?Our medical technology has completely outstripped our ability to pay for it,? said Boris Schlossberg, a foreign currency strategist at BK Forex Advisors.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
When climbing peaks in the Alps, the High Sierras, or the Himalayas, you know you?re getting close to the top when the air becomes thin, it is difficult to breathe, and your nose suddenly starts to bleed. I remember trying to smoke a cigarette at 20,000 feet on Mount Everest. If you didn?t keep puffing it went out immediately because of the lack of oxygen.
I am starting to suffer from a similar woozy feeling from the US stock markets. I have long since quit smoking, but the higher the indexes go, the more light headed I feel.
Take a look at the chart below produced last Friday by my friends at StockCharts.com. It shows the NYSE advance-decline ratio smoothed by a five day moving average. We have since blasted through to a new high for the year. The last time we were this high in July, the S&P 500 commenced a 23% swan dive down to 1068.
If you failed to protect yourself from this gut churning plunge, there is a good chance your clients fired you at the end of last year and you are now trolling through Craigslist looking for new employment opportunities. If you did follow the advice of this letter at the time, you sold short the S&P 500, the Russell 2000, gold, the Euro, and the Swiss franc. That enabled you to make a bundle, and your clients are now showering new money upon you.
I was hoping a sweet spot would set up that would allow me to pick up some meaty short positions, like the leveraged short (SDS) and put options, once a squeeze took us up to 1,350 in the S&P 500. Looking at the slow, low volume grind we are getting, I may not get my wish. Instead, we may get a choppy, rolling type top at a lower level that frustrates the hell out of everyone. We could top out as low as 1,312 instead. Every hedge fund trader I know is just sitting on his hands waiting for a decent entry point to present itself.
Aggressive traders may start scaling in short positions from here in small pieces. Until then, discretion is the better part of valor. Only buy here if your clients have a long term view, a very long term view.
Mount Everest 1976
Is It Time to Sell Yet?
Have I seen this movie before? Three years ago, analysts were predicting default rates as high as 17% for Junk bonds in the wake of the financial meltdown, taking yields on individual issues up to 25%. Liquidity in the market vaporized, and huge volumes of unsold paper overhung the market. To me, this was an engraved invitation to come in and buy the junk bond ETF (JNK) at $18. Since then, the despised ETF has risen to $39, and with the hefty interest income, the total return has been over 160%. What was the actual realized default rate? It came in at less than 0.50%.
Fast forward to a year ago (has it been that long?). Bank research analyst Meredith Whitney predicted that the dire straits of state and local finances will trigger a collapse of the municipal bond market that will resemble the ?Sack of Rome.? She believed that total defaults could reach $100 billion. This cataclysmic forecast caused the main muni bond ETF (MUB) to plunge from $102 to $93. Oops! That turned out to be one of the worst calls in the history of the financial markets. But the fees she earned landed her on Fortune?s list of the wealthiest women in America.
I didn?t buy it for a second. States are looking at debt to GDP ratios of 4%, compared to 100% for the federal government. They are miles away from the 130% of GDP that triggered distressed refinancings by Italy, Greece, Portugal, and Ireland.
The default risk of muni paper is being vastly exaggerated. I have looked into several California issues and found them at the absolute top of the seniority scale in the state's obligations. Teachers will starve, police and firemen will go on strike, and there will be rioting in the streets before a single interest payment is missed to bond holders.
How many municipal defaults have we actually seen in the last 20 years? There have only been a few that I know of. The nearby City of Vallejo, where policemen earn $140,000 a year, is one of the worst run organizations on the planet. Orange County got its knickers in a twist betting their entire treasury on a complex derivatives strategy that they clearly didn't understand, sold by, guess who, Goldman Sachs (GS). The Harrisburg, PA saga continues. To find municipal defaults in any real numbers you have to go back 80 years to the Great Depression. My guess is that we will see a rise in muni bond defaults. But it will be from two to only a dozen, not the hundreds that Whitney is forecasting
Let me preface my call here by saying that I know didly squat about the muni bond market. It has long been a boring, quiet backwater of the debt markets. At Morgan Stanley, this is where you sent the new recruits with the 'C' average from a second tier schools who you had to hire because his dad was a major client. I have spent most of my life working with top hedge funds, offshore institutions, and foreign governments for whom the tax advantages of owning munis have no value.
However, I do know how to use a calculator. Decent quality muni bonds now carry 6% yields. If you buy bonds from your local issuer, you can duck the city, state, and federal tax due on equivalent grade corporate paper. That gives you a pre tax yield of 11%. While the market has gotten a little thin, prices from here are going to get huge support from these coupons.
Since the tax advantages of these arcane instruments are highly local, sometimes depending on what neighborhood you live in, I suggest talking to a financial adviser to obtain some tailor made recommendations. There is no trade for me here. I just get irritated when conflicted analysts give bad advice to my readers and laugh all the way to the bank. Thought you should know.
There are two additional tail winds that munis may benefit from in 2012. No matter what anyone says in this election, your taxes are going up. Balancing the budget without major revenue increases is a mathematical impossibility. That will increase the value of the tax free aspect of munis. A serious bout of ?RISK OFF? that sends the Treasury market to a new all-time high, as I expect, will cause munis to rise even further.
This is Not the Muni Bond Market
Some people will do anything for a good stock tip. Futures magazine, published a complimentary profile about me in their recent issue. The publication is associated with the highly educational and informative annual Hard Asset Conferences in New York, San Francisco, and soon to be Chicago, where I have been a regular keynote speaker and panelist. For a quickie update on my global views, please take a look at the piece by clicking here. You might also get a peek into my murky and mysterious past. They take nice pictures too.
There is no doubt that the recent jobs data has been absolutely blistering. On January 4, weekly jobless claims plunged by 15,000 to 372,000, well below the 400,000 that is required for a sustainable recovery. The next day, the ADP report delivered a gob smacking 325,000 in job gains for December. Then the big kahuna surprised to the upside, the December non-farm payroll, reporting 200,000 new jobs, taking the unemployment rate to a three year low at 8.5%.
Are happy days here again? Is it off to the races? More importantly, should we be adding risk positions here in expectation of a continued economic miracle?
I think not. You all know well that I am a history buff. But I know enough about history to understand that it can be a dangerous thing. Don?t let these numbers lull you into a false sense of security. Any slavish reliance on the past can cause you to become history, if you?re not careful.
There is no doubt that a seasonal surge in hiring caused by the holidays has created this spike. Normally, governments and agencies smooth these figures through a seasonal adjustment process. The problem arises when the structure of the economy is changing faster than can be reflected in these seasonal adjustments, as it is now.
A large part of our economy is moving online more rapidly than most people realize. According to comScore, a marketing data research firm, online sales leapt by 15% to $35.3 billion during the November-December holiday period, an all-time high.? I speak from a position of authority here as I happen to run one of the most successful financial sites on the Internet, which I kicked off four years ago with a $500 investment.
Much of this migration is being captured by Fedex and UPS, the nexus at which Internet commerce meets the real world. After all, virtual products require a real world delivery. This explains why the couriers are seeing a booming business in an otherwise flat economy. Fedex hired 10,000 temporary workers to deal with the Christmas surge in 2011, a gain of 18% over the same period last year. UPS added a stunning 55,000, a 10% increase.
Watch for the other shoe to drop. That will become apparent when that the newly hired become the newly fired, leading to a sudden and rapid deterioration of the jobs data. This could be the information the stock market and other risk assets need to put in a top for the year. The scary part is that this may happen sooner than you think.
Yup, I Just Got My Pink Slip Too
After pulling some strings at the Pentagon, I managed to gain access for readers of The Diary of a Mad Hedge Fund Trader to a briefing from General Douglas Fraser. He is a four star Air Force General who is the commander of US Southern Command (SOUTHCOM), one of nine unified Combatant Commands in the Department of Defense.
Its area of responsibility encompasses Central America, South America, and the Caribbean. SOUTHCOM is a joint command comprised of more than 1,200 military and civilian personnel representing the Army, Navy, Air Force, Marine Corps, Coast Guard, and other federal agencies.
General Fraser graduated from the Air Force Academy in 1974 and is fluent in Spanish. He has commanded Air Force combat units in Japan, Korea, and Germany. He was later a senior officer in the Space Operations Command. General Fraser joined SOUTHCOM in 2009 after serving as deputy commander of the Pacific Command for two years.
The event will be held on Tuesday, January 24, 2012 at 6:00 PM at the Marines Memorial Association, 609 Sutter Street, San Francisco, CA 94102. To register, please click here , check the box next to ?SOUTHCOM Commander?, then click on ?next? and complete the registration process.
This is a rare opportunity for civilians to meet one of America?s most senior military officers. Expect every retired general and admiral in the San Francisco Bay area to attend, along with many active duty members of the US Marine Corps. Absolutely no recordings of any kind are permitted. If you want to say hello, I?ll be standing next to the registration desk, wearing a blue cap with ?USS Potomac? in gold letters. Just ask for USMC Captain John Thomas.
Before I left Chicago, I managed to catch up with my old friend, David Hale, for a cup of tea at the city?s prestigious University Club. I have been using David as my de facto global macro economist for decades, and I never miss an opportunity to get his updated views. The challenge is in writing down David?s eye popping, out of consensus ideas fast enough, because he spits them out in a rapid fire succession.
Hale believes that Q4 will come in much hotter than expected, delivering US growth possibly as high as 3.5% to 4%. If the payroll tax cuts and unemployment benefits are renewed once again, these alone could be worth 1% in GDP this year. The streak could spill into Q1, 2012, staying as firm as 2%-2.5%.
After that, the sushi hits the fan, and the numbers will threaten another dip. Europe will become a major drag, which accounts for 14% of US exports. A slowing by emerging markets, led by China and India, will also take its toll. This will lead to falling private demand and weak commodity prices. But David is not predicting a crash by any means.
To keep up with trends in the Middle Kingdom, Hale confesses to reading The People?s Daily News online edition each morning. He formerly worked as chief economist for Kemper Financial Services from 1977 to 1995, and Zurich Financial Services, which he joined as chief economist in 1995. He advised the group?s fund management and insurance operations on both the economic outlook and a wide range of public policy issues until 2002, when he founded David Hale Global Economics. To visit David?s website, please click here.
Does Hale see any outstanding investment opportunities out there? He sure does. Greece, of all countries, is presenting a generational opportunity. Big, state owned monopolies are being broken up. The unions are being tamed. Banks are trading at 10% of book value. The Hellenic Stock Exchange, which has cratered 65% since March, is about to end taxes on trading. Major structural reforms are being pushed through at a breakneck pace. Tourism, its biggest industry, is ready to rocket. A plunging Euro is giving it an important cost advantage.? After a long series of violent strikes and recent horrific economic performance, the country could return to positive growth as early as 2014. We could all be dining on moussaka, gyros, and Metaxa sooner than we think.
Is This in Your Future?
Traders and investors have grown comfortable with a steady stream of corporate earnings reports. 2011 as a whole may come in as high as $15 a share for the S&P 500. But the gravy train may end starting next week.
The number of companies reducing guidance and downshifting expectations is at a three year high. Similarly, analyst earnings forecast cuts are at a ten year high. Among the 25 companies that have already reported, only 60% beat estimates, another new low.
In my own 2012 Annual Asset Class Review I predicted that S&P earnings would slow from $15 a share to only $5, and I received a lot of abuse from the hedge fund community for being that optimistic. Morgan Stanley has since joined in with its own bucket of cold water by predicting a 7% decline in the stock market this year, blaming deceleration, disfunctionality, and deleveraging, matching my own expectation.
The announcements kick off after the Monday close when aluminum (aluminium to you Brits and Ausies) producer, Alcoa (AA), reports.? Costs have been rising, sales prices have been falling, creating a squeeze on earnings. The technical picture looks particularly dire, with a double top in place and a descending triangle formation in the works. Will this be a preview of what a second ?lost decade? will look like? Has the stock market figured this out yet? Not!
Those Q4 Earnings Aren?t Going to Be So Pretty