June 29, 2011

Short-term: 3 green, 1 yellow
Intermediate-term: 1 green, 3 yellow
Composite: Neutral and improving

For reasons that make no sense at all, the market is turning very positive. There is still resistance just above where we are and this could well be nothing more than a whipsaw and part of month/quarter end manipulation. But one of the reasons I started tracking these indicators was so that they could provide information about the actual market action that clashes with my preconceptions about what the market should be doing. And this is a perfect example of where it is doing just that. Breadth is still not particularly strong but if the market is going up from here breadth will follow. Stay in liquid stocks unless there is compelling value. But until the short-term indicators deteriorate, the market is likely going up.

June 28, 2011

Short-term: 2 green, 2 yellow
Intermediate-term: 2 yellow, 2 red
Composite: Neutral

I’m as unconvinced about the future of the market as my indicators. We’re also at month-end and quarter-end, along with the technical stuff mentioned yesterday. And QE2 ending (formally – the Fed is still finding ways to give free money to its favorites) in a few days. And earnings season coming up. And Greece/eurozone. And US debt-limit arguments.

Combine all that with anemic summer volume and it is hard to make a case that anything significant/meaningful will actually happen. The market is too volatile right now to be classed as “complacent”.

June 27, 2011

Short-term: 2 green, 2 yellow
Intermediate-term: 3 yellow, 1 red
Composite: Neutral but deteriorating

The market is at a crossroads. Just above a rising 200 day average, below a falling 50 day average. My indicators show that the pullback to date hasn’t been long enough, deep enough, or with enough volume to indicate that a healthy bull market can resume. Technically, when the market breaks out of its current wedge, it will make a large continuation move in that direction. The wedge will resolve itself within two weeks or so.

June 24, 2011

Short-term: 4 yellow
Intermediate-term: 2 yellow, 2 red
Composite: Neutral but deteriorating

Strike three on what looks like a failed bounce. I’m going to adjust my composite indicator so that it is less sensitive. That means it will be more likely to miss a trading/technical bounce but that’s not really my preferred time horizon anyway. And the short-term indicators are doing pretty well in indicating the probabilities of those short-term moves.

June 23, 2011

Short-term: 2 green, 1 yellow, 1 red
Intermediate-term: 1 yellow, 3 red
Composite: Neutral but deteriorating

Another day where the bounce is met with selling. Strike two. The positive divergence was large cap tech. Ideas I like are — AAPL (Apple) and CHL (China Mobile) which had news today that could carry both (CHL will carry iPhone starting in a few months); STE (Steris) – medical sterilization equipment is not affected by general economy; and JEC (Jacobs Engineering) – an infrastructure play for the next round of fiscal stimulus. All have value, upside that can outperform a trading bounce, some resistance to a further decline in the general market, and for the smaller companies stable/good institutional shareholders.

June 22, 2011

Short-term: 2 green, 1 yellow, 1 red
Intermediate-term: 3 yellow, 1 red
Composite: Neutral

A poor follow-through day is not good news for this bounce. And most shares had no liquidity – high bid-ask spreads, computer/automated programs drove most of what did trade.

In more significant “under the headlines” news, word is leaking out that money market funds in the US are now heavily levered to commercial paper issued by European banks. They do not have significant business in the US that generates USD. So how are they going to generate the dollars to pay off the commercial paper? Money market funds — marketed as a “safe” cash alternative — have now become a major bet on a currency squeeze and on the balance sheet quality of European banks and on a Greece bailout. With zero rewards to be delivered to fund holders – if the bet pays off. Money markets have now become part of the Wall St scam. The Federal Reserve knows this – it was mentioned by Bernanke at his press conference yesterday.

This creates a perverse problem. There is no escape from volatile markets in “cash”. At least not if that cash is in the form of money markets. Money market fund holders are now checkmated. We are now a full participant (well not a “full” participant since we will receive no rewards/bonuses – only expenses/risks) in all the financial chicanery merely by “sitting on the sidelines” with “cash” in a “safe” money market fund. If those scare quotes scare you, they should. Because when risk is transferred to those who are merely demanding that a currency serve as a unit of account; then the currency no longer really functions as money.

This really has become a completely insane financial world. Zero-yielding money market funds now require a freaking HEDGE in order to preserve the principal. Longer-term, this means only one thing — get physical gold and silver in your possession and out of the banking system. Not futures, not leveraged, not with debt, not miners, not ANY of the financial/paper crap that has built up around everything. That doesn’t mean all your “cash” devoted to that — because, like it or not, gold/silver are NOT legal money and they never will become so. They may become de facto money if/when the entire financial/legal de jure fiat money system breaks apart. But that is solely emergency fund or EOTWAWKI.

For everything else — your long-term plans re “retirement” (a quaint 20th century notion that will soon die) or other long-term saving — you are stuck in the world of financial risk with no escape (and no reward unless you actively manage that risk). And in that world, the dollar is actually massively undervalued against other currencies — most especially against the Swiss france, the commodity currencies (A$, NZ$, C$), and to a lesser extent Yen, Euro, Pound. Unfortunately also, in that world, “value” doesn’t really drive trading strategies in shorter time horizons.

As an aside. This is perhaps another example where we will be forced to emulate the “Japanese housewife”. Who recognizing that their savings would yield nothing but still risk everything, decided to embrace the risk, learn about it, and become a currency carry-trader.

June 21, 2011

Short-term: 2 green, 2 yellow
Intermediate-term: 3 yellow, 1 red
Composite: Neutral

Pretty significant improvement in the market. Still more characterized by a reduction in selling pressure than by an increase in buying pressure but that is also rather typical in a V-type bounce.

There does appear to be a cash crunch in Asia – originating in China. Short-term interbank rates have doubled in the last week and short-term interest rates are now over 8% and the highest in 3 years. The government has ordered banks to increase reserves which will mean that they are going to be pulling loans/credit from their customers. And the yield curve is now sharply negatively sloped — which means only very short-term loans will be available. Monetarily, this usually indicates a recession is being forced. This will likely have an impact outside Asia because Asia is the source of the global demand for commodities and the main engine for economic growth in the world.

These two are very contradictory forces. The Western equity markets are bouncing while Asian credit markets are indicating a future deflationary squeeze on global trade. It’s usually safer to assume the credit markets are smarter than the equity markets. I don’t think this time is different.

June 20, 2011

Short-term: 3 green, 1 yellow
Intermediate-term: 1 yellow, 3 red
Composite: Bearish but improving

A top-down technical bounce is under way. Looks like the institutions either a)did not need specific news of whatever happens re Greece or b)they are buying now to sell on the news later. That, combined with the technical investor crowd (lots of stocks around 200 day average) means that this bounce is sustainable for a short while. How long depends on how it broadens out.

By top-down I simply mean a market that is driven by the institutional need to deploy cash into asset classes via indexes. The indexes drive the individual stocks vs the stocks driving the indexes. This also means the continuation of “everything is correlated with everything else” and there is no reward for effort devoted to fundamental analysis.

Sharks Eat Themselves Too

Every minnow understands that the investment ocean is a perilous place since we are usually the ones who are eaten by the sharks. But once in a blue moon, the sharks fight amongst themselves. Presumably only when there aren’t enough minnows around. These rare fights are the only opportunity to see behind the curtain to see the standard M.O. of sharks. Here’s one of those fights. Coca Cola is accusing Goldman Sachs of manipulating metals prices via its ownership of the metals warehouses at metals futures exchanges. I’m excerpting pieces from the links on the assumption that the linked content will disappear at some point:

Wall St Eyed in Metal Squeeze
Goldman Sachs Group Inc. and other owners of large metals warehouses are being scrutinized by the London Metal Exchange after being accused by users like Coca-Cola Co. of restricting the amount of metal they release to customers, inflating prices.

The board of the LME met on Thursday to discuss complaints from aluminum users and market traders, who say operators of warehouses, which also include J.P. Morgan Chase & Co. and Glencore International PLC, should be forced to allow the metal out more quickly to meet demand……..

Goldman, through its Metro International Trade Services unit, owns the biggest warehouse complex in the LME system, a series of 19 buildings in Detroit that house about a quarter of the aluminum stored in LME facilities…..

Coca-Cola and other consumers say that Metro in particular is allowing the minimum amount of aluminum allowed by the LME—1,500 metric tons a day—to leave its facilities, and that Metro could remove much more, erasing supply bottlenecks and lowering premiums for physical delivery in the process…..

Coca-Cola, which has complained to the LME, says it can take months to get the metal the company needs, even though warehouses are allowing aluminum to come in much more quickly. Warehouses, meantime, collect rent and other fees…..

Since Goldman bought Metro early last year, the wait time for aluminum delivery in Detroit has increased to about seven months.

Metro charges its customers 42 cents a day for storing one metric ton of aluminum in Detroit, which is about the industry average. At 900,000 tons in the warehouses, Goldman is earning $378,000 a day on rental costs, or about $79 million in seven months.

Metro, meantime, is taking in metal. Metro also offers cash incentives to producers like Rio Tinto Alcan to store their metal in Metro’s sheds for contracted periods, sometimes as much as $150 a ton, according to traders.

Once the metal is in the warehouse, the producers sell ownership to this metal on the open market. The new owner can’t collect his metal for seven months because of the bottleneck. For that period, the new owner is stuck paying rent to Metro.

In recent years, major investment banks like Goldman and J.P. Morgan and commodities houses like Glencore have been snapping up warehouses around the world, turning the industry from a disperse grouping of independent operators into another arm of Wall Street…..The transformation has raised questions about whether the investment banks, which also have big commodity-trading arms, are able to use their position as owners of warehouses to manipulate prices to their advantage.

How Goldman Sachs Created the Food Crisis

Futures markets traditionally included two kinds of players. On one side were the farmers, the millers, and the warehousemen, market players who have a real, physical stake in wheat. This group not only includes corn growers in Iowa or wheat farmers in Nebraska, but major multinational corporations like Pizza Hut, Kraft, Nestlé, Sara Lee, Tyson Foods, and McDonald’s — whose New York Stock Exchange shares rise and fall on their ability to bring food to peoples’ car windows, doorsteps, and supermarket shelves at competitive prices. These market participants are called “bona fide” hedgers, because they actually need to buy and sell cereals.

On the other side is the speculator. The speculator neither produces nor consumes corn or soy or wheat, and wouldn’t have a place to put the 20 tons of cereal he might buy at any given moment if ever it were delivered. Speculators make money through traditional market behavior, the arbitrage of buying low and selling high. And the physical stakeholders in grain futures have as a general rule welcomed traditional speculators to their market, for their endless stream of buy and sell orders gives the market its liquidity and provides bona fide hedgers a way to manage risk by allowing them to sell and buy just as they pleased.

But Goldman’s index perverted the symmetry of this system. The structure of the GSCI paid no heed to the centuries-old buy-sell/sell-buy patterns. This newfangled derivative product was “long only,” which meant the product was constructed to buy commodities, and only buy….

This imbalance undermined the innate structure of the commodities markets, requiring bankers to buy and keep buying — no matter what the price. Every time the due date of a long-only commodity index futures contract neared, bankers were required to “roll” their multi-billion dollar backlog of buy orders over into the next futures contract, two or three months down the line. And since the deflationary impact of shorting a position simply wasn’t part of the GSCI, professional grain traders could make a killing by anticipating the market fluctuations these “rolls” would inevitably cause. “I make a living off the dumb money,” commodity trader Emil van Essen told Businessweek last year. Commodity traders employed by the banks that had created the commodity index funds in the first place rode the tides of profit…..

Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds. To put the phenomenon in real terms: In 2003, the commodities futures market still totaled a sleepy $13 billion. But when the global financial crisis sent investors running scared in early 2008, and as dollars, pounds, and euros evaded investor confidence, commodities — including food — seemed like the last, best place for hedge, pension, and sovereign wealth funds to park their cash…..

The result of Wall Street’s venture into grain and feed and livestock has been a shock to the global food production and delivery system. Not only does the world’s food supply have to contend with constricted supply and increased demand for real grain, but investment bankers have engineered an artificial upward pull on the price of grain futures. The result: Imaginary wheat dominates the price of real wheat, as speculators (traditionally one-fifth of the market) now outnumber bona-fide hedgers four-to-one.

Today, bankers and traders sit at the top of the food chain — the carnivores of the system, devouring everyone and everything below. Near the bottom toils the farmer. For him, the rising price of grain should have been a windfall, but speculation has also created spikes in everything the farmer must buy to grow his grain — from seed to fertilizer to diesel fuel. At the very bottom lies the consumer.

Don’t expect the US (or UK) government to do anything. The Vampire Squid owns the government and those same government bonds are what are being used to finance those warehouse operations. The bigger the deficit our government runs, the more money the squid has to do stuff like this. There is no end/reversibility to the cycle because it costs nothing to create money itself. Those warehouse operations are pure central planning — Goldman Sachs via the release of physical is deciding which metals/oil/food consumers get to live and which will die. Pretty neat — in a “those bastards should be hung” sort of way.

As a minnow, the best thing to take from this is — never assume that commodities prices are actually an expression of actual supply and/or demand.

Closed End Funds

There is only one exception that I make to making my own investment decisions. Closed end funds provide three things that I can’t get on my own:
1. A way to invest in some asset classes that are difficult to invest in in any other way.
2. A vehicle that is less immune than either ETF’s or mutual funds to the crowd behavior of either minnows or sharks.
3. A level of instant diversification to make decision making easier so I can focus my attention elsewhere.

Two CEF’s currently meet my buy criteria. No CEF is ever a screaming buy-now. More like a nibble so dollar-cost averaging can work in them.

CHN – China Fund – portfolio is mostly small/mid cap growth companies listed in Taiwan, Hong Kong and Shanghai (A, B, H shares) – portfolio is currently overweight healthcare and consumer and underweight tech and financial – fund has been around for 20 years – selling at a 13% discount to the underlying equities – one of which is a company called Fook Woo (couldn’t resist pulling that one out)

CEF – Central Fund of Canada – portfolio is entirely gold and silver bullion in a ratio of 1:50 (by oz) held in a segregated, allocated account in Canada – fund has been around for 50 years – current gold holdings are roughly comparable to the gold holdings of the central bank of Finland – currently selling at a very slight discount to the spot price of gold/silver (for the first time since 2005). This fund is a far better vehicle for gold/silver exposure than the big ETF’s – for reasons which I won’t explain but which give CEF a premium when gold/silver prices are rising. The current discount is also very revealing. CEF never sells at a discount unless gold and silver are stagnant/choppy for a somewhat extended period. The discount itself is a far better predictor of gold/silver prices than the hype/BS of those who prognosticate about gold/silver. So it makes for a better insurance hedge part of a financial portfolio (that can’t invest in physical – which is the EOTWAWKI hedge). Never chase CEF just to get an order filled.