Lesson in Trading Intraday Arc Trendline Reversal Breaks

October 8th, 2010

Thursday’s intraday activity in the markets gave us a great example of the not-so-common pattern of an Arc Trendline Reversal Break (I’m sure there could be a better name for that), which is a good opportunity to play a reversal trade off a price climax low.

Let’s first see the pattern, learn the concept, and find out how to trade it when it happens again.

First, the bigger picture:

(Click for full-size image)

Now, let’s see the smaller ‘pure price’ image I included in last night’s member report:

In each night’s report, I try to give an in-depth explanation or lesson in a particularly good example of a trading tactic, strategy, or concept (in addition to the “Idealized Trades” section and “Forecasting Tomorrow” portion).

The brief lesson from yesterday was clearly the “Arc Trendline Reversal” opportunity.

The logic goes as follows:

Typically, traders draw linear trendlines and never think to draw arc or sloping trendlines.  Sloping trendlines – that often form arcs – take into account price acceleration and dynamics (price is not always linear).

Anyway, without getting too detailed, the main idea is to observe and connect price highs (or lows for a rising arc) that may be forming an arc pattern in real time.

Then, look for a sharp sell-off (as we saw above) that forms the right side or 90 degree angle (from the top) point.

Think logically – price can do anything, but one thing price CANNOT do is complete a full circle on the chart. Right?  Price can’t go backwards, after all!

So, when price breaks free from a sharply plunging momentum move that has created an arc trendline pattern similar to that above, it’s a good spot to do two things:

1.  Take off any short-sale trades for a profit.  You can always re-enter if price continues to fall after an initial retracement up.

2.  Put on a Reversal style “aggressive buy” trade on the breakout from the arc trendline.

Putting on a new trade to play for a reversal is aggressive and not required, but it is a safe/conservative play to lock-in some profits on an arc trendline break such as this.

Why?

These patterns often highlight short-term capitulations in price at exhaustion points.  It’s similar to a ’sell-climax’ or “V-Spike” reversal where sellers are exhausted and buyers rush in to find ‘cheap’ value.

Either way, the result often is a short-term price trend reversal that you can trade intraday.

When entering on such a trendline break (entry doesn’t have to be perfect), put a stop just under the intraday low and trail it up perhaps under a short-term moving average (20 period EMA for example) or exit the position into the close if price kept on rising for the remainder of the session.

The absolute WORST thing to do would be to get aggressively short at the low, thinking the down-swing will continue forever – odds are it won’t.

Take a look at the pure price pattern for additional insights and helpful trading tactics.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
Lesson in Trading Intraday Arc Trendline Reversal Breaks

Uncategorized

Lesson in Trading Intraday Arc Trendline Reversal Breaks

October 8th, 2010

Thursday’s intraday activity in the markets gave us a great example of the not-so-common pattern of an Arc Trendline Reversal Break (I’m sure there could be a better name for that), which is a good opportunity to play a reversal trade off a price climax low.

Let’s first see the pattern, learn the concept, and find out how to trade it when it happens again.

First, the bigger picture:

(Click for full-size image)

Now, let’s see the smaller ‘pure price’ image I included in last night’s member report:

In each night’s report, I try to give an in-depth explanation or lesson in a particularly good example of a trading tactic, strategy, or concept (in addition to the “Idealized Trades” section and “Forecasting Tomorrow” portion).

The brief lesson from yesterday was clearly the “Arc Trendline Reversal” opportunity.

The logic goes as follows:

Typically, traders draw linear trendlines and never think to draw arc or sloping trendlines.  Sloping trendlines – that often form arcs – take into account price acceleration and dynamics (price is not always linear).

Anyway, without getting too detailed, the main idea is to observe and connect price highs (or lows for a rising arc) that may be forming an arc pattern in real time.

Then, look for a sharp sell-off (as we saw above) that forms the right side or 90 degree angle (from the top) point.

Think logically – price can do anything, but one thing price CANNOT do is complete a full circle on the chart. Right?  Price can’t go backwards, after all!

So, when price breaks free from a sharply plunging momentum move that has created an arc trendline pattern similar to that above, it’s a good spot to do two things:

1.  Take off any short-sale trades for a profit.  You can always re-enter if price continues to fall after an initial retracement up.

2.  Put on a Reversal style “aggressive buy” trade on the breakout from the arc trendline.

Putting on a new trade to play for a reversal is aggressive and not required, but it is a safe/conservative play to lock-in some profits on an arc trendline break such as this.

Why?

These patterns often highlight short-term capitulations in price at exhaustion points.  It’s similar to a ’sell-climax’ or “V-Spike” reversal where sellers are exhausted and buyers rush in to find ‘cheap’ value.

Either way, the result often is a short-term price trend reversal that you can trade intraday.

When entering on such a trendline break (entry doesn’t have to be perfect), put a stop just under the intraday low and trail it up perhaps under a short-term moving average (20 period EMA for example) or exit the position into the close if price kept on rising for the remainder of the session.

The absolute WORST thing to do would be to get aggressively short at the low, thinking the down-swing will continue forever – odds are it won’t.

Take a look at the pure price pattern for additional insights and helpful trading tactics.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
Lesson in Trading Intraday Arc Trendline Reversal Breaks

Uncategorized

Central Bankers’ Global Race to the Bottom

October 8th, 2010

Mike Larson

Well, that pretty much seals the deal. I’m talking about the latest, lousy batch of employment data. The ADP Employer Services report out Wednesday showed the economy shedding 39,000 jobs in September — the biggest decline since January and far below the Bloomberg forecast for a gain of 20,000.

Barring some huge surprise from this morning’s Labor Department report, the QE2 is poised to set sail. That was only reinforced by Chicago Fed President Charles Evans, who said “unemployment is too high” and inflation is “low,” and by New York Fed President William Dudley, who late last week called current economic conditions “unacceptable.”

The Fed’s goal is clearly to debase the U.S. dollar in order to create inflation. Or in the infamous words of now-Chairman Ben Bernanke from November 2002 …

“U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

The Cost of Competitive Devaluation

The Fed would have you believe this is good for America. That a country whose massive debts are majority-held by foreigners will never have a problem selling bonds — even as its central bank drives down the value of those bonds (in foreign currency terms).

My take? Let’s look at what the Fed’s war on your wealth has accomplished …

In the past several weeks, soybeans have surged up to 23 percent, crude oil has gained 30 percent, copper has jumped up to 39 percent, and wheat prices have soared as much as 97 percent.

The dollar? It has dropped more than 12.5 percent since June, making it more expensive to buy foreign goods and travel overseas. And gold? It has surged about 17 percent.

The Fed's policy has pushed the dollar down and gold up.
The Fed’s policy has pushed the dollar down and gold up.

Yes, stocks have rallied — but only roughly as much as the dollar has declined. In other words, you’ve basically made no “real” gains in terms of purchasing power!

Stated another way, the Fed’s ridiculous monetary policy is creating “bad” inflation. Prices for many raw commodities are going up. So are costs for the companies you buy goods from. But your wages likely aren’t keeping pace because of the lousy labor market. And your savings accounts and fixed income securities aren’t yielding squat.

Or as Nobel Prize-winning economist Joseph Stiglitz recently told Bloomberg:

“Fed policy was supposed to reignite the American economy, but it’s not doing that … the flood of liquidity is going abroad and causing problems all over the world.”

Worse, We’re Not Alone!

It’s bad enough that our central bank is heading down the dangerous road to currency debasement. What’s worse is that other central banks are doing the same darn thing!

The Bank of Japan tried to suppress the yen by intervening massively in the currency markets a few weeks ago. Then this week, it lowered its benchmark interest rate to 0 percent from 0.1 percent and announced a new QE plan. It’s going to spend 5 trillion yen, or about $60 billion, to buy assets.

Not just any old assets like government bonds either. The BOJ said it will buy “long-term government bonds, treasury discount bills, commercial paper (CP), asset-backed CP (ABCP), corporate bonds, exchange-traded funds (ETFs), and Japan real estate investment trusts (J-REITs).”

Yes, you read that right …

The BOJ is now going to start indirectly buying commercial real estate and stocks. I have to wonder, are Beanie Babies next? What about iPods? Or hey, if tuna prices plunge, maybe BOJ policy makers could show up at the famous Tsukiji Fish Market and go nuts buying there!

Don’t forget the Bank of England either. BOE policymaker Adam Posen advocated for more QE there in late September. The Brits are currently buying 200 billion pounds (about $317 billion) worth of government bonds to artificially prop up the market and suppress the value of the pound.

Meanwhile, central bankers in other Asian countries outside of Japan are selling the heck out of their own currencies to try to keep them from appreciating rapidly against the buck.

That’s happening in Brazil, too …

A weaker real makes Brazilian exports more competitive.
A weaker real makes Brazilian exports more competitive.

Brazil’s finance minister Guido Mantega just warned of a global “currency war,” and doubled the tax on foreign purchases of Brazilian bonds in an attempt to stem the flood of hot money into Brazil’s markets and currency, the real.

Lastly, there’s China, perhaps the world’s biggest currency manipulator. It’s continuing to hold down the yuan despite intense international pressure.

Chinese Premier Wen Jiabao just told a business conference that “if the yuan isn’t stable, it will bring disaster to China and the world.” He added that European officials should quit bugging him, saying “Europe shouldn’t join the choir to press China to allow more yuan appreciation.”

Protecting Yourself from the
Fed’s War on Your Wealth!

Bottom line? Practically every central banker in the world wants to drive his currency into the gutter. I’ve never seen anything like it — and mark my words, it isn’t going to end well!

In the meantime, you can protect yourself by continuing to hold contra-dollar hedges like those recommended in Safe Money Report.

I’d avoid long-term bonds, preferring instead to keep my maturities short. And gold? I’m a bull long-term. But I’d look to take some profits here given the massive, recent run and the risk that other countries will push back aggressively at the Fed’s dollar-debasement strategy.

Until next time,

Mike

Related posts:

  1. While Fed Dilly-Dallies, Central Bankers Overseas Get To Work
  2. While Fed Dilly-Dallies, Central Bankers Overseas Get To Work
  3. While Fed Dilly-Dallies, Central Bankers Overseas Get To Work

Read more here:
Central Bankers’ Global Race to the Bottom

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

Central Bankers’ Global Race to the Bottom

October 8th, 2010

Mike Larson

Well, that pretty much seals the deal. I’m talking about the latest, lousy batch of employment data. The ADP Employer Services report out Wednesday showed the economy shedding 39,000 jobs in September — the biggest decline since January and far below the Bloomberg forecast for a gain of 20,000.

Barring some huge surprise from this morning’s Labor Department report, the QE2 is poised to set sail. That was only reinforced by Chicago Fed President Charles Evans, who said “unemployment is too high” and inflation is “low,” and by New York Fed President William Dudley, who late last week called current economic conditions “unacceptable.”

The Fed’s goal is clearly to debase the U.S. dollar in order to create inflation. Or in the infamous words of now-Chairman Ben Bernanke from November 2002 …

“U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

The Cost of Competitive Devaluation

The Fed would have you believe this is good for America. That a country whose massive debts are majority-held by foreigners will never have a problem selling bonds — even as its central bank drives down the value of those bonds (in foreign currency terms).

My take? Let’s look at what the Fed’s war on your wealth has accomplished …

In the past several weeks, soybeans have surged up to 23 percent, crude oil has gained 30 percent, copper has jumped up to 39 percent, and wheat prices have soared as much as 97 percent.

The dollar? It has dropped more than 12.5 percent since June, making it more expensive to buy foreign goods and travel overseas. And gold? It has surged about 17 percent.

The Fed's policy has pushed the dollar down and gold up.
The Fed’s policy has pushed the dollar down and gold up.

Yes, stocks have rallied — but only roughly as much as the dollar has declined. In other words, you’ve basically made no “real” gains in terms of purchasing power!

Stated another way, the Fed’s ridiculous monetary policy is creating “bad” inflation. Prices for many raw commodities are going up. So are costs for the companies you buy goods from. But your wages likely aren’t keeping pace because of the lousy labor market. And your savings accounts and fixed income securities aren’t yielding squat.

Or as Nobel Prize-winning economist Joseph Stiglitz recently told Bloomberg:

“Fed policy was supposed to reignite the American economy, but it’s not doing that … the flood of liquidity is going abroad and causing problems all over the world.”

Worse, We’re Not Alone!

It’s bad enough that our central bank is heading down the dangerous road to currency debasement. What’s worse is that other central banks are doing the same darn thing!

The Bank of Japan tried to suppress the yen by intervening massively in the currency markets a few weeks ago. Then this week, it lowered its benchmark interest rate to 0 percent from 0.1 percent and announced a new QE plan. It’s going to spend 5 trillion yen, or about $60 billion, to buy assets.

Not just any old assets like government bonds either. The BOJ said it will buy “long-term government bonds, treasury discount bills, commercial paper (CP), asset-backed CP (ABCP), corporate bonds, exchange-traded funds (ETFs), and Japan real estate investment trusts (J-REITs).”

Yes, you read that right …

The BOJ is now going to start indirectly buying commercial real estate and stocks. I have to wonder, are Beanie Babies next? What about iPods? Or hey, if tuna prices plunge, maybe BOJ policy makers could show up at the famous Tsukiji Fish Market and go nuts buying there!

Don’t forget the Bank of England either. BOE policymaker Adam Posen advocated for more QE there in late September. The Brits are currently buying 200 billion pounds (about $317 billion) worth of government bonds to artificially prop up the market and suppress the value of the pound.

Meanwhile, central bankers in other Asian countries outside of Japan are selling the heck out of their own currencies to try to keep them from appreciating rapidly against the buck.

That’s happening in Brazil, too …

A weaker real makes Brazilian exports more competitive.
A weaker real makes Brazilian exports more competitive.

Brazil’s finance minister Guido Mantega just warned of a global “currency war,” and doubled the tax on foreign purchases of Brazilian bonds in an attempt to stem the flood of hot money into Brazil’s markets and currency, the real.

Lastly, there’s China, perhaps the world’s biggest currency manipulator. It’s continuing to hold down the yuan despite intense international pressure.

Chinese Premier Wen Jiabao just told a business conference that “if the yuan isn’t stable, it will bring disaster to China and the world.” He added that European officials should quit bugging him, saying “Europe shouldn’t join the choir to press China to allow more yuan appreciation.”

Protecting Yourself from the
Fed’s War on Your Wealth!

Bottom line? Practically every central banker in the world wants to drive his currency into the gutter. I’ve never seen anything like it — and mark my words, it isn’t going to end well!

In the meantime, you can protect yourself by continuing to hold contra-dollar hedges like those recommended in Safe Money Report.

I’d avoid long-term bonds, preferring instead to keep my maturities short. And gold? I’m a bull long-term. But I’d look to take some profits here given the massive, recent run and the risk that other countries will push back aggressively at the Fed’s dollar-debasement strategy.

Until next time,

Mike

Related posts:

  1. While Fed Dilly-Dallies, Central Bankers Overseas Get To Work
  2. While Fed Dilly-Dallies, Central Bankers Overseas Get To Work
  3. While Fed Dilly-Dallies, Central Bankers Overseas Get To Work

Read more here:
Central Bankers’ Global Race to the Bottom

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

The Number One Reason Brazil Could be Headed for a Pullback

October 8th, 2010

The Number One Reason Brazil Could be Headed for a Pullback

Brazil is emerging as one of the great stories of the 21st century. Sound economic policies and abundant natural resources have led to sustained economic growth. And investors are racing to get in to this Samba party — the iShares Brazil (NYSE: EWZ) exchange-traded fund (ETF) has risen nearly +20% since late August.

Thus far, Brazil's government has played its hand perfectly, combating inflation while stimulating growth. But the road ahead is bound to get much trickier, and it's not at all clear that all the key metrics can keep moving in the right direction.

Commodities, ETF, Uncategorized

What the Global Currency Wars Mean for Your Portfolio

October 8th, 2010

What the Global Currency Wars Mean for Your Portfolio

Even as the high-profile spat between the United States and China over the too-cheap Chinese currency gets much press coverage, currency wars are brewing all over the place. And how these battles shake out will determine whether the global economy will move into harmony, or come apart at the seams.

For many years, the U.S. stood by a “strong dollar” policy, which meant that a robust dollar was in America's best interests. The strong dollar enabled the U.S. to consume massive amounts of imports at a discount, which worked out just fine when the economy was doing well. It also allowed U.S. manufacturers to move jobs offshore to places where a weaker currency meant low wages.

That policy has come to an abrupt end. Congress is set to deliver a bill to President Obama that aims to amp up the rhetoric against China. If China doesn't act to let its currency rise in value (and economists believe it would need to rise +40% to achieve global parity), then the U.S. may start to enact steep tariffs on Chinese goods. That would be a clear positive in some domestic industries such as steel-making or electronics, but would prove quite troublesome for any industries that want to gain a foothold in the massive Chinese market. Chinese counter-moves that restrict access of U.S. goods would be almost inevitable.

For nearly 200 years, we have been taught that free trade and open markets are the key to rising global living standards. And myriad academic studies bear that out. But free trade theory assumes that everyone plays by a fair set of rules with regard to free-floating currencies and minimal trade barriers. In many respects, China is ignoring those rules by using a weak currency that is good for China and bad for its trading partners. These are known as “Beggar Thy Neighbor” policies, and have led to major conflicts in past centuries.

Nobody anticipates these currency battles to escalate into an all out war, but recent comments from Brazil sure were heated. Brazil's currency has surged in 2010 to a point where its domestic businesses are becoming less competitive when compared to neighboring businesses in Argentina, Chile and Mexico. [Read: "The Number One Reason Brazil Could be Headed for a Pullback"] And that led Brazil's Finance Minister to tell the Financial Times this week that financial leaders are “in the midst of an international currency war — a general weakening of currency,” adding that the situation, “Threatens us because it takes away our competitiveness.”

Uncategorized

5 Offbeat Ways to Generate 10% Yields

October 8th, 2010

5 Offbeat Ways to Generate 10% Yields

Interest rates near zero and record-low U.S. Treasury yields make finding good income investments a bit harder these days.

Don't get me wrong — it's still possible to find attractive yields, but you need to know where to look. Some of my best ideas for my High-Yield Investing and High-Yield International newsletters have come thanks to going off the beaten path and looking at asset classes overlooked by others. For example, I've locked in nice returns in the past by adding offbeat securities such as bank loan funds, trust preferred shares and master limited partnerships to my portfolios.

And luckily for income investors, I'm still finding plenty of fertile hunting grounds out there. To give you an idea, I've put together a quick summary of five spots where you can still find double-digit yields.

10% Idea #1 — Business Development Companies
Business development companies, or BDCs, are a dream come true for high-yield investors. Many of these companies — such as BlackRock Kelso Capital (Nasdaq: BKCC)yield double-digits and share prices are soaring.

BDC yields are powered by making loans to small companies and passing along the earned income as distributions. They are similar to venture capital funds, giving retail investors the ability to profit from an area normally reserved for only the biggest investors. With bank credit still tight compared to a few years ago, BDCs are thriving as businesses have fewer options for financing.

Like real estate investment trusts (REITs), BDCs must pay out at least 90% of their net investment income as dividends to avoid paying income taxes. That's why they can carry high yields. If you want to invest, look for business development companies that consistently raise dividends (or at least hold them steady) and can cover their dividend with investment income.

10% Idea #2 — Municipal Bond Funds
When is a 7% yield really 10%? When it comes courtesy of municipal bond fund.

Municipal bonds, or “munis,” are bonds issued by state and local governments to fund highways, hospitals and other public projects. What makes munis (and the funds that hold them) attractive is that the interest they pay is exempt from federal income taxes, and sometimes state and local taxes too if the bond is issued by your local government.

You'll be hard-pressed to find a muni bond fund that pays more than 10% as a headline yield. But what you should look at is the fund's taxable equivalent yield, which can exceed 10% for muni funds like Pioneer Municipal High Income (NYSE: MHI). The taxable equivalent yield is the yield you would need from a taxable investment (like a corporate bond) to match the tax exempt muni yield.

[For more on investing in muni funds, read: How to Hide from the Dividend Tax Increase]

To figure your tax equivalent yield, simply divide the bond fund yield by 1 minus your marginal tax rate. For instance, if the muni is yielding 7.2% and you are in the 28% tax bracket, your taxable equivalent yield would be 10%.

7.2%/(1-0.28) = 10%

You can buy individual muni bonds, but funds are a better choice for most investors since they offer instant diversification.

ETF, OPTIONS, Real Estate, Uncategorized

How to Invest With a Wall Street Legend

October 8th, 2010

How to Invest With a Wall Street Legend

An extremely valuable investment strategy is to keep tabs on what the major players on Wall Street are doing with their money. Warren Buffett, George Soros, Bill Gross, Mario Gabelli and Jeremy Grantham quickly come to mind — especially considering they are more than willing to put their own money on the line. So does Carl Icahn.

Icahn is an especially interesting subject, given his reputation as a corporate raider and activist shareholder willing to go head-to-head with management teams he deems inept or unable to maximize shareholder value. His moves have paid off — Icahn is currently worth an estimated $10.5 billion dollars.

Real Estate, Uncategorized

Newly Released Data Makes This Sector Even More of a Long-Term Buy

October 8th, 2010

Newly Released Data Makes This Sector Even More of a Long-Term Buy

If you are a close watcher of retail stocks, you have every right to throw up your hands in exasperation. With all of the distress taking place among consumers, who would have guessed that the back-to-school season would be so good?

Some retailers, such as Abercrombie & Fitch (NYSE: ANF) and Limited Brands (NYSE: LTD), posted surprise double-digit gains in same store sales, while many others posted comps in the mid single-digits. Almost all of them were ahead of analysts' forecasts.

ETF, Uncategorized

Consumer Deleveraging to Topple the Commercial Real Estate Market

October 8th, 2010

The US is in a state of consumer deleveraging — given unsustainable levels of personal debt and a weak job market – and as a result retailers are likely to continue facing hard times. The highly leveraged ones in particular are poised to watch their fortunes disintegrate. As a guest contributor to Naked Capitalism, Jim Quinn of The Burning Platform offers new insight on how the collapse will unfold in the commercial real estate (CRE) market.

According to Quinn:

“To give some perspective on our consumer society, here are a few facts:

* There are 105,000 shopping centers in the U.S. In comparison, all of Europe has only 5,700 shopping centers.

* There are 1.2 million retail establishments in the U.S. per the Census Bureau.

* There is 14.2 BILLION square feet of retail space in the U.S. This is 46 square feet per person in the U.S., compared to 2 square feet per capita in India, 1.5 square feet per capita in Mexico, 23 square feet per capita in the United Kingdom, 13 square feet per capita in Canada, and 6.5 square feet per capita in Australia…

“…Let’s look at some facts about the commercial real estate market and then assess the future:

* The value of all commercial real estate in the U.S. was approximately $6 trillion in 2007 (book value, not market value).

* There is approximately $3.5 trillion of debt financing these commercial properties.

* Approximately $1.4 trillion of this debt comes due between now and 2014.

* The delinquency rate for all commercial backed securities exceeded 9% for the 1st time in history last month and has more than doubled in the last 12 months.

* Non-performing loans are close to 16%, up from below 1% in 2007.

“Do these facts lead you to believe that the commercial real estate sector has bottomed, as stated in the Wall Street Journal? The Federal Reserve realized the danger of a commercial real estate collapse to the banking system over a year ago. They have encouraged banks to extend and pretend.”

Quinn goes on to describe his concerns about the “shadow monetization” of CRE debt. He points out that banks are forgoing overdue debt repayments because they see no point in either chasing after money they know isn’t being generated by ghost shopping malls or foreclosing because it isn’t a viable option.  Even if banks repossess CRE, they would be unable to find any buyers for the inventory in the current market. So, rather than admit the failure, banks are sweeping the mess under the rug, following the “extend and pretend” model described above, and hoping for an unlikely CRE market rebound.

You can read more details in the Jim Quinn piece on how consumer deleveraging equals commercial real estate collapse, appearing at Naked Capitalism.

Best,

Rocky Vega,
The Daily Reckoning

Consumer Deleveraging to Topple the Commercial Real Estate Market 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:
Consumer Deleveraging to Topple the Commercial Real Estate Market




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.

Real Estate, Uncategorized

Dollar Vs. Gold Ratio Putting Pressure On The Fed

October 7th, 2010

In Advance Decline Suggests Stimulus Hasn’t Worked I wrote about how the Federal Reserve and Washington DC will do anything possible to save the markets from a bear market before the November election. Unemployment is high, defaults on homes and credit cards are rising, and record amounts of taxpayers’ money have gone to bail out failed banks. The last thing Washington wanted was another bear market before a November election. An emergency job bill was passed and the Fed started pumping money into the system. Now we’re beginning to see the outcome of the Fed’s actions as the world looks at a deteriorating dollar and the tension that surfaces with volatile exchange rates. Recent job bills and quantitative easing may help tomorrow’s job report, which could put some hawkish pressure on the Fed to change its stance.

I believe over the next few weeks volatility could increase as a major shift in Washington may occur. Although the equity markets are up, the dollar and the economy haven’t shown improvement. The Tea Party movement and politicians who push tax cuts and less government spending are gaining recognition. I wouldn’t be surprised if there’s a shift in power, which may be bullish for the dollar, or another intervention from overseas to continue purchasing the dollar. Tomorrow’s job report could provide relief to the oversold dollar as additional government jobs were created through recent legislation and massive cash infusion from the Fed. The dollar could have a dead cat bounce.

Japan and China are facing pressure on growth from a devalued dollar. A cheap dollar is hard on businesses exporting to the United States. Japan is especially in a precarious situation where it has had to intervene to prop up the dollar in order to support growth. It was short-lived as the yen dropped only to rally to new highs a few days later. This may lead to further easing by the Japanese and purchases of the dollar. Japan hasn’t needed to do this since 2004.

The Fed needed to ease this past summer as equity markets were on the brink of double dipping. Central banks had no problem to devalue as well since the European Debt Crisis led a rush to the US Dollar and at that time the euro was collapsing and the dollar was high. The threat of deflation after the May flash crash was very high and markets were on the brink of heading into new lows before an election. The Fed injected a lot of money into the system causing a dollar collapse, a rise in US equities, and a major breakout in precious metals.

Bullish sentiment in gold is reaching very high levels and if this deterioration of the dollar continues we could see more sovereign debt and liquidity issues. This could be bullish for the dollar. The weakness in the dollar will also put hawkish pressures on the Fed. Many are expecting more quantitative easing but the market may have a surprise if the Fed changes its language to support the dollar and curb the speculation into gold and silver. The jobs report tomorrow will prove to be a key figure on which the Fed will base its decision. Just remember, in every bull market there are two steps forward followed by a step back. We may be entering that step back in precious metals.

Read more here:
Dollar Vs. Gold Ratio Putting Pressure On The Fed

Commodities

The Four Pillars of Successful Real Estate Investing

October 7th, 2010

When sizing up a potential real estate location, I always look for one of four strategies that indicate a potential rise in property values:

  • A new, emerging middle class
  • The Path of Progress
  • An influx of foreign buyers
  • Distressed or crisis opportunities

One of my hottest locations for real estate opportunities right now is Fortaleza, on Brazil’s northeast coast. I identified two strategies at play when I first scouted this city more than two years ago, and they still hold true today.

A new, emerging middle class means new consumers. These new consumers buy cappuccinos, refrigerators, cars, vacations, new homes and second homes. This started happening in the US in the 1950s.

We can profit by owning the condo this new middle class lives or vacations in, or the building that houses the coffee shop where they sip coffee.

Brazil has become a middle-class country. Car sales were up 17.9% for the first quarter of this year. Domestic budget airlines are growing exponentially, as this new middle class takes flight to various business and vacation destinations. In the first eight months of this year, 1.95 million new jobs were created – double the figure for the same period last year. The latest forecast for GDP growth this year is 7.3%.

Fortaleza is Brazil’s biggest domestic tourism destination. Brazilians come here to relax, sip cocktails by the beach, enjoy an evening meal and some entertainment. Passenger traffic at Fortaleza airport increased 23% year-on-year to the end of August 2010, and cargo traffic rose by 40% in the same period.

Anything that improves the accessibility of a piece of real estate increases its value. Infrastructure like roads, bridges, airports, and rail routes. Anything that improves amenities in an area will also increase real estate values…like resorts, golf courses, theme parks and conference centers.

We can profit by positioning ourselves ahead of this Path of Progress…

Fortaleza is enjoying a Path of Progress story today. Soccer’s Confederations Cup comes here in 2013 followed by the World Cup the following year. 9.8 billion reais ($5.7 billion) will be spent improving infrastructure and tourism amenities in the run up to 2014. Airport capacity will be increased from five million to thirteen million passengers annually. A new metro system will provide modern and reliable public transport. The first of the routes are already operational. The new stadium will be world class, the new conference center will be the second biggest in Brazil and the city will be home to South America’s largest aquarium.

Outside of all this tourism-related development, Fortaleza is also seeing development associated with a new industrial center at Pecem port. Earlier this year, the government announced a duty-free zone, alongside Pecem and forty minutes west of Fortaleza. The scale is massive: the zone is more than 10,500 acres in total. Businesses located within this area will pay practically no taxes on inputs purchased and finished goods exported. There will be less bureaucracy and customs procedures for its exporters.

Buying in Fortaleza could position you ahead of the Path of Progress. There is currently a lack of both short-term rentals or office space in the city. You could do well if you buy here with a view to filling that gap in the market, particularly if you buy close to the new convention center or the metro line.

And now for the two strategies that don’t apply to Fortaleza…

In countries like Nicaragua and Panama, large numbers of foreign buyers (mainly North American) pushed property prices rapidly upwards in a relatively short timeframe. These buyers used equity in their properties back home to finance their overseas property purchases. With the global slowdown, those buyers have gone…and the markets that relied on them have suffered.

Brazil’s real estate market is driven by the local middle classes. Less than two percent of property sales in the country’s northeast are to foreign buyers. Thanks to the growing Brazilian middle classes, the real estate market in Fortaleza is still buoyant.

Crisis investing means buying when everyone wants (or needs) out. There are no buyers on the ground…and the few that remain are afraid. You get to name your price. This happened in Argentina during its financial crisis in 2001. Today, you’ll see distressed deals, mainly in Europe and the US. Banks are fire-selling units at prices as low as 30 cents on the dollar. You need to be careful if you are considering this play. You need to focus on quality, and finished units.

The market in Fortaleza however is strong. Prices are rising and there are a lot of buyers. This isn’t the type of market where we see distressed or crisis sales.

These four strategies don’t just apply to Fortaleza. You can (and should) use them when investigating any real estate purchase overseas, especially when you are buying for investment.

Ronan McMahon,
for The Daily Reckoning

The Four Pillars of Successful Real Estate Investing 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:
The Four Pillars of Successful Real Estate Investing




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.

Real Estate, Uncategorized

The REZ Paradox

October 7th, 2010

I had a brief exchange with Andrew Butter on Seeking Alpha that I thought might warrant a broader audience here.

Specifically, Andrew asked about the FTSE NAREIT Residential Plus Capped Index Fund (REZ) and wondered if apartments were behind the relative outperformance of this real estate ETF.
My reply noted that the three largest components of REZ are:

  1. Apartments – 47%
  2. Health care – 37%
  3. Self storage – 13%

It comes as no surprise to anyone that recent economic forces have driven a number of strong housing market trends, including a decrease in home ownership and an increase in the demand for apartments. A story by Dawn Wotapka of the Wall Street Journal yesterday confirmed that the apartment market continues to rally.
Of course, as homeowners migrate to apartments, they are typically downsizing in terms of square feet of living space, which is also increasing the demand for self-storage facilities. When you add together the 47% of REZ that is accounted for by apartments and 13% that is attributed to self storage, the result of the move from homes to apartments is a paradox of sorts in which the REZ ETF as currently structured should perform particularly well in a deteriorating residential real estate market.

Seen in this light, there is little wonder that REZ has outperformed its counterparts, RTL and FIO, which are focused primarily on shopping centers and offices, respectively.

Finally, on a housekeeping note, I am making a concerted effort to keep up with my Seeking Alpha private mailbox and comments, just as I do with private emails and comments on the blog. At the moment I am a little behind, but if you have some outstanding questions and comments, I expect to get caught up in the next day or two.

Related posts:

Disclosure(s): none



Read more here:
The REZ Paradox

ETF, Real Estate, Uncategorized

A Few Reasons to Anticipate a Stock Market Downturn

October 7th, 2010

US stocks didn’t do much of anything yesterday. They spent the entire trading session dancing around the unchanged level like Victorian schoolgirls around a Maypole. The Dow Jones Industrial Average gained a smidgen, while the S&P 500 Index slipped a skosh.

The commodity markets danced a little more purposefully – perhaps like a couple of junior high kids “grinding” at a school dance. The RJ/CRB Index of Commodity Prices advanced to a new 9-month high, while gold jumped to a new all-time high. The now-and-again precious metal tacked on $8.00 to $1,348.70 an ounce. Nothing new there…Gold is going up because the world is full of well-meaning central bankers who mean well to debase their national currencies in the pursuit of economic vitality. Sounds wacky, we know; but that’s what the top universities are teaching these days. The top universities are also teaching that a few highly educated men in nice suits can turn enough dials and pull enough levers to cure recessions and create non-inflationary recoveries.

The men in nice suits are busily turning nobs and pulling levers, but the economy still flounders and gold still soars. Apparently, gold didn’t go to college.

Turning our attention back to the stock market, yesterday’s subdued trading action might soon yield to something a bit more raucous. At least that’s the informed opinion of two guys who monitor this kind of thing. First up, Jay Shartsis, a seasoned options trader from R.F. Lafferty in New York, has identified a few “cracks in the wall” of the recent stock market rally.

Shartsis, who has been expecting an intermediate-term market top for more than a week now, is finding more evidence in support of his caution. He observes that many of the high-profile stocks that have been leading the market higher suffered big sell-offs yesterday. Netflix (NASDAQ:NFLX) slumped 4%, Salesforce.com (NYSE:CRM) dropped 8%, VMware, Inc. (NYSE:VMW) fell 9% and Citrix Systems (NASDAQ:CTXS) tumbled 14%. “These are leading stocks and have market-wide implications,” Shartsis warns.

“I was also surprised to see only 272 new highs on the NYSE Tuesday,” Shartsis continues, “versus 674 last April 26 and 306 recorded on Sept 20. That’s a non-confirmation of importance. Further, as the S&P 500 has continued higher, the VIX Index – aka, ‘Fear Gauge’ – has not continued lower, as would be expected. In fact, the VIX bottomed at $20.93 on Sep 13 and has not made new lows as the S&P has made new highs. This non-confirmation suggests the VIX will soon rise and stocks will fall.”

Picking up on this same bearish theme, Dan Amoss, editor of The Strategic Short Report, remarks, “The September rally looks tired… The market is at risk of another sharp move lower. The S&P 500 is encountering strong ‘resistance’ at 1,150. One can easily imagine a return back to 1050 – the starting point of the latest sprint.”

Amoss believes the recent rally has less to do with underlying economic trends than it has to do with the Fed’s easy money tactics – both actual and anticipated. He suspects the stock market has already priced in the Fed’s next round of quantitative easing – the process by which the Fed conjures money out of thin air.

“Because the markets have already anticipated ‘quantitative easing 2’ by pushing up stocks and Treasury bond prices,” says Amoss, “the actual implementation of ‘QE2’ is less likely to be imminent.

“Here’s another ominous sign for stock market bulls,” he continues, “the darling momentum stocks are looking weaker. Ridiculously overvalued stocks (but good businesses) including Priceline, Amazon, Netflix, and Salesforce.com are weakening. Perhaps traders don’t want to own these stocks at triple-digit P/E multiples heading into earnings season…

“There’s plenty of room for 2011 earnings estimates to come down,” Amoss concludes. “This market is not cheap. I’m evaluating several short ideas…”

So there you have it; the stock market will fall very soon…unless it doesn’t.

Eric Fry
for The Daily Reckoning

A Few Reasons to Anticipate a Stock Market Downturn 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:
A Few Reasons to Anticipate a Stock Market Downturn




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.

ETF, OPTIONS, Uncategorized

Central Bankers: The REAL Rogue Traders

October 7th, 2010

Frankie looked up at the judge
Judge, what will be my fine?
And the judge looked down at Frankie…
Girl, you got 99

– Frankie and Johnny

We feel sorry for . Such a good-looking young man. With such a promising future. He was the trader with Société Générale who lost 4.9 billion euros in unauthorized trading.

Now, the poor fellow has faced the music. Trouble was, it wasn’t a tune he wanted to hear. And it seemed a little inappropriate to the occasion to us too. More below…

The news yesterday was mixed. Unemployment increased in September. The dollar and US bond yields hit new lows. And China said that trying to force it to revalue its currency would be a “disaster for the world.”

Hmmm…

Stocks rose 22 points on the Dow. Gold went up another $7.

Gold must be ready for a correction. Or else we really have reached the final stage…the runaway stage in the great bull market.

Back to Kerviel…

Kerviel drew a five-year sentence (two years suspended.) Plus, he’s supposed to repay 4.9 billion euros…

“By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part and whose future was threatened,” said the judge.

Well, we’re sure he didn’t do it intentionally. We mean, he didn’t intend to bring down the bank.

Besides, a lot of other people made authorized trades that were much bigger…which also put their banks in jeopardy. In fact, some of the CEOs of the world’s largest banks also put their institutions in harm’s way. And then, when the banks ran into the ditch, these guys didn’t get five years and a $7 billion fine. Instead, they got a $50 million bonus!

Kerviel recalled a card trick at a corporate party:

“Ladies and gentlemen, it’s up to you and our clients to find the margin. It has disappeared. Where’s it gone? Not here. Not there. Aha! Here it is, in my pocket!”

It didn’t go into Kerviel’s pocket. He’s penniless. The fine is about $6.7 billion. The man is said to earn about $3,000 a month. Talk about debt repayment! Let’s see, if he saves half his money each month. And he puts it all to paying off his debt to Société Générale… that’s $36,000 per year.

Hmm… If the poor man lives for 200,000 years…he’ll still be paying.

But wait. Suppose this quantitative easing thing takes off….

Yes, dear reader, central bankers are probably the biggest rogue traders of all. Remember Alan Greenspan? He has an opinion in The Financial Times today. We read it twice. Neither time did we discover anything new. He says the problem is fear. Until the fear diminishes…don’t expect businesses to start many new projects or hire many new employees. Thanks a lot for that insight, Alan.

Alan Greenspan is probably more to blame than any other human being for today’s financial crisis. He made a huge bet and put the whole world economy at risk. He bet that he knew better than the market. He put the Fed’s key lending rate below the rate of consumer price inflation…and left it there for four years. Over $12 trillion was lost – in America alone. Where’s the jail cell waiting for him? Where’s the $12 trillion fine?

And now central bankers are betting big again…BIG…and they risk not only putting the 140,000 employees of Société Générale out of work…but hundreds of millions of other people all over the world.

Central bankers are betting that they can add billions in QE money to the world’s money supply, without causing a calamity. Maybe they can. Maybe they can’t. It’s never been done before.

But every previous experiment with paper money has ended in disaster. Paper money never survived an entire credit cycle. When credit was expanding, people were happy to take the paper. When it shrank, they became fearful of the paper and wanted something more substantial. Paper money always ends up worthless.

Kerviel’s bets went well as long as credit was expanding. He was up more than $1 billion at one point. Then, when the markets began going down, so did his gambles.

Will it be any different for the central banks? Will their bets go bad too – perhaps in a spectacular blow-off in which the dollar itself becomes almost worthless. Remember, if the dollar loses just the equivalent of 5% of its 1900 value – there’s nothing left. It will be completely worthless.

Could it happen? Central bankers risk a full-blown currency calamity, worldwide, with full knowledge aforethought… This is premeditated currency assassination, in other words.

Where’s the jail cell waiting for Bernanke? Who’s going to fine him $10 trillion? How’s he going to pay?

So cheer up, Jerome. You might be able to pay your debt to society with a postage stamp… We have in our wallet a 10 trillion dollar note from Zimbabwe. Why not a 10 trillion dollar note from the US? We’re not predicting it…we’re just trying to keep the young man’s hopes up. And you never know…

Bill Bonner
for The Daily Reckoning

Central Bankers: The REAL Rogue Traders 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:
Central Bankers: The REAL Rogue Traders




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

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