Monday, December 31, 2012

Theatre of Absurd

Theatre (sometimes theater in American English) is a collaborative form of fine art that uses live performers to present the experience of a real or imagined event ...

Can there be any other form of live performance which present an imagined event and stock prices have the best day of the year?

That is the American Fiscal Cliff negotiations.

The best demonstration of the theatre of absurd that money can get you.

So do we have a deal or not? As per the latest headlines from the main stream media, we do not have any final deal yet. Why then the spectacular jump? Not that I mind it or really looking for any reason for it. That was the reason in my last post I said :  Had this (sell) signal come 15 days back, I would have jumped on the short side. But today I would stand aside and let it pass. But at least it gives confirmation to the path that lies ahead.

Even in the answer to the comments I said that I do not expect any major selling yet. (Nah, not yet.)

So where do we go from here? While it would be unfair to the subscribers to spill the bean here, all I can say that cycles are about to bottom soon and I expect a bit of choppiness in the next few trading sessions. Does it mean that the markets will never correct meaningfully because central bankers will continue to pump money for ever? My take is, at some point, the unintended consequences of all the liquidity pumping will manifest in un-curable malignant cancers. When and how that will happen, is a matter of interpretation. At this point, let's just drive the car very carefully and take advantages wherever we can.

We cannot trade or invest this dysfunctional market with TA alone. We need some other quantifiable edge. But whatever is your edge, always have proper risk controls in place and never look for absurd yields. No system is always correct 100% of the time and if I say that my system is the best, I would be bulls**tting. But I try not to front run, I do not chase trades and I tell everybody to be patient. In 2012, I may have given up more trades than taken and looking back I am happy that it has helped in the preservation of capital. When people tell you that " No risk no gain" what they mean is that when you take big risk, chances are that if you are right, you will make big money but if you are wrong, you will also lose big time. And we will be wrong more times than right. That is the fact of life. So you decide what you want to be, an investor with a long term financial goal or a speculator?

It has been great sharing this space with you. While I have shared my trading/investment philosophy  and systems with you, I have also learned so much more from you folks. I am thankful to those of you who have shown the faith and have signed up the subscription. I will work really hard to earn and keep your faith.

Happy New Year everyone

A Bad Deal -- No Progress on the Deficit

The Republicans have caved once again.  The deal hammered out between Biden and McConnell is one more setback for the nation.  It promises to put real brakes on the economic recovery because of the tax increases and makes no progress at all toward reducing the deficit that continues be the nation's number one economic problem.

Why Democrats support this is a mystery?  This deal and others like it, soon to be agreed to, virtually guarantee that future beneficiaries of social security and medicare are in for a very unpleasant surprise.  Those now 50 and under cannot expect much more than half of the promised social security and medicare.  Those under 40 should not expect anything at all.

Now, while age limits can be increased and means testing can be implemented, we should do it.  Doing it two years from now will effectively reduce future benefits more than doing it now.  Putting these things off just make things much, much worse in the future.  This was a squandered opportunity. 

Republicans should replace Boehner as Speaker and every Republican who votes for this deal should receive a primary challenge.  Hopefully, McConnell will be challenged in the primary in his upcoming bid for re-election.  It gets harder and harder to see how Boehner and McConnell are an improvement over Reid, Pelosi and Obama.  They all seem to get to the same place eventually.  It doesn't do any good to win elections if this is the ultimate political outcome.

It's not clear what the Republicans are fighting for -- but they are definitely not fighting for smaller government and for economic growth.  Nothing in this deal moves in those directions.

This is a good deal for Obama and a good deal for the media.  They should be very happy.  The steady decline of the US into a second rate status in the world economy proceeds apace.  This seems to be what Obama and his fans in the media want to happen and they are getting their wish.

Lessons from Hedge Fund Market Wizards: Scott Ramsey

Today we continue our series, "Lessons from Hedge Fund Market Wizards", with a look at Jack Schwager's interview with Scott Ramsey of Denali Asset Management. 

Ramsey, a futures trader and CTA who works on the island of St. Croix, spoke to Schwager about his first foray into the markets, his evolution as a trader, and the process he stands by to protect and grow his clients' money.

1). Ramsey started trading in college. He was roped into the OTC metals market via a broker's ad in the Wall St. Journal. The broker charged customers a flat fee to buy and sell as much as they wanted in a particular market for six month. At the time, Scott was a novice and didn't know about futures, so he traded metals in this fashion through the inflationary run-up of the late 1970s.

2). Scott had to rethink his trading strategy after he bought silver at $50 an oz., only to watch it collapse to $26 following a long string of limit-down days. He sold as soon as the market resumed trading, but he lost all the money he had made plus some starting capital.

3). "Losing money was what got me hooked", says Scott. He knew that some 90% of futures traders lost money and he was determined to be in the 10% that profited. This motivated him to succeed. He was so engrossed in trading that he left college 9 credits shy of graduating, despite being an excellent engineering student.

4). Scott learned to trade first w/ his own money, then by advising clients as a broker. He leased a seat on the IMM and tried trading from the floor. Being on the floor turned out to be a big disadvantage compared to screen trading. Scott felt there was a lack of meaningful info in the pits and he lost his feel from watching other markets. He soon left the floor.

5). Ramsey continued to broker and screen trade, watching every market and updating chart books by hand. He made money in his own account almost every year, but not a lot. Why? Ramsey says it was because he focused only on TA, not fundamentals. Also, because he regularly pulled money out of his account. He stayed a 1-2 lot trader instead of pushing it and increasing his size.

6). "The evolution of a trader is when you start letting your money work for you and increasing your size."
7). Scott is one of those traders who has used his time as a broker to his learning advantage. By observing retail clients, he learned what not to do - everything from holding losers and taking small profits to emotional decision making and chasing market activity.

8). In order to make the big money, Scott realized he had to embrace fundamentals. The transition began when he started thinking about prevailing sentiment in the bond market and why prices were where they were. He thought about how people were positioned and the psychology behind prices. He then initiated a trade that was positioned against the prevailing sentiment, which turned out to be a very profitable move. "I began to look at the market from the perspective of other traders."

9). Discussing market action during the Euro crisis, Ramsey notes, "The market's repeated resilience in the face of negative news tells me it wants to go higher. Chaos creates opportunity. We learn so much about the markets when we have crisis events."

10). Rigorous risk control not only keeps losses small, it impacts profit potential. You must be in a position to seize opportunity. The only way to do that is w/ a clear mind. Don't expend mental energy by managing poor trades. Cut those that are not working.

11). When asked what trading advice he offers to friends, Ramsey tells them that it's not about being right - it's about making money. Taking losses is part of the process, so don't dwell on losing trades. Think about your next trade. Trading is a business. Treat it like one, keep records of your trades and journal your experience.

Once again, I highly recommend reading Hedge Fund Market Wizards to get the full detail and feeling of these interviews. Hope you enjoyed this latest post and we'll see you back here, with more to come, soon. 

Happy New Year to all our readers and friends across the globe!  

If you're enjoying these posts and would like to see more, please subscribe to our free RSS updates and follow Finance Trends in real-time on Twitter and StockTwits. You can also check out our related posts below for more market wisdom and trading insights

Related posts

1. First 3 posts from "Lessons from Hedge Fund Market Wizards" series.

2. Lessons from Hedge Fund Market Wizards: Ray Dalio.

Photo credit: Trend Capture Futures.

What Happened to Curbing the Deficit?

In its extreme enthusiasm for Obama, the press has totally neglected the deficit issue, which was the entire reason behind the creation of the fiscal cliff in the first place. Instead the press has focused exclusively on Obama's absurd "tax the rich" gambit.  Obama's plan will likely lead to lower, not higher, revenues from the top two percent.  So, that part of the Obama agenda simply raises the deficit and provides disincentives to expand employment.  Great policy!

Meanwhile, the $ 1.6 trillion deficit is getting larger.  The real cliff lies ahead when the debt markets begin to balk at the continued explosion in US sovereign debt.  We are now on "Greece watch."  It is only a matter of time.

Meanwhile, the media continues to be irrelevant to the real issue of our time.  For a brief period, the media and Obama can enjoy their "victory," but the long run, not so long run now, leads to insolvency.  Watching Greece and Spain is instructive.  The media should spend some time in Greece and Spain to see where their policies lead.

Let's hope that McConnell can resist Reid, Biden and Obama and let nature take it's course.  Over the cliff we go.

Sunday, December 30, 2012

The Times on Taxes

The New York Times' Sunday lead editorial (12/30) is simply breathtaking. The title is "Why the economy needs tax reform." It starts well,
Over the next four years, tax reform, done right, could be a cure for much of what ails the economy...
OK, say I, the sun is out, the birds are chirping, my coffee is hot, and for once I'm going to read a sensible editorial from the Times, pointing out what we all agree on, that our tax system is horrendously chaotic, corrupt, and badly in need of reform. Let's go -- lower marginal rates, broaden the base, simplify the code.

That mood lasts all of one sentence.
Higher taxes,...
Words matter. "Reform" twice, followed by paragraphs of "higher taxes," with no actual "reform" in sight. The Times is embarking on an Orwellian mission to appropriate the word "reform" to mean "higher taxes" not "fix the system."

Let's be specific. What is the Times' idea of tax "reform?"

tax capital gains at the same rates as ordinary income.... a restoration of the estate tax, higher tax rates or surcharges on multimillion-dollar incomes, and higher corporate taxes..
That's just to get started. Since, as the Times refreshingly admits,
..the new revenue would only slow the growth of the debt in the near term..
before the health care entitlement deluge hits,
... Mr. Obama would be wise to instruct the Treasury Department to start work on tax reform now, exploring carbon taxes, both to raise revenue and to protect the environment; a value-added tax,... and a financial transactions tax...
That's "reform?"

What will all those taxes do? The Times has a little bit of deficit reduction on its mind,
 More revenue would also reduce budget deficits, helping to put the nation’s finances on a stable path.
But with "reduce," "help," and "stable path," you can tell that eliminating deficits and paying off the debt are not a real high priority here. The Times has bigger fish to fry, starting with a red herring and ending with a red whale.
Higher taxes, raised progressively, could encourage growth by helping to pay for long-neglected public investment in education, infrastructure and basic research...
We've been spending more and more on education for years. While performance steadily declines. The trouble with schools is not lack of money.

Yes, infrastructure is crumbling, as a few New Yorkers may have figured out when their power went off, while their politicians -- and the Times -- instead of talking about burying electric lines and putting in a modern grid, wished instead to stem the rise of oceans and sugar in their soft drinks. But infrastructure spending is a tiny component of the Federal budget; we could support anyone's wish list without a Federal income tax.  Basic research spending could be doubled on about 10 minutes worth of Federal spending. Red herring.

The whale comes last:
Greater progressivity would reduce rising income inequality, and with it, inequality of opportunity that is both an economic and social scourge. 
The Times is arguing forthrightly for confiscatory taxation of income and wealth, in order simply to  reduce post-tax incomes. This isn't "redistribution," it's "off with their heads!"

Inequality of opportunity? No, President Obama's kids should not go to Sidwell Friends, they should go to DC public schools like everyone else?  Mayor Rahm Emanuel's kids shouldn't go to the University of Chicago Lab school (mine go there too, but I don't preach this stuff), they should have to go to Chicago public schools like everyone else? These are "economic and social advantages" arising from unequal income. Big ones, that motivate a lot of parents to work hard so they can afford the tuition.  French President Francois Hollande has a better idea: ban homework, so kids with smart parents can't get an advantage because they get help on homework. Too bad you can't ban homework in China and India. No concierge medicine either. Stand in line for medicaid like the rest of us.

And to accomplish this leveling, we'll just take money from "the rich" until all are equally impoverished.

Am I being alarmist? No. Read the sentence again, carefully. Words matter. What else can it possibly mean?

It's just astounding. When has a society ever grown, become prosperous, and raised opportunities for its citizens--of any background--by confiscatory taxation, transferring wealth to the State, with the deliberate aim of reducing the opportunities of a segment of its population? The examples I can think of -- French and Russian revolutions, the whole communist world -- ended rather badly.  Even more modest attempts, say postwar Britain, do not augur well. The evidence of Europe's current high-tax "austerity" (another word Orwellianly appropriated to mean "high taxes") and the weight of academic research (most recently from the IMF and Alberto Alesina) stand before us: Fiscal retrenchment led by higher marginal tax rates simply does not work.

Moving from outcome to opportunity, as the Times does, when has a society ever accomplished equal and plentiful opportunities by confiscatory taxation and heavy regulation? I can think of lots of societies that by these means became much less equal, with opportunity dependent on political and family connections, and thus out of reach of even the most talented and industrious people without connections. 

What of us naysayers? On taxing "capital gains at the same rate as ordinary income,"  
That is an indefensible giveaway to the richest Americans. Research shows that the tax breaks do not add to economic growth but do contribute to inequality. Currently, the top 1 percent of taxpayers receive more than 70 percent of all capital gains, while the bottom 80 percent receive only 6 percent.
Three more fish and a whopper.

We might start with the interesting assertion that any tax rate is a "giveaway." Who gives what to whom, dear Times?

"Research shows" is another fascinating choice of words.  "Research shows" means "all research shows," or "the consensus of research shows," without actually saying it. The facts are "some research shows," or in this case, really, "two unpublished papers we found on the web claim."

The links point to a report by the Congressional Research service and a one-page screed from the Urban Institute.  Both pieces of "research" simply plot the usual pointless correlations ignoring the hundreds of other causes, effects, and things not held constant. Aspirin causes colds you know: Look, there is a strong correlation between asprin-taking and colds. Neither one is even submitted let alone published in a refereed journal, which is no guarantee of anything but at least it's the minimum standard for "research." If this were indeed what constitutes "research,"  and "science,"  vast new funding for fundamental research in economics might well be warranted.

Fortunately, that is not the case.  What real research concludes, as much as anything in economics concludes, is that capital gains taxes are about the easiest to avoid (see Buffett, Warren).  Real research shows that when capital gains rates were reduced in the 1980s, revenue increased. Real public finance, the rest of the world's tax systems, and the broad conclusion of just about everybody until the world lost its head in 2008, was that capital gains taxation is a bad idea.

And the whale: "Receive" capital gains? Dear Times, capital gains are not a check sent by great-grandma's trust fund. Let me educate you on where capital gains come from: People work, and earn money, and pay taxes on that money.  Rather than blow it all stimulating consumption demand, they save some of it, invest in stocks, or start businesses. When those investments pay off, they sell, and receive capital gains. A vast swath of retirees lives off capital gains, especially from their houses.Small business owners are "high income" in the one year they sell their businesses.

Words matter, again. "Receive" paints capital gains as passive receipts form a mysterious ill-gotten mountain of gold, ripe for plucking with neither tax avoidance, behavioral change, or economic consequence. That's just not how our world works, but very revealing of the Times' zero-sum, class-warfare worldview.

What about 
...higher corporate taxes..
Once again, one of the few things real "research shows," and  economists agree on pretty heartily, is that corporate taxation -- already higher in the US than the rest of the world -- is a silly idea. All corporate taxes are passed on to people, through higher prices, lower wages, or lower returns to investors, primarily the former two. Tax people when they get the money. And corporations are much better at evasion, lobbying, moving abroad, and structuring operation in silly ways to avoid taxes.

The value added tax -- the economist's favorite, if coupled with elimination of other taxes -- is famously "regressive," the modern term (here are those important little words again) for "everybody pays the same rate."  Value added is, in Europe (along with 30-40% payroll taxes) the middle class tax that pays for middle class benefits. What about that, dear Times?
a value-added tax, coupled with provisions to protect lower-income taxpayers from higher prices, to tax consumption and encourage saving;
This is just incoherent. If you're "protected from higher prices," you're not paying the tax. If we couple the VAT with a vast new income transfer program, adieu revenues.

At least we close with some humor. The VAT is there to encourage saving, while heavy taxation of interest, dividends, capital gains and estates, says just the opposite.

What about spending?
The big obstacle to comprehensive tax reform is the persistent Republican myth that spending cuts alone can achieve economic and budget goals. That notion was sounded rejected by voters during the election. Yet it still has adherents among many Republicans, which will make it that much harder for Congress to grapple with the bigger and more complex issue at the heart of tax reform: how to pay for government in the 21st century.

....All that [long list of taxes] would only be a start, because the new revenue would only slow the growth of the debt in the near term. After 10 years, the pressures of an aging population and health care costs would cause the debt to accelerate again.
Oh those evil Republicans, standing against "reform," and reusing to grapple with "how to pay for government." The size and scope of which is not under discussion. No, dear Times, it's not "the pressures of  an aging population and health care costs." It is the Federal Government's promises to pay for it all. Which are, apparently, fixed stars.

Technical regress in any area is sad. Once upon a time, when we talked about taxes, there was a modicum of economics involved. When we thought about raising or lowering a rate, we thought seriously about the inevitable avoidance and distortions.  The first question was, "if we pass this law, will x actually pay more money, or will he simply change behavior to avoid the tax?" The second question was, "will his change in behavior hurt the economy?" Before we talk about what's "fair" we talked about "what works."

And we knew the sign of the answer: distorting taxation raises less revenue than you think, and reduces economic prosperity. The only question is how much. We did not indulge in magical thinking that appropriating anyone's income would actually improve the economy, all on its own. We understood the damage, and tried to carefully balance the benefits of spending against that damage. This is how we got, for a while, to low marginal rates with a broad base (the latter since loopholed away), low capital gains, estate, and corporate taxes, and were headed messily towards a system that taxed consumption more than rates of return. 

As one glorious counterexample of all the Times' monstrous confusions:
a financial transactions tax, to ensure that the financial sector, whose profits have substantially outpaced those of nonfinancial corporations, pay a fair share
A transactions tax is the easiest thing in the world to avoid with financial engineering.  How do you begin to figure out the "fair share" that financial vs nonfinancial corporations should pay? How about mutual funds whose beneficiaries are impoverished union schoolteachers? 

Orwellian language, blatant mistruths, and magical thinking aside, however, I want to applaud this editorial. No, I'm not kidding.

The Times is saying, out loud, that if we are to have the regulatory and welfare state we have enacted, it must be paid for with huge middle class taxes, as well as confiscatory taxes on anyone who dares to save, invest, or start a business. This is refreshing honesty. Up until about November 3, all we heard from them is that reversing the Bush tax cuts on the rich would pay for it all. At least a few of its readers may wake up and say, "wait, we voted for this?"

Really, my main complaint is that they left out the "if," and its logical consequence, and any doubts that raising tax rates so massively might not produce the needed long-run revenue growth they hope for.

It is a mistake to dismiss this clear editorial. This isn't the Village voice, or the Berkeley Free Press. This is the New York Times. This is how a wide swath of our fellow citizens, and majority of our fellow voters, see the world.   This is the agenda. They could not have been clearer if they had said "first we annex Austria and move against Czechoslovakia. Then we invade Poland and swing North and West." Heed them.

Saturday, December 29, 2012

Republicans for Tax Hikes

A number of Republicans have decided to vote for the restoration of the Bush tax cuts with an upper limit.  Obama's upper limit is $ 250,000. Apparently, many Republicans are willing to sign on if the upper limit is moved up a bit to $ 400,000 or $ 500,000.  If Republicans would simply refuse to sign on unless all the Bush cuts were restored, they would, without any doubt, get their way.  But somehow they have become convinced by the media, the Democrats, and their reading of the polls that they must buy into the Obama tax hike.

Why would Republicans get their way?  Because Obama would be forced to go along if the choice were that stark.  Obama does not want to preside over a major tax increase that further damages an already weak economy.  He would own it, not Republicans.  After all, the Republican House passed a full extension of the Bush tax cuts last July.  It is only Obama's petty insistence on raising rates on the top 2 percent, raising at best a trivial amount of revenue, that is holding up the extension.  It is Obama's economy for good or evil. That is the leverage that the Republicans have.  But, they seem intent on throwing away that leverage.  They won't have this opportunity again if they let it slip away now.

Boehner, they say, will hold an "open vote" on any Reid-McConnell compromise so that House passage can be accomplished with a majority of Republicans voting no.

It's time to rev up the tea party.  What good is a Republican who votes for tax and spending increases, which is what the Reid-McConnell compromise will amount to?  If there were no Republicans at all in the House or Senate would the ultimate outcome be much different?

Various conservative pundits, Bill Kristol for one, have advocated that Republicans simply surrender and vote for the tax increase on the top 2 percent.  Has Kristol forgotten the effect of higher marginal tax rates on job creation?  Or is Kristol only concerned about pleasing the media?

Republicans should reject any compromise that involves raising taxes on anyone unless there are major cuts to social security and medicare.   Boehner should be replaced as Speaker if he permits a vote on a bill that a majority of House Republicans are opposed to. 

The country's future is at stake because of the exploding national debt.  Going over the fiscal cliff is far, far preferable to a bad Reid-McConnell deal.

It looks for now like Republicans are planning to join their Democratic brethren in raising taxes, increasing spending, and further damaging the country's future prospects and economic vitality.

Deja vu.

Friday, December 28, 2012

Sell Signal At Long Last.

At last we have that elusive sell signal but time wise we are reaching the last stage of down cycle. Had this signal come 15 days back, I would have jumped on the short side. But today I would stand aside and let it pass. But at least it gives confirmation to the path that lies ahead.

After hours Indices Futures are down a lot. /ES has gone down below its earlier low of 1390 and at some point was down almost 2 %.
Let us see where does it closes.

Last trading day of the year is normally bearish. As per Stock Trader's Almanac, Nasdaq down 10 out the last 11. And I do not see what kind of last minute deal they can make when both sides want to jump the cliff.

So it is going to be a very interesting week and New Year. Some juicy tit bits as to how 2013 may shape up:

First Five Days in January Indicator -  This one has a very nice track record. The last 40 UP first five days of the year have been followed by full-year gains 34 times for an 85% accuracy ratio. This includes 2012 which had a 1.8% rally in the first 5 days. The average gain for the first 39 of those years was 13.6%.  The results are less reliable when the first 5 days in January are negative, showing just a 47.8% accuracy rate and an average gain of 0.2%. It’s important to note that the S&P 500 posted a gain for the first 5 days of the year in just 6 of the last 15 Post-Election Years.

Do you want to make a guess ?

We are preparing for the new year with lots of cycles about to bottom and host of signals about to come through. From January, the posts would be irregular and all buy / sell / hold or wait signals will be emailed to the subscribers. Click on the “Donate” button on the left hand side just below the “Home” and pay $ 49 if you would like to join the service. In the subject, please write Monthly Subscription and you are all set.

Thanks for sharing my thoughts. It has been a great journey with you all and I wish everyone of you happiness, health and prosperity. Have a great weekend folks.

Was This By Design?

Listening to the media and democratic pundits ignore the exploding national debt to indulge in a dialogue about an almost irrelevant issue -- taxing the upper 2 percent -- makes one wonder?  Do these folks not understand the arithmetic.  Are they unaware of the $ 16.5 trillion national debt, growing by ten percent per year in an economy with just over $ 15 trillion in GDP?  Why the focus on something that, at the most optimistic assessments, can only produce 0.08 trillion in revenues annually?  Even that miniscule number is unlikely.  Far more likely is that the increased tax rates on the upper 2 percent would drive down revenues from that group.  But, even at the most optimistic assessment, it is a waste of breath.

So, why is that the entire conversation?  Maybe these folks are untroubled by a US decline.  They seem so fundamentally out of touch with traditional American values, maybe they are mainly interested in changing the culture to suit themselves even if that means economic decline.  That's what redistribution seems to be all about. Maybe the media and the democratic pundits don't really care if economic growth is zero and the young have no future and old folks end up with nothing.  Perhaps this is all by design, not simply gross stupidity.

Thursday, December 27, 2012

Don't Blame the Economy on the Cliff

The economy is weak because of government policy -- not the ongoing fiscal cliff stalemate.  The Obama Administration has waged war against the private sector free market from the day it took office.  That war has borne fruit.  This is the slowest economic recovery since the 1930s.

The slow pace of economic growth has nothing to do with the cliff.  It has been going on since late 2009.  There is not going to be any serious economic growth in the US given the regulatory and legal environment that has been imposed upon the US economy since Obama took office.  The financial sector has been crushed, bank lending has been discouraged by the regulators, the energy sector has just barely survived the Obama onslaught, and employees are an endangered species.

Obamacare pretty much says it all.  Another costly mandate on companies and ultimately on individuals was the final kicker.  Along the way the elimination of the Keystone pipeline project was emblematic of the Obama strategy.  Push government spending and expansion and crush the private sector.

Well, guess what.  They have succeeded.

So, forget the cliff.  The cliff, whether we go over it or not, won't matter.  This is not an economy going anywhere.  The only significance of the cliff is that if a deal is reached, US bankruptcy will be sooner not later.  At 20 trillion in debt and an economy in the ditch, it is unlikely that bankruptcy can be avoided and we should reach that level in Obama's seventh year in office.

Bi-poler Market

DOW travelled almost 300 points down and up and closed in small red. And all the action intra-day was based on hope and fear. I think big boyz used the bounce to unload some of their positions. In any case hope and greed is never a good investment strategy. Whatever be the deal, taxes are going up and Govt. spending, which is the main engine of growth for now, will be reduced somewhat. At best, they can kick the can down a bit.

But that is no tonic for growth.

Don't mis-understand me, I am not suggesting to short the market. In fact I have not shorted the market since  Uncle Ben came out with his QE4 except a quick stab at silver. I think the immediate / short term opportunity is on the long side for equities and commodities and I am waiting for cycles to finally bottom and give confirmation of the up move.

The whole world in in the last stage of reflation. Japan is making the last ditch effort to de-base its currency and bring in inflation. China is again pumping in money but in a different name. Now they want to develop the rural areas. In USA, the printing press is on full swing.

Only Europe is still pushing "Austerity" but living within your means has become a dirty word and politicians cannot get re-elected based on long term structural solutions. Look at Italy. It is very likely that Bunga Bunga will come back as the leader of that country to have fun with under-age girls again. 

The result of all the money printing will have the unintended consequence of pushing the commodity prices higher. I expect crude to go higher in 2013 as well as PM sector. But timing is going to be important because with higher oil prices will come higher inflation and ultimately higher interest rates. 

Short term, SPX was down 4 days in a row and most likely tomorrow there will be a hope driven rip. It has also taken a poke at 1400 and held. If we are to see some serious selling, we might see it in New Year but cycles are about to bottom and not much time left for serious correction. And yet, some folks will book their loss in 2013 so reduce the tax liability and that may affect the market behaviour a bit. Not a big deal but still be cautious. Santa Rally has been a disappointment so far and I do not expect much in the next few days either barring occasional flutter.

Thanks for your time to read this blog post out of your busy schedule. I hope you have had a great Christmas and having a great time with your family and friends. I look forward to your feedback and comments. Should you like to join the Newsletter service from Jan. 2013, you know the drill. Happy holidays folks. 

Benefits trap art

Two charts from the UK, admittedly sprayed with too much chartjunk, but illustrating the poverty trap in Britain. (A previous post  on high marginal tax rates for low income people has more charts like this.)

Most of UK benefits are not time-limited, so people get stuck for life, and then for generations.

The original article, by Fraser Nelson, "Why the Poles keep coming" in the Spectator, is worth reading.  The article starts with the puzzling fact that
Britain’s employment figures are strong but most of the rise in employment so far under this government is accounted for by foreign-born workers (as was 99pc of the rise in employment under Labour). 
The author had the same epiphany that led me to economics all those years ago. No, it's not culture, or "laziness." Treat poor people as intelligent, responding to incentives, just like you and me, but with a lot bleaker choices. Try to look at the world through their eyes if you want to understand their behavior:
 if I was in a position of a British single mother I have not the slightest doubt that I would choose welfare. Why break your back on the minimum wage for longer than you have to, if it doesn’t pay? Some people do have the resolve to do it. I know I wouldn’t.
...Until our policymakers start to see things through the eyes of those ensnared in welfare traps, nothing will change. 
More great quotes:
If you had designed a system to keep the poor down, in would not look much different to the above.

...the cash-strapped British government is still creating still the most expensive poverty in the world.
Hat tip: Dan Mitchell writing at Cato@Liberty. His post is worth reading, as are the links. (Alas, the Spectator only cites the source of the graphs as " an internal government presentation," so I don't know who to properly credit.)

Wednesday, December 26, 2012

Lump Of Coal?

This is the time of the year when volume is next to nothing and a yearend rally is all but assured. And yet, two trading days in a row SPX closed in Red.  Whatever happened to the Santa Rally? The all powerful man of USA cut short his holiday to solve the mess, which is his mess as well but the market just gave a big yawn. Some other time, SPX would have rallied 2% just on the news that President of USA has shown some urgency, but not today. So, is Santa going give a lump of coal to Wall St. for the New Year Gift?

Whatever happens with respect to the fiscal cliff, taxes are going to go up and spending will get curbed somewhere. None of that can be good in normal circumstances but coming in at a time when USA is just barely muddling along; the drag on GDP could be substantial. And yet, there is not much panic anywhere. Is this complacency? Or just the liquidity of QE infinity propping up the market?

The headlines after the market closed was: U.S. Stocks Fall as Retailers Slump Amid Budget Deadline.

 This is as moronic as it gets but the buzz is that the holiday sales were not as good as expected. So is the American consumers have stopped spending money that they don’t have on stuff that they don’t need? If that is so, what will happen to Chinese factories producing all those worthless junks that we find in Wal-Mart? Will all the folks in Africa and Bangladesh now buy up the entire excess inventory that every country on earth is trying to export and prosper? Somehow the math does not add up.  

It is too early to write off the American Consumers, more so when the Govt. actively encourages you not to save but borrow and spend. Well, sometimes in future they will go bankrupt along with the Govt. but by then it will be someone else’s headache. Most likely the Chinese and Japanese will be left holding the bag of crap bonds that the Fed has been able to sell. There are only two options for USA. Either become like Japan with a 20 year deflation and 200+ % of debt to GDP or become like Zimbabwe with super high inflation.  The Fed’s balance sheet will balloon to over $ 4 trillion by end of 2013 and they have no exit strategy. USA has over $ 16 trillion in debt and they are talking about reducing $ 1 trillion over 10 years. I still do not get it. While I am very sure about how it will end, I am not sure about the time and I think there is still some time to play on the long side and the end of the world scenario that everyone talks about, is still far away.

In this game, timing is everything. If we are too early we will lose our capital. So we will try to make money in both long and short trades / investments and we will be open to all other asset classes including commodities and bonds and not just equities. We just have to remember that “Return of Capital” is more important now than “Return on Capital”. We should never front run and never take undue risk for big returns. That is called “Greed” and greed kills.

We therefore continue to wait for opportunities and be patient with our investing / trading. And I see some interesting opportunities coming up soon which I will 1st share with the subscribers. Thanks for signing up during the holidays. I know, many of you would be travelling and be on vacation at this time of the year and that is why I am putting out the reminders regularly. Click on the “Donate” button on the left hand side just below the “Home” and pay $ 49 if you would like to join the service. In the subject, please write Monthly Subscription and you are all set.

Thank you for your time to read this blog post out of your busy schedule. I hope you have had a great Christmas and having a great time with your family and friends. I look forward to your feedback and comments. Happy holidays folks. 

Markets Like Going Over The Cliff

Why is the stock market so much higher than just a few weeks ago?  Don't stocks know that we are headed over the fiscal cliff?

Going over the cliff is a good thing, not a bad thing.  Higher taxes, lower spending is just the beginning.  Much, much higher taxes and the virtual elimination of the military and other discretionary spending will be required just to get through the next 15 years of the entitlement programs.  Going over the cliff will provide 15 years of breathing room against the collapse of the entitlement programs.

Not going over the cliff could force a crisis in treasury financing within the next two or three years.  Going over the cliff gets you past the end of the Obama years with a national debt of 20 Trillion and eight years of a lost decade.  But, it will get you to the end of the Obama years most likely. 

Not going over the cliff will accelerate the national debt crisis with a good chance that we can't get through the Obama years without a treasury financing crisis, similar to that of Greece.

So, let's buy a few more years by going over the cliff.  This is the price you pay for entitlement reform being "off the table."

Monday, December 24, 2012

Fiscal cliff or fiscal molehill?

Four thoughts, reflecting my frustrations with the "fiscal cliff" debate. 

1. Recession

How terrible will it be if we go over the cliff?

Bad, but for all the wrong reasons. If you, like me, didn't think that "stimulus" from government spending raised GDP in the recession, you can't complain that less government spending will cause a new recession now. The CBO's projections of recession are entirely Keynesian. Pay them heed if you still think the key to prosperity is for the government to borrow money and blow it.

There are no "cuts" in sight anyway. "Cut" in Washington means "increase spending less than we previously said we would." At worst a few programs will have to spend the same amount this year as last before spending increases resume.

It's not even obvious that the "cuts" will happen. Will Congress really try to pay doctors 1/3 less? (Will doctors take any medicare patients if they do?) Or will they pass an "emergency" bill, exempting doctors just like Social Security? Sequestration has never actually been used.

To an economist, the main worry is that higher marginal tax rates mean more distortions, which are a drag on the economy.  But distortions take a while to kick in. It takes a while for people to change to easier jobs, not start businesses, move businesses offshore, not go to school, choose easier but less rewarding majors, find more tax shelters, and so on. So the danger is not so much a recession, which comes, and then ends, and we go back to growth. The danger is settling in to a decade of (even more) high-distortion, sclerotic growth.

The headline rate people are fighting about -- 35% vs. 39.5 % federal income tax rate -- is basically irrelevant to the larger issues. If we had a clear, functional, stable tax system, with a total (all taxes) 39.5% top marginal rate, the economy would heave a big sigh of relief and take off like a rocket.

We have instead a horrendously complex, nay corrupt, tax system. It's chaotic, with teams of lobbyists descending now to carve out everyone's exemption, deduction and subsidy. Tax reform is, in my judgment, more important than the headline marginal rate. More generally, I think the lessons of growth economics are pretty clear that over-regulation and the consequent politicization of economic decisions is a larger danger to growth than any stable clear and uniformly administered taxes with faintly reasonable marginal rates. If you can start a business and know for sure you'll keep half the profits, that's more enticing than never knowing what new holdup you will be subject to from 100 overlapping regulatory agencies.

Furthermore, economics cares about the total marginal tax rate -- everything between the extra dollar you earn and the additional goods you receive -- including Federal, state and local income taxes, deduction phaseouts, payroll taxes, taxes on rate of return between earning and spending, sales taxes, estate taxes if you leave it to your kids, property taxes if you buy property, excise taxes, and on and on. Some parts of Washington seems to finally have figured out that reducing deductions raises taxes with less distortionary effects on marginal tax rates.  They have not so successfully figured out that every phaseout or income test adds to marginal tax rates. In any case, it makes no sense at all to talk about the Federal income tax rate in isolation.  

Economics cares equally about taxes and benefits. Whether you send the government a check or they send you a check doesn't matter, what matters is how that check changes based on your behavior. Marginal tax rates are high for lower income people too (earlier post on the subject). Asset tests are just as bad as income tests: If you save, and then an asset test takes away a benefit such as college aid, you might as well not bother saving. It makes no sense to talk about taxes and not benefits at the same time.

Economics cares about the overall impact of the Government on decisions, not just on-budget taxing and spending. If the government says "employers shall provide $15,000 worth of health insurance to every employee," that does not show up on the budget -- but it has exactly the same effect on the economy as a tax and benefit. If the government says "all gasoline shall contain 10% ethanol," that has the same effect on the economy as a tax and subsidy.

2. Distribution

The same points apply even more to distributional questions -- are the "rich" paying "their fair share," should they "pay more," and so on.  The headline Federal income tax rate is the tip of the iceberg. Economics tells us to consider the overall effect of the government at all levels on the distribution of individual consumption. (Not household, not income, not wealth.)

Obviously, we have to talk about taxes and benefits in the same breath here. We also need to talk about who benefits from government spending and intervention. There's a lot of corporate welfare, which ends up in the pockets of some very rich people. If we remove a few hundred billion in green energy subsidies, and the Al Gores of the world can't make another $100 million bucks on it, that ought to count as reducing the transfers to the rich just as much as raising their taxes.

Economics cares about the burden of taxation, not who pays taxes. This is clearest for gas taxes. It's clear to everyone that the government is not socking it to those fat-cat gas station owners with gas taxes, they are simply passed on to you and me.

3. Politics (admittedly dangerous speculation for an economist)

What in the heck is going on? Why is our national discussion paralyzed over the tip of an iceberg?

Only one story makes sense to me. President Obama has been saying for four and a half years that he wants to raise taxes on "the rich," and he means to do it. He wants to raise tax rates on the rich, for symbolic, social, political reasons as much as for anything in an economics textbook. Nothing else explains the Administration's monomania on this point, especially given that it won't make a dent in the deficit, the fact that it makes zero economic sense as a central policy to address our economic problems, and given the Administration's refusal to talk about reform -- which would raise tax revenue and help economic growth -- instead.

"The rich," need to get with the program, like Warren Buffet. It remains open season for deductions, exclusions, special deals and loopholes. Notice Buffet never asks for removal of all the clever dodges he uses to pay less taxes, and nobody has mentioned that he might do so. Tax on unrealized capital gains anyone? Limit the exclusion of charitable donations, even to family foundations that employ family members to run them, from estate taxes? Boy, that would raise a lot of revenue from some truly "rich" people.

Quid pro quo here, though, rich people and the CEOs who recently visited the White House had better line up and support the Administration if they want their special deal, deduction, credit, Obamacare waiver, and no visits from the NLRB, EEOC, EPA, consumer financial protection bureau, and so on.

High statutory rates, a Swiss cheese of loopholes renegotiated in every annual crisis, and an army of regulators on the prowl, are a recipe for permanent Democratic government. The cliff is beautifully structured to make Republicans look bad. Things happen when they make sense. This path makes enormous political sense.

The amount of magical thinking on the economic left doesn't help.  They used to claim that that economies like the US in the 1950s can still grow (for a while) despite high marginal tax rates (which nobody paid because of huge deductions). They used to claim that high tax rates wanted for other reasons don't hurt too much. Now they've talked themselves into arguing that high marginal tax rates are actually good for growth.  Why not just say the obvious, this is a policy desired for political reasons, and the political outcome is more important than the economic damage?

4. The future (admittedly dangerous prognostication for one who says things are hard to predict)

The discussion around the cliff  sounds like we are finally settling some large issue. We are not. This is the fiscal molehill, not the fiscal cliff. This is Harpers Ferry, not Gettysburg. It's the Anschluss, not D-day. It's... Ok, I'm overdoing the military analogies, you get the point. This is the prelude to what looks to me like 10 years of constant crisis.

Here is the big issue. The US has already enacted European welfare and regulatory state with American characterstics -- the bloated inefficiency, legalism, and red tape that is our specialty. We have not enacted the taxes to pay for it. We will either dramatically cut back the former, or rather dramatically raise the latter. On the table now is at most $100 billion out of a $1 trillion deficit, and likely much less. The fiscal molehill.

US Federal, State and Local spending is 40% of GDP. Pay attention to state and local, that's a lot more than the 24% Federal we talk about a lot. Europe is more like 50% of GDP, so it sounds like we're behind. But our government is bigger than it looks.

We have about a trillion dollars of "tax expenditures," including the deduction for employer-provided health insurance, deduction for mortgage interest, and (small but annoying) credits for all sorts of things like checks to silicon valley CEOs too subsidize the electric cars they drive down t their private jets. These are no different than a trillion dollars of tax and another trillion dollars of spending, or another 6% of GDP. We're at 46% right here.

Our government likes mandates and rules, which affect behavior and soak up the economy's taxing capacity just as much as on-budget taxing and spending, but hide the fact. Europeans tax gas and energy, and people choose small cars and turn down the heat. We have mileage standards, energy efficiency standards, carpool lanes, electric-car sales mandates, and so on. Same real size of government. And so on.

Before the ACA, our government was paying for health care for about half the country, in our inimitably inefficient style, including medicare, medicaid, schip, and current and retired government employees. Under the ACA, we're basically all in a European style system, funded by explicit or implicit (mandates) taxes. With those uniquely American characteristics.

The fact that government overall is about half of GDP matters to our tax debate. Properly measured, the average American must then pay about half his or her income in taxes. For every dollar taxed at a lower rate, another dollar has to be taxed at a higher rate. When we tax the average dollar at 50%, any progressivity  has to shift a lot of marginal rates well into the territory that destroys incentives and reduces revenue.

Europe pays for this stuff, and its middle class pays for this stuff. 30- 40% payroll taxes, 20% value added tax, $9 a gallon gas, 50% income taxes extending down to what we would call lower-middle-incomes, property taxes, estate taxes, wealth taxes. Sorry, Europe can't quite pay for this stuff, even with those taxes.

But this is our choice. European taxes to pay for the regulatory and welfare state we've already enacted. With the European growth and eventually southern European corruption they entail. Or a sharp cutback in that state. We can decide before or after we experience the European debt crisis.

So, the fiscal cliff is just the beginning. This will be a long hard road, and my guess is that we will lurch from crisis to crisis, with patchwork last minute deals, for another decade. It doesn't have to be so -- the economic choices are clear. But given the size of the question at hand and how little anyone is talking about the real issues, it's hard to see another way.

I think the deck is stacked towards the large-state camp.  There were two theories: "Starve the beast" said, cut taxes and eventually the size of the state will have to shrink. "Vote the benefits" said, increase spending and regulation, and eventually taxes will have to be raised to try to pay for it all. The latter seems to be winning.

I guess it's appropriate that the Grumpy economist is playing the Grinch for Christmas!

Fiscal Cliffmas

Today was the official starting day of Santa Rally. But the reindeer team is on strike so the rally is delayed until further notice.

Till last year, not many were aware of such a creature as “Santa Rally” but this year the name has become main stream.  Now the retail is sold on the concept of year end rally. While it is premature to say that there will lump of coal in the stockings, things don’t look too rosy either.

After talking with the insiders I get a feeling that the political class wants to get over the cliff. R gang doesn't want to be seen as the party which abandoned no tax hike policy. It is easier for them to come back and reduce the tax on some, after the rates have gone up. Obama is not interested in the negotiation anyway. Neither party has any plan for America except how they will win the next election and how they can play the game of one-up man ship better.  Secretly they are informing the Wall St. that they will take care of it in 2013 with some sort of Band-Aid. That is why we do not see any panic. But the Boyz will most likely create some panic near term before they gun for the top.  The old, tried and tested formula is: Rinse: Wash: Repeat. Why it would be any different this time? If that were to happen, expect some selling from now till 1st week of January. “Santa Rally” may well turn in “Satan Rally”, as I wrote last night.

2013 will also bring in focus the problem facing USA. In many ways things here are more dire than in Europe. With a $ 16 trillion debt, only thing that is keeping the lid on higher interest, is the blatant monetization by the Fed. It is keeping the interest rate low in an artificial manner and I would expect that at some point of time interest rates will start rising. It may not happen tomorrow or in the next month, but it is going to happen earlier than you think. Those of you invested in Bond funds, should think of getting out of it while you still can get out. While deflation is still the primary concern facing the Fed today, cycles show that inflation is going to pick up and that is why commodities are going to do so well in future.

Last night I also wrote that I am seeing some new trend whereby USD and GOLD are moving together in the same direction. It held true today as well when both of these two were up together.   I really don’t know what it means but surely old correlations are breaking down. Today even Bonds were down along with equities. Normally, I correlate Forex with Equities and look at AUD for direction. AUD is down and is likely to test 1.02 levels in the next few weeks. That should ideally take SPX in the range of 1380 level but time is running out. May be we will see some heavy duty stuff after New Year.

Cycles are bottoming in the commodities and we are about to get quite a few buy signals soon. I am not going to front run but wait for confirmation. I will be informing the subscribers about these buy signals on 2nd January.  Click on the “Donate” button on the left hand side just below the “Home” and pay $ 49 if you would like to join the service. In the subject, please write Monthly Subscription and you are all set.

I take this opportunity to thank you for sharing my thoughts and wish you merry Christmas and happy holidays. I wish 2013 will be a very prosperous year for all of us and wish you health and happiness.

Sunday, December 23, 2012

Why Pretend -- Let the Tax Cuts Expire

If there is no appetite for reforming entitlements, then our future is massive tax increases and a stagnant and depressed economy.  Why not start this process now?  The track that we are on will eventually lead to the kind of top tax rates that we see in Europe -- 70 percent in France, for example.  And even those rates won't improve the national debt situation.

The truth is that the Democrats plan is to continue to raise tax rates by pretending that somehow tax revenues can catch up with entitlement spending.  But there are no tax rates or revenues that can match the entitlement explosion.  Our national debt will be a multiple of GDP within a few years and is probably already unpayable at any level of tax revenues.

It's time to let the public get a taste of their future -- high taxes, massive bureaucracy, a crushing of the private sector, high and permanent unemployment, and diminished employment and income prospects for younger generations.  Within a dozen years, we will begin to back away from spending for the elderly -- not because we want to -- but because there is simply no money available to maintain these programs at existing benefit levels.

The problem we have is that a majority of Americans think all of this stuff is affordable.  That's why entitlement reform is "off the table."

So, let taxes rise.  Among Democrats, only Harold Dean seems to be aware of the arithmetic.  He has made it clear that he supports letting all of the tax cuts expire.  It's rare that I agree with Dean, but, on this one, I agree.

The public needs to get a taste of the future regime that they have voted for.  If the entitlements are "off the table," then lets put the reality of the future on the table now before it is too late.  Perhaps four years of economic stagnation, smothering regulations and high taxes will be enough of a taste of our future to bring our citizenry to its senses.

Saturday, December 22, 2012

Deck The Hall

Christmas comes in the fantasy land and who better to welcome the celebration than the genetically modified bimbos. So here you go and enjoy the holidays:

I will see you tomorrow with the weekly report.
As always, stay frosty.

The Latest from Greece

Greek riots and demonstrations are now a daily event in Athens and other major cities.  Civil disorder is common place -- looting and random thievery are accepted in modern day Greece.

Meanwhile, the Greek public still believes that they are beset by the evil greed of rich people and large corporations.  If only....  

For three generations, the Greeks have been told that the "middle class" deserves endless services, employment guarantees, free health care, and no taxes.  They bought in.

It's always about "fighting for the middle class," until there is no longer a middle class. That's where we are in Greece.  We now have a protracted battle between the protected class -- mostly government employees -- and everybody else.  We now witness a civil war between the young -- who are supposed to support all of this nonsense -- and the old, who no longer can support much of anything.

Greece is the target.  That's where the Obama policies take you.  Substitute personal responsibility for government largess and you get modern Greece.  Meanwhile, move the rhetoric over to demonizing the rich and you get the Obama plan.  Freedom, free markets, hard work -- these are now outmoded notions to be replaced by "defending the middle class."  One such defense is the announcement today that GM workers will receive $ 7,000 bonuses this year, thanks to the taxpayers, who have lost billions of dollars underwriting GM worker pension funds.

This is where it goes.  Pit one group of Americans against another.  It is no longer about merit and hard work.  Those are outmoded notions.  The Greeks don't believe any of that either.  They have been carefully nurtured to believe that the government will take care of everything.  Obama has taken heed.  You can win a lot of elections and curry favor with an adoring media by simply pretending that effort is no longer required for the good life.  These rich folks have enough for us all.

So, modern Greece is descending into chaos.  Don't visit Athens as a tourist, because police protection has broken down.  This is a society that no longer believes in civil order.  Virtually all Greeks now believe that their problems are caused by rich people, German banks, and big corporations. They have been watching TV and listening to their leaders.  They drank the koolaide.

Now, we are drinking the koolaide.  What is the Obama plan to reduce the deficit?  Tax rich people.  How do you deal with a $ 70 trillion unfunded entitlement deficit.  Raise $ 80 billion a year from rich people.  This year alone that will reduce our deficit from $ 1.6 Trillion to $ 1.52 Trillion.  That's what we are talking about.  These terrible Republicans. If they would only agree to the Obama plan our national debt would rise a mere $ 1.52 trillion per year and the national debt would reach only $ 24 Trillion in six years instead of $ 25 Trillion.  Thank you, Mr. President.  That's a big help.  No point in trying to deal with the entitlements, after all, $ 24 Trillion in six years isn't bad and that's only the beginning.  We can do better than that (or more than that, if you like).

No need to worry about Greece with such a statesman-like President.  The adoring media deserves some credit as well.  If they get their way...just think.  We can get to a mere $ 24 trillion in debt in six years.  In 20 years, we should be able to scale the $ 40 Trillion mark.  Hey, maybe Greece isn't that far way after all.

Friday, December 21, 2012

Road Signs on the Way to Greece

"Get something done....anything!"  That seems to be the thinking of the financial and political pundits.  Who cares if the outcome is further explosion in the national debt, more crushing taxes, and strangling regulations?  That seems to be the "rise above" mentality.  The ultimate policy is less important than the desire to get this episode behind us.  This is known as "kicking the can down the road."  The fact that the economy is getting a swift kick as well does not seem to concern the pundits.

The only thing that the President and his allies are willing to do is further the punish the free market and the private sector with increasing taxes and increasing regulation and creating further divisions between rich and poor and young and old.  This is the strategy that Greek politicians used for the past three decades to get Greece to the place where it is now. 

Blame rich people, blame the private sector and expand further government activity and the percentage of folks who are riding the stagecoach of government benefits.

When Greece was going down this road, the media strongly and vocally supported the trip.  They are doing so again as the US follows the Greek path.

Boehner and his Troops

John Boehner is doing his best, but it is hard to fault the House Republicans for refusing to go along.  Boehner is playing tactics, while many House Republicans think it is too late for tactics. They are probably both right.

Boehner tried to push the ball back into the President's court, since the President has been unwilling to bend on anything.  It is not unreasonable for those among Republican ranks to ask why they should vote to raise taxes on some folks absent any offer of spending cuts at all from the White House. This is especially the case given that Senate leader Harry Reid said that the Boehner plan was dead on arrival and Obama promised to veto it.  Why capitulate pre-emptorily when there is nothing forthcoming from the other side?

Not that any of this matters much as long as entitlements are "off the table."  No deal is of any significance without entitlement reform.  Obama is perfectly willing to let the country go over the cliff and proceed on its way to Greece.  Boehner is doing his best, but Obama and the Democrats are determined to continue the march to insolvency.

Thursday, December 20, 2012

Special Update

Futures are down quite a bit and I have not seen such a waterfall in quite a while.

I just hope that this red holds tomorrow. We do need some good scare.

December Quadruple Witching

There was no follow through of the correction of yesterday, so my hope of a better entry to go long was dashed while my doubts for any lower prices were proved correct. But tomorrow is year end quadruple witching and lots of shenanigans will go on, even without any input from the fiscal cliff drama. Come to think of it, we are days away from the cliff and no resolution is in sight. And yet there is no panic anywhere. Remarkable to say the least. I am waiting for the cycles to bottom before deciding the next course of action. I have identified a number of shares and ETFs which I think will yield spectacular returns in the coming months.

I closed the short trade in silver today. While cycles still did not bottom, I think there is not much juice left and whatever little downside is there, better leave it for the next guy. It is called the greater fool theory. We don't want to be the last guy holding the can. Gold fulfilled my price target and I do not have any lower target for gold. Just waiting for going long.

The wheat trade, which I did not take because wheat did not cross $ 820, was cancelled today when it closed below $ 800. I do not think there is much downside in wheat but why take any chances. Better opportunities are coming up soon.

Crude is consolidating around $ 89-$90 range and let us see how it behaves in the next few days. Something very interesting in brewing the the oil fields which has the potential of an explosive return on investments.

It was a good decision not to short Nat. Gas because cycles did not top yet. Today we saw Nat.Gas go up and I think it might challenge $ 3.70 level soon. But the preferred trade in Nat. Gas now is on the short side and I am waiting for the cycles to top.

This coming Sunday will be the last free market report. 2013 will be an exciting period for investment / trading and I am sure we will do great.

Thanks for sharing my thoughts and good luck with your last minute holiday shopping.

Heads up: new "Market Wizards" posts coming soon...

Hi gang, just wanted to let you know that we'll have a new "Lessons from Hedge Fund Market Wizards" post up soon. In the meantime, you may want to check out the most recent posts from this series. 

Dive in with this introductory post: key interviews and a trading webinar with Hedge Fund Market Wizards author, Jack Schwager. The videos found in this post contain some excellent insights and quotes from the traders and hedge fund managers interviewed in Schwager's latest Wizards book.

Ready to learn from some of the most astute traders around? Here you'll find some choice trading and investing lessons from global macro trader, Colm O'Shea and noted hedge fund manager, Ray Dalio

You'll find the first 3 posts in our "Lessons from Hedge Fund Market Wizards" series below.

1. Jack Schwager shares insights from Hedge Fund Market Wizards.

2. Lessons from Hedge Fund Market Wizards: Colm O'Shea

3. Lessons from Hedge Fund Market Wizards: Ray Dalio.

Now if you'd like to keep up with our real-time updates and be alerted to our upcoming posts, please subscribe to the Finance Trends RSS feed or follow Finance Trends on Twitter (totally free). 

We'll see you next week with the latest in our "Market Wizards" series. Until then, thanks for reading and have a safe and happy holiday season!

Don't "Rise Above"

CNBC keeps trumpeting the "rise above" slogan in reference to the "fiscal cliff" negotiations.  Nothing could do more damage than "rising above."  Rising above is how we got to this point.  "Rise above" means "kick the can down the road."  It is time, way past time, to not rise above.  Face the reality.  Don't duck reality by adopting the "rise above" strategy of the Jim Cramer no-nothings on CNBC.

Coming to a bogus agreement that does nothing to change the trajectory of medicare, medicaid and social security, accelerates the US on the path to bankruptcy.  If you like modern Greece and want to get there as soon as possible, then "rise above." 

If you want the US to return to fiscal solvency, then don't rise above.  Instead fight the current media frenzy to get to a fiscal deal regardless of what it implies for our future.

Go For Plan B

John Boehner is on the right track.  Passing an extension of the Bush tax cuts for as many people as possible is the best that can be accomplished at this point.  The main virtue of Boehner's plan is that the Republicans are not tied to a deal with this approach.  If Republicans agree to a tax hike deal and essentially no spending cuts -- the Obama approach -- then they will have nothing to run on in 2014.  By committing themself to an extension of the Bush tax cuts for almost everyone, they are able to maintain their anti-tax posture.

Let the Senate turn it down.  Let Obama veto it.  No harm done.

Going over the cliff puts the issue of our looming national insolvency front and center.  It is about time.

It is true that national defense is sacrificed and economic growth is probably jeopardized, but it would be anyway giving the current trajectory.

There is no time like the present to face what needs to be faced.  Lets get on with it.

Wednesday, December 19, 2012

Things That Make You Go " Hmmm".

One of those things that make you go  "Hmmm" could be my quick post of last night where I wrote that : We may see some pull back starting tomorrow afternoon
The other  "Hmmm" factors could be:

  • Short trade in silver is doing well if you have taken it. If not, don't worry, may other opportunities are coming up.
  • Now that you are seeing the price action of Crude, may be you will appreciate why I closed the short crude trade last week.
  • Wheat is still in range of $ 800- $820 and is a candidate for a long trade with this consolidation.
So may be you can say "Hmmm", the system is working and is in fact getting better.

Jokes aside, I do hope that the correction continues for a while more. I would love to see a lower low in indices and that would make me more comfortable going forward.

The reason that we have for the 11 points correction in SPX is the same that was given on the way up. i.e. fear of the cliff. But if I am allowed to put in my 2 cents, I would say, cycles did not bottom yet although they are close to. The 1st ideal target would be around 1415-1420 in SPX and a close below that should take it closer to 1400. But again, time is running out. Therefore, at this point of time, I do not have any price target, only time target. Don't bother about the end of the world stories. 

You may want to watch this clip from Bloomberg

I think the circus will continue for a while.

Gold is now around $ 1670 and here my price target is around $ 1650, not a huge drop but enough to shake weak hands out. For 2013, it is going to be a huge winner. 

Let us see how far the correction goes and whether it goes any further at all. Again, no need to front run or take any positions. Time for actions is coming soon and we remain alert and keep the powder dry.

Thanks for sharing my thoughts. Hope you remember the Amazon link if you need it for your holiday shopping.

Tuesday, December 18, 2012

Quick Note

Quick note today as I am running late with an assignment.

The short trade of silver was triggered today, but I would urge readers to keep a tight rolling stop.  The stop would depend on your risk tolerance level but I personally would keep it really tight. For e.g. right now silver futures (/SI) is at $ 31.82 and in this situation my stop would be around $ 32.25. Better still, if you have not taken the trade, rather wait it out for the cycle to bottom by end of the year.

Wheat is showing the positive consolidation pattern and I am waiting it to break above $ 820, re-test the break and make that as new support, to go long.

Equity indices are on fire but lots of divergences for comfort. VIX has a negative divergence with SPX and so has Dr. Copper. So far cycles have not bottomed yet so I am not long but I have identified some very nice and juicy numbers for going long in a few weeks time.

We may see some pull back starting tomorrow afternoon but no need to guess and front run. Let everything line up in a row before we open fire.

That's all for tonight. Will see you tomorrow with a more detailed report.

Without Medicare, There is Nothing There

The big driver of the national debt is medicare spending, made worse by Obamacare.  This subject is "off the table" according to the White House.  Put simply, the Obama administration is prepared for an exploding national debt and is unwilling to make any effort at all to slow that explosion.

Raising tax rates and tinkering with social security cost-of-living adjustments is a joke.  Neither will reduce the future trajectory of the national debt and raising tax rates will actually make things worse.

If Republicans sign on to this deal, you have to wonder what they plan to run for re-election on in 2014.  Why control the House of Representatives, if you intend to do nothing but cave to Obama?  Where is the loyal opposition?

Monday, December 17, 2012

Do Gods Hate Bears?

Poor bears. They are not getting a break. That’s very unfair. What will happen to ZH and all those who are waiting for the next disaster (just round the corner) for the last so many years?

Now that the year is coming to an end, what have we learned? I don’t know about you, but here are few things I would include in the learning experience:

1.       News is noise: Believe me, very rarely price moves based on news. Rather, it is the price action which makes the news. Only few months back, analysts were falling over each other to bring positive news from Apple and up the price target. Now that Apple is around $ 500, they are finding news to downgrade it. My take, stay away from news, mute the talking heads and stop reacting to things.
2.       Stop chasing beta: The losses arise because we take undue risk. We take risk because we want to chase performance.  Relax; stop chasing some imaginary benchmarks, stop comparing how others are doing. Just focus on what is your own goal and be realistic about it.
3.       Don’t listen to too many gurus: I have seen otherwise intelligent folks reading 100s of blogs and newsletters and getting confused in the process. Identify someone who has been consistent and stick with him/her. Everyone is correct at some point or other. Even a broken watch shows correct time twice a day. The trick is to find someone who is correct more times than not.  But use him/her as a pole for pushing the boat. Nothing beats your own analysis and due diligence. After all, it is your money which is at stake.

Back to markets, thank my lucky starts I did not short the indices last week. I should run a subscription service just to advice folks not to front run and keep capital safe! In so far as the two picks of last night, I am still waiting for them to break the range. Silver did not test $ 33 nor did it break below $ 32. Wheat is also stuck between $ 800- $ 820 and a consolidation here will be good for going long.  Euro is also in a consolidation mode and despite all the very smart and witty posts regarding its demise, it is holding up.  Short term, we better have some weakness in the market soon before the cycles bottom time wise.

With the market remaining in the chop zone, it is very frustrating for investors and traders who always feel the need to do something. But as I have demonstrated time and again that break up or down of the range, coupled with cycle directions, provide the best guidance in this uncertain market.

That’s all for this evening. Patience is the watchword for now. Thanks for sharing my thoughts. As always stay nimble and stay safe.