Archives for August 2015

Getting Started – The Hardest Part of Investing


Getting Started – The Hardest Part of Investing

Courtesy of The Banker

Let's start at the very beginning, a very good place to start...

“Let’s start at the very beginning, a very good place to start,” sings my children’s favorite nanny-from-the-movies, Maria.

School started for my girls this week, so I’m in the mood for new beginnings. New school uniforms, freshly sharpened #2 pencils, and lined notebooks still unblemished with unicorn stickers.

Besides inheritance (obviously the very best way, because remember your first $5.43 Million arrives tax free!) the next two best ways for a person to get wealthy are investing throughout your lifetime, and starting a business.[1]

Neither of these two methods – slow-and-steady investing beginning at a young age or entrepreneurship – require extraordinary talent or prior knowledge. In fact, the biggest common barrier to both methods is simply getting started.

But how does one even do that? Let’s not under-estimate the difficulty of the “getting started” part!


I have a reader who regularly emails me to the effect (I’m paraphrasing a bunch of his emails) “You need to tell everybody – especially young people – how to call up a brokerage company and how to buy their first stock or mutual fund. They don’t need special knowledge, they just need to get started now, contribute regularly, and never sell. And they’ll end up rich.”

Of course he’s right. You should all totally do this.[2]

Even so, many will resist the advice.

A managerie of discount brokers. Sadly, none of them pay me to list their brands

My question back to my reader: How do we get people to start at the very beginning?

I really don’t know how to fulfill my reader’s wish of inducing people to call up a brokerage firm, open up an account, and buy their first stock or mutual fund. I wish I had the words to express the importance of beginning, like, right now.


Goethe didn’t really say this, but…

The German writer Johann Wolfgang von Goethe didn’t really say, but sometimes gets credit for, this inspirational thought:

“Until one is committed, there is hesitancy … the moment one definitely commits oneself, then Providence moves too. All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one’s favor all manner of unforeseen incidents and meetings and material assistance, which no man could have dreamed would have come his way. Whatever you can do, or dream you can do, begin it. Boldness has a genius, power, and magic in it. Begin it now.”

Pseudo-Goethe is very mystical and awesome, but do you want to know what else has “genius, power, and magic” in it? Compound interest! That’s my personal favorite finance topic – and the reason why a lifetime of boring, simple, investing begun in your twenties will make anyone, eventually, wealthy.

My friend David is a 26 year-old public school administrator who recently asked me for financial advice. Like almost everyone his age, David has both student-loans and personal debts. Unlike many his age, he also has the beginnings of both an IRA plan and a 403b plan. He worries about his debts and has kept me updated over the past few months as he pays them down. What I know for sure – and he doesn’t yet fully believe – is that if he continues to contribute to his IRA and 403b, year in and year out, he’s going to end up just fine. Wealthy even.

Simply because he started now, while still in his twenties. (So start now!)

David’s initial $5,500 in his IRA this year, compounding at an assumed 6% annual growth over the next 40 years until age 65, should grow to $56,571.

His annual contributions of $5,500 each year, for the next 40 years, compounding at an assumed 6% growth rate, should grow to a total of $902,262.

That, combined with an employer-matched 403b and teacher pensions plans, should provide David plenty of comfort when he stops working. But compound interest works best over long periods of time, which means you have to begin now.

To people who wonder – “given all the risks today and all the ups and downs – when should I invest in the stock market?”

The true answer, always, is about thirty years ago.[3]

But the next best answer, for anyone not already in the market is always:

Now. Today.

The hard part: Beginning. Remember that beginning has genius, power, and magic in it.

[1] Another method, rising to the top executive echelons of someone else’s company, requires an unusual combination of talent, hard-work, and luck. In the past few decades the rewards for ‘super-managers’ who did not start out as business owners have been great. But I think the odds are stacked against most people being able to ‘make it’ that way, when compared to simply investing, or starting your own business.

[2] Although I can’t tell you which brokerage to call (because none of them pay me. If you work at the marketing firm of a big retail brokerage firm, it’s you guys who are really the best of the best and my readers deserve to know that. Here, let me send you my PayPal account.)

[3] Just like the truly best way to get wealthy would be via inheritance. But the best way, in both cases, is impossible to do for oneself.

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Re: the Death Cross

Michael Batnick studies the "death cross" and finds that the 50-day moving average crossing below the 200-day moving average is a short-term bad sign but post-death cross life is not as bad as the name suggests. 

Re: the Death Cross

Courtesy of Joshua Brown

Michael Batnick, our firm’s director of research, goes toe to toe with the Death Cross fixation among traders and the financial media:

On Friday the S&P 500 experienced what is known as a “death cross.” This is when the 50-day moving average crosses below the 200-day moving average and as you can guess by the name, is allegedly a negative signal for stocks moving forward.

A lot of work has been done to debunk the myth of the death cross and yet we continue to hear about it whether it’s in an index, a sector or a specific stock. Here are two reasons why it refuses to go away: 1) It sounds ominous, people love that and 2) over the last fifty years, a death cross occurred before each of the ten worst years. Not only did they appear but in eight of those ten years the indicator was quite timely, saving those who listened from further downside.

So if it identified the very worst years, wouldn’t it be foolish to dismiss this as a valid indicator?

Keep reading:

Beware the (stories of) the death cross (Irrelevant Investor)

Picture via Pixabay.


Say Goodbye to Normal


Say Goodbye to Normal

Courtesy of James Howard Kunstler

The tremors rattling markets are not exactly what they seem to be. A meme prevails that these movements represent a kind of financial peristalsis — regular wavelike workings of eternal progress toward an epic more of everything, especially profits! You can forget the supposedly “normal” cycles of the techno-industrial arrangement, which means, in particular, the business cycle of the standard economics textbooks. Those cycle are dying.

They’re dying because there really are Limits to Growth and we are now solidly in grips of those limits. Only we can’t recognize the way it is expressing itself, especially in political terms. What’s afoot is a not “recession” but a permanent contraction of what has been normal for a little over two hundred years. There is not going to be more of everything, especially profits, and the stock buyback orgy that has animated the corporate executive suites will be recognized shortly for what it is: an asset-stripping operation.

What’s happening now is a permanent contraction. Well, of course, nothing lasts forever, and the contraction is one phase of a greater transition. The cornucopians and techno-narcissists would like to think that we are transitioning into an even more lavish era of techno-wonderama — life in a padded recliner tapping on a tablet for everything! I don’t think so. Rather, we’re going medieval, and we’re doing it the hard way because there’s just not enough to go around and the swollen populations of the world are going to be fighting over what’s left.

Actually, we’ll be lucky if we can go medieval, because there’s no guarantee that the contraction has to stop there, especially if we behave really badly about it — and based on the way we’re acting now, it’s hard to be optimistic about our behavior improving. Going medieval would imply living within the solar energy income of the planet, and by that I don’t mean photo-voltaic panels, but rather what the planet might provide in the way of plant and animal “income” for a substantially smaller population of humans. That plus a long-term resource salvage operation.

All the grand movements of stock indexes and central banks are just a diverting sort of stagecraft within the larger pageant of this contraction. The governors of the Federal Reserve play the role of viziers in this comic melodrama. That is, they are exalted figures robed in magical Brooks Brothers summer poplin pretending to have supernatural power to control events. You can tell from their recent assembly out west — “A-holes at the J-hole” — that they are very much in doubt that their “powers” will continue to be taken seriously. This endless hand-wringing over a measily quarter-point interest rate hike is like some quarrel among alchemists as to whether a quarter-degree rise in temperature might render a lump of clay into a gold nugget.

What they do doesn’t matter anymore. What matters is that a great deal of the notional “wealth” they conjured up over the past decade or so is about to vanish —poof! Perhaps that will look like a black magic act. That wealth seemed so real! The bulging portfolios with their exquisite allocations! The clever options! The cunning shorts. Especially the canny bets in dark derivative pools! All up in a vapor. The sad truth being it was never there in the first place. It was just an hallucination induced by the manipulation of markets and the criminal misrepresentation of statistics, especially the employment numbers.

There are rumors that the Grand Vizeress of all, Ms. Yellen, is flirting with possible indictment over the “leakage” of valuable information out of her inner circle to potential profiteers. Whoops. It may lead nowhere but to me it is an index of her more general loss of credibility. All year she has spouted supernaturally fallacious nonsense about how “the data” guides Fed decision-making. Only her data is contrary to what is actually happening in the pathetic Rube Goldberg contraption that the so-called US economy has become (Walmart + entitlements). Her “guidance” amounts to a lot of futile drum-beating on a turret of the Fed castle, hoping to make it rain prosperity. Her enigmatic utterances have kept financial markets in a narrow sideways channel most of the year until recently.

I’d say she’d lost her mojo, and the lesser viziers on the Fed board are looking more and more like the larval, sunken-chested dweebs that they really are. So where is the nation to turn? Why, to the great blustering Trump, with his “can-do” bombast about “making America great again.” What does he mean, exactly? Like, making America the way it was in 1958?” Behold: the return of the great steel rolling mills along the banks of the Monongahela (and so on)! Fuggeddabowdit. Ain’t gonna happen.

I have to say it again: prepare to get smaller and more local. Things on the grand level are not going to work out. Get your shit together locally, and do it in place that has some prospect for keeping on: a small town somewhere food can be grown and especially places near the inland waterways where some kind of commercial exchange might continue in the absence of the trucking industry. Sound outlandish? Okay then. Keep buying Tesla stock and party on, dudes. Hail the viziers in their star-and-planet bedizened Brooks Brother raiment. Put your head between your legs and kiss your ass goodbye.

Picture via Pixabay.

Witch Hunt Victim “Confesses”: Word Police in China vs. Word Police in US

Courtesy of Mish.

Witch Hunt Review

As I noted earlier today China Starts Witch Hunt for Those Obstructing Government Efforts to Prop Up Stocks.

Public Confession

It took less than a day for a victim of the witch hunt to be rounded up for public display. The Financial Times reports China Reporter Confesses to Stoking Market ‘Panic and Disorder’.

A leading journalist at one of China’s top financial publications has admitted to causing “panic and disorder” in the stock market, in a public confession carried on state television.

The detention of Wang Xiaolu, a reporter for Caijing magazine, comes amid a broad crackdown on the role of the media in the slump in China’s stock market, which is down about 40 per cent from its June 12 peak. Nearly 200 people have been punished for online rumour-mongering, state news agency Xinhua reported at the weekend.

“I shouldn’t have released a report with a major negative impact on the market at such a sensitive time. I shouldn’t do that just to catch attention which has caused the country and its investors such a big loss. I regret . . . [it and am] willing to confess my crime,” [said Xiaolu]

When the market turmoil began in June, Beijing imposed restrictions on media reporting of the stock market. The independent China Digital Times, which monitors internet censorship in the country, said in June media were told to avoid stoking panic.

Do not conduct in-depth analysis, and do not speculate on or assess the direction of the market,” it reported an official directive as saying. “Do not exaggerate panic or sadness. Do not use emotionally charged words such as ‘slump’, ‘spike’ or ‘collapse’.”

Word Police US Style

With thanks to reader Mark for the link,  Campus Reform reports that Professors Threaten Bad Grades for Saying Oppressive Words.

Multiple professors at Washington State University have explicitly told students their grades will suffer if they use terms such as “illegal alien,” “male,” and “female,” or if they fail to “defer” to non-white students.

According to the syllabus for Selena Lester Breikss’ “Women & Popular Culture” class, students risk a failing grade if they use any common descriptors that Breikss considers “oppressive and hateful language.”

Continue Here

Nicole Foss Talks Energy, Psychology, Collapse and The Future

Courtesy of The Automatic Earth.

Dorothea Lange Hoe culture in the South. Poor white, North Carolina July 1936

Nicole Foss recently participated in a live Google Hangouts (not Skype. I’m told) ‘forum’ discussion at the Doomstead Diner site that also included among others, Gail Tverberg, Steve Ludlum, Norman Pagett and Ugo Bardi. Apologies for the fact that I haven’t watched the videos yet and I’m getting the details as I go, so my info will be a bit sketchy.

I’ll run this in episodes. Today’s post contains episode 4. Previously, I posted episode 2 and 1,

Nicole Foss Talks Economics At The End Of The Age Of Oil


Nicole Foss Talks Energy Industry Issues and Oil Price Collapse.

Episode 3 has apparently not even been recorded yet, but we’ll post it as soon as it is available,

Part IV- Futurology

The Doomstead Diner site blurb:

Renewable Energy
One of the biggest hopes as the fossil fuels run thin or become too expensive to dig up is a switch to renewable forms of energy. How can such forms of energy be utilized, and how much of our current technological society can be maintained with the renewables?

Building Community
As the larger structures of society begin to break down, a more localized organizational structure will become necessary, both on the food production and distribution level as well as new political organizations. How can communities come together and create the kind of structures necessary for a low per capita energy society of the future?

Psychology of Collapse
Collapse is creating many psychological issues and problems as it progresses and accelerates. More people are under more stress all the time, losing jobs, losing their homes to foreclosure, becoming homeless, waiting on long bread lines for food aid etc. We read daily about increasing suicide rates and the number of mass shootings is also on the increase, recently there were 142 mass shootings catalogued in 142 days, 1 every day. How can we handle these psychological problems that are cropping up, and likely will worsen as the overall economy worsens?

Prognosticating the Future
The toughest part in all of these discussions is trying to figure out what is going to occur in the future, and when it will occur. What is the timeline? Will we see a major breakdown of systems and a Fast Collapse scenario, or will it be a long slow “boiling frog” effect, the “Long Emergency” described by Jim Kunstler or the “slow catabolic collapse” described by John Greer? What can people do now to prepare for this future, especially if they are still dependent on a currently held job in a location which might not be too good in the future, like say they live currently in Las Vegas and have a well paid job in one of the casinos there?

Guest Post: Stanley Fischer Speaks – More Drivel From A Dangerous Academic Fool

Courtesy of David Stockman of Contra Corner 

With every passing week that money markets rates remain pinned to the zero bound by the Fed, the magnitude of the financial catastrophe hurtling toward main street America intensifies. That’s because 80 months—and counting—of zero interest rates are fueling the most stupendous gambling frenzy that Wall Street has ever witnessed. Sooner or later, this mother of all financial bubbles will splatter, bringing untold harm to millions of households which have been lured back into the casino.

The truth is, zero cost in the money market is irrelevant to main street. As we have repeatedly demonstrated the household sector is stranded at “peak debt” and, consequently, there is no interest rate low enough to elicit a spree of pre-crisis style consumer borrowing and spending. Based on the clueless jawing that occurred this weekend at Jackson Hole, the following simple chart that I laid out last week bears repeating:

On the eve of the financial crisis in Q1 2008, total household debt outstanding—including mortgages, credit cards, auto loans, student loans and the rest——– was $13.957 trillion. That compares to $13.568 trillion outstanding at the end of Q1 2015.

That’s right. After 80 months of ZIRP and an unprecedented  incentive to borrow and spend, households have actually liquidated nearly $400 billion or 3% of their pre-crisis debt.

Likewise, zero money market rates are irrelevant to legitimate business finance. That’s because no sane executive would finance the life blood of his enterprise—–the working stock of raw, intermediate and finished goods—in the overnight money market; and, self-evidently, free overnight money is beside the point when it comes to funding long-term, illiquid but productive assets such as plant, equipment and software.

In fact, the only impact that free money market funding has on corporate America is round-about and perverse. To wit, it flushes money managers into a desperate quest for yield and provides stock speculators with endless opportunities to load up their trucks with zero cost carry trades, thereby driving the stock averages to lunatic heights.

As a result of this double-whammy, the C-suites of corporate America have been turned into glorified gambling parlors. The stock option obsessed executives domiciled there are endlessly and overpoweringly presented with the opportunity to sell cheap corporate credit to yield-hungry fund mangers and use the proceeds to buyback their own over-priced stock or to acquire at a hefty premium the equally over-priced stock of their competitors, suppliers and customers, or any other company that Wall Street bankers happen to be peddling.

Again, as I demonstrated last week, after 80-months of the absurd proposition that money has no natural and inherent economic cost the pettifoggers who held forth at Jackson Hole betrayed no clue whatsoever that they are aware of the obvious:

On the margin, all of the gains in business debt since 2008 has been flushed right back into Wall Street in the form of stock buybacks and debt-financed takeovers.

Non Financial Business Net Debt- Click to enlarge

The evidence that zero interest rates have not promoted business borrowing for productive investment is also plain to see. During the most recent year (2014), US business spent $431 billion on plant, equipment and software after depreciation. That was 7% less than net business investment in 2007.

And these are nominal dollars! So all other things being equal, net business debt could have fallen over the past 7 years. The actual gain in net debt outstanding shown above self-evidently went into financial engineering—-that is, back into the Wall Street casino.

Here’s the thing. You don’t need fancy econometric regression analysis or DSGE models to see that ZIRP is an macroeconomic dud. Simple empirical data trends show that it hasn’t goosed household borrowing and consumption spending, nor has it stimulated business investment.

So this is how it boils down. The only thing zero money market interest rates are good for is to subsidize financial market speculation. ZIRP means that the speculator’s cost of goods (COGS) is essentially zero whenever yielding or appreciating assets are funded in the repo market or its equivalent in the options pits and Wall Street confected OTC trades.

Accordingly, after 80 months of showering Wall Street with what is a wholly unnatural and perverse financial windfall—that is, zero cost in the money market—–the Fed has ignited a rip-roaring inflation. But the inflation is in the financial market, not the supermarket.

Needless to say, there was not even a faint trace of recognition of this fundamental reality in Stanley Fischer’s much heralded Jackson Hole speech on inflation. As usual, it was an empty bag of quasi-academic wind about utterly irrelevant short-term twitches in various inadequate measures of consumer inflation published by the Washington statistical mills. Indeed, Fischer went so far as to acknowledge that one of the more plausible consumer prices indices—–the Dallas Fed’s “trimmed mean” measure of the PCE deflator—was up 1.6% in the past year.

Here’s the thing. No one except the modern equivalent of medieval theologians counting angels on the head of a pin could think that the difference between this reading and the Fed’s arbitrary 2.0% inflation target is of significance to any economic actor in the real world. That fleeting and miniscule difference would never in a thousand years impact the wage and price behavior of firms competing in the world market for tradable goods where cheap labor and mercantilist FX and subsidy policies drive the competition for customers.

Nor would it alter the behavior of the overwhelming share of purely domestic service firms that inherently face an elastic supply curve owing to low entry barriers. There is an unlimited supply of nail salons and yoga studios because folks need work and the Fed’s financial repression policies have fueled a fantastic over-expansion of strip mall real estate.

Likewise, firms with deep brand equity everywhere and always try to raise prices to capture the heavy marketing and other investments which go into creating their brands’ value and consumer franchises. But only clueless academic modelers like Fischer would ever think that 40 basis points of shortfall in the short-run consumer inflation trend would impact the pricing strategy of brand name service firms—such as Amazon and Wal-Mart, for example.

In short, Fischer’s entire meandering discourse on this and that inflation index and his speculations about immeasurable “inflation expectations” was irrelevant drivel. It could have been delivered by any student who had passed Economics 101 at Podunk College.

And besides that, the man has the gall to cite the “Survey Of Economic  Projections” (SEP) as one key indicator showing that inflation expectations have remained “anchored”. For crying out loud, the SEP is the quarterly stab in the dark about the inflation outlook concocted by the 19 members of the Federal Reserve itself!

In fact, the only real value of Fischer’s pretentious bloviation was that it was a reminder that the financial system of the world is in thrall to a tiny, insuperably arrogant posse of Keynesian academics who have invented  from whole cloth a monetary theory of plenary control. They have effectively ended free market capitalism in the financial system and beyond and made democratic fiscal governance essentially irrelevant.

Here’s why. It all starts with the Fed’s specious mantra that the “Humphrey-Hawkins” dual mandate makes them do it.

No it doesn’t!  Nowhere does it instruct the Fed to keep its fat foot on the neck of liquid savers and depositors for 80 months running.

In fact, Humphrey-Hawkins is a content-free expression of Congressional sentiment crafted under the far different economic conditions of the mid-1970’s. It essentially says price stability and fulsome employment are devoutly to be desired national objectives ranking right up there with motherhood and apple pie.

Indeed, the Humphrey-Hawkins Act, which I voted against in 1977, is no more meaningful than the plethora of “captive nations” resolutions, which I voted for that same year—and just as archaic, too.

In today’s globalized economy, the Fed’s ballyhooed 2% inflation target is no more warranted by the statute’s rubbery language on “price stability” than is 3%, 1% or 0%. And the Fed’s preference for the PCE deflator index of consumer inflation, as measured over a never explained or defined period of time, is no more mandated by the Act than is use of the Cleveland trimmed median or the indices of the MIT Billion Prices Project, as measured monthly, quarterly, yearly or for any other arbitrarily defined period.

In short, the Fed’s 2% target as practiced in the Eccles Building and gummed about by Fischer last Saturday is nothing more than the arbitrary concoction of one demonstrably erroneous and obsolete school of economics. Over the past two decades these Keynesian statist throwbacks to the 1930s have infiltrated the boards and staffs of most of the world’s central banks—and have used their unlimited resources to hire most of the worlds so-called “monetary economists” to write self-justifying studies and perform “research” that is more in the nature of what used to be called “agit prop”.

At the same time, how could the legions of financiers, fund managers, economists, strategists and traders who inhabit Wall Street possibly object—even if they have no use whatsoever for the Keynesian religion of Fischer and his sidekicks?

The answer is in the chart below. Under the guise of its silly and arbitrary Humphrey-Hawkins targets the academic fools and crony capitalist opportunists who inhabit the Fed have been delivering a relentless drip of monetary heroin to the casino gamblers 80% of the time over the last 25 years.

The Fed's Addiction To The 'Easy Button': Rates Falling Or Flat 80% Of The Time Since 1990 - Click to enlarge

The Fed’s Addiction To The ‘Easy Button': Rates Falling Or Flat 80% Of The Time Since 1990 – Click to enlarge

So with academia on its payroll and Wall Street on its gift list, there is no one left to state the obvious. Namely, that by fueling the most fantastic inflation of financial assets in world history the Fed and its convoy of global central banks have sown its opposite in the real main street economy.

To wit, there is now a massive deflationary tidal wave cresting on the planet, and it was manufactured entirely by the central banks. In the DM world, consumers and governments are stranded at “peak debt” and can no longer live beyond their means by leveraging their balance sheets to the breaking point, as they did in the 30 years leading to the financial crisis.

Likewise, the EM world has buried itself in “peak investment”. This condition is owing to the massive repression of capital costs instituted over the last three decades by their mercantilist central banks in the process of buying dollars and euros to peg their exchange rates, thereby flooding their economies with cheap domestic credits.

As a consequence, the world economy is drowning in malinvestment and excess capacity for virtually every commodity from oil to iron ore and for every stage of downstream industrial production from refineries to blast furnaces, pipe and tube mills, ship-building facilities, car plants and container ships, ports and warehouses.

Moreover, two decades of lunatic money printing have also drastically roiled the global capital and currency markets. During the last 20 years of financial inflation, the Keynesian central bankers have forced DM world money managers to scour the globe looking for yield regardless of risk—a toxic form of malinvestment which is now violently reversing.

That is, credit-saturated EM economies are now imploding, causing their exchange rates to crash, as in Brazil; or is forcing their governments to dump massive amounts of dollar assets—accumulated over the long decades of monetary inflation—in desperate efforts to prop-up their currencies, as is now happening in China.

Yet the clueless academic who has spent a lifetime contributing to this disaster—first at MIT where he superintended Bernanke’s misbegotten thesis claiming that the Fed’s failure to massively crank up the printing presses during 1930-1932 was the cause of the Great Depression, through his work as a certified monetary apparatchik at the IMF, the Israeli central bank and now the Fed—effectively confessed in his Jackson Hole speech that he can’t see the forest for the trees.

Well, goodness, gracious. Yes, tumbling commodity prices and the on-going scramble to cover the massive global “dollar short” is roiling the sundry US consumer prices indices. But that is simply the feedback loop of central bank monetary repression and systematic falsification of financial asset prices.

Yet central banker obliviousness to these self-created interferences with and repudiation of their Keynesian bathtub models of macroeconomics knows no bounds. So they continue to equivocate, bloviate and insist that they will keep subsidizing the casino——presumably until it finally blows sky high so that they can resume tilting at “contagion”, which is to say, the violent re-pricing of asset bubbles that they caused in the first place.

Here is Fischer’s concluding paragraph. It leaves no doubt that he is oblivious to the financial firestorm brewing everywhere in the world, and that he is one of the most dangerous academic fools every to gain immense power over the fate of millions of ordinary citizens:

The Fed has, appropriately, responded to the weak economy and low inflation in recent years by taking a highly accommodative policy stance. By committing to foster the movement of inflation toward our 2 percent objective, we are enhancing the credibility of monetary policy and supporting the continued stability of inflation expectations. To do what monetary policy can do towards meeting our goals of maximum employment and price stability, and to ensure that these goals will continue to be met as we move ahead, we will most likely need to proceed cautiously in normalizing the stance of monetary policy………

When the next financial bubble crashes it can only be hoped that this time the people will grab their torches and pitchforks. Stanley Fischer ought to be among the first tarred and feathered for the calamity that he has so arrogantly helped enable.

Have Peripheral Colds Caused a U.S. Recession Flu?


Have Peripheral Colds Caused a U.S. Recession Flu?

Courtesy of Wade of Investing Caffeine


At the trough of the recent correction, which was underscored by a brief but sharp -1,100 point drop in the Dow Jones Industrial Average, the Dow had temporarily corrected by -16.2% from its peak in May, earlier this year. Whether we retest or break below the 15,370 level again is debatable, but with the Dow almost reaching “bear market” (-20%) territory, it begs the question of whether the U.S. has caught a recessionary flu from the ill international markets’ colds?

Certainly, several factors have investors concerned about a potential recession, including the following: slowing growth and financial market instability in China; contraction of -0.4% in Japan’s Q2 GDP growth; and turmoil in emerging markets like Russia and Brazil. With stock prices down more than double digits, it appears investors factored in a significant chance of a recession occurring. Although the Tech Bubble of 2000 and generational Great Recession of 2008-2009 were no ordinary recessions, your more garden variety recessions like the 1980 and 1990 recessions resulted in peak to trough declines in the Dow Jones Industrial Average of -20.5% and -22.5%, respectively.

In other words, with the Dow recently down -16.2% in three months, investors were awfully close to factoring in a full blown U.S. recession.  Should this be the case? In answering this question, one must certainly understand the stock market is a predicting or discounting mechanism. However, if we pull out our economic thermometers, right now there are no definitive indicators sending us to the recessionary doctor’s office. Here are a number of the indicators to review.

Yield Curve Indicator

For starters, let’s take a look at the yield curve. Traditionally, in a normally expanding economy, we would normally expect inflationary expectations and a term premium for holding longer maturity bonds to equate to a positively shaped yield curve (e.g., shorter term 2-Year Treasuries with interest rates lower than 30-Year Treasuries). Interestingly, historically an inverted yield curve (shorter term interest rates are higher than longer term rates) has been an excellent leading indicator and warning signal for unhealthy stock market conditions forthcoming.

As you can see in the charts below, before the two preceding recessions, in the years 2000 and 2007, we experienced an inverted yield curve that served as a tremendous warning signal in advance of significant downdrafts in stock prices. If you fast forward to today, the slope of the yield curve is fairly steeply sloped – nowhere close to inverted. When the yield curve flattens meaningfully, I will become much more cautious.

Inverted Yield Curve 8-25-15

The Oil Price Indicator

There is substantial interest and focus on the recessionary conditions in the energy sector, and more specifically the high yield (junk bond) issuers that could suffer. It is true that high yield energy credit spreads have widened, but typically this sector’s pain has been the economy’s gain, and vice versa. The chart below shows that the gray shaded recessionary time periods have classically been preceded by spikes upward in oil prices. As you know, we currently are experiencing the opposite trend. Over the last 12 months, WTI oil prices have been chopped by more than half to $45 per barrel. This is effectively a massive tax for consumers, which should help support the economy.

Source: MacroTrends.Net

Source: MacroTrends.Net

Other Macro Statistics

Toward the top of any recession-causing, fear factor list right now is China. Slowing economic growth and an unstable Shanghai stock market has investors nervously biting their nails. Although China is the 2nd largest global economy behind the U.S., China still only accounts for about 15% of overall global economic activity, and U.S. exports to the region only account for about 0.7% of our GDP, according to veteran Value investor Bill Nygren. If on top of the China concern you layer a fairly strong U.S. labor market, an improving housing market (albeit slowly), and a recently revised higher GDP statistics, you could probably agree the economic dashboard is not signaling bright red flashing lights.

There is never a shortage of concerns to worry about, including most recently the slowing growth and stock market turbulence in China. While volatility may be implying sickness and international markets may be reaching for the Kleenex box, the yield curve, oil prices, and other macroeconomic indicators are signaling the outlook for U.S. stock remains relatively healthy.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) , but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Wayfair is the Most Mispriced Stock Citron Research has seen in Years – Fair Value Under $10


Wayfair is the Most Mispriced Stock Citron Research has seen in Years — Fair Value Under $10

Courtesy of Citron Reports by Stocklemon

Citron Exposes Wayfair's Admission that their Business is Fatally Flawed.

Wayfair (NYSE:W) makes Citron feel like apologizing to every company we have written about in the past 5 years. Compared to Wayfair, … you all have viable business models. Any analyst who defends this stock is clueless about furniture retailing and even more clueless about e-commerce.

W is not a Battleground Stock! 

Shake Shack, FitBit, Tesla, Ambarella and GoPro:  Each of these stocks has passionate bulls and bears of equal conviction.  While each of these stocks sells at nosebleed multiples, each has a disruptive, cult like, or blue sky prospect, which longs and shorts will continue to debate.

But there is no bull case whatsoever for this stock, and Citron proves it.  

As we have previously tweeted, Citron admired the work of the Friendly Bear published last week on Seeking Alpha explaining why Wayfair’s current business is in the doghouse. While acknowledging Friendly Bear’s piece, Citron elaborates on the real context of Wayfair's actual business prospects, predicting that its stock will soon end up in single digits. We will defer to the Friendly Bear for all relevant information about Wayfair’s dangerously high customer acquisition costs.

Meanwhile, for longs, a challenge: Finish this sentence: Wayfair is the next __________________________??? Exactly.

For the rest of the story you won't read anywhere else, click here…


Inventory Grows in Economic Liftoff Anticipation

Courtesy of Mish.

The Chicago PMI reading came in just shy of the Bloomberg Econoday Estimate of 54.9.

The headline for August looks solid, at 54.4 for the Chicago PMI, but the details look weak. New orders and production both slowed and order backlogs fell into deeper contraction. Employment contracted for a fourth straight month while prices paid fell back into contraction.

Lifting the composite index are delays in shipments which point to tight conditions in the supply chain. Inventories rose sharply in the month and the report hints that the build, despite the weakness in orders, was likely intentional. But strength is less than convincing and this report suggests that activity for the Chicago-area economy may be flat going into year end.

ISM Chicago

Let’s dive into the Chicago PMI Report for further details.

While New Orders and Production softened in August, both remained above their 12-month averages and significantly up from the depressed levels seen between February and June. Part of that resilience in Production and New Orders was due to stock growth as companies built inventories at the fastest pace since November 2014. Feedback from companies was mixed although our assessment is that the overall positive tone of the survey is consistent with a deliberate stock-build in anticipation of stronger demand in Q4.

Despite the latest gain, the labour component remained in contraction for the fourth consecutive month and was still close to June’s nearly 5-1/2 year low. The Employment component has been relatively weak in recent months and the survey suggests it’s unlikely to see a strong pick-up in the short-term.

Responding to a special question asked in August, 63% of our panel said they didn’t plan to expand
their workforce over the next three months.

Economic Liftoff Anticipation

Once again, everyone hopes for a “second half liftoff” that perennially struggles to arrive as strong as expected.

This year, I highly doubt 2% for the entire year. 1% growth might be an achievement. Nonetheless, businesses stockpile in anticipation liftoff.

Anticipation is the word (and song) of the day.

Link if video does not play Anticipation: Carly Simon

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Dallas Fed Region Activity Plunges Well Below Any Forecast

Courtesy of Mish.

Repeat after me “housing and cars and part time jobs, oh my”. There’s little else worth cheering about, not even the stock market lately. And housing is not all that strong either.

Today, the Dallas Fed reported that activity in its region plunged to a reading of -15.8, well below any economist’s prediction. The Bloomberg Consensus range was -8.0 to +0.5.

Nowhere are the effects of the oil-patch rout more evident than in the Dallas Fed manufacturing report where the general activity index fell to minus 15.8 in August from July’s already weak minus 4.6. New orders fell into deep contraction this month, down more than 13 points to minus 12.5 with employment, at minus 1.4, in contraction for a fourth straight month. Hours worked are at minus 6.3 while readings on the business outlook fell steeply though both remain in slightly positive ground. Less weak readings were posted by production, shipments and capacity utilization. But price readings are very weak, with raw materials at minus 8.0 and finished goods at minus 15.7. It really doesn’t get any worse than this report which points to increasing drag from the energy sector.

Dallas Fed Business Indicators

Note that wages and benefits are up big, while prices received and new orders are in deep contraction.

The above table from the Dallas Fed Texas Manufacturing Outlook Survey.

Some of the comments are interesting.

Primary Metal Manufacturing

  • Overall business is slowing.
  • The strength of the dollar is impacting us through an inability to export and high volume of imports.
  • The price of finished product dropped dramatically.

Fabricated Metal Manufacturing

  • New orders have dropped to half of what they were last year. Capital project equipment continues to be sourced in China and Korea as the owners are chasing every dollar of savings possible. We had our first layoff in 15 years.
  • We are currently experiencing a large surge in the automotive industry due to our relationship and close proximity to an automotive plant during a new vehicle implementation period.
  • It seems like if you are in a position to take on work and able to turn it around quickly there seems to be plenty of small to medium-range quantity types knocking. We are hoping that as oil prices continue to fall, food and other commodities fall also.
  • A little more deflation could certainly help.
  • Our oil and gas business, historically 50 percent of our revenues, is still down. Inventories have been consumed fairly well, which now offsets the second drop of oil prices. The growth we expect is due to our efforts to grow our non-oil and gas business.
  • The continued decline in the West Texas Intermediate crude oil price is expected to soften the demand for our basic fabricated products.
  • The volatility in the stock market and decreased energy costs always have a negative impact on replacement windows orders.
  • Even though there is a substantial decrease in raw material prices, capacity levels in PVC and glass are extremely constrained.
  • The reason for the decreased capacity levels is that during the housing crisis no capital expenditures were made and now most vendors are at full capacity.

Mike “Mish” Shedlock

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Michael Hudson’s New Book: Wall Street Parasites Have Devoured Their Hosts – Your Retirement Plan and the U.S. Economy

Courtesy of Pam Martens.

Author and Economist, Michael Hudson

Michael Hudson

The riveting writer, Michael Hudson, has read our collective minds and the simmering anger in our hearts. Millions of American have long suspected that their inability to get financially ahead is an intentional construct of Wall Street’s central planners. Now Hudson, in an elegant but lethal indictment of the system, confirms that your ongoing struggle to make ends meet is not a reflection of your lack of talent or drive but the only possible outcome of having a blood-sucking financial leech affixed to your body, your retirement plan, and your economic future.

In his new book, “Killing the Host,” Hudson hones an exquisitely gripping journey from Wall Street’s original role as capital allocator to its present-day parasitism that has replaced U.S. capitalism as an entrenched, politically-enforced economic model across America.

This book is a must-read for anyone hoping to escape the most corrupt era in American history with a shirt still on his parasite-riddled back.

Hudson writes from his most powerful perch in chapters describing how these financial parasites have tricked our society into accepting them as a normal, productive part of our economy. (Since we write about these thousands of diabolical tricks four days a week at Wall Street On Parade, poignant examples came springing to mind with every turn of the page in “Killing the Host.” From the well-placed articles in the Wall Street Journal to a front group’s pleas for more Wall Street handouts in a New York Times OpEd, to the dirty backroom manner in which corporate speech was placed on a par with human speech in the Supreme Court’s Citizens United decision, to Wall Street’s private justice system and the Koch brothers’ multi-million dollar machinations to instill Ayn Rand’s brand of “greed is good” in university economic departments across America — America has become a finely tuned kleptocracy with a sprawling, sophisticated public relations base.)

How else to explain, other than kleptocracy, the fact that Wall Street’s richest mega banks collect the life insurance proceeds and tax benefits on the untimely deaths of their workers – all codified into law by the U.S. Congress – making death a profit center on Wall Street. Or, as Frontline revealed, that two-thirds of your 401(k) plan over a working lifetime is likely to be lost to financial fees.

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Economics 102: WalMart Cuts Worker Hours After Hiking Minimum Wages


Courtesy of ZeroHedge. View original post here.

This year, some American executives who heeded loud calls for across-the-board wage hikes for America’s lowest-paid workers received a complimentary refresher course in undergrad economics courtesy of the free market. 

Take Dan Price for instance, the 31-year old CEO of Seattle-based Gravity Payments Systems who found out the hard way that setting the pay floor at $70K comes with all manner of unintended consequences. 

And then there’s Wal-Mart.

Earlier this year, the retail behemoth became one of several corporate heavyweights to raise wages for its meagerly compensated workers, around 500,000 of which are now set to receive at least $9/hour and $10/hour by Q1 2016. The move will cost somewhere around $1 billion this year. 

Now one thing that should have been abundantly clear from the start is that if ever there were an employer that could ill-afford a $1 billion across-the-board pay raise without immediately making up the difference by either firing some employees, cutting hours, or squeezing the supply chain, it’s Wal-Mart. After all, they’re the “low price leader”, and you don’t hold on to that title by passing labor costs on to customers.

Predictably, the company moved to extract more “value” from its suppliers and when that didn’t prove sufficient, the folks in Bentonville brought in the “plumbers.” 

But the story didn’t stop there. Late last month we highlighted an internal memo circulated at Arkansas recruiting firm Cameron Smith & Associates which looked to be an attempt to prepare the firm’s employees for layoffs at Wal-Mart’s home office. Then, not a week later, Bloomberg ran a story detailing the grievances of some senior Wal-Mart employees who suddenly realized that although they may still be making more than their subordinates, the wage hierarchy had been distorted and that distortion had nothing to do with merit. As we put it, “higher paid employees don’t understand why everyone under them in the corporate structure suddenly makes more money and if people who are higher up on the corporate ladder don’t receive raises that keep the hierarchy proportional they may simply quit which means that, for Wal-Mart, raising the minimum for the lowest paid workers to just $9/hour will end up costing the company around $1.5 billion if you include the additional raises the company will have to give to higher paid employees in order to retain their 'talents' and avoid a mid-level management mutiny.”

Well, don’t look now, but undergrad economics is rearing its ugly again at Wal-Mart as the retailer cuts workers’ hours in a desperate attempt to offset wage hikes. Here’s Bloomberg with more:

Wal-Mart Stores Inc., in the midst of spending $1 billion to raise employees’ wages and give them extra training, has been cutting the number of hours some of them work in a bid to keep costs in check.

Regional executives told store managers at the retailer’s annual holiday planning meeting this month to rein in expenses by cutting worker hours they’ve added beyond those allocated to them based on sales projections.

The request has resulted in some stores trimming hours from their schedules, asking employees to leave shifts early or telling them to take longer lunches, according to more than three dozen employees from around the U.S. The reductions started in the past several weeks, even as many stores enter the busy back-to-school shopping period.

A Wal-Mart employee at a location near Houston, who asked not to be identified because she didn’t have permission to talk to the media, said her store had to cut more than 200 hours a week. To make the adjustment, the employee’s store manager started asking people to go home early two weeks ago, she said. On Aug. 19, at least eight people had been sent home by late afternoon, including sales-floor associates and department managers.

The employee said she’s covering an area once staffed by multiple people at one of the busiest times of the year — the back-to-school season. On a recent weekday, she had a customer who had to wait 30 minutes for an employee to unlock a product the shopper wanted to purchase, she said.

The staff at a location in Fort Worth, Texas, were told that the store needed to cut 1,500 hours, according to a worker who asked not to be named for fear of being reprimanded. 

So there you have it. Further proof that across-the-board wage hikes – like socialized medicine and free college – is a concept that sounds good when considered in a vacuum, but when implemented is subject to economic realities that conspire to make the end result look far less desirable than proponents might have imagined.

And therein lies the problem. Projecting how these "experiments" might turn out isn't difficult, which makes one wonder how policymakers and corporate management teams seem to get them wrong on a fairly consistent basis. Then again, when you live in a world governed by the principle that the cure for debt is still more debt, it's easy to see why some still believe, despite all the evidence to the contrary, that you can have your cake and eat it too.

Picture source

The Real Refugee Crisis Is In The Future

Courtesy of The Automatic Earth

Dorothea Lange Farm family fleeing OK drought for CA, car broken down, abandoned Aug 1936

Perhaps Angela Merkel thought we didn’t yet know how full of it she is. Perhaps that’s why she said yesterday with regards to Europe’s refugee crisis that “Everything must move quickly,” only to call an EU meeting a full two weeks later. That announcement show one thing: Merkel doesn’t see this as a crisis. If she did, she would have called for such a meeting a long time ago, and not some point far into the future.

With the death toll approaching 20,000, not counting those who died entirely anonymously, we can now try to calculate and predict how many more will perish in those two weeks before that meeting will be held, as well as afterwards, because it will bring no solution. Millions of euros will be promised which will take time to be doled out, and further meetings will be announced.

But the essence remains that Europe doesn’t want a real solution to the crisis. That’s why Merkel refuses to acknowledge it as one. The only solution Europe wants is for the refugees to miraculously stop arriving on its shores. If more people have to drown to make that happen, Berlin and Brussels and London and Paris are fine with that.

If those who make it must be humiliated by not making basic needs available, by letting them walk dozens if not hundreds of miles in searing heat, then the so-called leaders are fine with that too.

Europe needs leadership but it has none. Zero. At the exact moment that it is time for all alleged leaders to stop talking about money, and start talking about human lives. It’s matter of priorities, and everything Europe has done so far points to nobody in charge having theirs straight.

That goes for Greece too: Tsipras, Varoufakis, all of them, need to stop campaigning on money issues, and direct their attention towards lives lost. That may well lead to a Grexit not on financial grounds, but on humanitarian ones. And those are much better grounds on which to leave Europe. Get your priorities straight.

Europe needs to, first, meet tomorrow morning and engage in immediate action to facilitate humane treatment of all refugees. And then it needs to call subsequent meetings at the highest levels to look at the future of this crisis. Not doing this guarantees an upcoming disaster the scope of which nobody can even imagine today.

The media focus on a truck in Austria where 70 human beings died, and on a handful of children somewhere who were more dead than alive when discovered. These reports take away from the larger issue, that there are dozens such cases which remain unreported, where there are no camera’s present and no human interest angle to be promoted that a news outlet thinks it can score with.

Brussels and Berlin must throw their energy and their efforts at ameliorating the circumstances in the countries the refugees are fleeing. They need to acknowledge the role they have played in the destruction of these countries. But the chances of any such thing happening are slim to none. Therefore countries like Greece and Italy must draw their conclusions and get out, or they too will be sucked down into the anti-humanitarian vortex that the EU has become.

Europe needs to look at the future of this crisis in very different ways than it is doing now. Or it will face far bigger problems than it does now.

Italy’s Corriere della Sera lifted part of the veil when it said last week (Google translation):

The desperation of millions of human beings, manipulated by traffickers and by terrorist groups is also an instrument of disintegration of the countries of origin and of destabilization of the host countries.

It is estimated that sub-Saharan Africa will have 900 million more inhabitants in the next twenty years. Of these, at least 200 million are young people looking for work. The chaos of their countries of origin will push them further north.

That is the future. It will no more go away by itself, and by ignoring it, than the present crisis, which, devastating as it may be, pales in comparison. Europe risks being overrun in the next two decades. And as things stand, it has no plans whatsoever to deal with this, other than the military, and police dogs, barbed wire, tear gas, fences and stun grenades.

This lack of realism on both the political and the humane level will backfire on Europe and turn it into a very unpleasant place to be, both for Europeans and for refugees. Most likely it will turn the entire continent into a warzone.

The only solution available is to rebuild the places in Syria and Libya et al that the refugees originate from, and allow them to live decent lives in their homelands. If Brussels, and Washington, fail to realize this, things will get real ugly. We haven’t seen anything yet.

At present, it is as impossible for Greece and Italy to define their own policies on the refugee issue as it is on their economic policy. They will be drawn down with the rest of the continent if they allow the EU to take charge of either issue, but the most important one today is the refugee crisis.

Stop talking about money, start talking about people. Or you will desperately regret it in the years to come. Consider yourselves warned.


China Starts Witch Hunt for Those Obstructing Government Efforts to Prop Up Stocks

Courtesy of Mish.

In China, a massive witch hunt is underway.

Beijing regulators now seek individuals who  have destabilized the markets and spread rumors.

Official want someone to blame after their Large-Scale Share Purchases failed to halt a huge stock market slide.

China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilising the market”, according to senior officials.

For two months, a “national team” of state-owned investment funds and institutions has collectively spent about $200bn trying to prop up a market that is still down 37 per cent since its mid-June peak.

After standing on the sidelines for more than a week, the government resumed large-scale stock-buying in the last hour of trade on Thursday. This helped to lift the Shanghai benchmark index from a small loss to end the day up more than 5 per cent. The market rose by almost 5 per cent again on Friday.

Senior financial regulatory officials insist that this was an anomaly, and that the government will refrain from further large-scale buying of equities.

Instead, authorities are planning to sharpen their focus on investigating and punishing individuals and institutions they believe have taken advantage of the state bailout to make profits or have obstructed the government’s attempts to shore up the market.

The regulator said 22 cases of insider trading, market manipulation and “spreading market rumours” had been handed over to the police.

Last Tuesday, following a 22 per cent fall in China’s stock market over four trading days — the worst drop for almost 20 years — police detained 11 people suspected of “illegal market activities”.

Inane Policies

If China wants to find the culprits behind the selloff, its leaders ought to look in a mirror.

Totally inane growth targets, worthless or near-worthless SOEs, and currency manipulation by China's central bank are obvious problems that helped create a huge property bubble followed by a huge stock market bubble….

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Donald Trump Versus Bernie Sanders?? The Political Bubble Is Bursting

Courtesy of John Rubino

Now it’s not just Europe where formerly-fringe candidates are suddenly vying for power. The US presidential primaries, which were supposed to be coronations for the latest Bush/Clinton snoozfest, have turned interesting and in some cases surreal, as Donald Trump, who a few short months ago was viewed as a kind of circus clown by most Republicans, and Bernie Sanders, an honest, straight-shooting avowed socialist, are drawing the biggest crowds and creating the most excitement.

But far from being a surprise, this is exactly the kind of thing an over-indebted and therefore ungovernable society should expect. From Chapter 14 of The Money Bubble: What To Do Before It Pops (January 2014):

Just based on the numbers, the global financial system should have collapsed long ago. That it hasn’t has less to do with economics than with politics. The people in charge have arranged things so that they can keep borrowing, spending and printing into the indefinite future – as long as they can agree on “compromises” that give each faction most of what it wants. That’s how US military spending can soar (thus keeping the right happy) while entitlement programs can simultaneously spread to every corner of American life (keeping the left happy). As long as the resulting deficits can be financed and the bond, currency and precious metals markets tamed with repeated government interventions and newly-printed currency, then the game can continue.

But if this log-rolling political consensus breaks down, all bets are off. And there are signs that this is indeed beginning to happen. An entire book could be written about the political turmoil that was roiling the world of 2013, but since we have just a few pages, we’ll present the juiciest European example and then focus on the US, which is emblematic of what’s happening everywhere.

In October 2013 Marine Le Pen’s eurosceptic National Front party won a local French election and for the first time ever took the lead in a national poll. As she famously told London’s Daily Telegraph before the election, the European Union “is just a great bluff. On one side there is the immense power of sovereign peoples, and on the other side are a few technocrats.”

Generally portrayed by the two major (center-right, center-left) parties as racist or neo-fascist, the National Front’s public goals of limiting immigration, especially from Africa and the Middle East, and withdrawing from the eurozone and going back to the French franc were beginning to resonate with voters exhausted by the feeling that recent immigrants aren’t assimilating and the PIIGS countries aren’t managing their own affairs. And the French experience is being replicated in numerous other eurozone countries, where anti-euro parties once on the fringe are drawing serious support. Greece in particular has actual neo-Nazis and communists contesting major elections.

In the US, the late-2013 battle over the debt ceiling has exposed similar, equally colorful fault lines. Within the Republican party, the mainstream (log-rolling, back-scratching) career politicians wanted, as the October default deadline approached, to cut a deal to keep the government up and borrowing. But a small band of Tea Party-affiliated conservatives and libertarians were having none of it, and forced a dramatic game of chicken in which neither side, for a while, was willing to blink until a day before the Treasury was due to default on its bond interest payments.

This was more than simple political brinksmanship. There seemed to be, gasp, actual principles beyond career longevity involved, and it presages both more turmoil between Republicans and Democrats and very possibly the birth of an influential third party, currently within the Republican tent but soon to be outside of it. It will be semi-coherently anti-debt and pro-small government – and it might, like France’s National Front, attract enough support to gum up the borrow-and-print consensus, perhaps forcing real choices.

Why does this matter? Because the markets by late 2013 had come to believe that political turmoil is always followed by a deal that feeds more currency into the hands of banks and consumers, thus supporting asset prices. Looked at this way, the American political system is a bubble of unrealistic expectations, just as certainly as were dot-coms in 1999 and home prices in 2006.

The complacency engendered by this political bubble is exactly why the ending of political consensus matters. With bonds, stocks, houses and pretty much everything else “priced for perfection” in the expectation that newly-created money will always save the day, any interruption in that flow – or perception that it might be interrupted in the future – would cause a broad-based re-pricing (i.e., a bear market) that could easily spin out of control – especially with a government grid-locked by incompatible ideas about how to proceed.

This asset re-pricing would be global, and would include Treasury bonds and the dollar itself, which would lose its reserve currency luster if the US was seen as no longer willing or able to automatically finance its deficits. In that circumstance, the Long Wave would return with a vengeance, taking the US and the rest of the world from the unreal (paper currency) into the surreal (hyperinflation, complex system catastrophic failure, and authoritarian government). And it would happen suddenly, when a spending bill fails, or an anti-Fed party has a surprisingly good election, or a debt ceiling extension just can’t be sold to Congress, bringing an immediate end to the easy-money gravy train.

The examples in the above excerpt are a bit dated but the sentiment is becoming more relevant every day. The credibility breakdown of the political class is opening the door to candidates who wouldn’t have gotten 5% in most previous elections, either because they’re buffoons (Trump) or because they won’t play ball with the ruling bank/government/corporate CEO coalition (Sanders).

The closer someone like this gets to actual power, the greater the possibility of gridlock that makes the next implementation of the Greenspan put less of a sure thing. And once the markets suspect that financial assets might soon be priced realistically, it’s game over.

Visit John's Dollar Collapse blog here


Greek Snap Election Confusion; Tsipras’ Questionable Gamble; Unwieldy Coalition Coming Up?

Courtesy of Mish.

Questionable Gamble

In the wake of reneging on major election promises, Greek prime minister Alexis Tsipras resigned and called for snap elections. He did so out of fear of losing a vote of confidence that would have forced the same result down the road.

In addition, Tsipras wanted the vote out of the way before further rounds of pension cuts and tax hikes took their toll on the economy.

His gamble now appears questionable.

Please consider Alexis Tsipras Rallies Supporters as Syriza Takes Knock in Polls.

Alexis Tsipras tried to rally Syriza party members behind him at the weekend in advance of a snap election, as opinion polls reflected deepening disappointment among voters with his government’s record.

His message to the weekend meeting was undermined by infighting among senior party officials, reflecting Syriza’s disarray in the wake of mass defections last week to Popular Unity, a new radical party led by the former energy minister Panagiotis Lafazanis, according to people who were present at the event on Saturday.

In another blow to the Syriza leader’s authority, a usually loyal party faction known as the “Group of 53”, which includes several former cabinet ministers, circulated a document at the meeting sharply criticising the premier’s decision last month to make a policy “somersault” and agree to a third rescue package totalling €86bn after months of tense negotiations.

“We need to come up with a persuasive alternative plan . . . that will lead us out of the memorandum [bailout agreement],” the document said.

More than 50 members of Syriza’s central committee and 27 of its MPs, including a former deputy finance minister, have switched to Popular Unity, which is campaigning on a defiant platform that calls for a voluntary exit from the eurozone and the re-adoption of the drachma.

“Re-adopting the drachma is not a catastrophe. . . There are plenty of European countries doing well that are not members of the eurozone,” Mr Lafazanis said at the weekend.

However, Syriza is still expected to win the election by a narrow margin, according to six opinion polls published over the weekend….

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The Fat Pitch: Weekly Market Summary


Weekly Market Summary

Courtesy of  

Summary: Waterfall events like the current one tend to most often reverberate into the weeks ahead. Indices will often jump 10% or more higher and also attempt to retest the lows.  Volatility will likely remain elevated for several months. But the fall in equity prices, which has knocked investor sentiment to its knees, opens up an attractive risk/reward opportunity for investors. Further weakness, which is quite possible, is an opportunity to accumulate with an eye toward year-end. However, a quick, uncorrected rally in the next week or two would likely fail.

* * *

Equities ended the week higher: SPY and DJIA rose 1% and NDX rose over 3%. Outside the US, Europe gained 1% and EEM gained 3%. The biggest mover was oil, which gained 12%.

The last two weeks have been remarkable. On August 17, SPY closed less than 1% from its all-time closing high. A week later it had lost 11%. And then three days later it had regained half of those loses, jumping 6%.

A drop that much, that quickly, is very rare. According to David Bianco, it has happened only 9 times in the more than 20,000 trading days in the past 80 years. All of these occurrences were precipitated by (perceived or real) political or economic crises.

That was the case now as well. Since the Chinese Yuan depreciation began through the low in equities on Monday, 92% of the fall in SPY occurred overnight. Cash hours were nearly flat. The fall in equities had very little to do with domestic earnings or economic reports. It was a reaction to events overseas.

Our view has been that the Yuan depreciation (just 3% to date) is unlikely to have a long lasting affect on the US stock market or its fundamentals. Exports to China account for less than 1% of US GDP. Only 2% of revenues for S&P companies is directly derived from China (data from Barrons).

Moreover, the current situation is nothing like the Asian financial crisis in 1997. We detailed this last week with the conclusion that even that far more significant event had limited impact on US equities (read more here). There has as yet been no spillover to other currencies (data from the WSJ).

Our bottomline is that the fall in equity prices, which has knocked investor sentiment to its knees, opens up an attractive risk/reward opportunity for investors. Further weakness, which is quite possible, is an opportunity to accumulate with an eye toward year-end.

Volatility will likely remain elevated for several months. Waterfall events like these tend to most often reverberate many weeks ahead. Price will often jump 10% or more higher and also attempt to retest the lows. Investors that have become accustomed to smooth conditions should be forewarned.

Let's look at previous similarly quick falls in SPY.

In 1997 (left side of the chart), a 14% fall in SPY was quickly reversed. The low was never retested but SPY struggled for several weeks after its initial bounce.  It gained almost 20% six weeks after the low but after 3 months it had given back half those gains and had really not progressed far. Note first resistance at the point where the plunge took place (arrow).

In 1998 (right side of chart above), SPY also hit first resistance at levels where investors had been trapped by the swift fall (horizontal lines). The first low was retested in the next week and next month. In between, SPY rallied 13%. The first low was largely the extent of the downside.

2011 was similar to 1998; both declines were more severe than now and both recoveries were slow. Like 1998, the lows were retested in the next week and next month. Again, note the first resistance where investors were left surprised and eager to sell (arrow).

On their own, these prior instances are not definitive, but they do suggest that at least half of the initial bound in SPY off the low will likely be retraced in the next week or two and maybe again a few weeks later. A full retest of the low is also possible, near term and in the weeks ahead. The range will likely be wide and loose.

The open gaps in SPY are areas where investors woke up and found themselves trapped from the overnight fall; these are likely to be resistance levels: 202-204 and 206 (green). The area around 204 is likely to be particularly formidable, as this was also the bottom of a long trading range (yellow). A rally to 204 would equal 9% off the low. On the downside, filling the open gap at 194 would equal a 50% retrace of the initial bounce.

Based on the patterns from prior cases, a revisit to the lows, especially the first time, would be a high odds point to accumulate.  Contrariwise, an uncorrected move to the 202-204 area in the next week or two would likely fail, with expectations that the lower end will be revisited before price moves substantially higher.

The most compelling evidence that a near low has been established is extreme equity outflows. Almost $30b left global equity funds over the past week, the largest outflow since BAML began tracking in 2002. $19b left equity funds on Tuesday alone, the largest single-day outflow since August 2007 (article).

In the chart above, large outflows in 2012 (May), 2013 (June) and 2014 (October) corresponded to durable lows in equities. In August 2007, SPY had dropped more than 10% (similar to now) in the course of a month. The large equity outflow marked the exact low (red arrow) and SPY was 12% higher two months later.

Note that at the August 2007 low, like now, SPY was under its 200-dma and it's 50-dma was declining. This was bearish price action; it looked to all like the bull market was over. In the event, it was not a smooth ride higher. More than half the initial bounce off the low was given back in September and it took 4 weeks for SPY to clear its 50-dma (blue arrow). But SPY went on to a new high nonetheless.

If this same price action occurs now, SPY could be trading between a high of 200-205 and a low of 190-195 until late September, and at new highs by Thanksgiving. That sounds unlikely to most now, but keep an open mind.

Similarly, flows into Rydex bearish funds and cash (lower panel) rose to one of the highest levels in nearly 10 years this week. Defensive moves like these have corresponded with lows in SPY during bull markets (data from Andrew Thrasher).  

Many sentiment reports look similar to fund flows. Investors Intelligence bulls minus bears fell to 9.1% and NAAIM equity exposure fell to 28%. The chart below is from II; sentiment is at the equivalent level to June and November 2012 and also the August 2007 low referenced earlier (green lines). Perhaps it will sink further to below zero. Based on this, the low this week 'should' be close to a durable low, although one that may be retested.

An important point: sentiment turned quickly bullish after the August 2007 low. By October, sentiment had already become overly bullish again. The index peaked and fell into a bear market. This is in contrast to the period after the 2011 low. This is something to watch closely in the weeks ahead.

Forward returns in SPY over the next 3, 6 and 12 months are above average when II bulls minus bears is at current levels (arrow and highlight).  In fact, lower sentiment doesn't improve returns over the next half year (data from Charlie Bilello).

Breadth is as washed out as sentiment. On Monday, the percent of DJIA stocks above their 50 or 200-dma was as low as on July 2, 2010 and August 10, 2011. That was the exact low in 2010 and a 2 month low in 2011.

In the Nasdaq, breadth has only twice in the past 15 years been more washed out than it was this week: near the end of the 2008 decline and at the 2011 low (green lines). Lows in the NDX have typically come when breath was less washed out than now (yellow). This week was an extreme sell off that typically sets up a new leg up in equities.

In the S&P, the percentage of stocks on Point and Figure buy signals (a measure of breadth) fell to one of the lowest levels in the past 20 years this week (green highlights). The bounces from the low in 1998 and 2011 might look small, but were ~10% both times. These lows were retested 1 and 2 months later, respectively. The other instances came during or at the bottom of a bear market. Assuming, as we do, that the bull market is ongoing, this week 'should' have marked a near low in equity prices.

VIX shot up over 50 this week. This is the highest level in 20 years outside of the 2008-09 meltdown. Clearly, fear levels were extreme. The more important point is that in each similar case during a bull market (highlighted) it took at least 2 months and sometimes as long as 6 months before VIX fell back under 20. This suggests that the coming weeks (and longer) will likely remain volatile; again, trading ranges will be wide and loose. A 10% move higher followed by a retest of the lows by the end of October is within that realm.

We see that prior cases where sentiment, breadth and volatility are similar to now have occurred in bear markets. Our firm belief is that the bull market is ongoing. We detailed this last week. In brief, bear markets begin either because sentiment reached an extreme or, more often, because economic data points to a contraction. Neither of these currently apply. Read further here.

US macro data continues to point to an expansion. Real GDP, final sales, GDI, retail sales and personal consumption are all growing about 2.5-3% yoy. Housing starts and sales are at 8 year highs. Railroad loadings are at all-time highs and trucking tonnage is near its recent highs. The overwhelming evidence is that the economy is in an expansion; there is not a compelling economic set up for a bear market (data from Yardeni).

The biggest weakness now is valuations: it is a valid point that valuations are not cheap. Even after the sell off, P/Es on the S&P are about 7% above their long term average. Price to sales is closer to 20% above its average. If margins decline, which they have yet to do, earnings will grow slower than sales. Unless the economy starts growing faster than 2-3% (real), valuations could realistically restrain the upside potential of share prices. That doesn't have to equate to an equity decline, but upside expectations should probably be kept in check (data from FactSet). 

Stability in crude would likely help calm equity markets (fear of HY defaults) and improve corporate financials (the fall in oil is the primary culprit behind flat EPS and sales in the past year). Crude prices fell 60% until March, then rose 50% to June before falling 40% into August. We have detailed this pattern before (here). The 12% rise in crude this week reversed the prior 3 week decline. The first reaction will likely come at its falling 50-dma near $50 (arrows). The 50-dma needs to flatten out before a more sustained uptrend becomes likely.

September begins on Tuesday. Over many different time periods, September has usually been a poor month for equities. This would fit with a pattern where equities now work off the extremes in downward momentum over the next month (data from Bespoke).

Equities perform well in the first half of the month; it's the latter half which has been weak, something to keep in mind should SPY rally without much of a retrace in the next week or two (data from Almanac Trader).

This roughly fits the pattern around Labor Day: SPY is normally strong leading into the holiday (which is next weekend) but turns neutral the week after (data from SentimentTrader).

The Fed holds its annual meeting at Jackson Hole this weekend. It has marked lows and near tops in the past 6 years. There's no solid edge either way.

Economic reports next week are dominated by non-farm payrolls on Friday. 

In summary: It's never perfect in equity markets; when price patterns and breadth look healthy, sentiment is overly bullish and further appreciation becomes limited. When price falls, the price pattern looks scary and breadth looks terrible but sentiment becomes too bearish. These are when longer term lows form. More likely than not, that is where equity markets are now. 

Our weekly summary table follows:


Cost of PUTs on Shanghai Index Hits Record vs. Calls; Sentiment vs. Valuation

Courtesy of Mish.

In spite of the recent plunge on the Shanghai index, as recently as August 24, CALL options on the index were more expensive than PUT options.

This Bloomberg headline “If the Options Market Is Right, China’s Stock Rescue Is Doomed” reads like something one would find in a tabloid, but the reverse is now true.

Options traders have never been so pessimistic on China’s stock market, betting the government’s renewed effort to prop up share prices is doomed to fail.

The cost of bearish contracts on the China 50 exchange-traded fund surged to the highest level versus bullish ones since they started trading in Shanghai six months ago. The so-called skew also climbed to a record for a similar ETF in the U.S., even as government buying drove China’s benchmark index to a 10 percent rally in the final two days of last week.

Puts that pay out on a 10 percent drop in the China 50 ETF cost 7 points more on Friday than calls betting on a 10 percent gain, according to implied volatility data on one-month contracts. As recently as Aug. 24, the bullish contracts were more expensive. For the U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the skew reached a record 38 points on Aug. 27 and closed the week at 28 points.

Puts that pay out on a 10 percent drop in the China 50 ETF cost 7 points more on Friday than calls betting on a 10 percent gain, according to implied volatility data on one-month contracts. As recently as Aug. 24, the bullish contracts were more expensive. For the U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the skew reached a record 38 points on Aug. 27 and closed the week at 28 points.

Equities on mainland bourses traded at a median of 53 times reported earnings last week. That’s the most among the 10 largest markets and more than twice the 19 multiple for the Standard & Poor’s 500 Index. Analysts have cut their 2015 profit estimates for Shanghai Composite companies by 8.8 percent this year, according to data compiled by Bloomberg.

Options Skew

click on chart for sharper image

Valuation Still Extreme

Fundamentally speaking, the Shanghai stock market is hugely overpriced. I concur with BofA strategist David Cui, who says equity valuations and earnings growth aren’t appealing enough to support the market in the absence of government buying.

Cui estimates the Shanghai Composite needs to fall another 35 percent before shares become attractive. “The government will not support the market forever.”

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Three Keys to the Week Ahead


Courtesy of Marc To Market

There are three things that will command investors' attention in the week ahead.  The first, and most important, is whether the global capital markets will continue to move toward stability after the huge drama over the past week or two. The instability appears to have shaken the confidence of some Fed officials and market participants that a September lift-off is the most likely scenario.  

Our assessment of the technical condition of the market is that the panic is over, some capitulation was seen, and equities, interest rates, and currencies took a big step toward returning to status quo ante in the second half of last week. We recognize the technical condition as a reflection of market psychology. It is as if Mr. Market was shaken out of its melodramatic response with an ostensibly refreshing slap.  While the precipitous drop of the magnitude we experienced was indeed scary on many levels, the system showed a comforting resilience, both operationally and psychologically.  

The markets had not reached the point of breakdown in which everyone was forced to be short-term traders.  Speculators capitulated (e.g., the gross short yen futures position were slashed by more than 37k contracts, which in percentage terms is the biggest short squeeze in three years).  Margin calls were made.  Yet there were medium and longer-term investors that recognized the exaggerated sell-off as a new opportunity.  The break of dramatic momentum was able to feed on itself.  Those short-term momentum traders then were forced to cover

The second is the ECB meeting.  The updated staff forecasts will likely point to slower growth and less price pressures than had been expected in the June forecasts.  Rather than end early as some had previously speculated, the ECB's asset purchases may be increased.  This could happen through increasing the monthly amount from the current 60 bln euros, or it could extend beyond September 2016.  

It seems unreasonable to expect any such announcement now.  ECB President Draghi is likely to emphasize the flexible nature of its asset purchases.   Draghi has often cautioned that the cyclical upswing would be contained by the lack of structural reforms.  Also, financial conditions have become somewhat less accommodative.  

On a trade-weighted basis, the euro has risen by 4.7% since March, and most of it has been recorded since the middle of July.  Indeed, since July 6, the euro has been the strongest of the major currencies.  European equity markets have continued to surrender the year's earlier impressive gains.  

With a 9% bounce off the extreme low recorded on August 24, the Dow Jones Stoxx 600 is still off a little more than 10% since the August 5 high.  The DAX had risen more than 25% in the first part of the year, but it has all been wiped out.  It spent the first part of last week in negative territory for the year.  It finished last week up 5%.  

Bond yields have risen in recent months.  Over the last six months, the 10-year benchmark bund yield has risen by 41 bp.  Spain's benchmark yield is up 80 bp.  Italy is up 60 bp.  More than half (25 bp) of the bund increase has taken place over the past three months.  The backing up of Spanish and Italian yields occurred earlier.  In the past three months, Spanish and Italian 10-year yields have risen by 22 bp and seven bp respectively. 

Market measures of inflation expectations have fallen, and although headline consumer prices are rising on a year-over-year basis, the risk is on the downside.  Similarly, core inflation has risen from 0.6% in March and April to 1.0% in July, but the best news may be behind it.     The final August reading will be published on Monday, August 31, and it is expected to be unchanged from the preliminary estimate of 0.9%.  

Even with mild downgrades in the staff forecasts, it is unreasonable to expect the ECB to respond this week by increasing the quantity of assets being purchased, or extending the current program beyond September 2016.  A consensus must be forged to implement the former, and it is too early for this. There is no urgency for the latter.  It can be used as a signal to the market, but the incremental advantage over Draghi noting this is a policy option may be minimal given the political capital likely needed to be expended.  

Draghi's press conference will likely be a timely reminder ahead of the third key event next week, US jobs data, that both sides drive the divergence of monetary policy between the Federal Reserve and the ECB.  As we have noted before, every central bank that has tried purchased assets to expand its balance sheet, to compliment near-zero interest rates or even negative deposit rates, has chosen to do more than one round.  ECB may break this pattern, but it is not a certainty, even if the German representatives on the ECB object.  

US nonfarm payrolls are notoriously difficult to forecast.  There are few meaningful inputs.  The ADP report does a good job of catching the important trends, but on a month-to-month basis can be wide of the mark.  Still, it has stolen some of the thunder from the monthly BLS report.  The consensus expected the ADP to show a 200k increase in private sector jobs in August, up from its 185k estimate for July.  

August is particularly problematic, especially given that this is the last jobs report before the FOMC meeting.  The historic pattern is for August to disappoint on the initial release and subsequently be revised higher.   This is not a secret, and Fed officials likely are cognizant of it.  This suggests that some headline weakness may be tolerable, especially if some of the internals is robust. 

There is, for example, a reasonable chance that the unemployment rate dips to 5.2%, which is the upper end of the Fed's estimate of full employment.   Economists did not expect hours worked to have increased in July and hence expect it to fall back in August.  There is potential for a surprise here.   It will be more difficult for hourly earnings to surprise.  Last August hourly earnings rose 0.3%.  If it is not matched now (consensus 0.2%), there is a risk that the year-over-year rate slips back to 2.0% where it was in June.  

We suspect that the outcome of next month's FOMC meeting does not rest on one high-frequency report.  The underlying trends in the US economy have been persistent.  Growth on a year-over-year basis has been largely stable.  It may not be an impressive pace, but it has been sufficient to gradually close the output gap and absorb slack in the labor market.

While the nonfarm payroll change is difficult to forecast, it has been amazingly stable.  The 12-month average stands at 243k; the 24-month average is 236k, and the 36-month average is 222k.  That is nearly eight mln net new jobs created over the past three years.  

It is the price stability mandate that is more elusive that the full employment goal.   For the past two decades, the core PCE deflator has also been amazingly stable.  It has been confined to a 1.0%-2.5% range, with some brief exceptions to the downside (June 1998 0.95%, July 2009 0.97% and December 2010 0.94%).  It has averaged about 1.7% over the past 20 years.  The report at the end of last week indicated it stood at 1.2% in July.  

Fed officials would clearly prefer a bit higher of inflation.  However, the consensus, especially among the leadership, is that 1) most of the elements dampening prices are transitory and 2) the key to core inflation is the continued absorption of slack in the economy, especially the labor market.  It also seems clear that the Fed's leadership does not want to wait for the core PCE deflator to rise to 2% before beginning to normalize monetary policy.  

In the market's panic, and arguably aided by NY Fed President Dudley's admission that a September rate hike had become less compelling over the last couple of weeks, the market slashed the odds of a hike.  The effective Fed funds rate has been averaging 14-15 bp.  At its extreme last week, the implied effective funds rate next month in the September Fed funds futures contract was 15.5 bp.  It finished the week at 17.5 bp.  

The risk is that there is a greater chance than this implies of a rate hike.  This is also what the 2-year note seems to be saying.  It had closed the first half yielding 64 bp.  It reached 75 bp in July though finished the month at 66 bp.  At the low water mark last week it fell to almost 53 bp and finished the week near 72 bp.   Fed comments at and around Jackson Hole are also consistent with this view.   

At the risk of oversimplifying, the domestic US situation makes a rate hike very likely, but the Chinese international developments and the apparent panic in the financial markets are of concern.  The situation is fluid, and a decision will be made when it has to (September 16-17). 

Nicole Foss Talks Energy Industry Issues and Oil Price Collapse

Courtesy of The Automatic Earth.

Unknown California State Automobile Association signage 1925

Nicole Foss recently participated in a live Skype ‘forum’ discussion at the Doomstead Diner site that also included, among others, Gail Tverberg, Steve Ludlum, Norman Pagett and Ugo Bardi. Apologies for the fact that I haven’t watched the videos yet and I’m getting the details as I go, so my info may be a bit sketchy. And so is the order the episodes come in here. I understand episode 3 is not even available yet.

I’ll run this in episodes. Today’s post contains episode 1. Yesterday I posted episode 2, Nicole Foss Talks Economics At The End Of The Age Of Oil.

Part I- Energy Industry Issues

The Doomstead Diner site blurb:

Coal Industry Collapse-Carbon Sequestration

One of the biggest effects we see lately is a collapse in commodity prices, through all sectors. Most intriguing to me is the collapse in coal prices, since coal is used in so many places for the production of electricity. Several large coal mining companies have gone into bankruptcy. How will this affect electricity production as we move along here? Q2: Will the efforts for Carbon Sequestration, Carbon Credits and Taxation have any meaningful effect on this dynamic?

Oil Price Collapse

Many people thought the price collapse in Oil that came at the end of 2014 was unforseen and unknowable. In fact many people in the peak oil community believed for a long time the price of oil would spiral inexorably upward. Some of us here have argued otherwise, that credit constraints would drive the price downward. Steve did the best job of this, and actually pegged the price crash for oil to the month more than two years in advance with his infamous Triangle of Doom charts. Steve, can you tell us how you were able to pull off that stunt? Q: John Mauldin and other shills for the Oil industry assure us that better and cheaper drilling technology will bring up all the oil we need and keep the industry solvent. How realistic is this?


Phil’s Stock World Trading Webinar 8-25-15

This week's major topics: 5% Rule, Short-term and Butterfly Portfolios, Trade Ideas, MSFT, NASDAQ, SPX, S&P, AMZN, WMT, BBY, AAPL, China, and Global Implications

Subscribe to The Phil's Stock World YouTube Channel here.

  • 00:00 Disclosure
  • 2:40 Butterfly portfolio, review positions, MSFT, WMT trade ideas
  • 17:28 Hedges
  • 24:50 Short-term portfolio, review positions, hedging
  • 35:00 NASDAQ, AAPL, S&P, AMZN, WMT, McDonald's, Uber trade Ideas
  • 58:00 MSFT, IBM, HP, trade ideas
  • 1:09:20 Hedge SPX trade ideas, review positions
  • 1:21:15 BBY, AMZN, AAPL, trade ideas
  • 1:33:10 NASDAQ 15% drop, 5% rule
  • 1:43:58 China, global implications
  • 1:53:26 Richmond Fed, Home sales, S&P Home Price index, FHFA Housing index

Dumb Money Redux


Dumb Money Redux

Courtesy of Joshua Brown


Cartoon by XKCD

Responses are pouring in from my post Computers are the new Dumb Money. A few of the quants I know told me the link was hitting their inboxes all day from friends and colleagues around the industry. A few desk traders I talk to had some anecdotes backing my assumptions up. One guy, a “data scientist”, was furiously angry, meaning he probably blew himself up this week or has some other deep-rooted insecurity about what he’s trying to do and needed to vent.

If you haven’t read it yet, go here: Computers are the new Dumb Money (TRB)

One thing worth keeping in mind about algorithmic trading is that there will always be some strategies that are better executed than others and many that will thrive while their competitors are chopped to pieces. In this respect, they’re no different than any other traders or funds.

For example, the quant funds that were probably most injured this week were those who were in the business of selling volatility or gamma. If they’re short gamma, they end up having to dump a ton of stock when volatility breaks out and prices dive. This kind of action is what exacerbates declines and makes a down-2% day into a down-4% day – especially when everyone is doing the same thing (see ‘portfolio insurance, 1987’). If they’re short vol, then they could be running one of those fabled strategies that picks up nickels fairly consistently until the steamroller flattens them – taking in options premiums in small, yet reliable amounts, and then a crisis forces them to actually make good on all that insurance they’ve been writing.

This has happened before, it will happen again. It doesn’t mean that all quant or algorithmic trading is foolish. It just means that the alchemy still isn’t all it’s cracked up to be.

Sunrise, sunset. 

[Picture via Pixabay]

With New Data Showing Housing Sales Slowing Here’s Why You’ll Want To Be In Cash

Courtesy of Lee Adler of Wall Street Examiner 

NAR data on housing sales showed the largest July decline since 2011, cutting the annual sales volume growth rate by 47% since March. However, while the growth rate is slowing, total sales volume was the heaviest for July since the peak of the housing bubble in 2005. Heavy but declining volume is a warning sign that you should heed.

Using the monthly seasonal adjustment error annualized, the Wall Street Journal and other mainstream outlets reported a 0.5% rise in July sales. In fact, using actual, not seasonally adjusted data, July sales fell by 11.5%. Sales always decline from June to July, but this July posted the second worst July performance since the housing crash. That contributed to the annual growth rate dropping from +13.5% in March to +7.2% in July.

Housing Sales and Inventory

Housing Sales and Inventory

The fact that sales are slowing from bubble levels could be an early warning that the current version of the housing bubble is peaking. As house prices inflate and household incomes stagnate, affordability issues are beginning to have an impact in many markets. The market can ill afford any increase in mortgage rates. We saw evidence of that when the contract fallout rate spiked in April when rates briefly shot higher before settling back in ensuing months. Another rise in rates that sticks should be marked by another sharp increase in sales contracts that fail to go to closing.

Monthly Housing Sales and Closings

Monthly Housing Sales and Closings

Do you believe that liquidity moves markets? Then click here to learn how you can follow the money. 


Still “Too Early” to Decide on Rate Hikes: Let the Market be Your Guide

Courtesy of Mish.

Still “Too Early”

After all the hemming and hawing by nearly every Fed governor, and despite the fact the Fed has to do something in just over two weeks, the Fed still does not know what to do.

Speaking in Jackson Hole Fed governor Stanley Fisher Keeps September Rate Hike Option on the Table.

With market turbulence casting a cloud over the outlook for US monetary policy, a senior Federal Reserve official strove on Friday to keep the option of an interest rate rise alive at September’s key meeting.

Stanley Fischer, the vice-chair of the Fed’s Board of Governors, said at talks in Jackson Hole, Wyoming, that it was too early to say how the recent market tumult had affected the argument for a move next month, and that no decision had yet been made.

“The change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds, so I wouldn’t want to go ahead and decide right now what the case is — more compelling, less compelling etc,” he told CNBC business news.

“We’ve got a little over two weeks before we make the decision,” he said. “And we’ve got time to wait and see the incoming data, and see what is going on now in the economy.”

Fisher Not Certain

Here’s the funniest line by Fisher in the interview: “The economy is returning to normal. We’re not certain we are there yet.”

I am certain the economy is nowhere near normal, and the Fed is the primary reason why.

My speech was all prepared for Jackson Hole, but somehow I was not on the invite list. It was a severe oversight by someone.

Where They Stand

Meanwhile, let’s take a look at where all the Fed governors stand.

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