Archives for March 2016

Terrorism Doesn’t Matter to the Markets?

Courtesy of Phil of Phil’s Stock World

I think it’s amazing.

They caught the Brussels bomber (the one that didn’t blow himself up) and there was an extra bomb, so he could have killed more people – yet the markets in Europe are UP this morning.  Sure it’s nice they caught the guy, and they say it’s the same guy who masterminded Paris, but the fact that he’s 24 years-old and that ISIS has 30,000 other core members SHOULD bother people – at least a little.

When the markets are back near their all-time highs, I tend to look for things that can go wrong and it’s kind of strange to think that terror attacks on major cities is not one of those things. Our near-total detachment from reality reminds me of a scene in the movie “Brazil”, where rich people are having lunch and the restaurant is bombed and they simply go on eating amidst the horror, only mildly inconvenienced. Is that the world we’re aiming for? Seriously?

Nevertheless, as you can see, the VIX, the “fear index” has continued its March march lower, down almost 50% from its February peak. The only thing the markets actually fear is that the Central Banks will stop the endless flow of FREE MONEY that is flying off the presses, and 13 Central Bank actions in the past 30 days say that’s not going to happen any time soon (see Monday’s post for the chart).

Speaking of Brazil (EWZ), corrupt President Dilma Rousseff said she will never resign and that she considers the impeachment procedure to be a coup as that country spirals completely out of control with barely 4 months to go before the August 5th start of the Olympics or, as Rousseff likes to think of it – payday!  You have to sympathize with her as all these years of bribes and kickbacks will all be for nothing if she can’t be there in August to collect her take.

You might think that, like terrorism, Brazil doesn’t matter but that country is possibly on the way to bankruptcy and it is the World’s 7th largest economy ($2.25Tn) so I think it’s going to matter a lot once people begin focusing on it as we ramp up for the Olympics.  Just this morning, Petrobas (PBR) announced a $10.2Bn loss for Q4 and will lay off another 15% of their staff to bring the 2016 total firings to 45% – 12,000 jobs.  They’ve also drastically cut spending by 25% ($32Bn), causing a ripple effect throughout Brazil’s economy.  Another massive company, Vale (VALE) is teetering on the edge of disaster with $8.7Bn in Q4 losses.

In the same way our Top 1% strives to emulate the diners in Brazil, the movie, they also want to emulate their peers in Brazil, the country, where the collapsing infrastructure causes 2-hour commutes for the working poor (who used to be middle class before all their money was funneled up to the top) while the Top 1% fly over the traffic in helicopters.  There are more registered helicopters in Sao Paulo than any other city in the world; 593 to be exact, surpassing New York and Tokyo in just the last five years.

Perhaps the most over-the-top example of the trend is that of Rio de Janeiro state Gov. Sergio Cabral. A recent magazine expose showed that his commute to work is only about 6 miles. Yet every morning he gets up, takes a chauffeured car to his helipad about halfway to work, and then takes the rest of the trip, about three minutes, by chopper. The cost to the taxpayer of that daily flight, according to the magazine, is $1.7 million a year. Cabral also used his helicopter to ferry his nanny, his dog and his family on shopping trips and vacations to his country home.

Again folks – this is the 7th largest economy in the World – it’s the “B” in BRIC and rampant “free market Capitalism” has turned it into a nightmare for 99% of the population.  On Dec 16th, Fitch became the second of the three big credit-rating agencies to downgrade Brazil’s debt to junk status.  Days later Joaquim Levy, the Finance Minister appointed by President Rousseff to stabilise the public finances, quit in despair after less than a year in the job.

Brazil’s economy is predicted to shrink by 3.5% in 2016, more than it did in 2015 (-3%).  For her part, PBR kickbacks are minor compared to charges that Rousseff conspired to hide the size of the deficit and Government debt – now 80% of GDP after being run up on failed stimulus attempts (sound familiar?).  Nonetheless, as you can see from the chart, Brazil has popped over 50% off the January lows on all the FREE MONEY enthusiasm generated by our beloved Central Banksters who are smart enough to be far less obvious in their corruption.

Notice the 1-week, 25% pop in the country’s index – yeah, that makes sense…

Meanwhile, we’re STILL shorting at those same lines we laid out Monday and this morning they are working yet again but, so far, it’s been nickels and dimes against quick reversals.  I still think a major sell-off is a lot more likely than a major rally but so far, so wrong.

Don’t forget, we have a Live Trading Webinar at 1pm (EST) this afternoon – last week we made our Members $390 trading the Russell Futures (/TF) – this morning our shorting lines for our Members were:

  • Dow (/YM) Futures short at 17,500
  • S&P (/ES) Futures short at 2,042.50
  • Nasdaq (/NQ) Futures short at 4,435
  • Russell (/TF) Futures short at 1,091
  • Nikkei (/NKD) Futures short at 17,000

The Nikkei is not a great short as the Dollar will rise when our markets fall and, if oil fails to hold $40, it will likely take the Dow with it – so we’ll keep an eye on that.  Our trading rules are very simple, we look for 3 of our 5 indexes to be below and then we short the laggards (the last ones to cross under) on the theory that they’ll catch up a bit.  If ANY of the indexes pop back over their line (including the ones we short), then we GET OUT!  That limits our downside but lets our upside run.

It’s also a good idea to learn how to take a profit – something we emphasize in our Live Webinars! (For replays, visit our YouTube channel here.)

See you later,

– Phil

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Janet Fakes It and Buys Just One Day

By Phil Davis of Phil’s Stock World

One day more.

Like those about to die miserably in Les Miserables, our fearless Fed leader sang the same old song with a few new lines (well, that’s The Who, actually) and, as Lincoln predicted – you can fool some of the people all of the time. And what a rally we had yesterday, as the Dow popped 200 points on “news” that the Fed would not raise rates more than twice this year.  We took quick advantage of it in our Live Trading Webinar (replay available here) and went long on the Russell Futures (/TF) and made a very quick (15 mins) $390 per contract but, since the whole thing was BS, we took the money and ran!

How much BS?  Janet’s fake, Fake, FAKE!!! enthusiasm for our economy was nicely summed up by Dave Fry, who said:

“There’s a lot of spin (um, lying?)going on with the Fed’s announcement Wednesday. It’s consistent with past comments and runs as follows:

  • Consumer Confidence has improved—no it hasn’t.
  • Economic Growth is growing at “moderate” pace—not really unless you consider 1% moderate.
  • The strong dollar has restricted economic growth—this has been the mantra for past two years, Retail Sales, Industrial Production and so forth remain weak.
  • Oil prices are rebounding has prices increased—that’s possibly true but the category is still weak.
  • Employment is expanding as is participation—most new jobs part-time or in the low paying services sectors, this is BS.
  • Overseas Economic weakness has little effect on our projections—seriously?
  • Financial market (stock markets) are doing well fanning the flames to heat up investor confidence—markets are still rallying based on corporate buybacks.  One thing to keep in mind is that this creates a lot of debt.

And, so the psychological manipulation goes.”

That “psychological manipulation” was enough to buy us that one more day before reality hit this morning as Japan’s February Trade Data was yet another disaster. You can blame a slump in exports to US (down 3.2%) as the source of new woes in addition to a continuing 15.6% decrease in export volume to China.

“The tailwind from the weak yen has gone. We can’t help but hold a pessimistic view on the outlook for exports,” said Atsushi Takeda, an economist at Itochu Corp. in Tokyo, said before the figures were released. “Domestic demand won’t be dependable at all, and the same goes for exports. I can’t deny the possibility of another economic contraction this quarter.”

“The lack of a boost from exports raises a risk of Japan’s contraction this quarter,” said Nobuyasu Atago, the chief economist at Okasan Securities Co. and a former Bank of Japan official. “It’s becoming clearer that the weakness of the global economy is taking a toll on Japan’s economy.” (Bloomberg)

Interestingly enough, going long on the Nikkei Futures (/NKD) was our last trade idea of the day in our Live Member Chat Room, where I said (3:51): “/NKD is the best way to go long overnight above 16,900.  Either Asia likes the Fed and rallies or the Dollar comes back and the Nikkei likes that – two ways to win!”  As you can see on the chart, by 9pm we were back to 17,200 but those who were greedy were punished at the Nikkei pulled a full reversal overnight (we don’t hold Futures positions overnight, in general, so no worries).

Though the Nikkei is back down, the very lousy data has us hesitating to go long again unless the Dollar (95 on /DX Futures) heads back up and /NKD crosses 16,700 – then we can play it long again with tight stops IF the US Index Futures are improving (Dow over 17,200, S&P over 2,120, Nasdaq over 4,375 & Russell over 1,070).  It hasn’t been a whole day yet and tomorrow is options expiration day so anything is possible.

On the whole, our tracking portfolios are all parked in neutral except our Butterfly Portfolio, where our spreads got downright aggressive in last month’s adjustments and that will be changed today as we get ready for a flat to down period between now and April expiration. We’ll want to get more aggressive with our hedges into the weekend uncertainty to protect our still cooking long positions.

CAUTION is the watchword for today and tomorrow.  While the Fed did not disappoint and tank the markets yesterday, it might be even worse that they drastically lowered the rate outlook and it barely got a reaction from the markets.  If we fully reverse the Fed move into the weekend – next week can be very scary indeed!

Tell me when the dollar rally ends, I’ll tell you when EM starts working again

Courtesy of Joshua Brown

A really simple chart that illustrates an incredibly powerful trend.

Emerging markets have been atrocious investments for almost 7 full years now. To me, it’s almost entirely a dollar phenomenon. The theory is that strength in emerging market stocks is predicated on one thing: demand for commodities. When China, Korea, Taiwan and India are buying a lot of what Brazil, Russia and South Africa are selling – commodities – then EM works. When they’re buying less commodities, EM doesn’t work.

And, to a large extent, the dollar’s strength or weakness determines the price and maybe even the demand for commodities. I know that could be considered controversial, but I think the missing piece of the puzzle is asset inflows and outflows around the world and the ability to sell and pay back dollar-denominated debt.

Pretty clear what’s been going on here in my chart below, although obviously after the fact. You’re looking at the EEM index of emerging market stocks priced in the S&P 500, as a ratio chart.

(click to embiggen!)


Emerging markets have underperformed by 50% over the last seven years – which is incredible. In the bottom pane, you see the US dollar chart, bottoming out precisely where the EEM:SPY ratio peaks circa 2011. It’s been all downhill for emerging stocks and all uphill for the dollar ever since.

When will this powerful trend reverse?

As you can see, there’ve been several tradeable rallies in EM stocks relative to US stocks over the years – many believe we’re in the midst of one now thanks to bouncing oil and metal prices. But it’s important to note that every one of these rallies has failed precisely at the downtrend line illustrated above in blue. There’s no reason to believe the next one won’t fail as well.

Guilty until proven innocent. There are very few prolific counter-trend traders in old age homes.