Global Market Comments
August 15, 2018
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Global Market Comments
May 21, 2018
Fiat Lux
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When I was a little kid in the early 1950s, my grandfather used to endlessly rail against Franklin Delano Roosevelt. The WWI veteran, who was mustard gassed in the trenches of France and was a lifetime, died-in-the-wool Republican, said the former president was a dictator and a traitor to his class who trampled the constitution with complete disregard. Candidates Hoover, Landon, and Dewey would have done much better jobs.
What was worse, FDR had run up such enormous debts during the Great Depression that, not only would my life be ruined, so would my children's lives. As a six year old, this disturbed me deeply, as it appeared that just out of diapers, my life was already pointless.
Grandpa continued his ranting until three packs a day of unfiltered Lucky Strikes finally killed him in 1977. He insisted until the day he died that there was no definitive proof that cigarettes caused lung cancer, even though during to war they were referred to as ?coffin nails?.
What my grandfather?s comments did do was spark in me a permanent interest in the government bond market, not only ours, but everyone else?s around the world.
So, whatever happened to the despised, future ending Roosevelt debt? In short, it went to money heaven.
I like to use old movies as examples. Remember, when someone walked into a diner in those old black and white flicks? The prices on the wall menu? said: ?Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.?
That is where the Roosevelt debt went. By the time the 20 and 30-year Treasury bonds issued in the 1930s came due, WWII, Korea, and Vietnam happened, along with the great inflation that followed.
The purchasing power of the dollar cratered, falling roughly 90%, Coffee was now $1.00, a hamburger $2.00, and a cheap steak at Outback cost $10.00. The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.
Who paid for this free lunch? Bond owners, who received minimal and, often, negative real inflation adjusted returns on fixed income investments for three decades.
In the end, it was the risk avoiders who picked up the tab. This is why bonds were known as ?certificates of confiscation? during the seventies.
This is not a new thing. About 300 years ago, governments figured out there was easy money to be made by issuing paper money, borrowing massively, stimulating the local economy, and then repaying the debt in devalued future currencies.
This is one of the main reasons why we have governments, and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.
Ever wonder how the new, impoverished United States paid for the Revolutionary War? It issued paper money by the bale, which dropped in purchasing power by two thirds by the end of the conflict in 1783. The British helped too by flooding the country with counterfeit paper money.
The really fascinating thing about financial markets so far this year is that I see history repeating itself. Owners of bonds had a great start, but I think the worm has turned.
I agree with bond maven, Geoffrey Gundlach, that bonds peaked in both the US and Europe last week, and that we are eventually heading back to a 2.75%-3.0% yield on the ten-year Treasury bond. Geoffrey has been long bonds until now.
Sell every rally for the rest of the year.
Bondholders can expect to receive a long series of rude awakenings when they get their monthly statements. No wonder Bill Gross, the former head of bond giant, PIMCO, says he expects to get ashes in his stocking for Christmas this year.
The scary thing is that we could be only two years into a new 30-year bear market for bonds that lasts all the way until 2042.
This is certainly what the demographics are saying, which predict an inflationary blow off in decades to come that could take short-term Treasury yields to a nosebleed 12% once more.
That scenario has the leveraged short Treasury bond ETF (TBT), which has recently leapt from $31 to $43, soaring all the way to $200.
If you wonder how yields could get that high in a decade, consider one important fact. The largest buyers of American bonds for the past three decades have been Japan and China. Between them, they have soaked up over $2 trillion worth of our debt, some 12% of the total outstanding.
Unfortunately, both countries have already entered very negative demographic pyramids, which will forestall any future large purchases of foreign bonds. They are going to need the money at home to care for burgeoning populations of old age pensioners.
So, who becomes the buyer of last resort? No one, unless the Federal Reserve comes back with QE IV, V, and VI.
Check out the chart below, and it is clear that the downtrend in long term Treasury bond yields going all the way back to April, 2011 is broken, and that we are now heading substantially up.
The old resistance level at 2.40% will become the new support. That targets a new range for bonds of 2.40%-2.90%, possibly for the rest of 2016.
There is a lesson to be learned today from the demise of the Roosevelt debt. It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra low interest rates and spending it all.
With inflation at nil, they have a free pass to do so. In effect, it never has to pay it back, but enables us to reap immediate benefits. My friend, Fed Reserve Chairwoman, Janet Yellen, certainly thinks so.
If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create domestic US jobs. Not a penny would go to new social programs. Long-term capital investments should be the sole target. Here is my shopping list:
$1 trillion ? new Interstate freeway system
$1 trillion ? additional infrastructure repairs and maintenance
$1 trillion ? conversion of our transportation system to natural gas
$1 trillion ? construction of a rural broadband network
$1 trillion ? investment in R&D for everything
The projects above would create 5 million new jobs quickly.
Who would pay for all of this? Today?s investors in government bonds, half of whom are foreigners, principally the Chinese and Japanese.
How did my life turn out? Was it ruined, as my grandfather predicted? Actually, I've done pretty well for myself, as did the rest of my generation, the baby boomers. My kids are doing OK too.
Grandpa was always a better historian than a forecaster. But he did have the last laugh. He made a fortune in real estate, betting correctly on the inflation that always follows borrowing binges.
Grandpa (Right) in 1916 Was a Better Historian than Forecaster
Treasury bonds spike to new one year highs, closing at a 2.40% yield, and trading as low as a 2.30% yield in the overnight market at one point last week. Clearly, serious deflation is continuing for the indefinite future.
Buy more bonds!
US corporate profits are at all time highs, just closing one of the strongest reporting periods in history. What?s more, the outlook they painted for the rest of the year is rosy. With dividend yields for many shares in excess of interest rates paid by government bonds, the bull market is alive and well.
Buy more stocks!
Stocks! Bonds! Stocks! Bonds! Which group of talking heads is right? The stock bulls or the bond bulls?
Yikes! What is a poor money manager to do?
Here is the certain answer to your plaintive question: They are both right.
So how does one deal with this dilemma? It?s easy. You buy everything, both stocks and bonds. That has been the judgment of the markets, which have sent both bonds and stocks flying in tandem for most of 2014.
How is this possible? Doesn?t this violate Economics 101? Should I take my copies of Paul Samuelson and Graham & Dodd and sell them on Ebay?
Not really.
Here is the explanation for it all. The world is now facing a cash glut unprecedented in history. There is so much money chasing everything these days, it is truly unbelievable for those of us rather long in the tooth. Prices can only go northward, whatever they are for.
Take a look at the U.S. government?s accounts, and you get a partial explanation. Over the past four years, the budget deficit has nearly vaporized, from a stratospheric $1.6 trillion to only $600 billion. Next year, $300 billion is in the cards.
This has caused the Treasury to massively cut back on new issuance. In fact, some recent government bond auctions have faced an outright shortage of bonds, prompting bid prices to spike.
The incredible thing is that this has been happening in the face of the Federal Reserve?s winding down of quantitative easing. By October, it will have removed $80 billion a month in bond buying to zero. Imagine how low rates would be by now if my friend, Fed governor Janet Yellen, had kept it going.
This is why virtually everyone in the world got the bond market wrong this year, calling for a swan dive, except for bond maven and hedge fund guru, Jeffrey Gundlach. I include myself in this category of errant prognosticators.
However, I still have a chance to be right. I expect bonds to give up all of their gains going into yearend, ending dead unchanged on the year with 10 year Treasuries showing a 3.0% yield. Improving US growth prospects is the reason.
In my New Year forecast (click here for my ?2014 Annual Asset Review?)
I expected bonds to be weak, but not fall below a 3.50% yield. I was in a small minority of strategists who called for such a small decline in Treasuries. If I am right, and yields retrace to 3.0%, I will only be 50 basis points off my target, which is better than most.
But that is not to say that 10-year yields won?t first spike to 2.25% first, which happens to be Gundlach?s personal target.
I am a guy who puts his money where his mouth is, who eats his own cooking, and wears his opinions on his sleeve. So, I have been shorting bonds for all of this year.
But my trading approach is so forgiving, using price spikes to buy out of the money-put-spreads, that my followers have had more than adequate room to get profitably in and out.
Every single trade was either a winner, or broke even, except for one, adding an eye popping 10.61% to my 28% profit for 2014. It has been my most profitable trade this year.
While I have been dead wrong with the trend, I have been erring so slowly that we were able to coin it almost every month. Such is the forgiveness of the options spread strategy.
Physicists like ?unified theories? that explain everything, be they the movement of single electrons around nuclei, or galaxies in the universe. Here is a nice unified theory of everything for your investments: technology is curing all.
Hyper accelerating technology means that the price of things is falling faster than anyone believes. That means inflation stays at bay forever, which is great for bonds.
Technology is also reducing the cost, and even the need for labor by business. That is also disinflationary, and helps generate ever rising corporate profits, which is wonderful for stocks.
It all sounds like a ?buy stocks and bonds? explanation to me.
It reinforces the ?Golden Age? scenario for the 2020?s that I have been harping about all year, when the last impediment for growth, demographics, shifts from a headwind to a tailwind. That is when risk assets really go ballistic.
Maybe Google?s Ray Kurzweil is right? (click here for ?Peeking into the Future with Ray Kurzweil).
The stock markets are on the verge of a small correction, perhaps less than 5%, which should unfold over the next six weeks.
There is just not enough juice in a mini crisis triggered by one lousy Portuguese bank, the Banco Espiritu Santo, to take us any further. Bonds globally should put in their highs for the year during this period.
After that, it will be off to the races with a major year-end rally that could take us up another 10%. Both old tech and new tech, plus biotech and social media will be the front runners in this next leg of the bull market. Fixed income products will suffer across the board.
These were the results of the exhaustive research Jim undertakes every quarter using his proprietary analytical system. His goal is to define the best long and short opportunities across all asset classes.
Ignore him at your peril. Last year Jim?s system delivered a gob smacking trading return of over 300%.
Jim, a 40-year veteran of the trading pits in Chicago, would tell you all this himself. But as he is a product of the Windy City?s lamentable school district, the task of translating his pivot points, swing counts, and support and resistance levels into simple ?BUYS? and ?SELLS? falls to me.
What else can I say?
By the way, a pivot point is a number Jim?s system serves up once a quarter dictating the tone of the market for individual securities. Trade above the pivot, and we are in ?RISK ON? mode. Trade below it, and we need to take a decidedly ?RISK OFF? posture.
Swing counts then project the distance a security should travel once the directional call has been determined. Think of it as your own private inertial navigation system for your trading approach.
Equities
With that said, Jim?s pivot for the S&P 500 for Q3 is 1,970. As we are well below that now, you can expect some further work to be done on the downside, possibly as low at the 1,875-1,895 range over the next six weeks.?That would then be a sweet spot to initiate new longs.
The NASDAQ 100 has a pivot of 3,811 for Q3, a few percent above here. Jump back into the technology arena with a tight stop in the 3,700-3,725 neighborhood, or down some 5%, which works out to around $90 for ETF (QQQ) players.
Among foreign markets, Jim likes Japan?s Nikkei (DXJ), is wary of the German DAX, and is neutral on Australia (EWA).
Point a gun to his head, and Jim will opt for the Wisdom Tree Europe Hedged Equity Fund (HEDJ), a customized long European equity/short Euro ETF that effectively prices these stocks in US dollars. Think of it as a (DXJ) with a French accent.
?Bonds
Jim sees a rare, generational opportunity, to sell bonds setting up for August. They could grind up until then off the back of today?s news from Europe, but not by much. Use $137.00 as the pivot point for the 30-year bonds futures.
The market?s Focus will remain on the SPX/Bond spread, as it has all year. When the Equity Indices go into profit taking mode, bonds are the only place to park money, taking prices northward.
Long term, he favors the short side of the bond market, when conditions allow.?His game plan remains to sell bonds at these levels, with tight stops, until proven wrong.
My own strategy of buying out of the money (TLT) put spreads on a monthly basis also works perfectly in this scenario. Use every three-point rally as an opportunity to get in.
We are on the threshold of a more normalized interest rate environment, with a long awaited reversion to the mean in rates imminent. Jim says that the entire bond world is about to roll over.
Foreign Currencies
Jim isn?t getting too excited about foreign currencies these days, which appear to have fallen into a bottomless volatility trap. He doesn?t see any big moves unless a serious risk off trend develops in the equity markets, which is unlikely.
Use the Australian dollar (FXA) as your lead currency with which to make directional calls for the entire asset class. The pivot there is $94.60 in the cash market. As we are now at $93.68, stand aside.
The Japanese yen (FXY) has done its best impression of a Kansas horizon this year of any financial asset. It will continue to flat line as long as the jury is out on Prime Minister Shinzo Abe?s ?third arrow? economic and reform strategy. The yen will eventually weaken against the greenback, but it could be a long wait. Until then, use 101.33 as a pivot.
If you have to hate a currency in 2014, make it the Euro (FXE), with a pivot of $139.50. Sell every rally against this figure until the cows come home. The fundamentals for a weaker continental currency are building by the day. But we won?t see real fireworks until we close below $135.50. Then we?ll be targeting $127.50.
Commodities
Jim likes the precious metals (GLD), (SLV) and thinks the recent bottom will last for some time. This is further confirmed by the miners (GDX), which appear to have staged a major turnaround.
Bond market rallies have been highly correlated to metals rallies this year, at least for over the short term. So follow the sparkly stuff along with a bond rally into August. Lower rates will be price positive the metals. Use $1,265-$1,275 as your pivot for gold going forward. For silver use $19.70.
Copper (CU) is a bit of a conundrum, as it is stuck, in the middle of one-year range, so don?t chase recent rally. Use $2.95 as the pivot there. It?s not going anywhere until China decides what to do with its economy.
Don?t buy into the upside breakout school of thought for oil (USO) until we close over 104.70-105.30 (last qtr's high). That?s where you can count on the buy stops to kick in. At the current $102, we are firmly in bear territory. Talk to Jim when oil breaks this quarter?s resistance and upside momentum level at 107.50.
Infrastructures plays are still the best way to participate in any move in the natural gas (UNG) market. At the top of the list is Mad Hedge Fund Trader long time favorite, Cheniere Energy (LNG), up from $6 to $74.??(LNG) should be on your shopping list on any big equity index sell-off.?This week may see a low, and then a substantial rally when July futures expire.
The Ags
Agricultural commodities (CORN), (SOYB), (WEAT), (DBA) have been the major disaster area of 2014, thanks to the best growing conditions in history. Not only has the weather been perfect, the US Department of Agriculture keeps ?finding? new stockpiles. Conditions have been improving in major export markets abroad, as well.
Farmers may get a break this week when multiple futures contracts expire. At the very least, we should get a dead cat bounce. After that, it?s up to Mother Nature.
By the way, Jim Parker?s Mad Day Trader service has attracted a substantial following over the past year. If you are not already getting Jim?s dynamite short term ?BUY? and ?SELL? calls, please get yourself the unfair advantage you deserve.
Just email Nancy in customer support at support@madhedgefundtrader.com and ask for the $1,500 a year upgrade from your existing Global Trading Dispatch service to Mad Hedge Fund Trader PRO. The service includes Jim?s timely Trade Alerts, a running daily market commentary, and the daily morning webinar, The Opening Bell with Jim Parker.
The Quarterly Calls Are In
Winter is definitely over here in Incline Village, Nevada. When I started my daily ten-mile hikes from the Tunnel Creek Caf? ten days ago, I had to don snowshoes in the parking lot. Yesterday, I had to climb for two hours to find snow at 8,000 feet.
It?s definitely time to put my winter equipment into storage. The aspen trees are budding and yellow crocuses are breaking out all over.
That was also the conclusion of the killer April nonfarm payroll report, which brought in an eye popping 288,000. March was revised up from 192,000 to 203,000. Even more stunning was the plunge in the headline unemployment rate from 6.7% to 6.3%. It was a perfect number. Almost. We?re almost back to normal again.
I thought we were home free on our iShares Barclay 20+ Year Treasury Bond Fund (TLT) May, 2014 $113-$116 in-the-money bear put spread.
The blockbuster release should have driven a stake through the heard of the bond market.
And fall it did?.for about 15 minutes. Then news of the White House press conference announcing a further ratcheting up of tensions with Russia over the Ukraine triggered one of those rip your face off short covering rallies that have become so common this year. Prices for the (TLT) jumped to new 2014 highs, just short of our near short strike at $113. Stocks sagged.
If you had a mole at the Department of Labor who leaked to you the April nonfarm payroll a day in advance, you would have loaded the boat with long stock/short bond positions. Instead, we got the opposite. Welcome to a trader?s dull, brutish, and short life in 2014.
Throw bad news on the market, and if it fails to go down, you buy the heck out of it. That is a valuable lesson that I have learned over the decades, and I think it applied to the Treasury (TLT) bond market on Friday.
This was not weekend I wanted to go into short of bonds so close to the money. Putin is on a roll and appears to be willing to toss the dice once again. Now, he?s calling for a United Nations Security Council Meeting. Better to talk than shoot, I always say. It?s cheaper. I?ve tried both, and definitely prefer the latter.
If there has been another valuable lesson this year, it has been to keep positions small, and stop out of losers fast. So, as much as I hate to, I pulled the ripcord on my short, taking another nick on my performance this year.
?Markets can remain irrational longer than you can remain liquid,? said the great economist and primordial hedge fund trader, John Maynard Keynes. So true, so true.
The goal here is to maintain iron discipline in risk control and be the last man still standing when trading conditions improve and markets become easy again later this year. Until then, I?ll be engaging in small, short term opportunistic trades. I?ll also be doing a ton of deep research, building short lists of positions to Hoover up when life gets better.
Mind you, yields at these levels make absolutely no sense. They are predicting that deflation is now a permanent aspect of our lives. (To understand how that might be possible, read my interview in tomorrow?s letter with Google engineering director, Ray Kurzweil). Bonds are also shouting at us that we will remain stuck at a subpar 2% economic growth rate for years to come.
The inverse of bad news is also true. If you shower good news on a stock market and it fails to rise, you sell it. This suggests that a big dump in stocks is imminent, which is long overdue.
The markets certainly think this. Take a look at the chart below showing the ?spinning tops? in the S&P 500 in recent days, where shares trade across a wide range, but remain unchanged on the day. So named because the bar looks like a child?s toy, a spinning top suggests indecision among investors and a possible coming selloff. This is what happened in the beginning of March and April, opening the way for drops of 50 and 85 (SPY) handles.
This means that the ?head and shoulders? scenario I talked about a week ago is still on the table (click here for the article ?Watch Out for the Head and Shoulders?). That?s why I quickly knocked out a (SPY) June $193-$196 put spread.
In the meantime the media deluge for the upcoming midterm elections has already started, which are still five months away. Nevada governor Brian Sandoval is basing his entire campaign on his failed attempt to stop Obamacare in the courts. It is a strategy that will be repeated across the Midwest this year.
It sounds like this will be a good summer to stay out of the country. Sell in May and go away?
Going Into Storage
Beware the Spinning Tops
This is a bet that the S&P 500 does not rocket to a new all time high by the May 16, 2014 expiration.
The news flow this morning is giving us an opportunity to re enter the short positions that I covered on Friday. Half of the opening 80-point pop in the Dow came from Citibank (C), which surprised to the upside with its Q1 earnings report.
We also got March retail sales +1.1%, better than expected.
We are down only 4.1% in this pullback, not even matching the 6% January dump, and we have clearly not suffered enough for our IPO sins. An eroding quantitative easing from Janet Yellen?s Federal Reserve is clearly taking a toll.
This rally could continue for a day or two more. But it has been so difficult to get short positions off in this correction that I don?t mind erring on the side of being a little early. The reversals ambush you at openings you can?t trade, and take no prisoners. We will probably get our reward on Friday in the next weekend flight to safety.
It is only because implied volatilities are so elevated that I can get this position so far out of the money off so richly, with only 23 trading days left until the May 16 expiration. The spring swoon has sent put prices through the roof, as panicking institutions rush to buy downside insurance a little too late.
Charts and technical analysis are far more useful and important in falling markets than rising one, as the downside crowd is far more dependent on this dismal science.
The fact that these charts are breaking down across markets on increasing volume is terrible news.
A sector rotation out of aggressive technology (XLK), financial (XLF), and discretionary stocks (XLY) into defensive consumer staples (XLP) and utilities (XLU) is a further complicating factor that is making matters worse.
During economic slowdowns, consumers postpone purchases of new iPhones and cars. They don?t for toilet paper and electricity.
Ten year Treasury yields approaching a five-month low is another nail in the coffin. Banks are falling because of the rocketing bond market, which is flattening the yield curve to the topography of Kansas, hurting profits.
All that is needed is a match to ignite a broader, more vicious selloff and Russian Prime Minister Vladimir Putin has a whole box of them!
1,760 in the S&P 500, here we come, the 200-day moving average!
Keep in mind that fast markets, such as the one we have, I can get you only ballpark prices at best. It?s every man for himself. Praise the Lord, and pass the ammunition.
There is absolutely no doubt that both risk and volatility are rising in the financial markets. The higher the indexes rise, the sharper the intraday breaks. That is never a healthy sign for a bull market that has thrived for more than two years without a 10% correction.
The Crimean referendum should have been a yawn, not worthy of the 400 point swan dive that the Dow Average delivered last week. When the markets over react to the downside, and then rally back only on small volume, that is another excuse to pare back risk.
Some 45 years in the markets have taught me that whenever I have a great run, they will then suddenly reverse and bite me back. And let?s face it, the last two years have been spectacular, the Trade Alert Service nearly doubling the assets of loyal followers. It?s time to learn some humility, before the markets impose it upon you.
All of the recent US economic data has been good. But this isn?t about the data. It is all about market sentiment. And the current rumblings in Crimea are definitely not market friendly, pro global growth, pro risk ones.
If serious economic sanctions are imposed on Russia by Europe and the US, the impact on global growth will be negative, even if it is small. Traders are all about the next incremental change, not necessarily the magnitude.
So I am inclined to take small profits when they arise. No more hanging on for the last dollar. That was a 2013 play. Look for a market that grinds for days, and then concentrates all of the volatility for the week in a single day, like today.
Take the money and run, while it?s there.
I believe that we are on the verge of seeing major reversals across all asset classes. Get this one right, and you will make a fortune. Screw it up, and you will soon be looking for your next job on Craig?s List.
I understand that there is a desperate need for code writers in the cloud.
As always, I am taking my cue from the bond market. The great anomaly in the financial markets during February was the big divergence between the stock and bond markets.
While it was off to the races for stocks, the S&P 500 rocketing an impressive 7%, bonds didn?t believe it for a nanosecond.
If you had asked any global strategist a month ago where the ten year Treasury yield would be if the (SPX) posted a new all time high at 1,865, to a man they would have said 3.05%. Instead, bonds closed the week at a parsimonious 2.65%.
Something is desperately wrong with this picture.
If it were just bonds blowing a raspberry at this stock rally, I wouldn?t be so concerned. However, both the Euro (FXE) and the Japanese yen (FXY), (YCS) moved from strength to strength. They should be falling in a real bull market for stocks.
Precious metals have also been calling foul. If shares were the new risk free investment, why did gold pop by 9% last month? Better yet, why is silver up a sparkling 18%?
The gold producers have done even better. When Barrick Gold (ABX) soars by 26% in s single month, you?ve got to be worried about the stock market.
So here?s what happens next. With an assist from the Russian takeover of the Ukraine (wasn?t it so polite of them to wait a full week after the Sochi Olympics ended?), bonds take a run at the highs for prices and the low for yields, in the mid 2.50%?s.
This is why Mad Day Trader, Jim Parker, shot out a quick, opportunistic long play in the (TLT) last week. There, they will fail once again, as we are now in the early stages of a multi decade bear market.
This will prompt stocks (SPX) to give up a third to a half of the recent rally, taking it to the bottom of an ascending channel at 1,800 (see below). Volatility (VXX) will spike from the current $12 handle back up to $20. This is why I bought the (SPY) $189 - $192 bear put spread on Thursday, which expires on March 21.
When the bond rally gives up the ghost, shares will resume their 2014 surge. Avoid emerging markets (EEM), because another dump in the bond market knocks the stuffing out of them one more time.
What will the currencies do? This will be the starting gun for great short plays on the yen, which returns to a ten-year bear market, and the Euro, which is just tweaking a three-year high.
In the meantime, the dollar basket ETF (UUP) launches into a multi month rally after putting in a double bottom. I shouldn?t need to draw lurid drawings for you on how to trade this.
As for gold? Sorry in advance to the hard money crowd, the inflationistas, and conspiracy theorists (who cares if Germany wants its gold reserves back from the Federal Reserve?). I think the 2014 rally in the barbarous relic dies a sudden, horrible death, and goes back to retest the $1,200 low one more time, possibly breaking it.
This scenario opens up great entry points across virtually all of the many asset classes that I track. When it?s time to strap on a position, I?ll shoot out Trade Alerts as fast as the speed of electricity permits (186,000 miles per second, or 300 meters per second in Europe).
Yes, I think we will finally get a real 10% correction in stocks going into the summer. But you better be nimble to trade it. My experience tells me that too many of you are selling at market bottoms, not buying.
I just thought you?d like to know.
Just Thought You?d Like to Know
The Department of Labor took the punch bowl away from the party on Friday, reporting that the December nonfarm payroll came in at an anemic 74,000. Analyst forecasts had been running in the 200,000-250,000 range.
What was even more interesting was that the labor participation rate dropped to a 1978 low, with nearly 400,000 workers disappearing from the rolls. This is what took the headline unemployment rate down to 6.7%, off a whopping 0.3% from November. The Fed 6.5% target looms.
It was happy days again for the bond market, which had been beaten like a red headed stepchild since the summer. The relief rally spread to the entire high yield space, including corporates (LQD), munis (MUB), Junk bonds (HYG), (JNK), master limited partnerships (LINE), and even construction stocks (ITB).
The weather seems to be a big factor. When consumers and employers are sitting at home, freezing their keisters off, they aren?t hiring. This was not just a one off storm. It appears that this will be one of the coldest winters in history, except on the west coast, which is facing a 100 year drought. For proof, look no further than the price of natural gas (UNG), which appears to have broken out of a multiyear torpor.
The calendar was also an issue. Thanks to the compressed placement of the Thanksgiving, Christmas, and New Years holidays, this was one of the shortest shopping seasons in history. This would especially impact the retail sector, which is big on seasonal hiring around then.
As for the participation rate, this is clearly an effect of the 80 million retiring baby boomers. Some 10,000 a day are now collecting their gold watches and hitting the golf course. This drain of workers will continue until we are all dead in 2030. Once people retire, they tend to never reenter the labor force again. Can you blame them?
The bottom line here is that you need to look at the headline unemployment rate, which is fabulous, and not the gross nonfarm payroll numbers, which are dire. Whatever we lost in the nonfarm this month we will make back in large upward revisions next month. This has been the pattern of the past year. So mark February 7 on you calendar with bold red ink.
In fact, all of the recent employment numbers have been behaving as if they are still on their New Year?s Eve drinking binge, exhibiting extraordinary volatility. These could be just statistical outliers. More likely is that the epochal changes now besetting the long-term structure of the US economy, such as the simultaneous implementation of Obamacare and the lurch towards US energy independence, can?t be captured by traditional data collection means. Combined, these account for 24% of American GDP.
All of this leads me to believe that the current pop in bond prices and dip in yields will be a temporary affair. I?m sorry, but I?m just not buying the world that the bond market is currently anticipating, that of a massive shift of money out of stocks into bonds, and the return of inflation moving out another decade. The truth is that there still is no other decent place to put your money than large cap us stocks, thanks to the efforts of the Federal Reserve.
The stock market is not buying this scenario either. It barely budged, and closed up on Friday. More importantly, the volatility index (VIX) plunged to a new six month low at an amazing 11.5% on Monday. This instrument at these prices is betting that stocks will be sideways to up for the next 30 days.
As for my own model-trading portfolio, I would be selling short bonds here with both hands if that I did not already have a position. The problem is that I do, owning the iShares Barclays 20+ Year Treasury Bond Fund January, 2014 $104-$107 bear put spread, which expires at the close in four days on January 17. This is what remains from a $106-$109 put spread, which I profitably rolled down on December 27.
In a perfect world, I would have taken profits on this position on January 3, when it was showing a 0.53% profit. It would have been prudent to take the belated Christmas gift, given that a nonfarm payroll was due a week later. But I didn?t. Everyone got it wrong. But that seems to be par for the course these days, continuing with the golf analogy.
I do have the luxury of carrying my losing bond short against a portfolio of nine other positions, some of which I have already taken profits on, which will still leave me up big on the month. This is why they have the term ?hedge? in hedge fund. So I am relaxed.
However, it is proof once again that even after spending 45 years mastering the art of trading, I can still make mistakes typical of a first year summer intern.
