Chinese Dollar Torture

September 17th, 2010

Recently, the US Treasury Department released data showing an 11% decline in official Chinese holdings of US government bonds during the past year. For US dollar holders, this is a troubling trend. Not so much for those holding gold.

To put it simply, the Chinese government isn’t adding to its US bond position, at least not in any meaningful way. Nor is it rolling over its previous purchases.

According to the latest Treasury International Capital report, China resumed net purchases in July for the first time in three months. China’s US Treasury holdings rose $3 billion. Dollar bulls looking to cheer the modest purchase may first consider the following, longer-term trend: Between September 2009-July 2010, Chinese holdings of US bonds fell from $938.1 billion to $846.7 billion, a drop of over $91 billion over nine months.

In short, the Chinese are backing away from US debt. They’re reducing their exposure to the US dollar, and by extension their vulnerability to a declining US economy.

What’s going on? Is the decline in Chinese holdings of US bonds strictly an economic assessment? Or is there something else afoot? What factions are driving this decision? And what does all of this mean for precious metals?

First let’s note how, in recent years, China has exhibited a newfound measure of international confidence, if not swagger. It’s easy to understand why.

China’s leaders see that the US suffers from a weak economy, hampered by chronic overspending on consumption and underinvestment in new capital. In the wake of the global financial crisis of the past few years, Chinese leaders have concluded that US-style democracy and Wall Street-style capitalism are discredited.

In other words, to use a Chinese term, the US is a “sunset power.” China, on the other hand, sees itself as a “sunrise power.” The Chinese are going places in this world. The Chinese have developed a different approach to development than other nations, and they have the economic statistics to back it up.

The Chinese are not afraid to trumpet their success, either. Recently, for example, the German magazine Der Spiegel noted, “All around the world, from Africa to Asia to South America, Beijing is trying to tout its model of authoritarian state capitalism as the better alternative.”

One way to look at things is that we’re watching historical waves unfold. China is on the rise, while US power and influence wanes. But in a nation and culture as complex as that of China, it’s also useful to take a close look at how and why things happen.

One key source of influence within China is a hard-core military faction. The Chinese military offers a viewpoint that almost always holds sway on issues of supreme national importance. Such issues definitely include areas of so-called “core Chinese interests” that cover Taiwan and Tibet, as well as the South China Sea and the Yellow Sea.

It’s common knowledge, for example, that Chinese military advisers are incensed over US arms sales to Taiwan. No amount of US diplomacy ever is enough to smooth the troubled waters that divide mainland China from Taiwan. Indeed, the Chinese view their relations with Taiwan as an “internal matter” and consider most US activities that touch on that relationship as “officious meddling.”

In a new development this summer, the Chinese military expressed outrage over joint US-South Korean military maneuvers in the Yellow Sea.

That is, the US and South Korea announced plans to conduct military exercises in the waters west of South Korea where a South Korean warship was sunk – apparently by a North Korean torpedo – in March of this year. The Chinese military, in turn, went ballistic (so to speak).

One recent article on the state-run Xinhua news website warned the US not to move the aircraft carrier USS George Washington into the Yellow Sea. The author of the article took care in his choice of words, but left no room for doubt about the Chinese position:

Offending Chinese people is not in the fundamental interest of the US. Any activity aimed at pushing a country with a 1.3-billion populace with enormous potential would be inadvisable.

On another news site, People’s Liberation Army Daily, Rear Admiral Yang Yi, former head of strategic studies at the Peoples’ Liberation Army’s National Defense University, was no less forceful, stating:

On the one hand, [the US] wants China to play a role in regional security issues. On the other hand, it is engaging in an increasingly tight encirclement of China and constantly challenging China’s core interests.

Adm. Yang believes that the US threatens China. Earlier this year, he said:

The US is the only country capable of threatening China’s national security interests in an all-round way… Japan has no such ability, while Russia has no such motivation and India is more worried about China.

In a recent editorial, Adm. Yang expressed dismay over US policies, stating, “Rarely has there been such wavering and chaos in US policy toward China.” Adm. Yang expanded the point in another article in China Daily, China’s main English-language newspaper: “Washington will inevitably pay a costly price for its muddled decision.”

Not to be outdone – or perhaps simply to offer a consistent message – Maj. Gen. Luo Yuan, deputy secretary-general of the People’s Liberation Army Academy of Military Sciences, added his authority to the discussion. In a scathing editorial in the Chinese newspaper Global Times, Gen. Luo said that moving the USS George Washington into the Yellow Sea was a “deliberate provocation” toward China and that the US should “think twice about the maneuver.”

Gen. Luo followed up with this comment: “Imagine what the consequences will be if China’s biggest debtor nation challenges its creditor nation.” China is the “world’s largest market,” and “offending China means losing, or at least decreasing, market share.”

I don’t think we have to “imagine” the consequences at all. I believe we just have to look at the decline in Chinese holdings of US bonds – or “decreasing market share,” like the man said.

Thus, I believe that in addition to the Chinese economic concerns about the future of the US economy and US dollar, the Chinese military is also pushing its leadership to back away from holding US dollars. There’s a component of military strategy to the decline in Chinese bond holdings.

Then next question is if the Chinese are NOT buying US bonds, then who IS buying them?

My hunch is that it’s the US Federal Reserve. That is, the Fed is covering China’s retreat from the dollar. For reasons both economic and military, China is gradually exiting is dollar position. The Fed is allowing this to happen quietly, without causing a dollar panic.

Meanwhile, the consequence is that the Fed is monetizing the US national debt. Over the long term, this can only lead to the further decline of the U.S currency. Looking out over the medium and long terms, it can only mean higher prices for precious metals.

And that, for our money, is exactly where the sunrise investors will want to be.

Regards,

Byron King
for The Daily Reckoning

Chinese Dollar Torture 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:
Chinese Dollar Torture




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

Chinese Dollar Torture

September 17th, 2010

Recently, the US Treasury Department released data showing an 11% decline in official Chinese holdings of US government bonds during the past year. For US dollar holders, this is a troubling trend. Not so much for those holding gold.

To put it simply, the Chinese government isn’t adding to its US bond position, at least not in any meaningful way. Nor is it rolling over its previous purchases.

According to the latest Treasury International Capital report, China resumed net purchases in July for the first time in three months. China’s US Treasury holdings rose $3 billion. Dollar bulls looking to cheer the modest purchase may first consider the following, longer-term trend: Between September 2009-July 2010, Chinese holdings of US bonds fell from $938.1 billion to $846.7 billion, a drop of over $91 billion over nine months.

In short, the Chinese are backing away from US debt. They’re reducing their exposure to the US dollar, and by extension their vulnerability to a declining US economy.

What’s going on? Is the decline in Chinese holdings of US bonds strictly an economic assessment? Or is there something else afoot? What factions are driving this decision? And what does all of this mean for precious metals?

First let’s note how, in recent years, China has exhibited a newfound measure of international confidence, if not swagger. It’s easy to understand why.

China’s leaders see that the US suffers from a weak economy, hampered by chronic overspending on consumption and underinvestment in new capital. In the wake of the global financial crisis of the past few years, Chinese leaders have concluded that US-style democracy and Wall Street-style capitalism are discredited.

In other words, to use a Chinese term, the US is a “sunset power.” China, on the other hand, sees itself as a “sunrise power.” The Chinese are going places in this world. The Chinese have developed a different approach to development than other nations, and they have the economic statistics to back it up.

The Chinese are not afraid to trumpet their success, either. Recently, for example, the German magazine Der Spiegel noted, “All around the world, from Africa to Asia to South America, Beijing is trying to tout its model of authoritarian state capitalism as the better alternative.”

One way to look at things is that we’re watching historical waves unfold. China is on the rise, while US power and influence wanes. But in a nation and culture as complex as that of China, it’s also useful to take a close look at how and why things happen.

One key source of influence within China is a hard-core military faction. The Chinese military offers a viewpoint that almost always holds sway on issues of supreme national importance. Such issues definitely include areas of so-called “core Chinese interests” that cover Taiwan and Tibet, as well as the South China Sea and the Yellow Sea.

It’s common knowledge, for example, that Chinese military advisers are incensed over US arms sales to Taiwan. No amount of US diplomacy ever is enough to smooth the troubled waters that divide mainland China from Taiwan. Indeed, the Chinese view their relations with Taiwan as an “internal matter” and consider most US activities that touch on that relationship as “officious meddling.”

In a new development this summer, the Chinese military expressed outrage over joint US-South Korean military maneuvers in the Yellow Sea.

That is, the US and South Korea announced plans to conduct military exercises in the waters west of South Korea where a South Korean warship was sunk – apparently by a North Korean torpedo – in March of this year. The Chinese military, in turn, went ballistic (so to speak).

One recent article on the state-run Xinhua news website warned the US not to move the aircraft carrier USS George Washington into the Yellow Sea. The author of the article took care in his choice of words, but left no room for doubt about the Chinese position:

Offending Chinese people is not in the fundamental interest of the US. Any activity aimed at pushing a country with a 1.3-billion populace with enormous potential would be inadvisable.

On another news site, People’s Liberation Army Daily, Rear Admiral Yang Yi, former head of strategic studies at the Peoples’ Liberation Army’s National Defense University, was no less forceful, stating:

On the one hand, [the US] wants China to play a role in regional security issues. On the other hand, it is engaging in an increasingly tight encirclement of China and constantly challenging China’s core interests.

Adm. Yang believes that the US threatens China. Earlier this year, he said:

The US is the only country capable of threatening China’s national security interests in an all-round way… Japan has no such ability, while Russia has no such motivation and India is more worried about China.

In a recent editorial, Adm. Yang expressed dismay over US policies, stating, “Rarely has there been such wavering and chaos in US policy toward China.” Adm. Yang expanded the point in another article in China Daily, China’s main English-language newspaper: “Washington will inevitably pay a costly price for its muddled decision.”

Not to be outdone – or perhaps simply to offer a consistent message – Maj. Gen. Luo Yuan, deputy secretary-general of the People’s Liberation Army Academy of Military Sciences, added his authority to the discussion. In a scathing editorial in the Chinese newspaper Global Times, Gen. Luo said that moving the USS George Washington into the Yellow Sea was a “deliberate provocation” toward China and that the US should “think twice about the maneuver.”

Gen. Luo followed up with this comment: “Imagine what the consequences will be if China’s biggest debtor nation challenges its creditor nation.” China is the “world’s largest market,” and “offending China means losing, or at least decreasing, market share.”

I don’t think we have to “imagine” the consequences at all. I believe we just have to look at the decline in Chinese holdings of US bonds – or “decreasing market share,” like the man said.

Thus, I believe that in addition to the Chinese economic concerns about the future of the US economy and US dollar, the Chinese military is also pushing its leadership to back away from holding US dollars. There’s a component of military strategy to the decline in Chinese bond holdings.

Then next question is if the Chinese are NOT buying US bonds, then who IS buying them?

My hunch is that it’s the US Federal Reserve. That is, the Fed is covering China’s retreat from the dollar. For reasons both economic and military, China is gradually exiting is dollar position. The Fed is allowing this to happen quietly, without causing a dollar panic.

Meanwhile, the consequence is that the Fed is monetizing the US national debt. Over the long term, this can only lead to the further decline of the U.S currency. Looking out over the medium and long terms, it can only mean higher prices for precious metals.

And that, for our money, is exactly where the sunrise investors will want to be.

Regards,

Byron King
for The Daily Reckoning

Chinese Dollar Torture 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:
Chinese Dollar Torture




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

Obama Guides the People to the All-Promises Land

September 17th, 2010

Moses, when in Egypt, warned the pharaoh of the ten plagues to be unleashed on the country if his people were not allowed a safe exodus. Perhaps President Obama has not held court over quite so many apocalyptic events, but it sure doesn’t feel far from it.

One can still hope, however unrealistically, that before his term is over he’ll find a long-run strategy to help broke American taxpayers across the nation’s growing Red Sea of debt... without all the caveats below.

Obama Guides the People to the All-Promises Land 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:
Obama Guides the People to the All-Promises Land




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

Obama Guides the People to the All-Promises Land

September 17th, 2010

Moses, when in Egypt, warned the pharaoh of the ten plagues to be unleashed on the country if his people were not allowed a safe exodus. Perhaps President Obama has not held court over quite so many apocalyptic events, but it sure doesn’t feel far from it.

One can still hope, however unrealistically, that before his term is over he’ll find a long-run strategy to help broke American taxpayers across the nation’s growing Red Sea of debt... without all the caveats below.

Obama Guides the People to the All-Promises Land 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:
Obama Guides the People to the All-Promises Land




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

Consumers Spending on Things They Need… And Not Much Else

September 17th, 2010

We couldn’t help but chuckle at the following headline: “US Retailers and Suppliers See Consumer Spending Bouncing Back.”

Here we go again. A survey by CIT indicates that “consumer spending is better than last year and gradually making a comeback.” In fact, “US retail spending may return to 2007 levels by late next year.”

Woohoo!

It’s not that we bear ill will toward retailers. Rather, we’re bothered by the fact that consumer spending has long, if erroneously, been the Holy Grail of the American School of Economics.

“Saving” since the 1980s has not been about how much you have in the bank, but how much less you spend on something you’re already buying. “Investing” during that same time has become an exercise in flipping stocks…rather than an effort to use capital to produce some “thing” for a profit.

“Consumer spending” has become the metric an economist uses to measure how quickly one is willing to part with his paycheck.

A closer look at Commerce Department numbers reveal what a chimera the CIT headlines are. The following items account for most of the increase in retail sales…

  • Gasoline: Up 1.9%
  • Food: Up 1.3%
  • Clothing: Up 1.2% (back-to-school time).

Retail sales numbers measure dollar figures, not quantity or quality of goods.

In August consumers were spending more on things they have no choice but to buy. In contrast, purchases of electronics – discretionary items that keep falling in price – fell 1.1%.

The “core” inflation rate for people who don’t consume food or energy was flat from July to August. But for the rest of us, it rose 0.3%. Food prices rose at the fastest pace since April. Commodities, as you’ll see in a moment, are beginning another run at historic highs.

Meanwhile, real consumers polled by Gallup say they spent $63 a day on average during August – down $5 from July and down $2 from August a year ago.

US Average Daily Spending

That covers spending in stores, restaurants, gas stations and online.

In theory, the retail numbers driven by food and energy “would lend credence to the view that consumer staple stocks should be outperforming consumer discretionary,” says David Rosenberg, chief economist with Canada’s Gluskin Sheff firm.

But in practice, “Over the past month, consumer discretionary stocks are up over 6% and staples by only 3%, so if there is a pint of contrary blood in you and you are looking for a possible anomaly to take advantage of in the equity market… there you go.”

At the same time, the Census Bureau reports the inflation-adjusted income of the median US household in 2009 was $49,777 – a 4.8% drop since 2000.

That “inflation-adjusted income” reading is even worse than the historic, game-changing inflation of the late ’70s, when household incomes still eked out a 1.2% gain.

“‘Consumer spending’ is facing a powerful, lasting head wind: the trend toward frugality,” says our stock market vigilante – and editor of Strategic Short Report – Dan Amoss, who’s got more than a pint of contrary flowing through his veins.

“Most US households need to repair their balance sheets after years of overextending on credit. With the economy weakening rapidly, it’s only a matter of time before consumer discretionary stocks take another hit.”

Addison Wiggin
for The Daily Reckoning

Consumers Spending on Things They Need… And Not Much Else 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:
Consumers Spending on Things They Need… And Not Much Else




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.

Commodities, Uncategorized

Consumers Spending on Things They Need… And Not Much Else

September 17th, 2010

We couldn’t help but chuckle at the following headline: “US Retailers and Suppliers See Consumer Spending Bouncing Back.”

Here we go again. A survey by CIT indicates that “consumer spending is better than last year and gradually making a comeback.” In fact, “US retail spending may return to 2007 levels by late next year.”

Woohoo!

It’s not that we bear ill will toward retailers. Rather, we’re bothered by the fact that consumer spending has long, if erroneously, been the Holy Grail of the American School of Economics.

“Saving” since the 1980s has not been about how much you have in the bank, but how much less you spend on something you’re already buying. “Investing” during that same time has become an exercise in flipping stocks…rather than an effort to use capital to produce some “thing” for a profit.

“Consumer spending” has become the metric an economist uses to measure how quickly one is willing to part with his paycheck.

A closer look at Commerce Department numbers reveal what a chimera the CIT headlines are. The following items account for most of the increase in retail sales…

  • Gasoline: Up 1.9%
  • Food: Up 1.3%
  • Clothing: Up 1.2% (back-to-school time).

Retail sales numbers measure dollar figures, not quantity or quality of goods.

In August consumers were spending more on things they have no choice but to buy. In contrast, purchases of electronics – discretionary items that keep falling in price – fell 1.1%.

The “core” inflation rate for people who don’t consume food or energy was flat from July to August. But for the rest of us, it rose 0.3%. Food prices rose at the fastest pace since April. Commodities, as you’ll see in a moment, are beginning another run at historic highs.

Meanwhile, real consumers polled by Gallup say they spent $63 a day on average during August – down $5 from July and down $2 from August a year ago.

US Average Daily Spending

That covers spending in stores, restaurants, gas stations and online.

In theory, the retail numbers driven by food and energy “would lend credence to the view that consumer staple stocks should be outperforming consumer discretionary,” says David Rosenberg, chief economist with Canada’s Gluskin Sheff firm.

But in practice, “Over the past month, consumer discretionary stocks are up over 6% and staples by only 3%, so if there is a pint of contrary blood in you and you are looking for a possible anomaly to take advantage of in the equity market… there you go.”

At the same time, the Census Bureau reports the inflation-adjusted income of the median US household in 2009 was $49,777 – a 4.8% drop since 2000.

That “inflation-adjusted income” reading is even worse than the historic, game-changing inflation of the late ’70s, when household incomes still eked out a 1.2% gain.

“‘Consumer spending’ is facing a powerful, lasting head wind: the trend toward frugality,” says our stock market vigilante – and editor of Strategic Short Report – Dan Amoss, who’s got more than a pint of contrary flowing through his veins.

“Most US households need to repair their balance sheets after years of overextending on credit. With the economy weakening rapidly, it’s only a matter of time before consumer discretionary stocks take another hit.”

Addison Wiggin
for The Daily Reckoning

Consumers Spending on Things They Need… And Not Much Else 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:
Consumers Spending on Things They Need… And Not Much Else




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.

Commodities, Uncategorized

Unusual Recent Moves with Stocks Oil and VIX

September 17th, 2010

This week has been a little strange toward the end in terms of standard market relationships, specifically with those of equities (seen by the S&P 500) and Oil, and then equities and the Volatility Index (VIX).

Generally, oil moves in the same direction as stocks while the Volatility Index moves opposite stocks, but over the last few days, that relationship has been strained intraday.

Let’s take a look, first starting with Oil and the S&P 500.

For reference, StockCharts does not show Crude Oil prices ($WTIC) intraday, so I’m resorting to comparing the USO Oil ETF with the SPY (S&P 500 ETF).

The USO fund is colored black (like oil) and scaled on the left side, while the SPY is red and scaled on the right side.

As you see, and as you’ve probably observed astutely in the past, oil and stocks tend to move together as they’re driven by expectations on broader (even global) economic expansion or contraction.

This was the case until a separation and relationship breakdown began on September 14th that continues to this day.

Oil (futures) fell from the $78 per barrel level to the $73 level this morning, and you can see that sharp multi-day (straight down) fall on the chart of the USO.

And what did the SPY (stocks) do?  Held up sideways.  Perhaps that’s due to Options Expiration (today) or other stock-related factors (better than expected technology reports this morning), but whatever the reason, it’s strange from an inter-market perspective.

And if that wasn’t enough, we have another solid inverse relationship temporarily breaking down – that of the S&P 500 and the VIX (Volatility Index).

This time we can compare the S&P 500 Index (red – right) to the VIX (blue – left) intraday.

Given that the Volatility Index is also called the “Fear Index,” it tends to move inverse to equities.

That’s been the case in early September as the blue and red lines criss-crossed, but a strange thing happened over the last few days.

The VIX spiked sharply higher on the morning of September 15th when stocks really didn’t move that much.

Stocks were held-up at the prior 1,117 support line but the VIX still surged noticeably higher.

In fact, the VIX rose intraday while stocks bounce higher off support (highlighted) which isn’t usual.

Since September 15th, the relationship returned (mostly) as stocks traded sideways while the VIX trailed lower, with the exception of another solid up-spike on this morning’s sell-off.

The fact is that stocks have remained flat, peaking at the 1,130 level while the VIX remains higher than its September 14th bottom of 21.  The index now trades just under 22.0.

Strange?  Yes.

It’s definitely something to keep watching closely as the Options Expiration concludes and things – perhaps – return to normal.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
Unusual Recent Moves with Stocks Oil and VIX

ETF, OPTIONS, Uncategorized

Unusual Recent Moves with Stocks Oil and VIX

September 17th, 2010

This week has been a little strange toward the end in terms of standard market relationships, specifically with those of equities (seen by the S&P 500) and Oil, and then equities and the Volatility Index (VIX).

Generally, oil moves in the same direction as stocks while the Volatility Index moves opposite stocks, but over the last few days, that relationship has been strained intraday.

Let’s take a look, first starting with Oil and the S&P 500.

For reference, StockCharts does not show Crude Oil prices ($WTIC) intraday, so I’m resorting to comparing the USO Oil ETF with the SPY (S&P 500 ETF).

The USO fund is colored black (like oil) and scaled on the left side, while the SPY is red and scaled on the right side.

As you see, and as you’ve probably observed astutely in the past, oil and stocks tend to move together as they’re driven by expectations on broader (even global) economic expansion or contraction.

This was the case until a separation and relationship breakdown began on September 14th that continues to this day.

Oil (futures) fell from the $78 per barrel level to the $73 level this morning, and you can see that sharp multi-day (straight down) fall on the chart of the USO.

And what did the SPY (stocks) do?  Held up sideways.  Perhaps that’s due to Options Expiration (today) or other stock-related factors (better than expected technology reports this morning), but whatever the reason, it’s strange from an inter-market perspective.

And if that wasn’t enough, we have another solid inverse relationship temporarily breaking down – that of the S&P 500 and the VIX (Volatility Index).

This time we can compare the S&P 500 Index (red – right) to the VIX (blue – left) intraday.

Given that the Volatility Index is also called the “Fear Index,” it tends to move inverse to equities.

That’s been the case in early September as the blue and red lines criss-crossed, but a strange thing happened over the last few days.

The VIX spiked sharply higher on the morning of September 15th when stocks really didn’t move that much.

Stocks were held-up at the prior 1,117 support line but the VIX still surged noticeably higher.

In fact, the VIX rose intraday while stocks bounce higher off support (highlighted) which isn’t usual.

Since September 15th, the relationship returned (mostly) as stocks traded sideways while the VIX trailed lower, with the exception of another solid up-spike on this morning’s sell-off.

The fact is that stocks have remained flat, peaking at the 1,130 level while the VIX remains higher than its September 14th bottom of 21.  The index now trades just under 22.0.

Strange?  Yes.

It’s definitely something to keep watching closely as the Options Expiration concludes and things – perhaps – return to normal.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
Unusual Recent Moves with Stocks Oil and VIX

ETF, OPTIONS, Uncategorized

The Governmental Money-Vacuum

September 17th, 2010

The drunker I get, the more it seems to me that you slave away at your stupid job every day of your stupid life, hating every moment of it, reviling all the idiotic people you deal with every hellish day, but you bravely and heroically put up with the aggravation, tedium and ennui because you desperately need the money.

And then your idiot boss comes walking up, out of nowhere, and wants to get in your face, complaining about all of your mistakes, and erroneous reports, and missing deadlines, and leaving work early, and how you bring your putter and a golf ball to work so that you can practice putting on company time, which you loudly deny by shouting, “That’s a lie! That’s a big stinking lie! If I was practicing, I would be better than I am! And if I was better at putting, I’d play so much more golf that you probably wouldn’t see me for freaking days at a time! But here I am, working at my stupid job, proving that I am not practicing putting on company time!”

And so you, tragically, put up with this, too, because you still need the money, a circumstance alluded to in an earlier paragraph where I also needed money, a literary device to show you that there may be many variables in the universe, but needing money is actually more of a constant.

You find it curious that no matter how much you work, you always have less and less money at the end of the month. It’s outrageous! And you want to know where the money went! “Hey”, you shout. “Somebody is stealing my money!”

More probably, it is the wife and kids wasting my money on frivolities like, for example, going to a movie, when they have a perfectly good TV at home where they can watch movies for free, instead of costing me money.

Or they are eating in a restaurant, instead of coming home to eat food that is, admittedly, past its expiration date, but the loss of crispness, taste and nutrition are more than offset by the savings that add up when paying the much lower cost of this food, some of which is actually free if you dig it out of the dumpster out back.

I personally don’t eat it, of course, but it ought to be good enough for teenagers, and if they don’t like it, then they can get a job and buy their own food!

Justifiably incensed and angry about all of this financial foolishness, I am on my way out the door to yell at the wife and kids for being such wanton wastrels, foolishly buying whatever it is that they are buying that is wasting all my money, when I happened to see that the real reason my money is disappearing is revealed in an editorial in The Washington Times: “We Can’t Afford This Government.”

This was no doubt prompted by the announcement by Americans for Tax Reform that “the average American worked 231 days just to support government, which consumes 63.41 percent of national income.” Yow! The government consumes two-thirds of income! We’re freaking doomed!

Even more horrifically, the cost of government is getting monstrously, exponentially, catastrophically higher, as, “Just two years ago, Cost of Government Day fell an astonishing 34 days earlier,” which is a tax increase of 17.3% in two years! And now the Obama administration wants to raise taxes even more! We’re freaking doomed!

A lot of this is due to, as USA Today reported Aug. 10 and The Washington Times reminds us, that “federal pay and benefits per employee now average more than twice that of private workers: $123,049 compared to $61,051.”

An interesting sidebar is that “Federal salaries outpaced inflation in the past decade by 33 percent.”

Now, as angry as you get about the income disparity between the gilded public servants and their impoverished masters, it is worse than that because I notice that this gain of 33% by federal workers is only the part that was more than inflation, which was, according to the Bureau of Labor Statistics, 27%, meaning that federal salaries went up 60% in 10 years! Un-Freaking-Believable (UFB)! It’s surprising they only make double what we private-sector people make!

Imagine how fabulously well these public employees would have done if they had invested their money according to the dictates of the Fab-U-Tastic Mogambo Portfolio Theory (FUTMPT) and invested it all in gold, silver and oil! They would all be multi-millionaires!

This only proves that buying gold, silver and oil, as per the immortal FUTMPT, is not only immensely profitable, but it’s easy, too! As in “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

The Governmental Money-Vacuum 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 Governmental Money-Vacuum




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

The Governmental Money-Vacuum

September 17th, 2010

The drunker I get, the more it seems to me that you slave away at your stupid job every day of your stupid life, hating every moment of it, reviling all the idiotic people you deal with every hellish day, but you bravely and heroically put up with the aggravation, tedium and ennui because you desperately need the money.

And then your idiot boss comes walking up, out of nowhere, and wants to get in your face, complaining about all of your mistakes, and erroneous reports, and missing deadlines, and leaving work early, and how you bring your putter and a golf ball to work so that you can practice putting on company time, which you loudly deny by shouting, “That’s a lie! That’s a big stinking lie! If I was practicing, I would be better than I am! And if I was better at putting, I’d play so much more golf that you probably wouldn’t see me for freaking days at a time! But here I am, working at my stupid job, proving that I am not practicing putting on company time!”

And so you, tragically, put up with this, too, because you still need the money, a circumstance alluded to in an earlier paragraph where I also needed money, a literary device to show you that there may be many variables in the universe, but needing money is actually more of a constant.

You find it curious that no matter how much you work, you always have less and less money at the end of the month. It’s outrageous! And you want to know where the money went! “Hey”, you shout. “Somebody is stealing my money!”

More probably, it is the wife and kids wasting my money on frivolities like, for example, going to a movie, when they have a perfectly good TV at home where they can watch movies for free, instead of costing me money.

Or they are eating in a restaurant, instead of coming home to eat food that is, admittedly, past its expiration date, but the loss of crispness, taste and nutrition are more than offset by the savings that add up when paying the much lower cost of this food, some of which is actually free if you dig it out of the dumpster out back.

I personally don’t eat it, of course, but it ought to be good enough for teenagers, and if they don’t like it, then they can get a job and buy their own food!

Justifiably incensed and angry about all of this financial foolishness, I am on my way out the door to yell at the wife and kids for being such wanton wastrels, foolishly buying whatever it is that they are buying that is wasting all my money, when I happened to see that the real reason my money is disappearing is revealed in an editorial in The Washington Times: “We Can’t Afford This Government.”

This was no doubt prompted by the announcement by Americans for Tax Reform that “the average American worked 231 days just to support government, which consumes 63.41 percent of national income.” Yow! The government consumes two-thirds of income! We’re freaking doomed!

Even more horrifically, the cost of government is getting monstrously, exponentially, catastrophically higher, as, “Just two years ago, Cost of Government Day fell an astonishing 34 days earlier,” which is a tax increase of 17.3% in two years! And now the Obama administration wants to raise taxes even more! We’re freaking doomed!

A lot of this is due to, as USA Today reported Aug. 10 and The Washington Times reminds us, that “federal pay and benefits per employee now average more than twice that of private workers: $123,049 compared to $61,051.”

An interesting sidebar is that “Federal salaries outpaced inflation in the past decade by 33 percent.”

Now, as angry as you get about the income disparity between the gilded public servants and their impoverished masters, it is worse than that because I notice that this gain of 33% by federal workers is only the part that was more than inflation, which was, according to the Bureau of Labor Statistics, 27%, meaning that federal salaries went up 60% in 10 years! Un-Freaking-Believable (UFB)! It’s surprising they only make double what we private-sector people make!

Imagine how fabulously well these public employees would have done if they had invested their money according to the dictates of the Fab-U-Tastic Mogambo Portfolio Theory (FUTMPT) and invested it all in gold, silver and oil! They would all be multi-millionaires!

This only proves that buying gold, silver and oil, as per the immortal FUTMPT, is not only immensely profitable, but it’s easy, too! As in “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

The Governmental Money-Vacuum 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 Governmental Money-Vacuum




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

Using Iron Condors to Create Profits Trading SPX

September 17th, 2010

This recent rally has many market pundits believing the market will continue higher, fueled by slightly improved economic data points. The bulls realize that the all important S&P 1130 level is not that far overhead; if they can push the SPX through that level with strong volume, a rally could play out. The charts below are using the S&P E-Mini contract for analysis purposes.

In contrast, the bears look at the S&P noting the ever present head and shoulders pattern as well as the potential triple top formation should the S&P 1130 resistance level hold. While the S&P 1130 level is critical for the bulls, the bears view it as the final stand. The bears realize that if they cannot hold the 1130 level, their party will end and the bulls will happily rub it in their face.

So what is a trader to do? The first advice worth offering is to utilize patience. Let others do battle and wait for the market to confirm a specific direction. Professional traders always have a plan before they enter a trade and they consistently utilize stops to define their risk. The very best of traders do not allow their opinions or the opinions of others to cloud their judgment; professional traders will abruptly change their trading plans in order to adapt to changing market conditions.

Trading is all about perception and leveraging probability. Regardless of whether a trader utilizes technical analysis, fundamental analysis, or the newspaper-dart method the very best traders realize that consistently taking money out of the market is more about managing emotions and probability than anything else.

The market always leaves clues behind, but if a trader is too biased in one direction or the other he/she becomes blind to clues that do not fit his/her directional bias. The current state of affairs in the S&P 500 offers another quality setup, regardless of which bias a trader has. With option expiration looming, a new option cycle presents itself with expiration at the end of September (Quarterly’s). My most recent missive focused on option butterflies, however the situation we have currently on the S&P calls for a wider trading range. We now find ourselves in condor season.

Condors and iron condors have similar setups, but they have slightly different constructions. Theta (time decay) is the primary profit engine just like traditional butterflies; the only difference is that condors and iron condors offer potentially wider profit zones than a traditional butterfly. Similar to butterflies, condors are susceptible to volatility shocks, expanding implied volatility on the underlying, and gamma risk can also present itself and negatively impact a trade’s overall performance.

The most important thing to remember about option trading is that as one progresses in his/her overall option knowledge, options allow a trader to modify their position to reduce risk and allow positions to become profitable.

While both types of condors are susceptible to the same risks, their primary functional difference is based around their construction. Both condors and iron condors have 4 separate and specific legs. A traditional condor utilizes 4 option contracts of the same type; 4 calls or 4 puts. Iron condors utilize a mixture of calls and puts; 2 calls and 2 puts. Another primary difference is that condors are a debit trade, while iron condors are a credit trade.

In this week’s example we will use an iron condor strategy to set up a trade. The trade will not have a directional bias, instead we will simply use the passage of time as our profit engine. We will use the S&P 1130 level as our midpoint, and build the wings of the iron condor equidistant from that level. Trading the cash settled SPX index options or trading options on the S&P 500 futures requires more capital and the acceptance of greater risk.

A trader with less capital could utilize the SPY in the same manner, with less capital at risk and tighter bid/ask spreads. For accounts exposed to the ravages of the tax system, it is important to remember there is preferential tax treatment of the cash settled index options and futures options that are not present in the SPY.

The iron condor is set up using 4 separate option contracts – 2 calls and 2 puts. The iron condor has the following construction ratio: Long 1 Put/Short 1 put/Short 1 Call/Long 1 Call. Each of these two vertical spreads is constructed as a credit spread. In our case, we are going to use the following strike prices for our example. Keep in mind, a trader willing to take more risk could use strikes which are closer for the potential of higher returns (more risk). On the other hand, those who are more risk averse could move the short strikes further apart for a lower return (less risk).

The chart below represents the profitability of an SPX iron condor using the following trade construction: Long 1 Sept (Quarterly) SPX 1050 Put/Short 1 Sept. (Quarterly) 1060 Put/Short 1 Sept. (Quarterly)1165 Call/Long 1 Sept. (Quarterly) 1170 Call. For further detailed information, prices used to produce this iron condor were based on the Thursday close and the midpoints of the bid/ask spread on all contracts. The profitability reflected below is based on a 1/1/1/1 setup. Obviously if a trader decided to add more contracts the max profit and loss would increase. Keep in mind, this example is for educational purposes only and is not reflective of intraday market prices.

The red line represents profit/loss at expiration. The white line represents profit today. As you can tell, the potential profit for today is essentially zero unless a substantial deterioration of implied volatility was to occur. The key to this entire trade is the passage of time. If the SPX stays within SPX 1060 and SPX 1165 price at expiration on September 30th the trade will realize the maximum of profit of $160. The total risk taken by this trade would be $840.

The beauty as always with options is that risk is crisply defined. The absolute most you could lose on this trade regardless of what happens is $840 per side. As a side note, the probability of SPX’s price remaining between the 1060-1165 price range over the next two weeks is around 70% based on a log normal (Gaussian) distribution of prices.

Additionally, iron condors can be manipulated throughout their lifespan to defend profits. The ability to make slight changes to the construction by purchasing slightly out of the money puts/calls can also help protect profits if price gets near the edge of the profitability window. A myriad of strategies exist once this trade is placed to adapt to ever changing market conditions.

As an example, let us assume that price goes higher to around SPX 1150 in one week. At that price point, we could close the put portion of the condor for the maximum gain and then restructure our condor to protect the call side with a slightly out of the money call purchase and/or another put credit spread at a higher strike point taking in more premium and further reducing our risk.

After a trader becomes proficient with the various option trading strategies, he/she can constantly adapt positions to prevent further losses. After all, options were designed primarily as a means to hedge equity positions and reduce risk.

In closing, the iron condor strategy can be profitable regardless of which direction an underlying’s price goes. There is no guesswork or fake outs, as long as the inevitable passage of time continues and price stays within the contracts that were sold to open the position, a near 19% return is possible based on capital at risk.

Get More Free Reports and Trade Ideas Here for Free: FREE SIGN-UP

Read more here:
Using Iron Condors to Create Profits Trading SPX




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF, OPTIONS

Using Iron Condors to Create Profits Trading SPX

September 17th, 2010

This recent rally has many market pundits believing the market will continue higher, fueled by slightly improved economic data points. The bulls realize that the all important S&P 1130 level is not that far overhead; if they can push the SPX through that level with strong volume, a rally could play out. The charts below are using the S&P E-Mini contract for analysis purposes.

In contrast, the bears look at the S&P noting the ever present head and shoulders pattern as well as the potential triple top formation should the S&P 1130 resistance level hold. While the S&P 1130 level is critical for the bulls, the bears view it as the final stand. The bears realize that if they cannot hold the 1130 level, their party will end and the bulls will happily rub it in their face.

So what is a trader to do? The first advice worth offering is to utilize patience. Let others do battle and wait for the market to confirm a specific direction. Professional traders always have a plan before they enter a trade and they consistently utilize stops to define their risk. The very best of traders do not allow their opinions or the opinions of others to cloud their judgment; professional traders will abruptly change their trading plans in order to adapt to changing market conditions.

Trading is all about perception and leveraging probability. Regardless of whether a trader utilizes technical analysis, fundamental analysis, or the newspaper-dart method the very best traders realize that consistently taking money out of the market is more about managing emotions and probability than anything else.

The market always leaves clues behind, but if a trader is too biased in one direction or the other he/she becomes blind to clues that do not fit his/her directional bias. The current state of affairs in the S&P 500 offers another quality setup, regardless of which bias a trader has. With option expiration looming, a new option cycle presents itself with expiration at the end of September (Quarterly’s). My most recent missive focused on option butterflies, however the situation we have currently on the S&P calls for a wider trading range. We now find ourselves in condor season.

Condors and iron condors have similar setups, but they have slightly different constructions. Theta (time decay) is the primary profit engine just like traditional butterflies; the only difference is that condors and iron condors offer potentially wider profit zones than a traditional butterfly. Similar to butterflies, condors are susceptible to volatility shocks, expanding implied volatility on the underlying, and gamma risk can also present itself and negatively impact a trade’s overall performance.

The most important thing to remember about option trading is that as one progresses in his/her overall option knowledge, options allow a trader to modify their position to reduce risk and allow positions to become profitable.

While both types of condors are susceptible to the same risks, their primary functional difference is based around their construction. Both condors and iron condors have 4 separate and specific legs. A traditional condor utilizes 4 option contracts of the same type; 4 calls or 4 puts. Iron condors utilize a mixture of calls and puts; 2 calls and 2 puts. Another primary difference is that condors are a debit trade, while iron condors are a credit trade.

In this week’s example we will use an iron condor strategy to set up a trade. The trade will not have a directional bias, instead we will simply use the passage of time as our profit engine. We will use the S&P 1130 level as our midpoint, and build the wings of the iron condor equidistant from that level. Trading the cash settled SPX index options or trading options on the S&P 500 futures requires more capital and the acceptance of greater risk.

A trader with less capital could utilize the SPY in the same manner, with less capital at risk and tighter bid/ask spreads. For accounts exposed to the ravages of the tax system, it is important to remember there is preferential tax treatment of the cash settled index options and futures options that are not present in the SPY.

The iron condor is set up using 4 separate option contracts – 2 calls and 2 puts. The iron condor has the following construction ratio: Long 1 Put/Short 1 put/Short 1 Call/Long 1 Call. Each of these two vertical spreads is constructed as a credit spread. In our case, we are going to use the following strike prices for our example. Keep in mind, a trader willing to take more risk could use strikes which are closer for the potential of higher returns (more risk). On the other hand, those who are more risk averse could move the short strikes further apart for a lower return (less risk).

The chart below represents the profitability of an SPX iron condor using the following trade construction: Long 1 Sept (Quarterly) SPX 1050 Put/Short 1 Sept. (Quarterly) 1060 Put/Short 1 Sept. (Quarterly)1165 Call/Long 1 Sept. (Quarterly) 1170 Call. For further detailed information, prices used to produce this iron condor were based on the Thursday close and the midpoints of the bid/ask spread on all contracts. The profitability reflected below is based on a 1/1/1/1 setup. Obviously if a trader decided to add more contracts the max profit and loss would increase. Keep in mind, this example is for educational purposes only and is not reflective of intraday market prices.

The red line represents profit/loss at expiration. The white line represents profit today. As you can tell, the potential profit for today is essentially zero unless a substantial deterioration of implied volatility was to occur. The key to this entire trade is the passage of time. If the SPX stays within SPX 1060 and SPX 1165 price at expiration on September 30th the trade will realize the maximum of profit of $160. The total risk taken by this trade would be $840.

The beauty as always with options is that risk is crisply defined. The absolute most you could lose on this trade regardless of what happens is $840 per side. As a side note, the probability of SPX’s price remaining between the 1060-1165 price range over the next two weeks is around 70% based on a log normal (Gaussian) distribution of prices.

Additionally, iron condors can be manipulated throughout their lifespan to defend profits. The ability to make slight changes to the construction by purchasing slightly out of the money puts/calls can also help protect profits if price gets near the edge of the profitability window. A myriad of strategies exist once this trade is placed to adapt to ever changing market conditions.

As an example, let us assume that price goes higher to around SPX 1150 in one week. At that price point, we could close the put portion of the condor for the maximum gain and then restructure our condor to protect the call side with a slightly out of the money call purchase and/or another put credit spread at a higher strike point taking in more premium and further reducing our risk.

After a trader becomes proficient with the various option trading strategies, he/she can constantly adapt positions to prevent further losses. After all, options were designed primarily as a means to hedge equity positions and reduce risk.

In closing, the iron condor strategy can be profitable regardless of which direction an underlying’s price goes. There is no guesswork or fake outs, as long as the inevitable passage of time continues and price stays within the contracts that were sold to open the position, a near 19% return is possible based on capital at risk.

Get More Free Reports and Trade Ideas Here for Free: FREE SIGN-UP

Read more here:
Using Iron Condors to Create Profits Trading SPX




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF, OPTIONS

Hope and Depression in the Investor Sentiment Cycle

September 17th, 2010

Charles Kirk of The Kirk Report has an interesting post up, The Investor Sentiment Cycle, in which analyzes the results of a recent survey he conducted in which he asked a broad group of professional investors to indicate where they believe investors are in the sentiment cycle, a graphic of which is at the bottom of this post.

I am not sure of the exact origin of the Investor Sentiment Cycle, though it was attributed to a graphic from 1998 by Westcore Funds by several sources. My guess is that the chart evolved from a similar graphic from Justin Mamis, which appeared in The Nature of Risk, published in 1991.

Given my recent discussion of the record highs in my proprietary VIX Futures Contango Index, extreme readings in the AAII Investor Sentiment survey (in the newsletter), records highs in the price of gold, record low Treasury yields, surging prices for default insurance for European credit defaults swaps (CDS), etc. it is not surprising that the #2 response to the Kirk survey was that investors are going through a period of depression. On the other hand, the S&P 500 index is now 69% above its March 2009 low, which is part of the reason that the #1 response to the survey was that investor sentiment is currently characterized primarily by hope.

While depression and hope are adjacent in the sentiment cycle, the distinction in an investor’s psyche is an enormous one. With depression, there is a concern that current conditions will likely not improve and that investment opportunities carry more risk than reward. More importantly, the is such an anxiety about the future that investors worry that about the potential for markets to deteriorate to previous low levels and perhaps even get worse than they were in 2008.

Just around the corner from depression is hope, where the outlook is still mostly cloudy with a chance of sun, but there is a widespread belief (perhaps partly wishful thinking, but grounded in some tangible signs of progress) that the bottom is behind us and continued improvements are more likely than not.

Given much of the data I have seen and written about, I believe investors are still operating under the long shadow of 2008 (and beyond), with the result that their psyche is still under the influence of ‘disaster imprinting.’ In terms of the sentiment cycle, this puts them in the depression stage. My personal perspective closer to hope than depression at this point. I understand that hope is a concept that traders should avoid, but I do think that even with all the challenges to the global economy, hope is a more appropriate place to look for investment opportunities.

When the VIX is at 22 and I can sell VIX futures (or options based on those futures) at 32, at least I have the comfort of knowing that I have a large margin of error before I have to worry about some of my trading ideas becoming unprofitable.

Related posts:

Disclosure(s): neutral position in VIX via options at time of writing



Read more here:
Hope and Depression in the Investor Sentiment Cycle

OPTIONS, Uncategorized

Hope and Depression in the Investor Sentiment Cycle

September 17th, 2010

Charles Kirk of The Kirk Report has an interesting post up, The Investor Sentiment Cycle, in which analyzes the results of a recent survey he conducted in which he asked a broad group of professional investors to indicate where they believe investors are in the sentiment cycle, a graphic of which is at the bottom of this post.

I am not sure of the exact origin of the Investor Sentiment Cycle, though it was attributed to a graphic from 1998 by Westcore Funds by several sources. My guess is that the chart evolved from a similar graphic from Justin Mamis, which appeared in The Nature of Risk, published in 1991.

Given my recent discussion of the record highs in my proprietary VIX Futures Contango Index, extreme readings in the AAII Investor Sentiment survey (in the newsletter), records highs in the price of gold, record low Treasury yields, surging prices for default insurance for European credit defaults swaps (CDS), etc. it is not surprising that the #2 response to the Kirk survey was that investors are going through a period of depression. On the other hand, the S&P 500 index is now 69% above its March 2009 low, which is part of the reason that the #1 response to the survey was that investor sentiment is currently characterized primarily by hope.

While depression and hope are adjacent in the sentiment cycle, the distinction in an investor’s psyche is an enormous one. With depression, there is a concern that current conditions will likely not improve and that investment opportunities carry more risk than reward. More importantly, the is such an anxiety about the future that investors worry that about the potential for markets to deteriorate to previous low levels and perhaps even get worse than they were in 2008.

Just around the corner from depression is hope, where the outlook is still mostly cloudy with a chance of sun, but there is a widespread belief (perhaps partly wishful thinking, but grounded in some tangible signs of progress) that the bottom is behind us and continued improvements are more likely than not.

Given much of the data I have seen and written about, I believe investors are still operating under the long shadow of 2008 (and beyond), with the result that their psyche is still under the influence of ‘disaster imprinting.’ In terms of the sentiment cycle, this puts them in the depression stage. My personal perspective closer to hope than depression at this point. I understand that hope is a concept that traders should avoid, but I do think that even with all the challenges to the global economy, hope is a more appropriate place to look for investment opportunities.

When the VIX is at 22 and I can sell VIX futures (or options based on those futures) at 32, at least I have the comfort of knowing that I have a large margin of error before I have to worry about some of my trading ideas becoming unprofitable.

Related posts:

Disclosure(s): neutral position in VIX via options at time of writing



Read more here:
Hope and Depression in the Investor Sentiment Cycle

OPTIONS, Uncategorized

Currencies Continue to Gain on the US Dollar

September 17th, 2010

Front and center this morning, we have more upward movement in the currencies, and precious metals. Gold has reached yet another all-time record at $1,280 this morning… And silver is $20.80… On their way to $1,300 and $21 respectively, eh? Sure looks like it to me, but then, that’s just me, I could be wrong, right?

The euro (EUR) is trading well over 1.31 this morning, and the Aussie dollar (AUD) is nearing a two-year high at 0.9455… Yes, it was July of 2008, the last time the Aussie dollar saw the other side of 0.9450, and then it was falling from its all-time high of 98-cents that it reached earlier in the summer of 2008.

Basically, I think what’s really moving these risk assets these past few days is that the markets are not worrying about a double-dip for the US economy any longer, and if that’s not going to happen, investors are looking for something outside of the dollar, for there’s no need for a so-called “safe haven”…

Personally, I think the markets are wrong, but I was taught many years ago, that the markets are never wrong, and when you go against them, you lose… So, I guess I’ll have to put my call of a double-dip in my back pocket for now, and play ball with the markets, eh? I mean, I think there will still be a double-dip, but I doubt that it will feed a flight to safety again…

OK… No intervention from Japan overnight, so their entry into the “currency manipulation game” – otherwise known as intervention – is, for now, a one-and done… But I don’t think it will continue to be a one-and done…that is, as long as traders still have the intestinal fortitude to fight a central bank!

Speaking of Japan’s intervention… Remember when I used to ask the question about why the US beats on China, but lets Japan go Ollie, Ollie, Oxen free?

Well… Now you’ve got Japan purposely weakening their currency, and US Treasury Secretary Geithner still beating on China!

Japan’s economic status is far more mature than China’s, and yet, Geithner is still beating on China?

Serenity now!

The Reserve Bank of India (RBI) raised interest rates in an effort to cool inflation, and hiked its repo rate to 6.00% from 5.75% and reverse repo rate to 5.00% from 4.50%. The market consensus was for a 25 bps hike in both rates. In its statement, the central bank said that “inflation may remain high for some months.” The rate hike boosted the rupee (INR) higher versus the dollar in a move that we’ve not seen from the rupee in some time!

Yesterday, Spain saw a well-received auction of Spanish government debt, thus allowing Spain to kick the can further down the road.

Next week, on Tuesday, the FOMC will meet… And I can’t begin to tell you how many rumors are going that the FOMC will announce a new round of quantitative easing at this meeting. And the thought of more quantitative easing is hanging over the dollar like the Sword of Damocles.

And while we’re here in the US… Did you see this story? Bank of America Corp., the biggest US lender by assets, should repurchase as much as $20 billion in home loans that were based on wrong or missing information, said a trade group for bond insurers. More than half of the soured home-equity credit lines and residential mortgages created from 2005 through 2007 that insurers examined should be bought back, the Association of Financial Guaranty Insurers said in a Sept. 2 letter to Bank of America Chief Executive Officer Brian T. Moynihan.

I wonder if BOA budgeted a $20 billion hickey?

And this from our mortgage commentary guy, Andrew Murray… US home seizures have reached a record for the third time in five months in August as lenders completed the foreclosure process for thousands of delinquent loans. Bank repos have also climbed 25% to 95,364 from a year earlier. Some estimate that foreclosures could add about 12 million homes to the US home stock over the next year, which would basically crush any real estate recovery for some time to come. Florida and Nevada are still the twin epicenters of foreclosure activity with Florida filings at a ratio of 1 to every 155 homes and Nevada at 1 to every 84 homes.

I saw a blip yesterday that 1-in-7 here in the US live in poverty now… I have sidebar thoughts on that subject, but I think I’ll keep those to myself…

So… The US data on Thursday was interesting… Not earth shattering, just interesting… PPI (wholesale inflation) printed higher at 3.1% year-on-year. The Initial Jobless Claims were lower by 3,000 from the week earlier, but still 450,000! The Current Account Deficit for the second quarter was $123.3 billion or $41.1 billion per month… And the TIC flows were very strong at $61.2 billion…

So… The naysayers will be on the shouting blocks exclaiming that the world is still buying enough Treasuries to finance our deficit, and therefore deficits don’t matter!

I can’t begin to tell you how visibly sick I became typing that last paragraph…

Today, on this Fantastico Friday, we’ll see the color of the stupid CPI and the U. of Michigan Consumer Confidence, which for some strange reason is expected to inch up higher… Sure the US stocks continue to defy gravity, but come on… Every day another economist climbs onboard the “recovery is not happening here” train…

Then there was this… Yesterday, I talked about banks that didn’t take TARP, and how relieved they are today because they did not take TARP… Then there was this story on MarketWatch that played nicely with my thoughts yesterday… “The early change in TARP strategy from asset purchases to capital injections, followed by the rollout of numerous seemingly unconnected programs, combined with largely ineffective communication of the reasoning behind these actions, spread confusion in the public and undermined trust in the TARP,” the Congressional Oversight Panel said.

Yes… TARP was a fiasco, and until the day I die, I will believe in my heart of hearts that it should not have ever taken place, nor should have the $787 billion stimulus… Yes, there would have been lots of heartaches and devastation, but it would have been over with, and the strong institutions would now be thriving, and our future generations wouldn’t have to deal with the loss of freedoms and incur a heavy tax burden… But that’s just me… If you don’t agree, that’s fine…

And right before I go to the Big Finish, I’m seeing selling happening in the currencies… Probably profit taking before the books close in London, eh?

To recap… The currencies are stronger this morning, with Aussie dollars nearing a two-year high, and euro is back to 1.31… Gold is at another new all-time record high of $1,280, and silver is $20.80.

Chuck Butler
for The Daily Reckoning

Currencies Continue to Gain on the US Dollar 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.”

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Currencies Continue to Gain on the US Dollar




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