Monday, April 30, 2012

Day After Tomorrow.

Like clockwork, we had a red day today. Nothing serious, at least not yet. It just let out some excess steam before reaching the April 10 high. We are about 25 points away from that and I expect the retest will happen by May 2, Wednesday.  While the momentum is definitely weak, there is no sign of definite sell signal yet. But it looks so similar like last year which I have marked in a rectangle.

If this pattern is to play out we might see an overshoot of the last high. It may not be a bad idea to start laying the defensive bets now onward.

When the correction comes, it will be fast and furious and will not give us much time to take advantage. But at the same time, it is risky to front run, as I keep saying. So we will have to pick up sectors where there are definite weaknesses.

Copper is having a bounce but given that the demands in China are slowing; it might be a safe play to short copper. Oil is another one, because oil sells off every summer. Emerging markets are struggling.  Financials do not look particularly strong nor do Russell 2000. We will see what day after tomorrow brings. It does not have to be all in at one go.

For tomorrow at least, I expect the market to be up if not substantially.  If on the other hand, we do not end strong green tomorrow, it will confirm that the end is close. I would like to end today’s post with a quote from the famed investor, historian and economist Peter Bernstein. ( Hat tip to Joshua Brown of reformed Broker) :

“I have opted for more conservative ideas and not aggressive ones.”
"After 28 years at this post, and 22 years before this in money management, I can sum up whatever wisdom I have accumulated this way: The trick is not to be the hottest stock-picker, the winning forecaster, or the developer of the neatest model; such victories are transient. The trick is to survive. Performing that trick requires a strong stomach for being wrong, because we are all going to be wrong more often than we expect. The future is not ours to know. But it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future (maybe the real trick is persuading clients of that inexorable truth). Look around at the long-term survivors at this business and think of the much larger number of colorful characters who were once in the headlines, but who have since disappeared from the scene."

I am reading the above post again and again and would request you to do as well.

Floating-rate Treasury Debt?

Bloomberg has an intriguing April 29 article on Treasury Floaters According to Bloomberg, the Treasury may announce on May 2 that it will issue floaters. It quotes Cam Harvey, who testified that floaters as being a great idea in 1993, as disapproving.   Knowing Cam,  I suspect he had a more sophisticated view in mind.

Issuing floaters and converting a lot of debt to floating-rate debt is a great idea, if done right, even if the maturity structure of government debt should be much longer now. Let me explain.

Floating-rate debt is like an adjustable-rate mortgage. If you buy a $100 floating rate bond and short-term rates are 5%, you get $5. If next year short term rates rise to 10%, you get $10. And so forth.

The alternative to floating-rate debt is our current practice of rolling over short-term debt. The government issues one-year bills,  then next year issues new bills to pay off the old ones.  The big danger for our -- or any -- government is that markets refuse to roll over its debt. Greece didn't get in trouble because it couldn't borrow new money to pay its bills for a month; it got into trouble because it couldn't borrow new money to pay off the old money. The US has to roll over about half our $15 trillion debt every two years, so we face a similar danger. You may say, interest rates are low now, who needs to worry about that? I would answer, Greek interest rates were low in 2006 as well. You need fire insurance even if a fire seems remote. 

From a frictionless finance point of view, however, floating-rate debt is the same thing as rolling over short term debt.   If the one year rate is 5% in the first year and 10% in the second year, the payments from government to bondholders are exactly the same. Similarly, rather than get a floating-rate mortgage, you could get a one-year loan, then borrow again next year to pay off this year's loan and so on.

So, if you like floating-rate debt, you must have some market friction in mind. It certainly feels safer for bondholders to have long-term bonds with adjustable coupons rather than explicitly trying to sell new debt every year to pay off the old debt. It isn't, really, however. In the circumstance that markets refuse to lend new one-year debt, the short-term interest rate would rise arbitrarily high; people would all be trying to sell the long-term "floating rate" bonds, and you have exactly the same crisis.

So where does the feeling that floating-rate debt is safer come from? I suspect part of it is a little behavioral, and perhaps sensibly. Many holders of government bonds may act passively around an interest rate reset, where they would actively have to make the decision how many new bonds to buy after their old bonds retire.  It's easier to have a bank run if everybody has to go to the bank every day, than if most people sit at home and watch interest rates change.  On the other hand, most Treasury bills are held by large sophisticated institutions. Maybe the idea that we can get them not to pay attention by essentially making a roll over the default option is optimistic.

I think the real reason is a bit deeper. To really evaluate floating rate bonds, we need to know how the interest rate is set. Will it be an index, based on some other market? Or will it be some auction mechanism? Can rates rise arbitrarily high, or is there some cap on how far rates can rise? The devil is in the details here!  Rolling over one-year bonds is the ultimate auction mechanism. Both sides really know they're getting the market rate on bonds.

Another way to put the issue: will the market value of floating-rate debt always be exactly $100? True floating-rate debt has an interest rate set by auction every day, and the principal value is exactly $100. In that way it really is functionally the same as rolling over debt every day, but avoids a lot of needless churn.

I suspect the answer is no. As with auction-rate securities that fell apart in the financial crisis, I suspect there will be some cap on the floating rate, or that it will be set relative to some index. In a crisis, the market value will fall below $100, and bondholders take a hit. Now it is a combination of short-term debt and some sort of option which makes it much more fun for financial engineers.

That might actually be good for some purposes. I think Cam was objecting, as I do, to the short maturity structure of US Government debt in the present situation. Interest rates can only go one way, up. If the US massively lengthened the maturity structure of government debt, we would be insured against a rollover crisis, or the fiscal impact of rising interest rates. If interest rates rise to 5% now, that's going to add something like $500 billion to the annual deficit. If the US switched entirely to long-term debt -- fixed-coupon perpetuities -- then interest rates rising to 5% would cost us exactly zero. Bondholders would take the hit. Sure, it's a little more expensive on average -- the yield curve is upward sloping. That's the premium you pay for insurance. The premium seems mighty small.

So, in that context, short-term debt that turns into long-term debt in a financial crisis has some advantages. It doesn't stop the fiscal consequences of rising interest rates, but it includes an option for the government to make the debtholders take a hit during a potential rollover crisis or sudden spike in rates. For which the government will pay a premium. 

In sum, the issue of the maturity structure of government debt is different from the issue whether our short-term debt is rolled over or consists of floating rate debt. I suspect what Cam Harvey really said is that he likes a longer overall maturity structure but also likes conversion of the shorter debt to floaters. 

And, the key question to ask of Treasury floating-rate debt is, just how will that floating rate be set? Maybe the right answer is a spectrum: some truly floating rate debt (next subject) and some debt that resets less frequently and with an explicit cap on interest rate changes.


A second aspect of floating-rate debt intrigues me.

We already have floating-rate debt. It's called reserves. Reserves -- accounts banks hold at the Fed -- are nothing more than overnight, floating-rate government debt. They are curiously absent from the Congressional debt ceiling, but that's it.

Interest on reserves is a great innovation. Together with more and more widespread electronic transactions, it means we can live the Friedman rule. The economy can have all the money it wants without losing anything to foregone interest. All of the cash-management shenanigans of the past can be forgotten. One of the main justifications for massively levered banks goes out the window -- the idea that the economy needs a vast supply of bank deposits as very liquid assets.

The only problem is, you and I can't access interest-paying reserves, only banks can do so. And the interest rate is not a market rate, it is set by whatever the Fed feels like paying. And the Fed loudly announces that it will lower the rate on reserves below market rates when it feels like stimulating the economy. But smart cash managers will not want to suffer lower rates, so all the financial engineering starts up again.

A good supply of floating-rate Treasuries would be great in this situation. I mean really floating - rate, with an interest rate set each day by auction at whatever value makes the price exactly $100. And they should be electronically transferrable in arbitrary denominations.

These securities would be the ideal asset for money market funds to hold, and offer (at, I presume lower cost than the Treasury) all sorts of transactions services. Now you and I can have perfectly safe, interest-paying money.  And we don't have to put up with the "demand for liquid assets" story justifying huge bank leverage, very high levels of deposit insurance, and the other pathologies of our banking system.  

Will we get it? Let's see.

Sunday, April 29, 2012

Things To Look Out For Next Week.

  • Election in France and Greece. May have some impact on Euro in short term. But commercials are still heavily long Euro.
  • Monday there will be settlement of about $ 9 billion Operation twist. Most likely markets will be in Red.
  • Expect one more push up in May 1 and 2.
  • McClellan Oscillator has reached that danger zone.
Do we still want to bet on more straight up?
  • Will watch carefully the test of the highs. If it fails , may be time to start building up short position.

Saturday, April 28, 2012

Weekend Musing.

·         Did you notice that Apple is down two days in a row while Nasdaq has been up? It would seem that those who are holding big lots of Apple are using the strength of the general market to unload, without causing panic. Rather, BOYZ may be pumping the market to distribute. There is a method in the madness my friends.

·         Bad news is good news. US GDP is below estimate. UK in double dip recession. Spain is downgraded. US unemployment claim is high. How do we react? By pushing the stocks higher.  How quickly the sentiment changes. Only last week there were talks of end of Bull Run and deep correction. Today we are talking of SPX 1500!

·         SPX is on its way to re-test the high of April 2. My maximum upside target was/still is 1450 + or – a few points. We have already been to 1422 and back. I do not see the point of taking risk to go long for another 2% at this point.

·         We may not hit a huge bear market anytime soon, but let us not rule out the possibility of a 10%-15% correction.  The Chairman said that he will be there to catch us if we fall. Look at it other way. He can catch us only if we fall and he is standing ready to catch. If the market keep going up where is the need for cash, I mean to catch? Now that GDP count has come lower than expected, he can justify more easing without looking partisan. But for that he needs some panic. Mark my words, panic will come soon.

·         Then why am I not doing anything? Because any action now will not result in good entry.  If we shorted last week, we would have regretted already as you can see. And if we go long now, we will regret  week after. 

··         You are really interested to understand how the macroeconomic factors and world events affect the market behavior in the USA. You read all finance blogs and are convinced that the world is run by bad bankers and politicians and it will soon come to an end. You have started hording gold because you believe gold will reach $10000/oz and fiat money will come to an end. But still, for the last four years, your portfolio may not have grown along with your conviction. How do I know? Because I am one of those suckers who fell for that trap. Only now I am waking up to the reality.  Only now I am starting to understand a little as how money of today is different from money of yesterday. What are the powers and limitations of CBs. Eyes are now opening to the fact that fear mongering is a powerful business model. I am not mocking anyone. I am just one of those who have been taken to the cleaners time and again and have now decided to try it out myself. This is a process of learning and in that process; I have made some good calls and some bad calls. I am trying to learn from the mistakes and bad calls and reduce bad calls. And I think I will reach there. To make a long story short, if you want to know where the Index will go, just follow GE.

This is a comparison of GE vs SPX. If you can analyze how GE will perform going forward, you may be able to guess where the markets will go. 

That’s all for this weekend folks.  Enjoy this wonderful weekend and forward this post to someone you know who might benefit and invite them to read more at

Friday, April 27, 2012

Who Should Pay for Higher Education?

It seems so easy to say that states should provide more support for public universities, but should they?  Who pays if the states pay more?  The answer is: the average taxpayer.  Why shouldn't the student attending the university foot their own bill.  Why should a taxpayer who is not attending and who may or may not have children attending pay to subsidize college students?

"We all benefit" is the usual refrain.  But, is that correct?  Does the average taxpayer benefit when Joe Dough gets a sociology degree from Alabama Polytechnic Institute, while sudsing his way through four years of school?  Certainly, the local bars in every college town would like to see higher subsidies by taxpayers for higher education.  They know where the poor college student likes to spend his/her own money.  Visit any major university and check out the attendance records in a typical class these days and you might wonder why taxpayers are subsidizing a lot of empty seats.

The usual principle is that if you want something bad enough you should pay for it yourself.  Why doesn't that rule apply to higher education?  I can understand the case for public funding for elementary school and secondary schools but the case for public funding for higher education seems to me to be no stronger than the case for public funding for iphones, ipads and tv sets. 

Study after study has demonstrated that college degrees are worth it to the student enrolled.  I point you to the most recent edition of the Journal of Economic Perspectives (Winter, 2012) for some observations on the "private value" of higher education in an article by academics Christopher Avery and Sarah Turner: "On the other side, the earnings premium for a college degree relative to a high school degree nearly doubled in the last three decades."  Earnings premium means how much more in earnings a student will earn with a college degree as opposed to a high school degree.  So, why should the taxpayer subsidize and make the premium even larger by transferring wealth from those without to those with?

In an otherwise excellent survey, the article by Avery and Turner does not raise the question: why does higher education cost so much more than it used to cost?  Are we doing something different in higher education that escalates the costs without limit?  That is really the much more interesting question than posing the endless pursuit of "how to feed the beast" exercises that involve more loans and more taxpayer funding.

So often you hear the refrain that state funding has been reduced or that big donor contributors are down this year.  Fine.  But, that does not explain why costs are exploding.  The fact that revenues are not growing as fast as one might like is irrelevant to the issue of why costs are exploding.  Higher education is not simply looking for more funding because existing sources are drying up, which is what college bureaucrats would have you believe.  Costs of higher education have been and are exploding.  Why?  Doesn't anyone care?

Tuitions this year rose once more at most major universities.  You have to wonder what expenses are rising so much in the midst of a still faltering global economy and a moribund US economy.  What is straining the budget?  Simply expanding student loans to an already overburdened student loan market adding to the mountain of debt that overhangs our citizenry and forcing taxpayers to cough up more and more  does not address the question of cost.  This is one more example, paralleling the health care debacle, that once you decide someone else should foot the bill, the bill explodes to infinity.

Thursday, April 26, 2012

There Is Bull and Then There is Bulls**t. Edited.

It is not the market action that is surprising. It is the reaction of various pundits who dish out various sermons that is surprising. Was it surprising that SPX closed around 1400? I would have been surprised if it did not. But so many have written the obituary of the up-trend and have gone short and are now surprised that the market is going to test the highs again. 

So, the market has killed some of the early bears and it is now laying trap for the early bulls. Or for those who missed the last rally.  Among all the noise, what caught my eye today was an article, stating that Gold will reach $10000/oz! Now that is something! I was so intrigued that I did dig a bit more. This article was written by an entity that is operating out of Ireland and fishing in North America for gullible investors. They proclaim to be dealers in precious metals and offer wealth management services. Obviously they are trying to manage their own wealth not yours.

I am gold bull myself and expect the price to reach $ 2500 in the next 12-18 months but $ 10000/oz? What are they drinking?  Does it remind you of Tulip mania? But a scam star will do its best to scam and we give it to them.

Educate and inform one more person around you and let this chain start working. Only through collective knowledge about the functioning of the market, we can become better investors.

Nobody can be right in calling the market all the time. The best investment policy is to follow the dominant trend and not get whipsaw or front run. Give up some of the profits in the beginning of the trend just to make sure that it is not a head fake. I understand that the most difficult part is to wait but with proper money management, risk management and trend identification we can be successful in the long run. Good trading opportunities come only 2/3 times in a year.

Thanks for bearing with my rant. We will wait and see how the market behaves for next few days and decide our course of action. A test of the high is always in the cards but we need to see what happens thereafter. Do not chase the bus. I would humbly suggest that you do not even dream of going long here or short. Just stay put in cash. In the mean time, start the process of educating one more person. Forward this post to someone you know who might benefit and invite them to read more at

Note: This post has been edited after one reader very correctly pointed out that I should not mock anyone else.It is OK to point out scams but it is not OK to criticise others who are also doing a great job of educating retail investors / traders. I myself have been wrong in my market calls in the past and I should realize that nobody can be right all the time. My apologies and thank you for pointing out my mistakes.
I stand corrected and humbled. 

Wednesday, April 25, 2012

Any Value In Free Advice?

We do not normally value what we get free. But I think my free advice “Do not short” has more value than many paid subscription services. At least I was able to save some from harm’s way and protect capital.

It now looks more likely that we will re-test the high of April 2. It may not happen tomorrow but we have few more days to go there. We will evaluate the momentum and strength of the test in the next few days and decide whether to short, depending on whether such a retest fails or makes new high.  I do not think it will make a new high now.

The Pavlovian dogs started salivating the moment Bernanke mentioned that he is ready for more accommodation. What he did not say when he will start new QE. But with the super duper result of Apple and hint of more free money, the market has sprinted out of the gate. I think it can go up for few more days. NYMO has now crossed in positive territory and not yet overbought.

The market is keeping both sides interested and in the process killing both the bulls and bears. It is amazing to see how quickly the sentiment changes. Now we will have new believers who think that the correction is over and will bring in their money to get long. Beginning of a new month is around the corner and those who were lucky enough to sell around the top, will now think of going long again. Those who missed the boat last time, will jump in early, only to be fooled by the market again.

But if we stop to think, nothing really has changed from last week or the week before or even the months before. We are muddling through till we cannot. Only thing that is keeping the circus going is the unlimited CB liquidity. Some of you may not agree but that is a fact. Also the fact is, it is an election year and we are coming close to a long term cycle and this script has already been played before.

Do you remember this chart I had shown before?
This is SPX translated in Euro, matched against Nikkei. The picture gives the general direction and do not indicate absolute levels of highs or lows. Everything that I follow tells me that this is the path we will take. So expect a new high this year before they tell the last man out to switch off the light.

That’s all the free advice for today. Thank you for reading . Please forward it to your friends and invite them to join me in twitter.  (@BBFinanceblog).

The Cradle of Civilization?

Civil society is breaking down in Greece.  Riots, civil anarchy, violence and a rapidly descending respect for the rule of law is being played out on the streets of Athens daily.  What once was the "cradle of civilization" is now a country descending into barbarism.  The road to anarchy is often paved with good intentions.

Left wing governments for three generations, originally inspired by the American-trained economist Georges Papandreou, have fought the fairness battle -- the same battle that Obama is engaged in today -- and Papandreou emerged the winner in Greece.  They got what they wanted -- a bloated government, a massive government bureaucracy, and promises of fat government retirements and free health care for their citizenry.  They got it all.  They had the same dream that the Obama folks have in the US.

Now we can see clearly where that dream takes you -- the modern nightmare that is Greece and will soon expand to Portugal, Italy, Spain, France and, yes, even Germany.  Slowly but surely civil society is unraveling in Europe and economic collapse is unfolding.  This is the inevitable outcome of a society that believes that no one is responsible for providing for their own health care, their own retirement, their own housing and for their own family.  As the government, whatever "government" means in this context, gradually assumes responsibility for all of the basic necessities of life, there is no one left to produce the goods and services to provide those necessities.  That's where we are in Greece.

One can only guess the ultimate outcome of the Eurozone collapse, but one thing for certain, it won't be freedom and democracy.  When the respect for law and personal responsibility have disappeared from society, that society becomes fair game for demagogues and that's most likely where this is headed.  If you think twentieth century Europe was a continual warzone, watch the unfolding drama now taking place in Europe.  Finger pointing is now the major government policy in every European country.  There are no political solutions to what ails Europe.

The roadmap to Greece is plainly in front of the US.  If Americans want to travel down this road, it is pretty easy to see where it leads.

Tuesday, April 24, 2012

So, What's the Deal With Corzine?

Just because Corzine is an Obama supporter, is he going to get a free pass?  Madoff should have thought of this: "hey, it was just an accident!"  Or, perhaps: "I never intended to mislead anyone."  Would that have gotten Bernie Madoff a free pass?  I don't get why Madoff is in jail and Corzine is free as a breeze.

It looks like Corzine is getting a free pass on the $ 1.2 billion of customer money that disappeared on his watch at MFGlobal.  If there is a difference between what Corzine did (presiding over the looting of customer accounts, protected by law as segregated from firm accounts) and what Madoff did (running a ponzi scheme with customer money), I fail to see the distinction.  Why is one guy behind bars and the other guy still the President's best buddy and on the loose?

Last Bounce Coming?

I don’t want to sound vain but I did write last Sunday that both Apple and the market in general are due for rebound.  “I think from TA point of view Apple and the market in general is due for a bounce but such a rally should be sold.”

Yesterday I said: “What I find interesting is that we can consider it as test of previous lows which it did not break.  Now it should have a test of the previous highs, at least which is the theory. Only when that test fails and it reverses, we can short with confidence.

And there we have it all.

Apple blew away the street prediction with almost doubling its profit and the shares of Apple are up $ 40 in after market.  SPY is up over 0.5 %. Of course we will have to wait for the market to open tomorrow and much can change overnight. But taking everything into consideration, it is highly likely that we will have a re-test of the April 2 high before we roll over.  And this is precisely the reason I am not short yet. Hope you all are in cash and cushy!

DOW closed above the psychological 13000 mark and SPX gained almost half of yesterday’s loss. So there is not much downside momentum yet. They are keeping both the bulls and bears interested in the game.

It is tiring to repeat same thing every day and you may also be feeling bored reading the same stuff. But the objective is not to lose money and not to write something sensational like global conspiracy etc or scare the hell out of readers. We want to cut the noise and follow the confirmed trend. No fancy charts, no analog, no Elliot wave analysis, no macroeconomic bull s**t.

The bottom line is: stay on the sideline and stay in cash.

Thank you for reading . Please forward it to your friends and invite them to join me in twitter.  (@BBFinanceblog).

Cliff Asness of AQR: Bubble Logic

I'm reading a passage from Scott Patterson's book, The Quants, that looks back on the .com bubble. Let me share a few brief quotes from this section with you here.

Backdrop: "A few months before the dot-com IPO frenzy began, LTCM had collapsed. Greenspan and the Fed swept in organizing a bailout. Greenspan also slashed interest rates...the easy money added fuel to the smoldering internet fires...pushing the tech-laden Nasdaq to all-time highs on an almost daily basis." 

The .com boom proved disastrous for Cliff Asness' hedge fund, AQR, which invested in value stocks while "betting against companies his models deemed expensive". 

After agonizing over the fund's poor performance and the perceived boundless stupidity of market participants, Asness finally came to a realization about markets and crowds: investor irrationality does not stay within expected, "just right" modeled bounds. 

Surveying the scene near the peak of the internet bubble in 2000, Asness expanded on his views in an academic paper entitled, "Bubble Logic: Or, How to Stop Worrying and Love the Bull"

Enjoy the historical market overview - maybe you'll find some lessons that apply to the markets of 2012 and beyond.

Why Not Just Make It Against the Law to Hire Anyone?

The Obama Administration seems bound and determined to eliminate job opportunities in the American economy.  The latest salvo in the war on jobs by the Obama folks is the new set of rules and regulations coming out of the EEOC (the mis-named "Equal Employment Opportunity Commission").  The new rules would force more and more mandates on companies who have the temerity to hire a handicapped worker.  The new rules force dramatically higher "reasonable accomodation" standards on firms that hire handicapped workers.

The Wall Street Journal highlights the new rules in their opinion piece today entitled (appropriately): "Disabling Common Sense."

So, what is the predicable effect of the new EEOC rules?  For certain, employers will be less willing to hire the handicapped.  For another, since the definition of the handicapped is ever-shifting and will in time encompass virtually every American, employers will be less willing to hire anyone.

The Obama plan for jobs seems to be to make it as difficult and costly as possible for employers to hire employees.  Employers aren't stupid.  They read the memos.  This is a jobless recovery by design.

Monday, April 23, 2012

Range Bound.

Apple sold off in the morning but bounced back later, to close with a tiny red. The interesting story of the day is that of SPX. At some point in the morning, SPX was down almost 1.5% but it pared back the loss.

What I find interesting is that we can consider it as test of previous lows which it did not break.  Now it should have a test of the previous highs, at least which is the theory. Only when that test fails and it reverses, we can short with confidence.

Tim Knights of SOH has this chart of /ES. ( SPX futures)

As you can see, /ES is moving in a range and today it touched the lower part of the range and bounced back.
Let us see what Apple and Bernanke bring the day after.

They say, sell in May and go away. But no where it is said that sell on 1st of May. Actually, 1st of May is bullish for stocks, DOW up 11 of the last 14.

I am still waiting on the side for confirmation of break of this range and failure of the test of the highs. As of now, the markets either gap up or gap down and mostly stay there for the rest of day. Not a good sign for retail.

Thank you for reading . Please forward it to your friends and invite them to join me in twitter.  (@BBFinanceblog).

So Long Sarcozy

Nicolas Sarcozy, President of France, is in deep political trouble.  He should be.  Along with Angela Merkel of Germany, Sarcozy has orchestrated the absurd policies that have been pursued in the Eurozone over the past 36 months.  The answer to too much debt, if you believe Merkel and Sarcozy, is more and more debt.  Together with half-hearted pleas for budgeting austerity, the Merkel-Sarcozy is a "more of the same" plan that simply makes a bad situation potentially catastrophic.

Tim Geithner and Barrack Obama have openly advocated even more ridiculous policies for the Eurozone, patterned after their own US policies, that make the Merkel-Sarcozy absurdities look mild by comparison.

It is amazing how often the Merkel-Sarcozy formula is used in countries throughout the western, developed world.  All of these countries, without exception, have made promises to their citizenry that cannot be kept.  So, now, all of these countries have a combination of out of control sovereign debt, declining GDP (or soon to be declining GDP), and a dawning awareness that their old folks of the future are doomed to live in penury.  Thanks for nothing.

Because debt financing is becoming hopeless in the Eurozone in country after country, there is a movement to cut government expenses.  This is not a plan, it is a necessity.  They have no funds to pay the bills anymore.  The result: political chaos.  That is the ultimate destination of the Merkel-Sarcozy path and we are moving rapidly along.

America should take note.  We will soon be on that path as well.  Other than Scott Walker and Chris Christie, no American elected politicians have successfully challenged the fiscal problems that are in front of them.  Indeed, the Obama Administration follows the "Ostrich" policy.  See no problem, hear no problem, speak no problem.  But the problem is there and it is simply a matter of time.

Sadly, Francois Hollande, who will replace Sarcozy as President of France advocates even more absurd policies than Sarcozy, if that can be imagined.  The end game of the Eurozone political posturing is economic and political chaos.

There is a much, much easier solution.  Owning up to their true fiscal situation, admitting that there is no way to finance the health care and entitlement plans in place, and sitting down with borrowers and restructuring loans is the right set of policies that could lead to European prosperity.  But, it looks like no European politicians have what it takes to get there.  So, look for increasing chaos ahead for the Eurozone.

One wonders if US policy makers will see the light before the US follows Europe down this tragic path.  The problems in the US are exactly the same as the problems in the Eurozone and, if anything, of a larger magnitude.

Sunday, April 22, 2012


I find lots of similarities between price pattern of Apple and Gold. Take a look at the weekly price of GLD.

And now at the weekly price of Apple.

Same parabolic move. Similar euphoria. The law of mean reversion applies to everything which shows parabolic move.  In both cases, prices moved within a well defined trend line for a long time. When prices touched the upper trend line, there were corrections which were healthy and subsequently the uptrend resumed.  But then greed and irrational exuberance took over.

Gold has reverted to the bottom of the trend line. I remember last year ZH and various other gold bugs were talking of gold $ 5000. And this year there were talks of Apple $ 1000. If the mean reversion of Apple takes place, we are likely to see $ 500 or below before we see $ 1000 for Apple.

Apple quarterly reporting is at the front and centre of things next week. Anything less than block buster is going to blow up.  And the cycle of Apple is down till June. It does not mean Apple is doomed. It is an excellent company and price may indeed reach higher. But such burst to the high will come around the release of Iphone5 which is due sometimes in October. So a good correction will be a buying opportunity.

SPX is holding the support level at 1375. 20 DMA has not yet crossed down the 50DMA but that cross over is close. The market may try again to test the high of 1422 but there are signs of exhaustion.  A spectacular earning report of Apple might give that last boost. But on the other hand The Fed meeting and announcement is due this week and like last month, I do not think they will announce any QE3 this time either. So we are setting up the stage for some volatility.

I think from TA point of view Apple and the market in general is due for a bounce but such a rally should be sold.

Right now patience is the key.

Thank you for reading . Please forward it to your friends and invite them to join me in twitter. ( @BBFinanceblog).

Speculation and gas prices

I was getting myself frothed up about the recent idea that  "speculators" are behind the recent gas price increase.  Have we learned nothing in the centuries of witch hunts for "speculators" "middlemen" and "money changers"? And how horribly things go wrong when societies take these witch hunts seriously? Haven't the Europeans just woken up from a severe attack of denial that "speculators" were to blame for their sovereign debt crisis?

Then I found that Jim Hamilton already did a better job than I could hope to do, while skewering Rep. Joseph Kennedy's editorial in the New York Times calling for a ban on speculation. 

Jim reminds us that volume numbers are meaningless because most of the trading lasts hours: 
Many of the traders who bought a contract on Friday turned around and sold that same contract later in the day. If the purchase in the morning is argued to have driven the price up, one would think that the sale in the afternoon would bring the price back down. It is unclear by what mechanism Representative Kennedy maintains that the combined effect of a purchase and subsequent sale produces any net effect on the price.
And what's good for the goose is also good for the gander: 
It's also worth noting that on that same day, there were 146,000 May natural gas contracts traded... By what mysterious process can all this within-day buying and selling of "paper" energy be the factor that is responsible for both a price of oil in excess of $100/barrel and a price of natural gas at record lows below $2 per thousand cubic feet?  
Jim reminds us how futures markets work
But remember that for every buyer of a futures contract, there is a seller. The person who sold the initial contract to me also likely wants to buy out of the contract at some later date. I buy and he sells at the initial contract date, he buys and I sell at a later date. One of us leaves the market with a cash profit, the other with a cash loss, and neither of us ever obtains any physical oil. 
However, if you read too quickly, you will think that "speculators" in a zero sum game cannot affect prices. This is not true. If speculators collectively think that prices will be higher in the future, more of them want to buy than want to sell, so futures prices rise until there are equal buyers and sellers.

In turn, when futures prices rise, people who actually have some oil hold it off the market (or sell it forward).  This is precisely the correct economic function of speculation. As William Tucker, quoted in the  Wall Street Journal explains,
What speculators do, however, if they guess right, is smooth out the availability of supplies between the present and the future. By paying a higher price now, they assure that prices will be lower in the future. In effect, they hold supplies off the market today so that they will be available next week or next year when things become even more scarce.
If they guess wrong, they lose horrendous amounts of money. There is a lot stronger self-correction mechanism at work here than among politicians.
Adam Smith described this as preventing a "dearth" from becoming a "famine": 
When the government, in order to remedy the inconveniences of a dearth, orders all the dealers to sell their corn at what it supposes a reasonable price, it either hinders them from bringing it to market, which may sometimes produce a famine even in the beginning of the season; or if they bring it thither, it enables the people, and thereby encourages them to consume it so fast as must necessarily produce a famine before the end of the season.… No trade deserves more the full protection of the law, and no trade requires it so much, because no trade is so much exposed to popular odium.
 Adam Smith had seen a few witch hunts. Maybe I should have just started and ended with that one. 

Jim Hamilton again. The problem for all attempts to ban "speculators" whose assessments of price we don't like, is that your "speculator" is my "liquidity provider:"
 How exactly do we define the "speculators" whose participation in the markets is to be banned? Suppose for example, we stipulate that the only people who are allowed to trade oil futures are those who are actually physically producing or consuming the product. If we do that, what happens if a particular producer wants to hedge his risk by selling a 5-year futures contract, and a particular refiner wants to hedge his risk by buying a 3-month futures contract? Who is supposed to take the other side of those contracts, if all "speculators" are banned?
Meanwhile, the New York Times  joined the witch-hunt:
Research presented in Congressional testimony, academic papers, government and private studies indicate that excessive speculation, mainly by Wall Street index-fund traders, is needlessly driving up prices,...
Speculation by index-fund traders??? I don't have to explain just how silly that is, do I? Next thing you know, Vanguard's S&P500 index fund will be behind bubbles in the stock market.

The Times' links are a  fun too, or a bit depressing if you value the ability of  "research" to credibly inform public policy, or the Times as an impartial aggregator of consensus among serious academic researchers. The first one, by L. Randall Wray of the Levy Economics Institute of Bard College, starts out stating a fact so obvious it needs no documentation:
"Money manager capitalism has resulted in a series of boom-and-bust cycles in equities, real estate, and commodities."
"Money manager capitalism?" You get the idea where it's going from there. 

Suing Bank of America

Bank of America has recently settled a lawsuit with two public pension funds for $ 160 million.  The case involved BofA's purchase of Merrill Lynch.   Who pays for this?

As in many things, no one seems to ever ask the question: who pays?  Instead, folks bask in the view that the bad guys got their due.  But, did the bad guys get their due in the BofA case?

BofA is a public company.  The biggest single owner of BofA are American workers of slightly above average income.  How do they own it?  In their pension funds.

The next largest owner is another set of average Americans -- folks who own mutual funds either in their IRA accounts or in the brokerage accounts.  These folks have saved this money, invested it, and have ended up as a major owner of BofA.

So, when you ask who pays, look in the mirror.  The two public pension funds who won $ 160 million in the case will be paid essentially by the owners of BofA, the single biggest group being other public pension funds.  So, to make it clearer: in effect, the public pension plans of Louisiana have successfully sued the public pension plans of Arizona, New York, California, etc.  One public pension plan is dipping its hands into the pockets of another pension plan.  Does that sound like "getting the bad guys" to you?

If all that is going on is one group of average Americans are suing another group of average Americans (who are, by and large, unaware that they are being sued), who really wins?

That's easy.  The lawyers.  They are the ones who loudly trumpet these lawsuits and lobby hard to see to it that damage awards and other financial penalties are not limited by state and federal law.  It's great to see those average Americans who own BofA get what they are due.  "Sock it to the little guy."  That's the message of the BofA lawsuit.

Meanwhile, the perpretators of whatever went wrong are completely unaffected by the outcome of this lawsuit.  They are highly paid executives of BofA, that bear no penalty whatsoever from the outcome of this lawsuit.  Even if they own stock, the company typically simply grants them more stock if the value of the their holdings have fallen.

So, as in other things, rich folks roll merrily along unscathed, while middle class Americans are crushed once more.

Anytime you read about a public corporation being sued for some malfeasance -- think Enron, Exxon, World Com, whoever -- and you wonder who pays if the lawsuit is successful, look in the mirror.  It's the little guy that pays for all of this litigation.  The Enrons of the world aren't owned by some rich bad guy.  The Enrons of the world are owned by average Americans, mostly trying to save for their old age.  These lawsuits make it tougher for these folks to retire.  But, the media seems to think that bludgeoning the retirement hopes and dreams of the average American with these kinds of lawsuits is "getting the bad guys."  I guess that tells us who the media really thinks the bad guys are.

Meanwhile the Wall Street Journal reported yesterday that Bank of America was planning more layoffs.  Maybe BofA needed to produce some cost cutting to pay off the recent victory by the plaintif lawyers.  That should get the bad guys!  Sock it to them!

Saturday, April 21, 2012

Longer Term View.

I would like to share one chart from Stock Trader’s Almanac which they have put out in their free report.

This chart makes the distinction of a Presidential Year cycle. Because all incumbent Presidents try to pump the market and the current one is no exception.  They all need money from Wall St and TBTF Banks for their campaign.

This chart became available only yesterday. But I have been writing the same thing for past so many days and months.

The only thing that is important to the market; How much money is out there and where that money wants to go.  To all the Uber economorons  out there who are predicting imminent doom of fiat money, sorry guys, I have some bad news for you. You will have to wait.

Did you read the latest efforts of global re-flation? IMF has just increased its war chest by $ 440 billions and most of the money is coming from the developing countries.

This is specially aimed for Spain and Italy. Why do you think the central banks will stop here? What prevents them to write another cheque to themselves again. Isn’t that they are doing for so many months?

There is a time for everything, even for serious corrections. If you look at the monthly chart of SPX

We are in a range for over 15 years now and are about to complete the upper side of the range before any serious correction can happen.  Let ZH scream and shout about Spain and break up of Euro, nothing much is going to happen till the end of 2012. For now it’s all noise and fear mongering is a very good business model.

However, that does not mean I am suggesting that we should go long now. On the contrary, I think we have a short term opportunity for a fishing expedition when a short and violent correction takes place. I expect that correction, between 5-10% should start by next week, after Apple results. I plan to write a short note on Apple tomorrow. I think end of such correction will be a buying opportunity, not now. For now, we can either sit on cash or try the short side, but do not expect any major correction.

I wish you a very enjoyable weekend. Thank you for reading . Please forward it to your friends and invite them to join me in twitter. ( @BBFinanceblog).

The Public Pension Saga

State and local governments in the United States have a major fiscal disaster on their hands.  The obligations of these governments embodied in their pension plans for government employees are not funded and there are no serious plans to fund them.  The result: a combination of looming state bankruptcies and drastically reduced pension benefits for covered employees.  The biggest single group of pensioners threatened by this looming disaster are public school teachers.

Yesterday, Democratic Governor Pat Quinn of Illinois made a last ditch desperate effort to avoid disaster in Illinois by urging state employees to "voluntarily" accept a shift in the retirement age to 67 and to contribute an additional three percent of salary to their pension funds.  This is not a reform, this is an emergency and Quinn is a Democrat elected with strong union support in a traditionally Democratic state.  Even if Quinn's suggestion is taken up by public employees, which it won't be, it is only a drop in the bucket compared to the real problem that Illinois' pension fund faces. That tells you how bad things have become.

Illinois is in the vanguard of this coming catastrophe.  New York, California, New Jersey are waiting in the wings.  South Dakota may be the only state of the 50 states in the US that has a real shot at delivering on their public employee retirement promises.  No one else is coming anywhere near close to properly funding their systems.  Some states, Virginia is an example, have recently enacted "reforms" that will have minimal impact on the massive funding deficits of their public pension plans.  These reforms are notable in their inadequacy.

Inevitably, the younger members of the work force will find little or nothing waiting for them when the time for retirement comes.  This parallels the outcome of social security for this same work force demographic.  There is simply nothing out there to fund the promises that politicians continue to make and continue to pretend will be there when the time comes.

On this score, the coming retirement disaster is a bi-partisan affair.  Republicans as well as Democrats are both complicit in confusing the public as to where this situation is headed.  Ultimately, Democrats like Governor Quinn of Illinois and Republicans yet to be named will be forced to tell the truth to their employees, well past the date that these employees could increase their personal savings to offset the abandoned promises of the politicians.  Government and politics at its worst.

Friday, April 20, 2012

Arthur C. Clarke predicts the internet and PCs

Arthur C. Clarke forecasts the future of 2001, a time when home computers and interconnectivity with others through technology are commonplace (via Eddie Markets).

How to lie with statistics

Along with David Leonhardt's interesting article "Taxmageddon," last weekend's  New York Times Sunday Review included this pair of graphs. These belong high up in the pantheon of "How to lie with statistics" (one of my favorite books) examples. 

These graphs are paired left and right in the original.  (I made them big and split them up so you could see them. They're even clearer on the Times' website)  On the left, is this graph:

Right next to it, is this one

(The graphs had little to do with the article, so I presume they are the work of the Times staff, not Leonhardt.)

It's damning, right? The rich got huge tax cuts (top graph) and so made a ton of money courtesy of the government (+528% change in income, numbers to the right of the first graph). The rich are also feeding at the trough of tax breaks (bottom graph). Outrage!


Now wait a minute here...The top graph is a tax rate, the percentage of income paid, while the bottom graph is total dollars. To say this is comparing apples and oranges is an insult to fruits.

In fact, wealthier people pay nearly all Federal income taxes. So it's not surprising that they benefit more in dollar terms from tax deductions -- except credits, which is money the government pays you even if you pay no taxes. 

If we expressed the bottom graph as a percentage of taxes, or a percentage of income -- the same units as the top graph -- you'd see a dramatic reversal of the implication. Since the lower percentiles have so much less income and pay so much less taxes, the graph would suggest those with less income get the largest (percent) benefits.


The top graph is even more misleading, at least for the Times' goal which is to back a raise in Federal income taxes for the wealthy.

Where does this 60 and 71% tax rate in the 1960s come from? The basic fact of the Federal taxation is that it raises about 20% of GDP despite wild variation in the statutory tax rates. In 1960 Federal tax receipts (NIPA table 3.2) divided by national income (NIPA 1.12) were 93.9/2013.9 = 19.8%. In 2004 this ratio was 2013.9/10534.0 = 19.1%.

Statutory tax rates in the 1960s were as much as 90% marginal rates on the highest incomes. (Remember George Harrison's "Taxman?" "One for you, 19 for me." He wasn't kidding.) But the tax code was so shot full of loopholes that the Federal government didn't collect nearly that fraction of income from anyone.

So where does the 71% come from? At least the Times gives their source, so you can go back and see what the heck the number means. These are estimates by Emmanuel Saez and Thomas Piketty of total Federal taxes -- individual income, corporate income, payroll (Social Security, etc.), and estate taxes -- divided by an estimate of income, which excludes Government transfers.  (The paper is here and a longer working paper version here.)

To what extent is this the statutory rate and to what extent is it actual money paid? I'm still tracking this down, but it appears to be some of each. For example, "We use the TAXSIM calculator developed at the National Bureau of Economic Research ... to compute federal individual income taxes." That seems to imply this is taxes the NBER thinks they should have paid, not what people actually paid.   But they do have individual level IRS data, so in theory know what people actually paid. On the other hand, it doesn't add up: Total tax recepits are 20% of income. So how can everybody's rate come down yet the total rate stay stuck at 20%?  How can the rate of everybody who has any money in 1960 be above 20%, yet the average is still 20%? 

But let's not get in to the depths of the sausage factory, as  it does not matter for the point here. (And my head starts to hurt anytime I delve in to the details of this kind of calculation.) 

The important point, for the Times is that graph has basically nothing to do with Federal income taxes. All of the action comes from Saez and Piketty's assigment of corporate taxes and estate taxes. They assume all corporate taxes are paid by stockholders and bondholders.  This is conceptually right -- it is not true that "corporations" bear any tax burden. Someone is paying, through higher prices, lower salaries, or lower returns to investors. Saez and Piketty assume it's all the latter.

Here is Saez and Piketty's breakdown of how taxes changed between 1960 and 2004 (source):

The actual individual income tax line has not changed much at all, other than to fall slightly for all income groups. Almost all of the Times' fabled taxes the rich were happily paying in 1960 comes from Saez and Piketty's assignment of corporate taxes to wealthy people and their calculations of estate taxes! (Estate taxes are notorious for the games the rich pay to avoid them.)

(It also appears to me that Saez and Piketty are a bit off here: If you charge corporate income tax against the rich, don't you have to divide that tax by an income measure that includes corporate income? In general, you have to divide taxes by pre-tax income not post-tax income. Dividing corporate taxes by individual income, and not including corporate income, can produce "rates" above 100%. On the other hand, if their "income" number attributes all corporate income as individual income to the wealthy, then the distribution of income is grossly overstated. Ok, we're not going in to the sausage factory, maybe for another post someday, but I'm still scratching my head.)   

As Piketty and Saez put the matter:
The larger progressivity in 1960 is not mainly due to the individual income tax. The average individual income tax rate in 1960 reached an average rate of 31 percent at the very top, only slightly above the 25 percent average rate at the very top in 2004. Within the 1960 version of the individual income tax, lower rates on realized capital gains, as well as deductions for interest payments and charitable contributions, reduced dramatically what otherwise looked like an extremely progressive tax schedule, with a top marginal tax rate on individual income of 91 percent.

The greater progressivity of federal taxes in 1960, in contrast to 2004, stems from the corporate income tax and the estate tax. The corporate tax collected about 6.5 percent of total personal income in 1960 and only around 2.5 percent of total income today. Because capital income is very concentrated, it generated a substantial burden on top income groups. The estate tax has also decreased from 0.8 percent of total personal income in 1960 to about 0.35 percent of total income today. As a result, the burden of the estate tax relative to income has declined very sharply since 1960 in the top income groups
Note the tiny percentages of total income involved. These are not going to balance anyone's budget.
Now, when we talk about the "Buffet rule," that is about raising the individual Federal income tax rate. If we calculate Warren Buffet's taxes this way -- including all corporate taxes paid by all Berkshire Hathaway companies (and why not property taxes, business taxes, business contributions to social insurance, and all other business-paid taxes), Buffet's tax rates would be correctly measured, and a lot more than his secretary's tax rate! 

This assignment of corporate taxes takes us into the dark territory of who bears the burden of taxes rather than who actually pays them. Saez and Piketty are assuming that rates of return on investments are reduced because corporations pay taxes, so rich people get less return than they would otherwise. Hence, it's "like" paying more taxes. Ok, that's how economists think about things, but why stop here? Who really bears the burden of the much larger wedge between what employers pay and what employees get? And all the other taxes,  that distorts prices and wages all over the place. And while we're at it, why not "who bears the burden of regulation?" through higher prices or lower returns?

Bottom line: It may be fine for Saez and Piketty's purpose, but I doubt any New York Times reader had the faintest idea they were looking at a graph that primarily said "rich people were hurt by taxes in the 1960s not because they actually paid more taxes but because we assume corporate income taxes drove down the rates of return on their investments!"

And, in case you think this all means  we should go back to the days of "Mad Men" taxation, Saez and Piketty warn:
The surge in top incomes since the 1970s has been driven in large part by a steep increase in the labor income component, due in large part to the explosion of executive compensation. As a result, labor income now represents a substantial fraction of income at the top. This change in composition is important to keep in mind, because the corporate and estate taxes that had such a strong effect on creating progressivity in the 1960s would have relatively little effect on labor income.
In sum, this graph has nothing to do with the main point -- establishing facts about who pays Federal income taxes.  It would be great if our national discussion were to broaden up and consider all taxes -- yes, proper attribution of corporate taxes (all corporate taxes); along with estate, excise, state and local income taxes, sales taxes, property taxes, and so on and so forth. And proper attribution of the burden of taxes. But it isn't.


Now, look at the nefarious pairing of the decline in (statutory) tax rate with the change in income on the right hand side of the top graph. We cut rich people's taxes and look how they got richer!

Here, the Times got too clever by half. The cause and effect insinuation here is actually a supply sider's dream, if you can read and add. The insinuation is, the rich got richer because they got to keep all that income that they're not paying to the government. Even that doesn't add up: a 528% rise is much more than (1-0.34)/(1-0.71) = 2.28 = 128% rise in after-tax income.

But the tabulated rise is in pretax income. (At least the labels are honest.) As tax rates came down, people went out and made an enormous amount more income in the first place.

A 528% increase in income is a lot. 71% x $100 = $71.00.  34% x $100 x (1+5.28) =  $213.52. So, using the New York Times' numbers, we would infer that lowering the tax rate on the top earners corresponded to tripling the tax revenue earned from that group! The rich are, apparently, paying much more in taxes than before.

If you take the Times' numbers seriously, Art Laffer's wildest dreams came true.


Update: Abel Winn notes it's worse than I said:

 The top graph’s y-axis is scaled according to position in the income distribution, while the bottom graph’s y-axis is scaled according to position in the distribution of taxpayers. Since only about half of income earners pay income taxes, being in the top x% of the income distribution means that one is in about the top 2x% of taxpayers. So when we see massive benefits going to the top 20% of taxpayers, that means the tax code was benefiting the top 40% of income earners. But that doesn’t fit very nicely into the 99% rhetoric that we’ve been hearing so much of late, and that the NYT graphs appear to be backing.

Slowdown Ahead?

Some regions and sectors of the US economy are moving right along.  In the aggregate, though, the economy may be slowing and slipping back into recession.  It is not just housing.

The current prosperity has limits.  Economic expansion depends upon aggressive entrepreneurial activity and, except in technology, we're not seeing much on the entrepreneurial front.  Why?

Some roadblocks to prosperity are "hard" obstacles and some are "soft" obstacles.  The "hard" obstacles are excessive government regulation, the government-imposed cost of labor, and sharply rising energy costs.  Most of these "hard" obstacles are self-imposed problems for the US economy.  We have put these restrictions on our economy and they are now a serious impediment to an economic recovery.

The "soft" obstacles are the almost daily attacks by the White House and its supporters on the business community.  These attacks have created a gloomy background that clouds and dampens the American entrepreneurial spirit.  Business folks are discouraged.  They feel that they are being singled out for political reasons by the current administration.   The White House seems to believe that American society is an "unfair" society dominated by greedy and rapacious businesses and the White House trumpets the "unfairness" theme at every opportunity.

These things matter.  Both the "hard" and "soft" obstacles are weighing heavily on the economic recovery and dampening the prospects for Americans in the bottom half of the wealth and income pool.  The comfortable and the wealthy, who by and large support the policies that have created these obstacles, are largely unaffected and can preoccupy themselves with "fairness" discussions and other irrelevant topics.

What could kick the American economy into a more sustained downturn is the fear of the future.  There has been no progress on reducing the fiscal footprint of the various levels of American government.  This means that a chaotic fiscal future is becoming inevitable.  Politicians have quit discussing the level of government debt in the US, which suggests they have become resigned to this chaotic future.  Debt problems in the US are far, far more significant than those currently plaguing the Eurozone and we all watch daily how the Eurozone countries are faring.

The Eurozone is now in recession and things are getting worse.  America may not be far behind.  If the "Affordable Care Act" is sustained by the courts, which I suspect is more likely than not, and if nothing is done regarding the tax increases due to automatically take place next January, then the US economy will likely fall back into recession in the second half of 2012.

There are bits and pieces of evidence that are beginning to accumulate to suggest that the probability of a second half economic slide in the US is increasingly much more likely.  There is almost no shot that real economic prosperity is on the way.  With current economic policies, the 3 percent growth days of America's past are a fading memory.  The best that we can hope for, and it is growing increasing unlikely, is that the economy can limp through the balance of 2012 at a 2 percent real GDP growth pace.  It is a sad state of affairs that 2 percent economic growth is now an "optimistic" scenario.

Thursday, April 19, 2012

Typical Topping Process

This is a typical topping process we are witnessing.  Most of the indicators have turned south and tomorrow is the last day for cycle top.  It does not mean that we will have huge sell-off from tomorrow. Actually we might see a green day tomorrow being Op-Ex.  As they say, topping is a process.

Gone are the days when the index will go up on the one way street no matter what. But I still do not have any target for downside. Will it be similar to 2011?

Given the fact that it is a Presidential election year when the incumbent grease the market to stay in power and huge liquidity around, I do not think a huge sell off like 2011 is in cards.

I am still waiting on the sideline without being short. One of the simple sell signal occurs when fast moving averages like 20 DMA crosses under slow moving averages, say 50 DMA. Right now they are coming close have no crossover has occurred yet.

Gold seems to be coming to a bottom but I would still wait for sell-off in equities to see how all the risk assets behave together. Here is a long term weekly chart of GLD.

As you can see, the price of gold is just touching the trend line. Even with the correction it has not broken the trend line yet. Gold may well cross $ 2500 in the next 12 months before the bull market in Gold ends.

Hope you all are in cash and cushy.  Thank you for sharing my thoughts and reading