Monday, August 31, 2009
baltic dry as a leader
UPDATE: more from fund my mutual fund.
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renting in chicago
Friday, August 28, 2009
killing off retail short interest
Recently, both the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have cautioned against the use of Leveraged Exchange Traded Funds (ETFs).
Their concerns are that these funds are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Because leveraged and inverse ETFs are reset daily, FINRA and the SEC caution against the use of these funds for investors who plan to hold them for longer than one trading session.
Princor Financial Services Corporation, like several broker-dealers in the industry, has taken the position to no longer allow access to leveraged ETFs, beginning on Friday, August 28, 2009. Princor® will no longer allow purchases in these securities; however, liquidations will continue to be permitted.
i don't doubt that some folks have mauled themselves with ultra proshares -- but that's an argument against defined-contribution retirement planning in its entirety, not any particular instrument. principal and other administrating brokers may not realize that's what they're actually saying, and certainly they don't want to say that, but that is the core of their assertion. if you can't be trusted with a
that is, frankly, an argument i have a great deal of sympathy for -- but i sincerely doubt principal is trying to make it. indeed it isn't hard to imagine other reasons for a forced buy-in of retail short interest, particularly amid the aftermath of one of the great asset price collapses in the history of western civilization, one which has sent any number of insurers and other financial intermediaries whose balance sheets are predicated on, among other things, equity price levels to the brink of destruction.
one might expect that such concerted efforts would drive short interest to very low levels -- and indeed, by the tally of bespoke, it has fallen to the level last seen in february 2007. of note is that bespoke expresses short interest as a ratio to the float; shares short outstanding here. one can see that NYSE shares short are down on the order of 20% from august 2008, but the short interest ratio is down closer to 45%. this is testament to the massive equity offerings that have flooded the market, particularly in the financial sector, as firms have tried to raise capital.
february 2007 was a period when the S&P was marking new post-dotcom highs just prior to the shudder sent through the markets by the reversal of the chinese equity bubble which, for my money, marked the beginning of the global debt collapse even if american shares continued to rally for some months thereafter. margin debt was then at an all-time high, retail mutual fund cash at an all-time low -- balance sheet risk for retail investors was at a maximum, and the suckers were all in. immediately thereafter paul mcculley introduced much of the investment world to hyman minsky, and we've spent much of the last two-and-a-half years living out minsky's hypothesis.
in any case, i suspect the huge short squeeze of recent months, in combination with excess liquidity from banks and other government funding recipients seeking a return, has provided much of the rocket fuel for the markets since march. though the lesson might have been learned in the aftermath of the financial shares short sale ban in the UK and US in september 2008, sucking forward and eliminating all that future demand through covering and forced buy-ins -- and replacing it with a latent pent-up supply -- creates the potential for a terrible air pocket beneath shares, diminishing both liquidity and future demand. i find few market tells more convincing than extremes in short interest.
UPDATE: pragmatic capitalist also adds that reporting hedge funds haven't been so long (31% net) since june 2008. that's still a far cry from the 47% of early-crisis third quarter 2007.
Thursday, August 27, 2009
treasury default in the cards?
It is not literally impossible that the Federal Reserve could unleash the Zimbabwe option and repudiate the national debt indirectly through hyperinflation, rather than have the Treasury repudiate it directly. But my guess is that, faced with the alternatives of seeing both the dollar and the debt become worthless or defaulting on the debt while saving the dollar, the U.S. government will choose the latter. Treasury securities are second-order claims to central-bank-issued dollars. Although both may be ultimately backed by the power of taxation, that in no way prevents government from discriminating between the priority of the claims. After the American Revolution, the United States repudiated its paper money and yet successfully honored its debt (in gold). It is true that fiat money, as opposed to a gold standard, makes it harder to separate the fate of a government's money from that of its debt. But Russia in 1998 is just one recent example of a government choosing partial debt repudiation over a complete collapse of its fiat currency.
... [U]nconvinced that the Treasury will default? The Zimbabwe option illustrates that other potential outcomes, however unlikely, are equally unprecedented and dramatic. We cannot utterly rule out, for instance, the possibility that the U.S. Congress might repudiate a major portion of promised benefits rather than its debt. If it simply abolished Medicare outright, the unfunded liability of Social Security would become tractable. Indeed, one of the current arguments for the adoption of nationalized health care is that it can reduce Medicare costs. But this argument is based on looking at other welfare States such as Great Britain, where government-provided health care was rationed from the outset rather than subsidized with Medicare. Rationing can indeed drive down health-care costs, but after more than forty years of subsidized health care in the United States, how likely is it that the public will put up with severe rationing or that the politicians will attempt to impose it? And don't kid yourself; the rationing will have to be quite severe to stave off a future fiscal crisis.
it's thought impossible, but it pays to remember rogoff and reinhart as they observed that better than 50% of world governments typically end up in some manner of default during depressions such as this -- a far more common occurrence than hyperinflation. national defaults also generally are not the death sentence one might infer. particularly in the case of the united states, which is a very large component of global economic activity regardless of its fiscal condition, the idea that the country is going to become an international economic pariah is silly. indeed, willfully engaging in hyperinflation would likely be the more chaotic step by far.
so the option is there, if it is needed. much depends on the extent to which the government is compelled to explicitly backstop the financial system and provide fiscal stimulus -- and particularly to what extent social insurance commitments are retracted.
some measure of devaluation of the dollar at some point seems likely to close the american current account deficit, and any default would likely be accompanied by heady dollar trauma. but i continue to think deleveraging will result in deflation and probable relative strength in the dollar in the intermediate term. i think competitive devaluation is far more likely than a unilateral dollar crash, and privately created money emergent of fractional reserve banking is being destroyed on a scale the fed will find difficult to counteract.
UPDATE: two sides of the debate on federal deficits and debt presented by paul krugman, jim hamilton and krugman again. i tend to agree with krugman.
[I]n 1950, federal debt in the hands of the public was 80 percent of GDP, which is in the ballpark of what we’re looking at for 2019. By 1960 it was down to 46 percent — and I haven’t heard that anyone considered America a debt-crippled nation when JFK took office.
So how was that possible? Was it through drastic cuts in defense spending? On the contrary: we’re talking about the height of the Cold War (with a hot war in Korea along the way), and federal spending actually rose as a share of GDP. So yes, it wasn’t entitlement programs, but it wasn’t exactly discretionary either.
How, then, did America pay down its debt? Actually, it didn’t: federal debt rose from $219 billion in 1950 to $237 billion in 1960. But the economy grew, so the ratio of debt to GDP fell, and everything worked out fiscally.
the trick of course is that it wasn't until 1954 that private, as opposed to public, debt reached a minima. the growth seen from the end of the 1953 recession forward to the 1970s -- a period rightfully associated with the peak of american global economic power -- was made possible by the complete resolution of the private debt bubble which popped in 1929 and more than two subsequent decades of household and corporate balance sheet repair. what economic strength was seen in the intervening time was largely a product of government deficit spending -- again, the refinancing through government-derived income of private debts onto the public balance sheet, particularly between 1941-45. and of course there was the assistance in that resolution of an apocalyptic cycle of defaults and bankruptcies.
if we're to return to the kind of growth track that allowed our society to outgrow its debts following the second world war, we first have to use public policy today to effect private sector balance sheet repair. we have done that only modestly thusfar. krugman is of course correct that government deficits have moderated the default cycle in a way that they didn't in the early 1930s. but a monster debt pile remains to be resolved in the private sector, and government -- particularly through the operations of the federal reserve -- has taken steps to delay or even attempt to prevent this resolution at the possible expense of creating even larger debt resolution problems down the road for an economy that has reached zero hour and experienced a classic bout of what minsky called financial instability, leaving it in a very poor position to grow.
this is a long way of saying that america needs to proceed smartly toward a massive expansion of public spending and debt as a means of refinancing the private sector, transferring obligations to the taxpayer through income so as to provide real relief. of course much debt must simply be liquidated -- not all of the private sector obligations will fit under the treasury umbrella with private debts around 300% of GDP outstanding -- and that means a measure of absolute balance sheet contraction. such contraction can hopefully proceed in lockstep with the closing of the current account deficit and weaning the banking sector off wholesale funding. all this, and an efficiency-minded reconfiguration of social insurance as well.
there's a lot on the american plate, no matter how you look at it. but krugman is i think essentially correct -- this is less a problem of mathematical certitude than political will.
case shiller ticks up
I have been waiving warning flags about this statistical house price appreciation for a few months now — since CA house prices started moving up in April — and finally this month some of the larger research shops have started to point to the same things. These are absolutely unprecedented in nature and are wreaking havoc with reported house prices.
particularly interesting at econbrowser was the comment of jm, here appended.
Except in the low end of the market, stimulated by the $8k credit and "investors" scooping up foreclosures, hardly anything is selling here in the Chicago suburbs. Above $500k, especially above $600k, we have multiple years of inventory on the MLS even though only what absolutely has to be sold is listed -- sales rates are down nearly 80% from bubble peak. Yet the asking prices have still fallen very little, almost certainly because they are set by the amounts of the underlying mortgages, and the only way they can go lower is if the mortgage holder agrees to a short sale or forecloses and takes a loss on the REO. So the prices up in middle and high ranges of the market are not market-clearing prices -- only very few sales are being made, presumably to people who either feel they must buy or who think the market is going to come back soon.
Eventually, those homes are going to be foreclosed upon, and sold at much, much lower prices.
sornette and the china echo bubble
sornette's group modeled a window stretching from july 10 to august 10, with a 20-80 confidence interval from july 16 to july 27.
the peak turned out to be august 4, and all future calls by sornette are now worth watching closely.
if this is in fact the bursting of the chinese echo bubble brought on by massive forced lending by the state-managed banking system, there should be plenty of downside left in china. fund my mututal fund discusses steps being taken in china to rein in such lending. and, as pragmatic capitalist has hammered on recently, china has been the leading indicator par excellence in this crisis.
UPDATE: one can also cross reference this post from pragmatic capitalist on the divergence between hong kong equities and the baltic dry index to derive potential motivation for further disruption in stock prices.
UPDATE: more on sornette's group via new scientist.
davidowitz on retail
with thanks to pragmatic capitalist -- howard davidowitz hasn't changed his tune one bit.
"living standards will never be the same." cyclical upticks (such as the current one) will come from time to time on the back of stimulus, but won't last -- "we go right back into the tank," in davidowitz's words. pricing trends in retail indicate pervasive deflationary pressure. his incisive criticism of the obama administration and their projections for growth, revenue and funding capacity for health care expansion among other plans spares nothing.
is it possible to be more dire than davidowitz? "we are in the tank forever. as a country we're out of control. we're in a death spiral. ... we're non-functional." bright spots? extreme value/dollar stores, drugstores (including CVS), major food distributors, rent-to-buy, autozone, kohl's.
I only got through half that video -- too much judgment and emotion for me to put much weight on the analysis, correct though it may be.
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I'm lucky enough to have some family up there to show me around instead. Hardly roughing it, but caught some nice fish. Charter boat business is feeling it up there, as one would suspect. Locals also comment on the reduction of cruise traffic. Commercial fishing is having a bang-up year, though, with big catches and good prices.
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Monday, August 10, 2009
"deleveraging the most leveraged economy in history"
UPDATE: pragmatic capitalist cites as well. i think many underestimate the intensely positive short-run effect that government deficit spending is having right now on an economy that is privately delevering for the longer term. if or when that stimulative spending is phased out by a nervous and divided populist government -- much as the hashimoto government of 1997 did -- the scale of that beneficence will become more tangible.
Friday, August 07, 2009
excess reserves and liquidity
hulbert on ned davis, part 2
Davis has turned his attention to what would signal that it was time to reduce equity exposure and go to cash. He mentioned four indicators, any one of which would likely cause him to start selling:
- Valuation. Davis would look to exit from stocks whenever the P/E ratio on the S&P 500's normalized earnings reaches 20. To be sure, putting this indicator into practice is a bit tricky, since it requires normalizing those earnings -- adjusting them, in other words, for where we are in the economic cycle. Nevertheless, Davis calculates that normalized earnings on the S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 997.08, -5.64, -0.56%) currently stand at "around $60," which suggests that Davis will be looking to start exiting the market at the 1,200 level.
- Sentiment. Davis maintains his own sentiment index, which he calls his "Crowd Sentiment Poll." This index currently stands at 62%, according to Davis, which is just above the 61.5% level that he considers to be the lower bound of "extreme optimism." He says that, on past occasions when this index has risen above 61.5%, its eventual peak has averaged 68%. He says that reaching that level this time around would "be a sign for traders to begin selling weak performers."
- Internal market divergences. The indicator that Davis relies on here is one that was created three decades ago by Norman Fosback, who currently edits a newsletter called Fosback's Fund Forecaster. The indicator is called the "High Low Logic Index," which represents the lesser of new 52-week highs or new 52-week lows as a percentage of all issues traded. In Fosback's book "Stock Market Logic," he describes this indicator's rationale as follows: "Under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows -- but not both. As the [High Low] Logic Index is the lesser of the two percentages, high readings are therefore difficult to achieve. ... When the Index attains a high level, it indicates that the market is undergoing a period of extreme divergence. ... Such divergence is not usually conducive to future rising stock prices." Fortunately for the current market, this index is solidly in bullish territory right now at 0.8%, according to Davis' calculations. He says that it would have to rise to around 2.5% before he would start looking for the exit signs.
- Rising interest rates. Davis has found from his research that one of the best market timing indicators in recent years has been the 26-week rate of change for investment-grade bond yields. With that rate of change currently standing at minus 12.6%, a sell signal from this indicator is not imminent.
The bottom line? Only one of these four indicators is even close to flashing a warning signal right now, which is why Davis is bullish right now.
Thursday, August 06, 2009
the potential for inventory cycle
Paul Krugman has been predicting a double-dip recession based on an inventory bounce. He figures that middle to latter part of this year will have an inventory bounce which will (briefly) make the economy look good again – but will not (in his Keynsian world view) bring back the fragile flower of true sustainable demand and hence will not result in sustained recovery.
That said – the inventory bounce might be very spectacular indeed. I wish to illustrate with an (admittedly) extreme example – the manufacturing of recreational motor boats (scornfully known in the Australian vernacular as “stink boats”). ...
So what do we have
• End sales down 30 percent
• Dealer sales down 60 percent
• Production down 75 percent
Or – as they put itWe produced 13% of what the dealers actually retailed, in terms of even numbers.
Obviously these numbers are unsustainable and either retail sales have to dramatically fall from current levels (unlikely) or production has to grow dramatically...
How else do you spell inventory bounce?
My guess is that the inventory bounce here will be so big as to restore pricing power to (of all things) luxury recreational motor boats manufacturers.
This looks like a V-shaped recovery – at least for stink boat manufacturers.
Whilst there are inventory shortages in far more important industries (see this story from the WSJ about auto-dealer inventory shortages) they won’t quite be of the scale of Brunswick. But the risks to the inventory driven manufacturing economy are in my view (and quite surprisingly) to the upside.
in the competition between secular private sector deleveraging and inventory dynamics, inventory dynamics can win for a time. the inventory cycle might drive something that looks (for a time) very like a real recovery -- even without any end demand pickup whatsoever.
Wednesday, August 05, 2009
trimtabs on employment
“The personal income report the Bureau of Economic Analysis released Tuesday contained huge downward revisions to wage and salary growth,” said Biderman. “Now that the BEA is using unemployment insurance reports from the first quarter to estimate current wage and salary growth, its data confirms what we have been reporting for months.”
The BEA’s estimates of wages and salary growth changed from year-over-year declines of 0.8% in April and 1.1% in May to year-over-year declines of 4.0% in April and 4.2% in May. Also, the BEA reported that wages and salaries dropped even more sharply in June, falling 4.7% year-over-year.
“Two months ago, we asked BEA economists how they reconciled the huge declines in real-time tax deposits with their report of a modest decline in wages and salaries,” said Biderman. “They could not answer our question. We know now that by ignoring real-time data, the BEA was providing an inaccurate view of the economy’s health.”
this perhaps helps to explain the continuing softening of econometrics, not to mention surprisingly soft deposit growth among commercial banks in spite of increasing savings rates. calculated risk takes on today' comments from proctor & gamble as well as the non-manufacturing ISM.
[T]he ISM non-manufacturing numbers this morning and the P&G numbers matter. Away from auto sales, it is hard to find much evidence of a pick up in consumer demand.
I've seen some argue for a business led recovery. That is the wrong order. Sure, there will probably be some inventory replenishment since some companies probably cut back too far, but most companies already have too much capacity, so after the inventory adjustement what will happen? They will not need to expand until their sales pick up significantly.
So I still think the keys are Residential Investment (RI) and PCE, and therefore I think the recovery will be sluggish. Note that CRE and non-residential investment in structures is a lagging indicator for the economy.
the idea of a business-led recovery amid 65% capacity utilization is something i find hilarious. there's no doubt that the real elements of the leading economic indicators are reviving a bit, giving weakly positive contributions to the LEI over the last quarter. the harder question to answer is, "what does that represent?" -- and i'm of the belief that the pickup in manufacturing activity amounts to channel stuffing following an epic first quarter shutdown. we are continuing to see little to no evidence of a pickup in consumer demand, while -- as inventories decline -- inventory-to-sales remains near cycle highs and very far indeed from the levels which globalized industry honed (and levered) to just-in-time delivery can profitably tolerate.
i admire edward harrison of crdit writedowns immensely, and his analysis of employment trends is valuable. he shows the ISM manufacturing report to be indicating near-recovery.
Given this data and other recent bullish economic reports, don’t be surprised if Q3 GDP change prints a positive number. If it does, it is very likely that the recession is all but over right now. Mind you, I still am talking about a weak Q4 or Q1 2010 recovery and possible double dip. But, I am aware that it is mostly upside economic risk that is apparent in the US. The data cannot be ignored. And right now, it is very bullish.
that double-dip, with a middle "expansion" consisting entirely of channel stuffing and government stimulus, looks fairly probable to me. whether or not third quarter GDP prints positive is immaterial on the longer view, in my opinion. a not-entirely-useless analogy might be the landing one sometimes finds between floors in a long flights of stairs -- less the end of the decline than a pause in it.
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declining farmland values
Commodities are not in a bubble, the USD is in a death spiral; as the dollar crashes commodities rise. Did that help you understand why you should be buying agriculure before it goes up in price?
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Sunday, August 02, 2009
first, buying climaxes -- this is a condition of the underlying components of the index wherein an issue makes a high in the previous five days which is also a 65-day high, but then also reverses to close on this day lower than any of the five previous closes. it is intended to mark big momentum shifts in the underlying which may not be apparent in index price.
some 14.6% of the S&P 500 met that condition on friday, in spite of the index giving the best closing price since november 4. i ran some date-marked red lines through previous spikes in buying climaxes to give some kind of feel for how the condition typically resolves. particularly curious is the divergence with index price -- often, buying climax spikes are part of broader price corrections reflected in the index price. is there any special place for those arising on new five-day high closes?
the previous dates for this infrequent condition: 7/15/2005, 1/6-7/2004, 6/12-13/2003, 1/3/2001, 2/19/1991, 12/12/1990. from five of six of these points there was a possibility of buying lower during a multiweek market stall. just as notably, however, all six saw somewhat higher index prices ahead of trouble -- as though some time was needed to dissipate momentum. small sample size, however, should weigh on the applicability of this particular divergence as a predictor.