The first day of the month has been particularly rewarding to investors over the last decade.? CNBC reports on a S&P report that shows an investor who has been invested only on the first day of the each month since the year 2000 has outperformed a buy and hold portfolio by 68%:
“But a very simplistic form of market-timing has worked for the past 11 years. It involves owning the Standard & Poor’s 500 stocks, but only for the first day of every month.
An S&P report recently found that someone who invested $10,000 in the S&P 500 on Dec. 31, 1999, and left the money there until Dec. 1, 2010, would have just $8,209. An investor who was in the market only on the first day of every month over the same time — for example, buying at the close on Dec. 31 and selling at the close of the first trading day in January — would have $13,816.
That’s nearly 70 percent more than buying and holding the whole time. S&P didn’t include reinvesting dividends in either scenario because of the complications of figuring out which companies paid dividends on the first trading day of the month for 11 years. But even if you include all possible dividends for the buy-and-holders, the first-day trade strategy came out 33 percentage points ahead.”
As I type, S&P futures are trading higher by 4 points as we head into the first trading day of 2011.? Looks like the trend is set to continue….
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The opinions of all guest authors or contributors can and will differ from those of Mr. Roche. These opinions do not necessarily represent the opinions or investment decisions of Mr. Roche. The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”? -?? Benjamin Graham
Commodities have become an increasingly popular asset class in recent years as faith in fiat currencies has declined, economic growth has stagnated and traditional investments such as equities and bonds have become increasingly unreliable.? As demand for hard assets has increased Wall Street has been right there to satisfy this demand with various new products that are sold as “investments”, “hedges” or whatever can help these banks meet their ever increasing need to drive bottom line growth (and take money from greater fools).
Yesterday, Dylan Grice of Societe Generale published what I believe is an incredibly important piece of research showing that commodities are NOTinvestments.? In fact, when you buy a commodity for non-commercial purposes you are speculating.? Grice elaborated:
“The fluctuations of commodity prices have fascinated speculators for hundreds of years, but why should investors be interested? Commodities aren’t productive assets, so how can they create wealth over time? And why should they provide investors with a collectable risk-premium?? Commodity returns can be decomposed into the? “spot”? return and the? “roll” return. It’s not obvious to me that either are dependable sources of compoundable profit.”
He goes on to show that commodities have actually been terrible investments over the last 140 years? *(see more images below):
This makes sense as commodities have no cash flow and the purchase of such assets ultimately involves playing a zero sum game with the hope of one day selling to someone else at a higher price.? Seth Klarman, the founder of hedge fund Baupost and of value investing fame, recently described this phenomenon:
“Buying anything that is a collectible, has no cash flow, and is based only on a future sale to a greater fool, if you will—even if that purchaser is not a fool—is speculating. The “investment” might work—owing to a limited supply of Monets, for example—but a commodity doesn’t have the same characteristics as a security, characteristics that allow for analysis. Other than a recent sale or appreciation due to inflation, analyzing the current or future worth of a commodity is nearly impossible. The line I draw in the sand is that if an asset has cash flow or the likelihood of cash flow in the near term and is not purely dependent on what a future buyer might pay, then it’s an investment. If an asset’s value is totally dependent on the amount a future buyer might pay, then its purchase is speculation. The hardest commodity-like asset to categorize is land, an asset that is valuable to a future buyer because it will deliver cash flow, not because it will be sold to a future speculator.”
Grice added that the purchase of commodities is actually the sale of human ingenuity.? You are essentially betting that humans won’t one day replace their oil based energy needs with some alternative energy.? Or you are betting that humans won’t find a way to more efficiently produce wheat:
“Why? should? commodities provide investors with a real risk premium? Shouldn’t? prices actually decline? in real terms over time? A bushel of wheat, a lump of? iron-ore or an ingot of silver today is identical to a bushel of wheat, lump of iron-ore or ingot of silver produced one thousand years ago. The only difference is that they’re generally cheaper to produce because over time, human innovation has? lowered the cost of production.? When you buy commodities, you’re selling human ingenuity.
Past performance is no guarantee of future results, obviously, but human ingenuity has a good track record of overcoming nature’s constraints so far. A commodity bull market is really just a bottleneck? and as a? species we’ve succeeded in bottleneck? removal. Historically, most bull markets have ended up where they started.
Why bet against human ingenuity by buying physical commodities when you can bet on it by investing in? the enterprises whose? task? is to remove the bottlenecks and lower commodity prices?”
Of course, there is a complexity in the equation here that Grice also tackles.? Commodities futures contracts have a built-in risk premium because you don’t transact in the spot price.? But Grice finds no evidence that this risk premium necessarily exists.? In fact, he finds that commodities markets tend to be in a consistent state of contango therefore creating a negative roll effect:
“If investors? had been? picking up? a? risk premium by systematically rolling futures indices their? total? return would be higher than the spot market return. So the ratio of the total return index to the spot index should steadily rise over time. In fact, the ratio has been zero for the last twenty years.”
“What the chart doesn’t show is that over the past 20 years the GSCI’s annualised total return has been 4.3% despite the spot return being 5.2%. In other words, the ‘roll yield’ has? been -0.9%. Since the year 2000 it has been even worse. The GSCI spot return has annualised an impressive 9.9%, but the total return has been only 3.9%. The “roll yield” has been -6%!”
Of course, this doesn’t mean you can’t make money in commodities.? As we’ve seen in recent years there are fantastic swings in commodity prices over time and savvy speculators can benefit from such swings.? For instance, CTA’s (trend followers) have had fantastic success trading commodities over the last 30 years according to the Barclay’s CTA Hedge Fund Index (the index doesn’t include survivorship bias, however):
The more important takeaway is to avoid believing that you are making an investment when you buy commodities.? Rather, you are making a specific speculative bet.? The fact that Wall Street has begun selling the idea of “investing” in commodities should play no role in your decision to buy a commodity.? In fact, I believe this is just one more case of Wall Street attempting to monetize the ignorance of the general public.? If you’re interested in generating sustainable income from commodities you are better off investing in the commodities related companies themselves.
There’s an interesting counterargument that can be made for a commodity such as gold, however.? Doesn’t its currency like characteristics make it unique?? Seth Klarman says no:
“Gold is unique because it has the age-old aspect of being viewed as a store of value. Nevertheless, it’s still a commodity and has no tangible value, and so I would say that gold is a speculation. But because of my fear about the potential debasing of paper money and about paper money not being a store of value, I want some exposure to gold.”
I would add that Grice’s comments regarding innovation are applicable here as well.? Ultimately, a bet on gold is a bet that we will revert back to some form of commodity based currency system which proves the modern fiat monetary system is flawed.? But as I have previously explained, I believe this is faulty thinking in the long-run.? In fact, the move from the gold standard was a form of financial innovation due to the fact that the gold standard imposed inherent restrictions on the modern complex and dynamic global economy.
What we are seeing in single currency Europe is in many ways equivalent to the flaws generated in a world which was once a single currency world (see here for more).? Obviously, that system is highly flawed. And it was these inherent flaws that ultimately led to the demise of the gold standard.? A move back to the gold standard would quite literally be like moving back into the stone age.
In the near-term, however, (remembering that all commodities are speculative bets) we can’t ignore the voracious demand for gold as a currency, the problems in Europe, the false belief that the Fed is “printing money” and the misguided belief that fiat currencies are not the wave of the future.? As I have repeatedly stated in recent years, it’s likely that gold prices continue to surge higher as investors seek a safehaven from a world of economic uncertainty, political strife and what is viewed as a failing fiat currency in Europe.? Ultimately, I still believe gold’s endgame in the current cycle is an irrational bubble, but that is a purely speculative short-term bet and not a long-term investment.
In conclusion, mathematician John Allen Paulos famously said:
“people generally worry only about what happens one or two steps ahead and anticipate being able to get out before a collapse… In countless situations people prepare exclusively for near-term outcomes and don’t look very far ahead. They myopically discount the future at an absurdly steep rate.”
Investors are caught in a wave of euphoria in the commodity markets today.? And that’s not to say that it is wrong to own commodities or that their prices won’t be substantially higher in the coming years.? But just remember that the product your Wall Street broker so nicely wrapped up for you is NOT an investment.? It is a product that is guaranteed to line the pockets of bankers while you make nothing more than a speculative bet that a greater fool will one day buy from you at a higher price.
————————————————————————-
*Additional images provided below:
(Real Commodity Prices)
(Copper, aluminum & zinc prices)
(Real gold and silver prices)
(Real oil prices)
** A special thanks to Gregory White of Business Insider for help with this article
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The opinions of all guest authors or contributors can and will differ from those of Mr. Roche. These opinions do not necessarily represent the opinions or investment decisions of Mr. Roche. The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
A brief note on comments – The increase in users in recent months has resulted in an increase in unproductive comments. Any user who engages in the use of racial epithets or uses the comment section as a place to insult other users will be banned from the site. The comment section is welcome to all readers who are interested in asking pertinent questions and/or engaging in thoughtful, intelligent, and productive debate. In short, just be nice. Thanks.
China is leading the way lower overnight as artillery fire is exchanged in South Korea and fresh worries about inflation lead to further risk aversion.? Stocks in Shanghai closed down by 2% as rumors of a halt in mortgage lending lead investors to wonder if the government doesn’t see something substantially worse than previously believed (via Trade The News):
“Asian equity markets are in full retreat, as the positive tone set in the region overnight proved unsustainable in Europe and US sessions. Despite the confirmation of Irish bailout and a less severe than expected RRR PBoC tightening out of China, the focus of the bond markets appears to have shifted to Portugal and Spain, forcing local finance ministers to defend the progress made in meeting deficit reduction targets. Moreover, the bailout has hardly proven agreeable to the Irish labor, as waves of protests and calls for resignation of PM Cowen have forced the prime minister to plan an early national elections, with December budget serving as referendum for the ruling party. In China, Shanghai Composite is entering final hour of trade down over 2%. Financials and insurance companies are leading the slump after China Daily reported China Banking Regulatory Commission (CBRC) may have forced largest trust companies to halt mortgage lending.”
In Korea there are reports of an attack on a South Korean island (WSJ):
“North Korea fired artillery at South Korea’s Yeonpyeong island in the Yellow Sea off the countries’ west coast Tuesday afternoon, setting houses on fire. South Korea returned fire, according to residents on the island speaking on South Korea’s YTN television network.
A spokesman for South Korea’s joint chief of staff confirmed the exchange but didn’t have details except to say “scores of rounds” were fired by the North.
The artillery—more than 50 rounds, according to island residents speaking on YTN—was fired from positions south of the North Korean city of Haeju.”
And all this time you might have expected the bombs to go off in Ireland.? Financial hardship is leading to tensions in North Korea as well though this region of the world has become largely forgotten in recent weeks as the Euro crisis unfolds.? Never a dull moment during this financial crisis….I’ve been sincerely hoping none of this would lead to mass violence.? Let’s hope this is a false alarm.
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The opinions of all guest authors or contributors can and will differ from those of Mr. Roche. These opinions do not necessarily represent the opinions or investment decisions of Mr. Roche. The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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In our view the market, at current levels, is highly vulnerable to a major downturn as a result of negative fundamentals and high valuations.? Following is a summary of important factors likely to impact stocks in the period ahead.
ECONOMY—The economic fundamentals remain weak. ??Following the deepest recession since the 1930s the recovery has been extremely slow and too heavily dependent on an inventory turnaround and government transfer payments.? The usual catalysts for self-sustaining growth have largely been absent, including consumer spending, employment, housing and credit availability.? As we would expect after a major credit crisis, debt deleveraging has offset most of the massive fiscal and monetary stimulus undertaken by the Administration, Congress and the Fed. Growth has been slogging along at an annual rate of 2 percent or under and threatens to go even lower as stimulus efforts wind down.? In addition the dire financial condition of numerous state and local governments is already leading to sharply reduced spending (see Cisco for example) and the possibility of state defaults.? The economy is between a rock and a hard place as further stimulus would threaten to send the budget deficit out of control while austerity would send the economy careening lower.
QE2—-This is a desperate effort with little potential gain and a lot of risk.? The bet is that QE2 can reduce interest rates in the 2-to-10 year range, boosting the economy and jump-starting asset values.? But mid-range interest rates are already historically low while asset values are unlikely to respond much more than they already have on the anticipation of the move.? At the same time expectations have resulted in a weakening dollar and soaring commodity prices that could help ignite a global trade war and squeeze the profits of companies that will have problems passing through price increases to deleveraging consumers.
SOVEREIGN DEBT—-We’ve stated in previous comments that the Greek debt problem in the spring was merely papered over and was still simmering beneath he radar.? Now it’s Ireland’s turn in the spotlight.? This will probably be papered over as well, but the problem is that a number of the weaker EU members are essentially insolvent and will eventually have to be restructured with severe damage to European banks that hold the debts, particularly in Germany, France and England. ??This will continue to be a drag on economic growth in the EU.
CHINA—–With inflation threatening to get out of control, the Chinese authorities are trying to tighten monetary policy gradually to engender a soft landing together with lower inflation.? A few weeks ago we described how home building had gotten so out of control that there were at least a dozen huge ghost towns with empty houses and unused roads.? Now food prices are soaring leading to popular discontent to the chagrin of the Chinese leaders who fear the possibility of widespread rioting that imperils the regime.? With the leading economies of the U.S., the Eurozone and Japan in such weak condition, China has been the major catalyst for global growth.? Any slowdown in China would therefore put the entire global economy at risk, and we all know from experience that once a nation starts tightening, recessions are the outcome much more often than the occasional soft landings.
VALUATION—-In addition, don’t believe the story that stocks are cheap.? This misconception is based on the year-ahead forecasts of S&P 500 operating earnings.? The use of operating earnings is a contrivance that began in the mid to late 1980s to make earnings look better than the reported earnings according to generally accepted accounting policy (GAAP).? Prior to the bubble period that began in the late 1990s the S&P 500 sold at an average P/E of about 15 with a range of 22 to 7 going back 1926.? Based on our 2010 trendline GAAP earnings of about $65 the S&P 500 is now at 18.2 times the average and far closer to the top of the range than the bottom.? Secular bear markets have typically bottomed at 7 to 10 times earnings.? Similar calculations by Robert Shiller?and John?Hussman indicate even higher valuations.
All in all we think that the stock market is discounting far better results than the economy can produce in the period ahead.? As was true at the market tops in early 2000 and late 2007 the market is once again misreading the negative signals that are evident all around us.
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The opinions of all guest authors or contributors can and will differ from those of Mr. Roche. These opinions do not necessarily represent the opinions or investment decisions of Mr. Roche. The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
A brief note on comments – The increase in users in recent months has resulted in an increase in unproductive comments. Any user who engages in the use of racial epithets or uses the comment section as a place to insult other users will be banned from the site. The comment section is welcome to all readers who are interested in asking pertinent questions and/or engaging in thoughtful, intelligent, and productive debate. In short, just be nice. Thanks.
Housing woes are starting to come back into the forefront as several reports in recent weeks have shown a sharp decline in US real estate prices.? Unfortunately, the problems are severe and likely to persist.? As I’ve regularly argued in recent years the current housing issue remains an econ 101 story – supply and demand.? The current supply is simply too enormous for the market to overcome.? In today’s chart of the day Bloomberg highlighted just how enormous this supply overhang is:
“So many U.S. homes are unoccupied these days that demand may not catch up with the supply until 2014, according to Josh Levin, an analyst at Citigroup Inc.
The CHART OF THE DAY displays the percentage of housing units that are vacant, according to quarterly data compiled by the Commerce Department. The chart also shows housing starts as a percentage of homes already built, or the housing stock.”
“Last quarter’s vacancy rate was 10.96 percent, near a peak of 11.05 percent in the second quarter. These figures are based on the number of homes for sale and apartments for rent that are designed for year-round occupancy, and include mobile homes.
About 2.1 million homes now available aren’t needed, Levin wrote in a report yesterday. The estimate is based on the overall rate, along with separate figures for houses and apartments.
“It will take three to four years to work off the excess supply and reach equilibrium,” he wrote. This means housing starts are unlikely to follow “a V-shaped recovery pattern” after plunging in the past few years, the report said.”
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The opinions of all guest authors or contributors can and will differ from those of Mr. Roche. These opinions do not necessarily represent the opinions or investment decisions of Mr. Roche. The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
A brief note on comments – The increase in users in recent months has resulted in an increase in unproductive comments. Any user who engages in the use of racial epithets or uses the comment section as a place to insult other users will be banned from the site. The comment section is welcome to all readers who are interested in asking pertinent questions and/or engaging in thoughtful, intelligent, and productive debate. In short, just be nice. Thanks.
Stocks pulled back after a big advance and that can be good for bull markets
Most of the bricks in the previous wall of worry have been removed.?Economic reports have continued to improve over recent weeks; in manufacturing, the service sector, retail sales, durable goods orders, and even in the employment picture, where 151,000 new jobs were created in October, more than double the 70,000 that economists expected.
The uncertainty over the Federal Reserve’s QE2 decision has been resolved with the Fed adding to the stimulating atmosphere, providing another round of quantitative easing in spite of the already improving economy.
The major U.S. market indexes, including the Dow, S&P 500, and Nasdaq rallied back to, and then above the potential resistance at their April peaks, before pulling back some this week.
Investors have become even more bullish and optimistic. This week’s poll of its members by the American Association of Individual Investors showed 57.6% bullish, the highest level in almost four years.
The good news apparently also reached Main Street. On Friday morning it was reported that the Thomson Reuters/University of Michigan’s Consumer Sentiment Index improved to 69.3 in early November (its highest level in five months) from 67.7 in October.
So what has been wrong with global markets this week?
The U.S. market closed down roughly 2.5% for the week. Emerging markets, which many analysts projected would benefit the most from inflows of additional liquidity provided by the Fed’s decision, were down the most. Brazil, India, South Korea, closed down two to three percent for the week, while China closed down a big 5.5%. Meanwhile, Japan, a large developed country, which was not supposed to fare as well as emerging country markets, closed up 1.0% for the week.
A bet against emerging markets via the ProShares UltraShort Emerging Markets ETF, symbol EEV (designed to move up when emerging markets move down, and leveraged two to one) closed up almost 9.0% for the week.
Was it just that markets had become short-term overbought and ran into a brief bout of profit-taking, particularly since this was the week before the month’s options expirations week, and the week before tends to be negative?
If so, markets are likely to be back up next week since the decline this week took care of the short-term overbought condition, and next week is the week of the expirations, which tend to be positive.
Or was the decline the beginning of something more serious?
The market does seem to have a new wall of worry just a week after concerns about the economic recovery, and whether the Fed would or would not provide additional quantitative easing, faded away.
The bricks in the new wall of worry include:
Concerns that the Fed’s additional stimulus may cause new problems rather than help the economy by encouraging home purchases or providing new jobs.
Worries that commodity prices had spiked up into bubbles which may burst, a worry that struck Friday with the big $40 an ounce (3%) plunge in the price of gold, and equally large declines in the price of oil and other important commodities.
Apprehensions about the activities of the Chinese government, including talk that it might hike interest rates to dramatically slow its globally important economy and ward off threatening excessive inflation in China.
Anxiety about a potential currency or trade war if the decline in the U.S. dollar continues.
Via technical analysis there is also the U.S. market’s intermediate-term overbought condition above 20-week moving averages, and the high level of investor bullishness (which is at levels of complacency often seen at market tops).
The uncertainties have even extended to U.S. Treasury bonds, which investors have piled into as a perceived safe haven over the last two years. The safe haven over the last two months has actually been a bet against U.S. Treasury bonds. For instance, the ‘inverse’ ProShares Short 20-year bond etf, symbol TBF, designed to move up when bonds move down, has gained 11% since early September, while bonds have declined 11%.
There’s no doubt about it. We are still in a very fluid economic and investing period, not a time for investors to become so complacent as the investor sentiment readings seem to indicate, that they fall asleep at the switch.
(In the interest of full disclosure, we have positions in the U.S. market, the Japanese market, gold, and the ‘inverse’ bond ETF TBF, in our portfolio, at least at the moment).
Stocks pulled back after a big advance and that can be good for bull markets
Most of the bricks in the previous wall of worry have been removed.?Economic reports have continued to improve over recent weeks; in manufacturing, the service sector, retail sales, durable goods orders, and even in the employment picture, where 151,000 new jobs were created in October, more than double the 70,000 that economists expected.
The uncertainty over the Federal Reserve’s QE2 decision has been resolved with the Fed adding to the stimulating atmosphere, providing another round of quantitative easing in spite of the already improving economy.
The major U.S. market indexes, including the Dow, S&P 500, and Nasdaq rallied back to, and then above the potential resistance at their April peaks, before pulling back some this week.
Investors have become even more bullish and optimistic. This week’s poll of its members by the American Association of Individual Investors showed 57.6% bullish, the highest level in almost four years.
The good news apparently also reached Main Street. On Friday morning it was reported that the Thomson Reuters/University of Michigan’s Consumer Sentiment Index improved to 69.3 in early November (its highest level in five months) from 67.7 in October.
So what has been wrong with global markets this week?
The U.S. market closed down roughly 2.5% for the week. Emerging markets, which many analysts projected would benefit the most from inflows of additional liquidity provided by the Fed’s decision, were down the most. Brazil, India, South Korea, closed down two to three percent for the week, while China closed down a big 5.5%. Meanwhile, Japan, a large developed country, which was not supposed to fare as well as emerging country markets, closed up 1.0% for the week.
A bet against emerging markets via the ProShares UltraShort Emerging Markets ETF, symbol EEV (designed to move up when emerging markets move down, and leveraged two to one) closed up almost 9.0% for the week.
Was it just that markets had become short-term overbought and ran into a brief bout of profit-taking, particularly since this was the week before the month’s options expirations week, and the week before tends to be negative?
If so, markets are likely to be back up next week since the decline this week took care of the short-term overbought condition, and next week is the week of the expirations, which tend to be positive.
Or was the decline the beginning of something more serious?
The market does seem to have a new wall of worry just a week after concerns about the economic recovery, and whether the Fed would or would not provide additional quantitative easing, faded away.
The bricks in the new wall of worry include:
Concerns that the Fed’s additional stimulus may cause new problems rather than help the economy by encouraging home purchases or providing new jobs.
Worries that commodity prices had spiked up into bubbles which may burst, a worry that struck Friday with the big $40 an ounce (3%) plunge in the price of gold, and equally large declines in the price of oil and other important commodities.
Apprehensions about the activities of the Chinese government, including talk that it might hike interest rates to dramatically slow its globally important economy and ward off threatening excessive inflation in China.
Anxiety about a potential currency or trade war if the decline in the U.S. dollar continues.
Via technical analysis there is also the U.S. market’s intermediate-term overbought condition above 20-week moving averages, and the high level of investor bullishness (which is at levels of complacency often seen at market tops).
The uncertainties have even extended to U.S. Treasury bonds, which investors have piled into as a perceived safe haven over the last two years. The safe haven over the last two months has actually been a bet against U.S. Treasury bonds. For instance, the ‘inverse’ ProShares Short 20-year bond etf, symbol TBF, designed to move up when bonds move down, has gained 11% since early September, while bonds have declined 11%.
There’s no doubt about it. We are still in a very fluid economic and investing period, not a time for investors to become so complacent as the investor sentiment readings seem to indicate, that they fall asleep at the switch.
(In the interest of full disclosure, we have positions in the U.S. market, the Japanese market, gold, and the ‘inverse’ bond ETF TBF, in our portfolio, at least at the moment).
The contents of this site is provided as general information only and should not be construed as investment advice. All content on the site should not be interpreted as a recommendation to buy or sell any security or financial product, or participate in any particular strategy of trade or investment.The ideas expressed on this site are solely the opinions of the authors and do not necessarily represent the views of the companies affiliated to the author (s) .the opinions of all the guest authors or contributors and will differ from those of Mr. Roche.These opinions do not necessarily represent the opinions or Mr. Roche investment decisions.Authors are, or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned in this Web site.Any action you take information and analysis on this site is ultimately your responsibility.Consult your investment advisor before taking an investment decision.
A short note on the comments-the increase in users of recent months has led to increased improductifs.Tout user who engages in the use of racial epithets or uses the comment section as a place to insult other users is prohibited on the comments section site.La feedback is welcome to all readers interested in relevant questions and engage in a thoughtful, intelligent discussion and brief productive.En, just be agréable.Merci.
Friday posted a story highlighting the outperformance of the market when the US Federal Reserve permanent Open Market operations (POMO).? POMO nothing new for the Fed is therefore a set of data a month is really nothing more than the exploration.? If we consider the data for the past five years, we get a much more realistic (and potentially troubling) perspective of market performance when the US Federal Reserve makes its POMOs agenda.
? Since October 2005 205 operations.? The day that the transaction was conducted complete negative market 41% of the time, positive 53% of the time and finish flat 6% of the time.? The total return on those days was to + 27.28%.This is equivalent to + 48.6% annualized gain.Un look under the hood offers a more useful perspective on the data, however.?
? The days that were positive, 63% of total earnings was held 3 days in March 2009.If we delete these three-day total of earnings equals + 9.98 %.Cela equals one + 18% annualized gain.? If we delete best and worst three days in the game total return waves to 18.1% or a 33.1% annualized gain.?
? Perhaps the most interesting perspective in all of this is looking at long-term markets performance when the US Federal Reserve performs these operations.? As you can see below the market has made shocking when the Fed conducts POMO.? The Fed stopped POMO in May 2007 after a fairly stable calendar.? Market decreased by 20% after a year and a half.? They do not start the new program in September 2008 when the economy was merged.Technically, the program began on September 19, 2008 only days before Lehman.Cela crash heavily skews the crisis of credit operations series starting point.?? If we take that exact departure, the market fell to 2% between that date and the last operation on the 24 March 2010.Of course, one could easily argue that September 2008 operations have been largely unnecessary that the market was already blending mode.?
? Between March 24 and 17 August 2010 when the program was interrupted, the market has declined single channel %.Since then restart the program in August the market increased by 8.3 %.La this following figure a Visual operations and their (potential) market impact:?
? For the period from 2005 to 2007 POMO, there are 50 operations and market advanced a grand total of take % these days.? Given that the market collapse, however, there were 155 operations and the market has advanced a total of + 26.95% on these days.? Thus, outsized returns may be simply a function of coinciding with one of the biggest bull market in history.?
What is so interesting about all of this is the impact of the real world, however. These operations change financial assets net result privés.Par, it is really just good mix. The Fed is printing new funds when it performs these operations. They are simply the trading of goods. They add income from the private sector, they create jobs, they do not succeed better economy (apart from a very debatable and marginal interest rate effect).However, there is a clear argument that there is a strong correlation between the response of the market and the POMO.Si although there is no reason to believe that these operations are in reality we all better off this evidence supports the idea that these operations are correlated with periods of goods "high that they would otherwise be"-in other words, the assets tend to be disconnected from their fundamental principles of these operations in the US Federal Reserve.
I'll be honest with the reader. When I ran this data that I was really hoping that I would find evidence showing that the POMO have no impact on the direction of the market. The conclusion is troubling for obvious reasons.And while it may be nothing more than a case of exploring the evidence is compelling that the Federal Reserve helps increase equity prices without creating positive change also in growth sustainable economic.I'm not a conspiracy, but when I theorist Manager system Open Market account for the Federal Committee, saying that he wished to retain "price higher than that they would otherwise be" combined with this evidence it makes it very difficult to believe that the Fed is not attempting to exceed Bernie Madoff.
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?The current market rally is not based on a typical autonomous economic recovery but on blind faith that reserve US Federal may withdraw a magic wand and heal with another series of mitigating quantitative (QE2).? As we noted last week, a desperate attempt by the Federal Reserve to try non-conventional is get the economy going again after a massive dose of conventional measures led to the collapse.? Members of took it place the knowledge, but other tax measures outside of the table, they know that they are the only game of the city.Recognition of the Federal Reserve that the economy is in trouble is once more highlighted by the last book published beige hier.Voici a few excerpts from the report:
? "National economic activity continued to increase, albeit at a modest pace... consumer spending has been stable at until slightly, but consumers remain sensitive to prices and purchases limited mainly to the necessities and items not discrétionnairesMarché housing remained faibleLa most reports all suggested home sales were slow déclinAccueil inventories were higher or in commercial real estate market hausseConditions were sifted and construction should remain weak.Reports suggests that rental rates continued to decline in most propriétécontacts industry types seem to believe that commercial real estate and sectors of construction remained low since a certain tempsEmbauche remains limited, with many companies are reluctant to add to the ongoing payroll economic softness provided plans capital expenditure future appear to be limited."?
Thus, you have an overview of the anemic economic picture in the words of the Federal Reserve.? Of course, they indicated some strong points as well.But the weakness of consumption, housing expenditures, capital, commercial real estate and the job fairly well account for approximately 85% of the global economy.?
? In addition some of the main problems concern the market sooner have not really disparu.Les problems of sovereign debt of the smaller EU countries are still persistent just below the surface and lined without being resolved.The wars that threatens currency rushed at the recent meeting of the G - 20 on the road are also a major threat to the global economy.?
In addition the bubble Chinese already highlighted by bearish investor Jim Chanos and others now appeared on the cover page of the New York Times. A new neighbourhood in the city of Ordos, in China, covering 12 miles square and consisting of tens of thousands of homes and dozens of office buildings remain a ghost town virtual, cited as "evidence of a real estate bubble will soon pop send shockwaves through the banking system of a country... was the main engine of global growth." In accordance with article there is as much of a dozen other cities ghost resembles Ordos.
Another imminent crisis which will not go away is early mess recently revealed with the paperasse.Il lock mortgage is no mere detail that some would have believe you. Due to complications introduced by slicing the securitization of mortgage loans and mortgage loans more sliced trimmer, it seems that large numbers of mortgage procedures brought by the parties with no legal right to do so.
The gravity of the situation is highlighted by the fact that Freddie Mac with giant investment houses such as Pimco, BlackRock, Neuberger Berman and Met Life, and New York Federal Reserve Bank has continued to Bank of America to return to securitized mortgages that they have purchased from the Bank or its affiliate program. Other major banks can then be sued and and other buyers are likely to join the fray. The situation is also studied by the FBI, various federal agencies regulate and most General Prosecutor States.With the huge amounts of money involved, should not much imagination to realize that this could have to reveal a large threat to the financial system.
Overall it seems to us that the rally market relies on fragile hypothesized that the reserve US Federal can now all the problems above with proven, unconventional monetary measures that could not be resolved by the massive stimulus provided by either monetary or fiscal conventional tools.From the perspective of QE2 already baked in the cake, we believe that the market is highly vulnerable in the coming period.
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From the operational point of view, there is no reason why the market is expected to exceed one day when the reserve US Federal performs its POMO, but it's an interesting fact of Goldman Sachs via Zero Hedge:?
"On the interaction between the EDF and the stock: since September 1, 1996 - where the EQ was becoming a dominant focus -If you owned only S & P days when the led Fed Open Market in US Treasury), operations your cumulative return is more than 11% Furthermore, 6 7 times when S & P rallied 1% or more, OMO was carried out to date."This compares with a 5.8% YTD return item: you would have exceeded the 2 market where x is the 16-day long only when - this is the important part - you knew in advance that OMO should be carried out. Performance of the market on the 19 days of non - OMO: + 70 bps. ?
The US Federal Reserve certainly does help their credibility when this sort of thing is thrown in the faces of people .c ' is something to suggest that you'll print million. This is another thing to admit that you want to run a ponzi economy (as Brian Sack done directly). Incredible to run an economy....
The contents of this site is provided as general information only and should not be construed as investment advice.All content on the site should not be interpreted as a recommendation to buy or sell any security or financial product, or participate in any particular strategy of trade or investment .the ideas expressed on this site are solely the opinions of the authors and do not necessarily represent the views of the companies affiliated to the author (s).The opinions of all the guest authors or contributors and will differ from those of m. Roche.These opinions do not necessarily represent the opinions or Mr. Roche investment decisions.Authors are, or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned in this Web site.Any action you take information and analysis on this site is your responsabilité.Consultez ultimately your investment advisor before taking an investment decision.
A short note on the comments-the increase in users of recent months has led to increased improductifs.Tout user who engages in the use of racial epithets or uses the comment section as a place to insult other users is prohibited on the comments section site.La feedback is welcome to all readers interested in relevant questions and engage in a thoughtful, intelligent discussion and brief productive.En, just be agréable.Merci.
Mike O'Rourke, BTIG, explains market expected too much of the Federal Reserve in November.He says that the Fed is likely to act in increments, as they always do with result, TargetObject interest rate announcements o ' Rourke, explains the current expectations of an announcement of. 2T QE2 $ 1 at the next meeting took place is likely price already too much optimistes.O ' Rourke finds that they are unlikely to announce the "shock and awe" that the market is currently awaiting:
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