or of a dollar bill for that matter.

Chairman Bernanke says the forces of deflation are encroaching upon the US economy. The government bean-counters tell him so. They tell him that the Consumer Price Index (CPI) increased only 1.2% during the past 12 months…and that the seasonally adjusted “core” CPI barely budged at all.

This disinflation/deflation stuff is a serious threat to economic recovery, Bernanke believes, and it must be quashed. If not, the bean-counters will walk into his office one of these days and tell him that seasonally-adjusted, hedonically refined prices are falling. And that would be a really bad thing.

Why? We are not really sure. But the rationale for Bernanke’s deflation-fighting campaign seems to go something like this:

Ben Bernanke was a good student; Ben Bernanke studied the Great Depression at MIT; the good student learned that the Great Depression was really bad; therefore, things that happened in the Great Depression were also really bad; deflation happened during the Great Depression; therefore, deflation must be bad [along with jazz and temperance]; bad things should not happen; therefore, deflation should not happen…and neither should jazz or temperance.

Even though the cause-effect relationship between deflation and the Great Depression are highly debatable, Bernanke countenances no debate whatsoever. He simply proceeds doggedly under the assumption that deflation is a cause of bad stuff and that it must be vanquished so that inflation can work its therapeutic marvels.

Therefore, the Federal Reserve must continue printing dollars and funneling them into the US economy until the “threat” of deflation becomes so remote that the Bureau of Labor Statistics removes the minus signs from its computer keyboards.

Putting aside for a moment the wisdom or idiocy of printing money to combat deflation, let’s examine merely the idiocy of combating an enemy that does not exist. Deflation is missing in action; it has already fled the battlefield. This fact seems obvious to everyone except the BLS, Ben Bernanke and the thinning ranks of 30-year T-bond buyers. Inflation is the real enemy, and Bernanke is inadvertently consorting with it.

What is a $600 billion quantitative easing operation if not a “supply line” to the forces of inflation?

But the chairman doesn’t see it that way. He sees things like contracting credit, rising savings rates, sluggish economic activity and meager employment growth as sure-fire signs of a dangerous deflationary trend. He also sees the press releases from the BLS that tell him prices are, as he would put it, “failing to rise.” But the truth of the matter is that the Consumer Price Index (CPI) is one big seasonally-adjusted, hedonically refined lie.

Officially, year-over-year CPI is up 1.17%. Officially, it is also up 8.51%. That’s right; based on the official CPI-calculation methodology in use prior to 1982, the year-over-year inflation rate would be soaring north of 8%. (Deflation looks nothing like that). This fascinating insight emerges from the always-fascinating work of John Williams at Shadow Government Statistics.

If the Shadow Stats inflation data would fail to convince the Chairman that inflationary phenomena are at least as prevalent as deflationary ones, he could take a peek at commodity prices (up 11% yoy) or at health insurance costs (up 12.5% yoy). Easier still, he could examine his grocery bill.

“It’s getting harder and harder for Americans to put food on the table,” The Classic Liberal reports, “our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October…

“You don’t need a Harvard PhD in economics to understand what this means,” The Classic Liberal concludes.

Very true, but you do need a Harvard PhD in economics to not understand what this means. “You can always tell a Harvard grad,” the century-old saying goes, “you just can’t tell him much.”

Ben Bernanke did not merely graduate from Harvard, he graduated summa cum laude. The PhD came later, and not from Harvard. Be that as it may, we would never try to tell the Chairman anything about inflation or deflation. (He knows more about all of that stuff than we could ever hope to forget). We would simply tell him to look around…out in the real world where prices don’t conceal themselves inside hedonic refinements.

He wouldn’t have to look very far. Heck, he wouldn’t even have to look outside of academia. The price of a four-year college education is soaring, even though the value of that education is going nowhere. For more than a decade, college tuition has been increasing at triple the rate of CPI. As a result, 100 colleges or universities are now charging more than $50,000 per year for tuition, fees, room, and board, according to the Chronicle of Higher Education – that’s up from 58 last year and only five colleges two years ago. As recently as 2004, no college or university charged more than $50,000 per year.

The rising price of a college education is not synonymous with inflation, but it’s close. In the halls of academia, the only thing that’s deflating is the value of a college degree. According to the National Association of Colleges and Employers, more than half of all 2007 college graduates who had applied for a job had received an offer by Graduation Day. In 2008, that percentage tumbled to 26%, and to less than 20% last year. Meanwhile, the unemployment rates for all college graduates – both recent and ancient – have doubled from 2% to 4% during the last year.

Ergo, college prices up; value down.

Number of College Presidents Receiving Over $500,000 Per Year

But don’t try telling that to a college president. The number of college presidents receiving more than half a million dollars per year has been soaring at a 27% annualized rate during the last six years. The value of these presidents may or may not have soared commensurately. Either way, the aspiring youths who attend these universities are paying ever-higher prices to pursue their aspirations…and are assuming ever-larger quantities of student debt.

Student Loan Debt vs. Credit Card Debt

Earlier this year, for the first time ever, the total value of student loans outstanding exceeded the value of credit card debt outstanding. And this trend is accelerating. According the website Critical Mass, “The number of college students graduating with over $25,000 in student loan debt has tripled in the past decade alone. Today, 66% of students borrow to pay for college, taking on an average of $23,165 in debt. Twelve years ago, 58% borrowed to pay for college, taking on only $13,172 in debt.”

Is this inflation? Maybe not, but it sure as shinola isn’t deflation.

Eric Fry
for The Daily Reckoning

Rationalizing the Fight Against Deflation originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Rationalizing the Fight Against Deflation




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Rationalizing the Fight Against Deflation

November 18th, 2010

“A cynic,” Oscar Wilde famously remarked, “is one who knows the price of everything, but the value of nothing.” A Federal Reserve Chairman is not so different.

Ben Bernanke seems to know the seasonally-adjusted, hedonically refined, government-calculated price of everything, but he seems incapable of determining the real-world value of a banana…or of a dollar bill for that matter.

Chairman Bernanke says the forces of deflation are encroaching upon the US economy. The government bean-counters tell him so. They tell him that the Consumer Price Index (CPI) increased only 1.2% during the past 12 months…and that the seasonally adjusted “core” CPI barely budged at all.

This disinflation/deflation stuff is a serious threat to economic recovery, Bernanke believes, and it must be quashed. If not, the bean-counters will walk into his office one of these days and tell him that seasonally-adjusted, hedonically refined prices are falling. And that would be a really bad thing.

Why? We are not really sure. But the rationale for Bernanke’s deflation-fighting campaign seems to go something like this:

Ben Bernanke was a good student; Ben Bernanke studied the Great Depression at MIT; the good student learned that the Great Depression was really bad; therefore, things that happened in the Great Depression were also really bad; deflation happened during the Great Depression; therefore, deflation must be bad [along with jazz and temperance]; bad things should not happen; therefore, deflation should not happen…and neither should jazz or temperance.

Even though the cause-effect relationship between deflation and the Great Depression are highly debatable, Bernanke countenances no debate whatsoever. He simply proceeds doggedly under the assumption that deflation is a cause of bad stuff and that it must be vanquished so that inflation can work its therapeutic marvels.

Therefore, the Federal Reserve must continue printing dollars and funneling them into the US economy until the “threat” of deflation becomes so remote that the Bureau of Labor Statistics removes the minus signs from its computer keyboards.

Putting aside for a moment the wisdom or idiocy of printing money to combat deflation, let’s examine merely the idiocy of combating an enemy that does not exist. Deflation is missing in action; it has already fled the battlefield. This fact seems obvious to everyone except the BLS, Ben Bernanke and the thinning ranks of 30-year T-bond buyers. Inflation is the real enemy, and Bernanke is inadvertently consorting with it.

What is a $600 billion quantitative easing operation if not a “supply line” to the forces of inflation?

But the chairman doesn’t see it that way. He sees things like contracting credit, rising savings rates, sluggish economic activity and meager employment growth as sure-fire signs of a dangerous deflationary trend. He also sees the press releases from the BLS that tell him prices are, as he would put it, “failing to rise.” But the truth of the matter is that the Consumer Price Index (CPI) is one big seasonally-adjusted, hedonically refined lie.

Officially, year-over-year CPI is up 1.17%. Officially, it is also up 8.51%. That’s right; based on the official CPI-calculation methodology in use prior to 1982, the year-over-year inflation rate would be soaring north of 8%. (Deflation looks nothing like that). This fascinating insight emerges from the always-fascinating work of John Williams at Shadow Government Statistics.

If the Shadow Stats inflation data would fail to convince the Chairman that inflationary phenomena are at least as prevalent as deflationary ones, he could take a peek at commodity prices (up 11% yoy) or at health insurance costs (up 12.5% yoy). Easier still, he could examine his grocery bill.

“It’s getting harder and harder for Americans to put food on the table,” The Classic Liberal reports, “our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October…

“You don’t need a Harvard PhD in economics to understand what this means,” The Classic Liberal concludes.

Very true, but you do need a Harvard PhD in economics to not understand what this means. “You can always tell a Harvard grad,” the century-old saying goes, “you just can’t tell him much.”

Ben Bernanke did not merely graduate from Harvard, he graduated summa cum laude. The PhD came later, and not from Harvard. Be that as it may, we would never try to tell the Chairman anything about inflation or deflation. (He knows more about all of that stuff than we could ever hope to forget). We would simply tell him to look around…out in the real world where prices don’t conceal themselves inside hedonic refinements.

He wouldn’t have to look very far. Heck, he wouldn’t even have to look outside of academia. The price of a four-year college education is soaring, even though the value of that education is going nowhere. For more than a decade, college tuition has been increasing at triple the rate of CPI. As a result, 100 colleges or universities are now charging more than $50,000 per year for tuition, fees, room, and board, according to the Chronicle of Higher Education – that’s up from 58 last year and only five colleges two years ago. As recently as 2004, no college or university charged more than $50,000 per year.

The rising price of a college education is not synonymous with inflation, but it’s close. In the halls of academia, the only thing that’s deflating is the value of a college degree. According to the National Association of Colleges and Employers, more than half of all 2007 college graduates who had applied for a job had received an offer by Graduation Day. In 2008, that percentage tumbled to 26%, and to less than 20% last year. Meanwhile, the unemployment rates for all college graduates – both recent and ancient – have doubled from 2% to 4% during the last year.

Ergo, college prices up; value down.

Number of College Presidents Receiving Over $500,000 Per Year

But don’t try telling that to a college president. The number of college presidents receiving more than half a million dollars per year has been soaring at a 27% annualized rate during the last six years. The value of these presidents may or may not have soared commensurately. Either way, the aspiring youths who attend these universities are paying ever-higher prices to pursue their aspirations…and are assuming ever-larger quantities of student debt.

Student Loan Debt vs. Credit Card Debt

Earlier this year, for the first time ever, the total value of student loans outstanding exceeded the value of credit card debt outstanding. And this trend is accelerating. According the website Critical Mass, “The number of college students graduating with over $25,000 in student loan debt has tripled in the past decade alone. Today, 66% of students borrow to pay for college, taking on an average of $23,165 in debt. Twelve years ago, 58% borrowed to pay for college, taking on only $13,172 in debt.”

Is this inflation? Maybe not, but it sure as shinola isn’t deflation.

Eric Fry
for The Daily Reckoning

Rationalizing the Fight Against Deflation originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Rationalizing the Fight Against Deflation




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Go for Profits with International ETFs

November 18th, 2010

Ron Rowland

Let me ask you a question. Suppose you have the ability to invest in any stock market in the world. One of the largest markets has lagged badly for many years now. And there are few reasons to think the situation will improve.

Would it make sense to put the bulk of your assets in that relatively weak market?

“No, of course not,” you will probably say. Good for you!

Unfortunately, most U.S. investors are making the wrong choice … and many so-called “experts” are cheering them on. How can this be?

Simple: The weak lagging market I mentioned above is the U.S.! And sadly, thousands of professional financial advisors tell their clients to stick with the “safety” of U.S. stocks.

U.S. stocks aren't always
U.S. stocks aren’t always “safe.”

I wish I knew why so many of my peers refuse to face reality. Maybe it’s just a force of habit.

However, those investors do have the ability to invest around the world — with hundreds of international exchange traded funds (ETFs).

So today I’m going to give you three challenging questions you should ask any investment advisor, stock broker or newsletter editor who tells you to keep most of your money in U.S. stocks, mutual funds or ETFs.

Challenging Question #1:
Is it hard for me to invest in
non-U.S. stock markets?

There was, in fact, a time when practical considerations made it very difficult for American investors to get overseas exposure. Many brokers couldn’t process foreign trades, the tax paperwork was complicated, and it was hard to get news from off-the-beaten-path places.

These barriers are no longer relevant — and anyone who tells you otherwise is sadly uninformed. Let’s look at them in order …

  • With a few mouse clicks or a quick phone call, you can buy or sell an ETF like iShares MSCI Singapore (EWS) just as easily as an S&P 500 index fund. Both trade on the same exchanges. No need to get up in the middle of the night and call a broker on the other side of the world.
  • Tax paperwork? You’ll have to speak with your Congressman if you want to get rid of it completely. A good interim step is the simple tax reporting that you can get even from discount brokers today. You don’t have to frustrate yourself trying to calculate your cost basis … unless you just enjoy that sort of thing.
  • International news is easy to find on the web now. Sometimes the sources are questionable. But there is no shortage of basic news and analysis, even on the most obscure exchanges. You can read the local newspapers online at the same time as Wall Street’s analysts.

Therefore, the argument that investing overseas is somehow hard for the average investor just doesn’t hold water.

Challenging Question #2:
Which ETFs have the best short-term
and long-term performance?

The table below shows you the top ten best-performing unleveraged equity ETFs for the one-year and five-year periods ended 11/12/2010. All are readily accessible to U.S. investors.

International ETFs dominate the winner's list!
International ETFs dominate the winner’s list!

You’ll notice that most of the top-ranked ETFs for one year, and ALL of the top-ranked for the last five years, specialize in international markets, particularly emerging markets. Yet relatively few investors have money in them!

This brings us to our third and most important question:

Challenging Question #3:
Why should I invest my money anywhere else?

To me, the answer to this question is quite obvious. Global economic power is shifting away from North America and Western Europe. The new leaders are in Asia and Latin America.

I’ve written about that mega-trend many times. Of course, I’m not saying there are never any opportunities to profit in the U.S. Obviously there are. My point is the potential is even greater elsewhere.

And to me, the logical answer is to follow the momentum wherever it leads.

Momentum is now with the emerging markets.
Momentum is now with the emerging markets.

Are international and emerging markets ETFs volatile? Yes, of course. They’re subject to political unrest … currency turmoil … natural disasters … and assorted other risks.

These are pretty much the same risks you take in U.S. stocks!

Like it or not, risk is everywhere. You can’t escape it — but you can use it wisely. I think international ETFs are one of the wisest risks an investor can take. That’s why I use them extensively. You should do likewise if you want to survive and profit in the coming decades.

You can get specific buy and sell recommendations for many global ETFs in my International ETF Trader service. Martin Weiss and I made a free video presentation to tell you more. Click here to check it out.

Best wishes,

Ron

P.S. This week on Money and Markets TV, we look ahead to the holiday shopping season. I’ll be among a panel of experts to explain why it’s so important for the retail industry, the overall economy and how you can profit with ETFs.

So tune in tonight, November 18, at 7 P.M. Eastern time (4:00 P.M. Pacific). Simply go to www.weissmoneynetwork.com and follow the on-screen instructions. Access is free and no registration is required.

Read more here:
Go for Profits with International ETFs

Commodities, ETF, Mutual Fund, Uncategorized

Go for Profits with International ETFs

November 18th, 2010

Ron Rowland

Let me ask you a question. Suppose you have the ability to invest in any stock market in the world. One of the largest markets has lagged badly for many years now. And there are few reasons to think the situation will improve.

Would it make sense to put the bulk of your assets in that relatively weak market?

“No, of course not,” you will probably say. Good for you!

Unfortunately, most U.S. investors are making the wrong choice … and many so-called “experts” are cheering them on. How can this be?

Simple: The weak lagging market I mentioned above is the U.S.! And sadly, thousands of professional financial advisors tell their clients to stick with the “safety” of U.S. stocks.

U.S. stocks aren't always
U.S. stocks aren’t always “safe.”

I wish I knew why so many of my peers refuse to face reality. Maybe it’s just a force of habit.

However, those investors do have the ability to invest around the world — with hundreds of international exchange traded funds (ETFs).

So today I’m going to give you three challenging questions you should ask any investment advisor, stock broker or newsletter editor who tells you to keep most of your money in U.S. stocks, mutual funds or ETFs.

Challenging Question #1:
Is it hard for me to invest in
non-U.S. stock markets?

There was, in fact, a time when practical considerations made it very difficult for American investors to get overseas exposure. Many brokers couldn’t process foreign trades, the tax paperwork was complicated, and it was hard to get news from off-the-beaten-path places.

These barriers are no longer relevant — and anyone who tells you otherwise is sadly uninformed. Let’s look at them in order …

  • With a few mouse clicks or a quick phone call, you can buy or sell an ETF like iShares MSCI Singapore (EWS) just as easily as an S&P 500 index fund. Both trade on the same exchanges. No need to get up in the middle of the night and call a broker on the other side of the world.
  • Tax paperwork? You’ll have to speak with your Congressman if you want to get rid of it completely. A good interim step is the simple tax reporting that you can get even from discount brokers today. You don’t have to frustrate yourself trying to calculate your cost basis … unless you just enjoy that sort of thing.
  • International news is easy to find on the web now. Sometimes the sources are questionable. But there is no shortage of basic news and analysis, even on the most obscure exchanges. You can read the local newspapers online at the same time as Wall Street’s analysts.

Therefore, the argument that investing overseas is somehow hard for the average investor just doesn’t hold water.

Challenging Question #2:
Which ETFs have the best short-term
and long-term performance?

The table below shows you the top ten best-performing unleveraged equity ETFs for the one-year and five-year periods ended 11/12/2010. All are readily accessible to U.S. investors.

International ETFs dominate the winner's list!
International ETFs dominate the winner’s list!

You’ll notice that most of the top-ranked ETFs for one year, and ALL of the top-ranked for the last five years, specialize in international markets, particularly emerging markets. Yet relatively few investors have money in them!

This brings us to our third and most important question:

Challenging Question #3:
Why should I invest my money anywhere else?

To me, the answer to this question is quite obvious. Global economic power is shifting away from North America and Western Europe. The new leaders are in Asia and Latin America.

I’ve written about that mega-trend many times. Of course, I’m not saying there are never any opportunities to profit in the U.S. Obviously there are. My point is the potential is even greater elsewhere.

And to me, the logical answer is to follow the momentum wherever it leads.

Momentum is now with the emerging markets.
Momentum is now with the emerging markets.

Are international and emerging markets ETFs volatile? Yes, of course. They’re subject to political unrest … currency turmoil … natural disasters … and assorted other risks.

These are pretty much the same risks you take in U.S. stocks!

Like it or not, risk is everywhere. You can’t escape it — but you can use it wisely. I think international ETFs are one of the wisest risks an investor can take. That’s why I use them extensively. You should do likewise if you want to survive and profit in the coming decades.

You can get specific buy and sell recommendations for many global ETFs in my International ETF Trader service. Martin Weiss and I made a free video presentation to tell you more. Click here to check it out.

Best wishes,

Ron

P.S. This week on Money and Markets TV, we look ahead to the holiday shopping season. I’ll be among a panel of experts to explain why it’s so important for the retail industry, the overall economy and how you can profit with ETFs.

So tune in tonight, November 18, at 7 P.M. Eastern time (4:00 P.M. Pacific). Simply go to www.weissmoneynetwork.com and follow the on-screen instructions. Access is free and no registration is required.

Read more here:
Go for Profits with International ETFs

Commodities, ETF, Mutual Fund, Uncategorized

Muni Market Collapsing – How Do Active Muni ETFs Compare?

November 18th, 2010

The chart above is not a pretty sight. The US municipal bond market started a massive leg down on November 8th which has now turned into what looks like an all-out collapse. In the space of a week and a half, the iShares S&P National Municipal Bond Fund (MUB: 100.54 0.00%) which is the largest ETF for the US municipal bond market with a market cap in excess of $2 billion, has fallen by 4.55%. This may not sound like much compared to equity market movements, but it is a huge move in the muni market, as is evident from all the tiny daily moves in the chart above before November.

Municipal bonds have traditionally been held widely amongst tax-sensitive investors, especially those in higher marginal tax brackets. This is because municipal bonds provide income that is free from federal taxes and often from taxes of the state in which they are issued. However, since 2008, many states and municipalities in the US have had trouble keeping their budgets in line and have suffered large deficits. A prime example is, of course, California. Due to California’s budget problems, the state’s bonds have suffered badly. In fact, since November 8th, CMF, which tracks an index holding municipal bonds issued in California, has fallen much more than MUB, dropping close to 6%.

What is behind the panic?

Interestingly, most commentators haven’t been able to pin-point any one single trigger that may have sparked the sell-off in the general muni bond market. However, there are plenty of underlying problems that have been festering in the market for a while.

First off, as mentioned earlier, nearly every state in the US has had trouble balancing its budget and budgetary problems have reduced confidence in the ability of the issuers to meet their debt obligations. California will be auctioning off $14 billion in bonds this month to help bridge its deficit gap, in turn creating an over-supply of bonds when demand for them is dropping. Another reason speculated to be behind this recent move down has been the pending closure of the Build America Bond program. The program has been hugely successful since its launch as issuers capitalized on a cheaper way to finance their capital needs because of the credits they receive on interest payments from the government. The program though is due to expire at the end of 2010 and there has been no word on previous discussions in the US Congress of extending this program till the end of 2012. Due to the upcoming deadline, states and municipalities are rushing to issue bonds under the program, again causing a supply glut.

How do Active Muni ETFs stack up with Passive Muni ETFs?

One good opportunity that this panic does provide us with is an ideal testing ground to evaluate whether active management adds any value in times like this. In other words, are active managers earning their marks in times when they would be expected to. There are currently two actively-managed ETFs in the US that compare well, in terms of maturity, with the iShares S&P National Municipal Bond Fund (MUB) which can be taken as the passive proxy – PIMCO’s Intermediate Municipal Bond Fund (MUNI: 50.86 0.00%) and the Grail McDonnell Intermediate Municipal Bond ETF (GMMB: 49.11 0.00%). The chart below shows how the 3 funds have fared in the last month.

Where MUB has fallen in excess of 5% in the last 1 month, MUNI and GMMB have been able to restrict their losses to about 2%. So at least in this panic situation, it appears that whatever active decisions that the managers made helped them avoid the worst of the downfall.

What explains the outperformance?

But what are the specific differences between MUB and PIMCO’s MUNI for example, that helped MUNI outperform. For one thing, the portfolio managers behind MUNI are not obliged to hold every single security in the index regardless of the credit quality of the issuer. This fact shows up in the portfolio composition of those two ETFs. Where MUB held a whopping 1,144 bonds as of Nov 16th, MUNI held a select 98 securities and GMMB held an even narrower selection of 22 securities. In terms of its top holdings, because it follows a cap-weighted index following the municipal bond market, it should come as no surprise that the largest holding of MUB was a California State Bond.  This is the classic “bums” problem that is a favourite argument of the fundamentally-weighted indexing proponents. Cap-weighted indices like the one that MUB tracks give more weight to issuers that issue more debt – in this case California. As a result, investors holding MUB end up with California bonds as their biggest holdings at a time when they are probably the riskiest. To prove the point, just over the past month, CMF – an ETF which tracks the California municipal bond market – has underperformed NYF – which tracks the New York municipal bond market – by more than 1.5%. So in contrast to MUB, a California issued bond was not to be found in MUNI’s top 10 holdings. That should provide some indication of the value of credit analysis done by active managers from PIMCO for MUNI and from McDonnell Investment Management for GMMB.

How do Premium/Discounts compare?

Another area where the actively-managed ETFs seem to be performing better in this panicked market is in keeping the discount/premium from NAV to a minimum. In general, ETF shares trade at a premium to NAV when demand is high and trade at a discount to NAV when the demand is low. Bond ETF discounts were a big problem in 2008 when credit markets locked up. At one point in October 2008, the largest bond ETF at that time, iShares Lehman Aggregate Bond ETF (AGG: 107.21 0.00%), traded at an 8.9% discount.  Hence, that discounts in bond ETFs are definitely another metric that needs to be assessed in times of market stress.

According to the iShares’ website, MUB had a discount of 186 basis points to its NAV at the close on Nov 16th, a substantial discount given that the largest discount recorded for MUB in 2010 up till September was just 16 basis points. In comparison, PIMCO’s MUNI had a premium of 6 basis points as of market close on Nov 17th, a substantial difference. Grail’s GMMB though had a harder time, but still fared better than MUB as Grail’s website reported GMMB having a discount of 161 basis points as of Nov 17th.

ETF

Muni Market Collapsing – How Do Active Muni ETFs Compare?

November 18th, 2010

The chart above is not a pretty sight. The US municipal bond market started a massive leg down on November 8th which has now turned into what looks like an all-out collapse. In the space of a week and a half, the iShares S&P National Municipal Bond Fund (MUB: 100.54 0.00%) which is the largest ETF for the US municipal bond market with a market cap in excess of $2 billion, has fallen by 4.55%. This may not sound like much compared to equity market movements, but it is a huge move in the muni market, as is evident from all the tiny daily moves in the chart above before November.

Municipal bonds have traditionally been held widely amongst tax-sensitive investors, especially those in higher marginal tax brackets. This is because municipal bonds provide income that is free from federal taxes and often from taxes of the state in which they are issued. However, since 2008, many states and municipalities in the US have had trouble keeping their budgets in line and have suffered large deficits. A prime example is, of course, California. Due to California’s budget problems, the state’s bonds have suffered badly. In fact, since November 8th, CMF, which tracks an index holding municipal bonds issued in California, has fallen much more than MUB, dropping close to 6%.

What is behind the panic?

Interestingly, most commentators haven’t been able to pin-point any one single trigger that may have sparked the sell-off in the general muni bond market. However, there are plenty of underlying problems that have been festering in the market for a while.

First off, as mentioned earlier, nearly every state in the US has had trouble balancing its budget and budgetary problems have reduced confidence in the ability of the issuers to meet their debt obligations. California will be auctioning off $14 billion in bonds this month to help bridge its deficit gap, in turn creating an over-supply of bonds when demand for them is dropping. Another reason speculated to be behind this recent move down has been the pending closure of the Build America Bond program. The program has been hugely successful since its launch as issuers capitalized on a cheaper way to finance their capital needs because of the credits they receive on interest payments from the government. The program though is due to expire at the end of 2010 and there has been no word on previous discussions in the US Congress of extending this program till the end of 2012. Due to the upcoming deadline, states and municipalities are rushing to issue bonds under the program, again causing a supply glut.

How do Active Muni ETFs stack up with Passive Muni ETFs?

One good opportunity that this panic does provide us with is an ideal testing ground to evaluate whether active management adds any value in times like this. In other words, are active managers earning their marks in times when they would be expected to. There are currently two actively-managed ETFs in the US that compare well, in terms of maturity, with the iShares S&P National Municipal Bond Fund (MUB) which can be taken as the passive proxy – PIMCO’s Intermediate Municipal Bond Fund (MUNI: 50.86 0.00%) and the Grail McDonnell Intermediate Municipal Bond ETF (GMMB: 49.11 0.00%). The chart below shows how the 3 funds have fared in the last month.

Where MUB has fallen in excess of 5% in the last 1 month, MUNI and GMMB have been able to restrict their losses to about 2%. So at least in this panic situation, it appears that whatever active decisions that the managers made helped them avoid the worst of the downfall.

What explains the outperformance?

But what are the specific differences between MUB and PIMCO’s MUNI for example, that helped MUNI outperform. For one thing, the portfolio managers behind MUNI are not obliged to hold every single security in the index regardless of the credit quality of the issuer. This fact shows up in the portfolio composition of those two ETFs. Where MUB held a whopping 1,144 bonds as of Nov 16th, MUNI held a select 98 securities and GMMB held an even narrower selection of 22 securities. In terms of its top holdings, because it follows a cap-weighted index following the municipal bond market, it should come as no surprise that the largest holding of MUB was a California State Bond.  This is the classic “bums” problem that is a favourite argument of the fundamentally-weighted indexing proponents. Cap-weighted indices like the one that MUB tracks give more weight to issuers that issue more debt – in this case California. As a result, investors holding MUB end up with California bonds as their biggest holdings at a time when they are probably the riskiest. To prove the point, just over the past month, CMF – an ETF which tracks the California municipal bond market – has underperformed NYF – which tracks the New York municipal bond market – by more than 1.5%. So in contrast to MUB, a California issued bond was not to be found in MUNI’s top 10 holdings. That should provide some indication of the value of credit analysis done by active managers from PIMCO for MUNI and from McDonnell Investment Management for GMMB.

How do Premium/Discounts compare?

Another area where the actively-managed ETFs seem to be performing better in this panicked market is in keeping the discount/premium from NAV to a minimum. In general, ETF shares trade at a premium to NAV when demand is high and trade at a discount to NAV when the demand is low. Bond ETF discounts were a big problem in 2008 when credit markets locked up. At one point in October 2008, the largest bond ETF at that time, iShares Lehman Aggregate Bond ETF (AGG: 107.21 0.00%), traded at an 8.9% discount.  Hence, that discounts in bond ETFs are definitely another metric that needs to be assessed in times of market stress.

According to the iShares’ website, MUB had a discount of 186 basis points to its NAV at the close on Nov 16th, a substantial discount given that the largest discount recorded for MUB in 2010 up till September was just 16 basis points. In comparison, PIMCO’s MUNI had a premium of 6 basis points as of market close on Nov 17th, a substantial difference. Grail’s GMMB though had a harder time, but still fared better than MUB as Grail’s website reported GMMB having a discount of 161 basis points as of Nov 17th.

ETF

If States Start Defaulting, This Company is in Trouble…

November 18th, 2010

If States Start Defaulting, This Company is in Trouble…

When money managers buy bonds offered by state and local governments, they gladly accept the tax-free interest payments that come with them. But they're no fools. They know they can lose their investment if a state or local government goes into default. [See: "12 States in Financial Distress"] So these money managers buy insurance. And these days, most of those bond insurance policies are being underwritten by one company.

Assured Guaranty (NYSE: AGO) surely hopes that state and local governments can fix their finances without the need for bankruptcy protection, because if they can't, the company would be on the hook for hundreds of millions of dollars — at least.

Back in August, I wrote a fairly bullish profile of Assured Guaranty. At the time, it looked as if the Obama administration — with a supportive Congress — would keep the aid flowing to states into 2011. Shares went up +20% from the time I wrote about Assured Guaranty, but by late October, investors started to realize that a change in Congressional leadership likely spelled the end of federal aid to states. As a result, shares of Assured Guaranty have given up those recent gains, and could head well lower.

A deceptively low P/E
To be sure, shares of this municipal bond insurer look quite cheap when you look at earnings per share (EPS) forecasts, trading for around five times projected profits. And profits are on the upswing, thanks to a higher volume of business after rival Ambac (NYSE: ABK) had to seek bankruptcy protection and MBIA (NYSE: MBI) experienced severe financial distress.

The real reason Assured Guaranty sports such a low price-to-earnings (P/E) ratio is that investors don't trust the “E” part of the equation. Value investors also note that shares trade below book value. (And if earnings forecasts come to pass, book value would exceed $25 within a year). But here again, unexpected losses, possibly severe, would sharply erode book value.

A massive market
Assured Guaranty underwrites more than $30 billion in municipal bonds every year. And up until now, the company has not seen much distress on that massive debt exposure. Yet Standard & Poor's recently downgraded the company's bonds from “AAA+” to “AA+” on concerns that the company's financial exposure might deteriorate.

But even a small amount of defaulting bonds would wreak havoc. The company is on the hook to insure losses that are 150 times its entire capital base. If just 5% of the bonds it underwrote defaulted, Assured Guaranty would be wiped out. The company has some protection in the form of reinsurance, but not nearly enough to handle more than a few defaults. And if it saw defaults rise, the cost of getting its own reinsurance would rise sharply, effectively making its business model financially unfeasible.

Wiser than the peers
The fact that Assured Guaranty is still operating at healthy levels is a testament to management's savvy. The company wisely avoided much of the mortgage meltdown while rivals sought to profit from seemingly attractive opportunities in mortgage bond defaults. (And we know how that turned out.)

But that doesn't mean this is a low-risk model. Indeed it's quite high risk when you consider the deep financial stress that state and local governments are feeling. Since I wrote this article two months ago, states have made scant headway in their battle to close looming 2011 budget gaps. And as I subsequently wrote, recent elections ensure that states shouldn't expect any more federal help.

A curious breakdown

Are signs of trouble emerging? Closed-end funds that own municipal bonds just popped up on many radars. For example, PIMCO's California Municipal Income Fund II (NYSE: PCK), which traded above $10 in late September, and above $9.50 as recently as last Monday (November 8), has now fallen for six straight sessions to a recent $8.22, the lowest level in nearly two years. Other muni bond funds have traded poorly in the past few days. The only explanation: heightened concerns that distressed state and local governments may have trouble meeting 2011 obligations.

Action to Take –> This is a difficult stock to handicap, as it is clearly cheap and could rise if state and local economies rebound or come up with ways to close budget gaps. But right now, shares of Assured Guaranty look poised to drop further as the headlines become ever more daunting. I think this is a great stock to short if we hear more about state and local distress, but aggressive investors may want to jump in now.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
If States Start Defaulting, This Company is in Trouble…

Read more here:
If States Start Defaulting, This Company is in Trouble…

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If States Start Defaulting, This Company is in Trouble…

November 18th, 2010

If States Start Defaulting, This Company is in Trouble…

When money managers buy bonds offered by state and local governments, they gladly accept the tax-free interest payments that come with them. But they're no fools. They know they can lose their investment if a state or local government goes into default. [See: "12 States in Financial Distress"] So these money managers buy insurance. And these days, most of those bond insurance policies are being underwritten by one company.

Assured Guaranty (NYSE: AGO) surely hopes that state and local governments can fix their finances without the need for bankruptcy protection, because if they can't, the company would be on the hook for hundreds of millions of dollars — at least.

Back in August, I wrote a fairly bullish profile of Assured Guaranty. At the time, it looked as if the Obama administration — with a supportive Congress — would keep the aid flowing to states into 2011. Shares went up +20% from the time I wrote about Assured Guaranty, but by late October, investors started to realize that a change in Congressional leadership likely spelled the end of federal aid to states. As a result, shares of Assured Guaranty have given up those recent gains, and could head well lower.

A deceptively low P/E
To be sure, shares of this municipal bond insurer look quite cheap when you look at earnings per share (EPS) forecasts, trading for around five times projected profits. And profits are on the upswing, thanks to a higher volume of business after rival Ambac (NYSE: ABK) had to seek bankruptcy protection and MBIA (NYSE: MBI) experienced severe financial distress.

The real reason Assured Guaranty sports such a low price-to-earnings (P/E) ratio is that investors don't trust the “E” part of the equation. Value investors also note that shares trade below book value. (And if earnings forecasts come to pass, book value would exceed $25 within a year). But here again, unexpected losses, possibly severe, would sharply erode book value.

A massive market
Assured Guaranty underwrites more than $30 billion in municipal bonds every year. And up until now, the company has not seen much distress on that massive debt exposure. Yet Standard & Poor's recently downgraded the company's bonds from “AAA+” to “AA+” on concerns that the company's financial exposure might deteriorate.

But even a small amount of defaulting bonds would wreak havoc. The company is on the hook to insure losses that are 150 times its entire capital base. If just 5% of the bonds it underwrote defaulted, Assured Guaranty would be wiped out. The company has some protection in the form of reinsurance, but not nearly enough to handle more than a few defaults. And if it saw defaults rise, the cost of getting its own reinsurance would rise sharply, effectively making its business model financially unfeasible.

Wiser than the peers
The fact that Assured Guaranty is still operating at healthy levels is a testament to management's savvy. The company wisely avoided much of the mortgage meltdown while rivals sought to profit from seemingly attractive opportunities in mortgage bond defaults. (And we know how that turned out.)

But that doesn't mean this is a low-risk model. Indeed it's quite high risk when you consider the deep financial stress that state and local governments are feeling. Since I wrote this article two months ago, states have made scant headway in their battle to close looming 2011 budget gaps. And as I subsequently wrote, recent elections ensure that states shouldn't expect any more federal help.

A curious breakdown

Are signs of trouble emerging? Closed-end funds that own municipal bonds just popped up on many radars. For example, PIMCO's California Municipal Income Fund II (NYSE: PCK), which traded above $10 in late September, and above $9.50 as recently as last Monday (November 8), has now fallen for six straight sessions to a recent $8.22, the lowest level in nearly two years. Other muni bond funds have traded poorly in the past few days. The only explanation: heightened concerns that distressed state and local governments may have trouble meeting 2011 obligations.

Action to Take –> This is a difficult stock to handicap, as it is clearly cheap and could rise if state and local economies rebound or come up with ways to close budget gaps. But right now, shares of Assured Guaranty look poised to drop further as the headlines become ever more daunting. I think this is a great stock to short if we hear more about state and local distress, but aggressive investors may want to jump in now.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
If States Start Defaulting, This Company is in Trouble…

Read more here:
If States Start Defaulting, This Company is in Trouble…

Uncategorized

4 Reasons to Buy the Bank Stock Everyone Hates

November 18th, 2010

4 Reasons to Buy the Bank Stock Everyone Hates

Imagine hearing this from your financial advisor: “I've got a great stock for you. It's down -20%, the company lost $7 billion this year, and its reputation stinks.”

You'd probably get up and walk out the door, right?

But what if, just before you slammed it shut, the advisor managed to blurt out, “Wait, this stock is on sale for half price and could more than double your money”?

You just might go back, sit down and listen to the rest of the pitch.

And you'd hear a bunch of things, some good, some bad. The bad part, in addition to the tanking stock and hefty losses, is the company helped precipitate the financial crisis and got billions of dollars in bailout money.

More recently, it admitted to signing off on thousands of foreclosures without even reviewing them — the “robo-signing” scandal you've probably heard about. The recession spurred such an avalanche of loan defaults that some big-name banks resorted to simply pushing foreclosure documents through just to keep up, regardless of whether foreclosure was actually warranted.

The culprit I'm referring to is the largest consumer bank in terms of assets in the United States, Bank of America (NYSE: BAC).

After all the bad press, it would be easy just to dismiss BofA as unworthy. But since the point of investing is to make money, I suggest looking past the ugliness for a moment and considering why this might actually be a great stock for the long-term.

I've got four good reasons for you…

1. The company's turning over a new leaf. New President and CEO Brian Moynihan has been trying to salvage BofA's image since taking over the company in January 2009. For example, he has publicly backed financial industry reform and consumer protections, openly agreed that banks shouldn't be considered “too big to fail” and looked for ways to improve service, such as scaling back penalty fees. He has also become known for consulting frequently with front-line employees to get first-hand reports of what customers are saying.

Regarding the robo-signing situation, Barbara Desoer, President of Mortgage, Home Equity and Insurance Services at BofA, has said the bank will improve its foreclosure procedures by doing a better job of gathering accurate information on each case and of selecting and monitoring the law firms it uses to process foreclosures. In the meantime, it's reviewing and resubmitting affidavits for more than 100,000 foreclosures it had previously initiated.

2. There's still big earnings potential. During the next five years, analysts predict BofA will post annual earnings growth of +9% to +13% from sources like the company's wealth management services through Merrill Lynch, its investment banking division and, of course, its gigantic deposit base and loan business. The strong presence of the company's consumer banks in high-growth areas like California, Florida and Texas will help earnings immensely. I should also note that the earnings estimates I've reported incorporate a -$2 billion decrease in annual revenue starting in the third quarter of 2011, which

Uncategorized

4 Reasons to Buy the Bank Stock Everyone Hates

November 18th, 2010

4 Reasons to Buy the Bank Stock Everyone Hates

Imagine hearing this from your financial advisor: “I've got a great stock for you. It's down -20%, the company lost $7 billion this year, and its reputation stinks.”

You'd probably get up and walk out the door, right?

But what if, just before you slammed it shut, the advisor managed to blurt out, “Wait, this stock is on sale for half price and could more than double your money”?

You just might go back, sit down and listen to the rest of the pitch.

And you'd hear a bunch of things, some good, some bad. The bad part, in addition to the tanking stock and hefty losses, is the company helped precipitate the financial crisis and got billions of dollars in bailout money.

More recently, it admitted to signing off on thousands of foreclosures without even reviewing them — the “robo-signing” scandal you've probably heard about. The recession spurred such an avalanche of loan defaults that some big-name banks resorted to simply pushing foreclosure documents through just to keep up, regardless of whether foreclosure was actually warranted.

The culprit I'm referring to is the largest consumer bank in terms of assets in the United States, Bank of America (NYSE: BAC).

After all the bad press, it would be easy just to dismiss BofA as unworthy. But since the point of investing is to make money, I suggest looking past the ugliness for a moment and considering why this might actually be a great stock for the long-term.

I've got four good reasons for you…

1. The company's turning over a new leaf. New President and CEO Brian Moynihan has been trying to salvage BofA's image since taking over the company in January 2009. For example, he has publicly backed financial industry reform and consumer protections, openly agreed that banks shouldn't be considered “too big to fail” and looked for ways to improve service, such as scaling back penalty fees. He has also become known for consulting frequently with front-line employees to get first-hand reports of what customers are saying.

Regarding the robo-signing situation, Barbara Desoer, President of Mortgage, Home Equity and Insurance Services at BofA, has said the bank will improve its foreclosure procedures by doing a better job of gathering accurate information on each case and of selecting and monitoring the law firms it uses to process foreclosures. In the meantime, it's reviewing and resubmitting affidavits for more than 100,000 foreclosures it had previously initiated.

2. There's still big earnings potential. During the next five years, analysts predict BofA will post annual earnings growth of +9% to +13% from sources like the company's wealth management services through Merrill Lynch, its investment banking division and, of course, its gigantic deposit base and loan business. The strong presence of the company's consumer banks in high-growth areas like California, Florida and Texas will help earnings immensely. I should also note that the earnings estimates I've reported incorporate a -$2 billion decrease in annual revenue starting in the third quarter of 2011, which

Uncategorized

Negative Divergences On The Dollar Forecasted Trend Change

November 18th, 2010

Last week I warned that the US dollar was reaching three-year lows and to expect a dollar bounce. The dollar has bounced higher as risk aversion has returned with Ireland on the verge of needing a bailout and China raising interest rates to combat rising inflation. There are growing concerns of the Fed needing to raise interest rates ahead of schedule. The previous euphoria in commodities appears to be waning and the technicals are demonstrating the fundamental challenges facing commodities.

There are negative divergences of momentum and price on both the dollar and gold to indicate counter trend reversals may be developing. I have alerted to be 100% defensive since the November 9 high volume reversal. (See Fed Creates Parabolic Move in Gold, Silver)

Understanding momentum gives a trader clues that the trend may be changing ahead of the actual trend breakdown. Divergences in momentum signals the enthusiasm may be receding and the attitude of the crowd is changing.  At the beginning of a new trend there is a lot of excitement, but as the price continues higher demand weakens to the point where a major reversal occurs. Just like when you throw a ball into the air, the initial force wears off until it reverses direction and falls back. This loss of upward or downward momentum is being signaled in both the dollar and gold. Momentum changes trend often ahead of price.

A new low was made in the US dollar after the election and the Federal Reserve’s QE2 announcement. However, the momentum didn’t confirm the new low made as it made a higher low on the RSI and MACD. This signals that the downtrend may be ending and that may have been an intermediate low.

Negative divergence between momentum and price forecast further weakness for gold. Unexpected by many, the dollar is appearing to be the winner of the QE2 trade. Jesse Livermore said, “The smarter they are the easier the market fools them.” At the top in gold and the bottom in the dollar, the smart and easy trade was the wrong trade. Being long the dollar at a time when $900 billion is poured into the market is highly counterintuitive.

The dollar has bounced higher as risk aversion has returned with Ireland on the verge of needing a bailout and China raising interest rates to combat rising inflation. There are growing concerns of the Fed needing to raise interest rates ahead of schedule as Treasury prices have had a bearish reaction. The previous euphoria in commodities appears to be waning and the technicals are demonstrating the fundamental challenges facing commodities as momentum deteriorates.

The dollar broke through its five-month downtrend as investors are concerned of an Ireland bailout and emerging markets raising rates to combat imported inflation. Now we’re seeing political opposition to the Fed’s last move to pump $900 billion into the economy.

Gold at the time of the QE2 decision was perceived as indestructible as investors worried about a currency devaluation war. As targets were being reached I issued a sell signal and cautioned about getting caught up in the euphoria. I had the four-word famous response, “This Time Is Different.” It was at this point in the precious metals rally where the rain clouds began getting dark beginning in late July. As bottoms and tops take time to form, patience is required when issuing a sell or buy signal. A top is now being confirmed as trendlines are being broken.

Read more here:
Negative Divergences On The Dollar Forecasted Trend Change

Commodities

Join Corey Thursday Morning for Popped Stops Live Webinar

November 18th, 2010

I wanted to invite you to Thursday morning’s Live-Cast Webinar of my presentation at the Traders Expo in Las Vegas.

The folks at the MoneyShow / Traders Expo will be broadcasting my presentation at 11:00 EST, 10:00 CST entitled:

Popped Stops:  How to Profit When Good Trades Go Bad

Registration is free and you’ll be able to attend live from your home if you couldn’t make it to the Expo in Las Vegas.

Details below:

I will be defining the concept, discussing “Feedback Loops,” identifying the Four Components of All Trades (and how that plays into Popped Stops), and how to identify and profit from this market reality.

I’ll go over three specific “stories” of how Popped Stops played out on the larger frame and what signal that sent market participants – who were open to the new information.

Thank you to everyone at the Money Show and Traders Expo for making this available!

Corey Rosenbloom, CMT

Read more here:
Join Corey Thursday Morning for Popped Stops Live Webinar

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Lesson How the 30min Chart Helps Intraday Trading 5min

November 18th, 2010

While today’s intraday trading session didn’t offer stellar opportunities in the low-volatility session, those who were watching the 30min SPY chart in conjunction with the 5-min or 1-min SPY charts had a distinct information advantage today.

Let’s take a look at why that was so and learn a lesson in how to trade lower frames using higher timeframes as a reference.

Keep in mind that while this discussion is focused on the SPY as the reference, the same lesson is true in the @ES futures or in related stocks with similar patterns.

Keeping the lesson as simple as possible (as in, no discussion of other indicators), let’s focus on price and the 20 period Exponential Moving Average (an average – along with the 50 EMA – I use on all my charts).

The basic lesson is that in the context of a downtrend, price often retraces up to the 20 or 50 EMAs and then turns back down to form a new swing leg lower which is a tradeable opportunity (place the stop just above the EMA in case it breaks).

Price can form key resistance into these EMAs, turn lower, and then fall.  While that’s great to know on a higher timeframe (the same is true for the daily chart), how might it benefit you to take this new knowledge, arm yourself with it, and then trade more efficiently on a lower timeframe?

Glad you asked!

Let’s now drop to the 5-min chart of November 17th’s session to see how to trade very short-term (scalping even) with this 30min structure in mind.

While you’d be much more specific in real-time, (as in, knowing exactly what the 20 EMA was on the 30-min chart), I’ve replicated it slightly on the 5-min chart (you can’t super-impose higher timeframe EMAs in most charting platforms – you’ll just have to keep it open on a separate chart).

That being said, keeping it simple, each time price rallied up into the 20 EMA and formed a corresponding reversal candle, it was a short-sale opportunity.

The AGGRESSIVE entry is to execute as close as possible to the price reference level you expect to hold as resistance.

The CONSERVATIVE entry is to wait for a reversal candle to form then for price to break the low of that reversal candle (in each opportunity, a reversal candle formed – mostly spinning tops).

You can also combine structure to see that the 5-min upper Bollinger Band was roughly equivalent to the 20 EMA on the 30-min chart.  That alone is a lesson in dual-timeframe confluence.

The stop goes just above the prior swing high and/or the 20 EMA resistance level (remember to give a few cents of leeway in for slight breaches that then break down).

The target is usually the lower Bollinger Band on the 5-min chart or a prior swing low on the 5-min chart.

These are very quick, active ’scalp’ type trades that – while they don’t look like much – they were decent opportunities for quick profits on a day that really didn’t give much other opportunities.

Each was good for about 30 cents – which is about $300 on 1,000 shares, or about 3 points if you traded the same set-up in the @ES futures (which was about $150 per contract, as one contract is equal to 500 shares SPY).

Granted, it’s not much to write home about, but nothing to sneeze at either.

Take this lesson and incorporate it on future days and in individual stocks – incorporating a higher timeframe “idea” that you execute with corresponding entry signals on the lower/intraday frame.

This is the type of logic and explanations I detail to members in the “educational” section of the Idealized Trades Report each evening.

The more you see these setups and the more you learn these lessons with real-world examples, the better you’ll be able to recognize then act on real-time opportunities as they develop intraday.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Lesson How the 30min Chart Helps Intraday Trading 5min

Uncategorized

Lesson How the 30min Chart Helps Intraday Trading 5min

November 18th, 2010

While today’s intraday trading session didn’t offer stellar opportunities in the low-volatility session, those who were watching the 30min SPY chart in conjunction with the 5-min or 1-min SPY charts had a distinct information advantage today.

Let’s take a look at why that was so and learn a lesson in how to trade lower frames using higher timeframes as a reference.

Keep in mind that while this discussion is focused on the SPY as the reference, the same lesson is true in the @ES futures or in related stocks with similar patterns.

Keeping the lesson as simple as possible (as in, no discussion of other indicators), let’s focus on price and the 20 period Exponential Moving Average (an average – along with the 50 EMA – I use on all my charts).

The basic lesson is that in the context of a downtrend, price often retraces up to the 20 or 50 EMAs and then turns back down to form a new swing leg lower which is a tradeable opportunity (place the stop just above the EMA in case it breaks).

Price can form key resistance into these EMAs, turn lower, and then fall.  While that’s great to know on a higher timeframe (the same is true for the daily chart), how might it benefit you to take this new knowledge, arm yourself with it, and then trade more efficiently on a lower timeframe?

Glad you asked!

Let’s now drop to the 5-min chart of November 17th’s session to see how to trade very short-term (scalping even) with this 30min structure in mind.

While you’d be much more specific in real-time, (as in, knowing exactly what the 20 EMA was on the 30-min chart), I’ve replicated it slightly on the 5-min chart (you can’t super-impose higher timeframe EMAs in most charting platforms – you’ll just have to keep it open on a separate chart).

That being said, keeping it simple, each time price rallied up into the 20 EMA and formed a corresponding reversal candle, it was a short-sale opportunity.

The AGGRESSIVE entry is to execute as close as possible to the price reference level you expect to hold as resistance.

The CONSERVATIVE entry is to wait for a reversal candle to form then for price to break the low of that reversal candle (in each opportunity, a reversal candle formed – mostly spinning tops).

You can also combine structure to see that the 5-min upper Bollinger Band was roughly equivalent to the 20 EMA on the 30-min chart.  That alone is a lesson in dual-timeframe confluence.

The stop goes just above the prior swing high and/or the 20 EMA resistance level (remember to give a few cents of leeway in for slight breaches that then break down).

The target is usually the lower Bollinger Band on the 5-min chart or a prior swing low on the 5-min chart.

These are very quick, active ’scalp’ type trades that – while they don’t look like much – they were decent opportunities for quick profits on a day that really didn’t give much other opportunities.

Each was good for about 30 cents – which is about $300 on 1,000 shares, or about 3 points if you traded the same set-up in the @ES futures (which was about $150 per contract, as one contract is equal to 500 shares SPY).

Granted, it’s not much to write home about, but nothing to sneeze at either.

Take this lesson and incorporate it on future days and in individual stocks – incorporating a higher timeframe “idea” that you execute with corresponding entry signals on the lower/intraday frame.

This is the type of logic and explanations I detail to members in the “educational” section of the Idealized Trades Report each evening.

The more you see these setups and the more you learn these lessons with real-world examples, the better you’ll be able to recognize then act on real-time opportunities as they develop intraday.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Lesson How the 30min Chart Helps Intraday Trading 5min

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