How Markets Don’t Work!

It's funny how the markets work.  Everyone expects one thing, and the market does the exact opposite.

Case in point:  The US gets its national credit rating cut, and every US Dollar bond and US Dollar bear in the world figures that this is it... this is the big one... finally, interest rates are going to spike higher!

WRONG!

Since getting the credit rating cut from AAA to AA, we have seen the US Dollar remain fairly steady, and US Government bonds have rallied huge!  In fact, intraday on Tuesday 9^th August, 2011 we saw 10 year bond yields go below the 2008 low, all the way down to 2.036% - resulting in higher prices. WOW!

You have to think about this now -- why would bond yields go lower than the 2008 low? What could possibly be looming on the horizon that is so awful that bond yields would pierce the low set during the greatest market meltdown since 1929?

In a word, RECESSION.

The Fed pretty much came out and confirmed this thesis when they said that they would keep rates at ultra low levels until at least mid 2013!!  That’s almost two years away. WOW AGAIN!  Do you know how bad the internal data must be if the Fed is publicly acknowledging that they will not raise rates for 24 months?

So How Low Can Rates Go?

The irony was not lost when, after S&P announced that it was cutting US credit rating, China publicly blasted the US over its "bloated welfare costs".

Imagine that -- a communist country putting America down for being too socialist!

The funny thing is that, since the USA lost its AAA rating, bond prices have soared in value. In fact, over the last three days the Chinese have seen their Treasury holdings appreciate by tens of billions of dollars. (bond prices rise when relevant market interest rates drop)

For all their tough talk about how reckless the Fed was being when it announced QE2, they must have been secretly high-five-ing each other as their 1.16 trillion dollars worth of Treasuries appreciated in value by an estimated $100+ billion!!

Since QE2 was announced, we've seen 10 year yields drop from 4% to 2%, and we've seen much steeper declines in the 2-5 year duration, which is where China has MASSIVE exposure.  So that $100 billion gain guesstimate could be very conservative indeed.

Did QE2 Work?

It sure did!  Just not for you and I.

In fact, I know you have been asking yourself who benefited the most from QE2? After all, equity investors certainly didn't win... the average US worker didn't win.

You want to know who the winners were?

The only winners were Government and other bond holders.  And by the way, want to know who the two largest holders of US government bonds are?

YEP! It’s China and the Federal Reserve!

Want to know what's going on?  Just look around at who’s got the biggest slice of the pie.

It's no surprise that it was the Fed, and the US’s next single most important banker - the Chinese Government.  The US didn't break the 2008 yield lows on a fluke -- the market is telling us something.  It is shouting from the roof tops that we will almost certainly experience a recession in 2012.

While equity prices rebounded, after getting pounded so relentlessly again, I'll be looking to fade the rally and get short some more stock because unless we see a miraculous turn around in the employment and GDP figures we are going lower as far as equities are concerned anyway.

But we may go to 1,250 on the S&P 500 first before we see 1,050.  So, nimble traders: have fun.  Longer term traders: wait for the roll over, at which point you'll be able to short 'em all.

In the meanwhile, I’m getting longer on secured corporate bonds from entrepreneurial corporations in Asia. 

The US Debt Downgrade – A look behind the scene? « Jaykeumarezz’s Blog

The US Debt Downgrade – A look behind the scene? « Jaykeumarezz’s Blog

Ahhh Sooo! Always suspected there was more to the downgrade.

Volatility Trading Myths!

The VIX volatility index is supposed to be a proxy for volatility. However, when it comes to the VIX, nothing trades quite like you think it should. 

Don’t Believe All the So-Called VIX Experts. According to an article by Adam Warner in Investor’s Place - "Ten years ago, most people hadn’t even heard of the CBOE Volatility Index, or VIX. These days, the “fear index” is covered by the mainstream financial media, and you can’t throw a stick without hitting someone who fancies themselves a VIX expert."

The problem is that half of these people don’t have any clue what they’re talking about. So there is a lot of misinformation out there surrounding the VIX and VIX trading products, including futures and ETNs. When it comes to trading the VIX, nothing moves quite like you think it should.

To clear things up a bit, here are eight VIX trading myths you don’t want to fall for.

VIX Myth #1 – You Can Buy and Sell the VIX

Reality: You cannot buy and sell the actual VIX. You can buy and sell VIX futures, but that is a very different thing. VIX futures can trade at premiums or discounts to the VIX. In fact, they almost always trade at premiums to the VIX.

VIX Myth #2 – You Can Own the VIX Via Futures

Reality: VIX futures cash out when they expire based on a VIX settlement price. So unless you roll out, your position will vanish.

VIX Myth #3 – A Rolled Position Will Track VIX Moves

Reality: VIX futures price based on where the market expects to see the VIX on a given date in the future, i.e, the day the VIX expires. That estimate may or may not move on a given day with a move in the VIX. The further out in time the future is, the less it will track VIX moves.

VIX Myth #4 – VXX Tracks the VIX Better Than Futures

Reality: The iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) is an exchange-traded note that is based on a hypothetical rolling 30-day VIX future and trades like a regular stock. However, it does not track VIX moves particularly well. In fact, it underperforms over time so long as VIX futures trade in an upwardly sloped term structure. And VIX futures virtually always trade that way.

VIX Myth #5 – You Can Chart VXX Like a Stock

Reality: Since VXX trades like a stock, you may think you can chart it like a stock. Wrong. Run, don’t walk, from anyone who tells you about a key chart point on VXX. The VIX is a statistic, and VIX futures trade based on estimates on a forward price for that statistic. VXX creates a hypothetical constant duration 30-day VIX future and, therefore, loses money each day simply rolling from the nearest month future to the next month out if the next month out trades at a premium. Hence VXX is really just a number relative to itself the day before. It’s the tail of a tail of a tail of a dog.

VIX Myth #6 – Holding VXX Can Protect a Portfolio

Reality: VXX works fine as a short-term trading vehicle. On a day-to-day basis, it will track about 50% of the VIX move. However, it is terrible as a portfolio hedge for the reasons listed before, namely that it loses money over time in an upward sloping VIX term structure. Owning and rolling two- to three-month VIX futures works better.

VIX Myth #7 – VXZ is a Good Portfolio Hedge

Reality: The iPath S&P 500 VIX Mid-Term Futures ETN (NYSE:VXZ) is similar to VXX, but it tracks four- to seven-month VIX futures instead of 30-day VIX futures. VXZ has done relatively well since its inception and has outperformed VXX by a wide margin. But while it doesn’t have the contango trouble of VXX, the VIX curve gets pretty flat out that far. I would also caution that VXX and VXZ only listed in January 2009, and thus, neither has had to show its mettle through a VIX storm. Four- to seven-month VIX futures almost always hold their premium to the VIX, but would move to a significant discount in a serious VIX explosion. In 2008, they lagged by 20-30 points. So I suspect VXZ would not provide great protection when you wanted it most. It’s a fine volatility proxy in a quiet market, but if the goal is insurance, it may disappoint.

VIX Myth #8 – High VIX, VIX Call Buying is a Signal to Get Out or Get Short

Reality: I don’t agree with the above, but I can’t actually prove it wrong. I will say this though, the VIX is a mean-reverting statistic. A high VIX and excessive VIX call buying (and actual SPX put buying) represent extreme nervousness and/or bearish sentiment. In theory, that’s a time you want to buy, not sell. But take that with a grain of salt, because trends do take on a life of their own, like the VIX explosion and market implosion of 2008.

If you really want to trade volatility you’ve got  to trade VIX products. Email me for details.

S&P downgrades US debt to AA+ - FT.com

S&P downgrades US debt to AA+ - FT.com

Wow!!! This has to be the most stupid decision made by any Rating Agency.

Reminds me of the time when rating agencies gave a country with a population of more than a billion, an army of more than two million, the world's largest producer of gold, the world's factory with one of the most entrepreneurial societies in the world - a risk rating significantly lower than for a country with a population of around 300,000 and whose only export was fish.... I'm sure we all remember Iceland!

Is it time to buy the US Dollar?

There are riots in the streets of Greece, which now has the lowest credit rating of any sovereign nation on earth. Remarkably, the Euro Zone has managed to weather the storm quite well.  Whether it can continue is another matter.

The European Facade maybe Crumbling

A look at the US Dollar Index and the US dollar / euro exchange rate certainly points in that direction. As bad as things appear to be in the USA, Europe seems to be more worse off. 

The European Union is made up of 17 countries who speak different languages, have different customs and have varying degrees of work ethics and national productivity levels. 

As split as the US is between liberal and conservative views, the people are still all Americans - even if they come in all shades and shapes.  As such Americans have far more in common with one another than the 17 nation Europeans do.  If one of the states in the  USA gets into trouble, people won't be rioting in the streets if the Federal government decides to bail them out.

Now let’s consider it from the European point of view: If you are the German Chancellor, how do you defend the diverting of your national wealth to support a country such as Greece, when your electorate holds the firm view that the Greeks are neither as hard working nor as fiscally responsible as the average German? Correctly or not this appears to be the view reportedly held by much of the German public.

This puts Angela Merkel in quite a political situation. If the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) follow Greece, it would be a miracle if the European Union survived intact. This fear is what has been behind the bull market we have seen in US bonds over the last six or so weeks, because, on a relative basis, US Treasuries still look like a much safer bet than EU Sovereign debt.

So, how can we benefit?

I know it's in vogue or even cool to be totally negative on the dollar, but to me, the dollar looks like it wants to rally. The US Dollar Index (DXY) is a basket of 6 currencies measured against the US dollar.  The biggest component by far is the euro, which makes up 58.6% of the index. Any drop in the euro will push up the value of the dollar, which in turn will drive the US Dollar Index higher.

If we get a real increase in Euro-related fear, we could easily see the US Dollar Index hit 80 - 81. Those looking to go long the dollar could do so by either buying the front month US Dollar Index futures contract (DXU11), or via the Bullish Dollar ETF, symbol UUP. 

So if I’m going long, I would use a break below 74.50 on the US Dollar Index as my stop point. In fact, if the US Dollar Index breaks that level, I'd be inclined to switch my entire strategy and look to going short for a  bit.  Anybody who tells you that they know with 100% conviction what the future will be is either fooling themselves or attempting to con you into something nasty.

Another way of playing a rising dollar is to take some bets directly against other currencies. One such currency is the Australian Dollar. I doubt if there is another developed country (except maybe Canada) that is more leveraged to the price of commodities. Remember, global commodities are priced in US Dollars -- if the value of the Dollar goes up, commodities typically go down. As commodities go down, the value of the Australian Dollar will typically decline as well. I would go short the Australian dollar in the futures market. The symbol on the front month contract is ADU11.  I'd use a move above 1.0730 as my stop if I’m short, with a price target of say 1.0275.  Alternatively, I could use the Australian Dollar currency ETF, symbol FXA.  If I’m using FXA to go short, I’d be sure to track the movement of the front month futures contract. I’d use the levels in the actual futures contract to trigger any profit taking and stop loss decisions in the ETF.

Remember, the whole world is looking for the US dollar to collapse into oblivion. I don’t consider it likely that everyone will be right. May the trend be with you always...

 

 

 

Expectations for the stock market in 2011

Happy New Year!

2011 kicked off with a bang as the Dow rallied 93 points and the S&P 500 up more than 1%. Most financial analysts and economists are predicting we are going to see more days like this in the next 12 months and that the stock market will continue to move higher; upwards of 10%.

At this point, I too am bullish for global markets in 2011.

With that said, I have been in this business long enough to know that the stock market will not move higher each and every week. We will see dips and sell-offs occur in 2011, just as we did in 2010. The sovereign debt issues in Europe, the sluggish real estate market, unemployment, disappointing earnings seasons, and China's raising of interest rates are just some of the challenges that will cause these down moves. In addition, the world economy will probably be forced to deal with issues no one has been able to predict at this point.

However, even with all these headwinds in 2011, I still believe the markets are headed higher on an annual basis. The stock market has been battling these headwinds for 2 years now, and still it continues to to rally. I learned early on that the trend is your friend... until it stops being so. From my vantage point, it's hard to see this rally stopping in the near term as the Federal Reserve is doing everything in its power to keep interest rates at all time lows and buying $600 million of Treasuries. Also, we can't discount the robust growth we are seeing from emerging markets, like India and China.

So what exactly am I saying? 2011 will be similar to 2010; we will see rallies, we will see sell-offs, but we will end the year higher than it is now.

In the interim I am looking forward to trading the increased volatility that will ensue over the next 12 months. Though everyone knows they should have an investment account to build for their financial future, too many people shy away actively trading a portion of their accounts. Unfortunately, most investors have sat in mutual funds for 10 years and have little to show for it except the fees they paid to their financial planners and the funds themselves.

If you are one of those people, I encourage you to take action in 2011 and diversify into actively trading a portion of your portfolio. I expect the volatility to begin increasing this month and whether you are a novice at trading or a seasoned veteran, now is an opportune time to take advantage of the market's swings.

I wish you and your families a healthy, happy, and prosperous 2011.

Luxury Industry Poised For 2011 Recovery

"Conspicuous consumption isn't dead, it's just been on hold. The luxury consumer will be ready to spend again within the next year.”

This view is shared by the Richman's IMC, the soon to be launched chain of International Millionaire's Clubs, whose memberships have been reported to be the world's most expensive private club membership...

Acccording to a story by Lauren Sherman in Forbes referring to the global consulting firm, Bain & Company's Luxury Market Update: 2012, which will be released tomorrow, the luxury goods industry is poised for full recovery in 2011.

The Bain & Co report is authored by Claudia D'Arpizio, a partner based in the firm's Milan office. The study covered some 220 luxury brands, which includes leather goods, fashion, jewelry, alcohol and cosmetics companies that serve high net worth customers, or those with assets of US$1 million or above.

Growth to return: The global luxury industry has seen steady growth for the last 15 years but contracted by just 10% in the first two quarters of 2009 to 153 billion euros (or $215 billion), compared with 170 billion euros ($238 billion) in the first two quarters of 2008.

D'Arpizio says this decrease does not reflect a permanent change in the spending habits of the luxury consumer. Consumers were tiring of the recession and will start spending more freely again within the next year and a half.

Some other key findings from the report:-

• Spending is expected to pick up again in 2011, with a full recovery in 2012. Global sales of luxury goods will stabilize in 2010 and increase by 4% in 2011 and by 7%-8% in 2012.
  
• Consumers in emerging markets like China, India, Eastern Europe and Russia will begin aggressively spending as soon as the stock market fully rebounds.
  
• China will see a 7% increase in sales of luxury goods in 2009. The less-developed interior of the country will see increases up to 35%.
  
• High-end shoes are still selling well because of their accessible price point ($400-$2,000) and perceived quality.
  
• Luxury brands whose core business is leather goods--such as Louis Vuitton, Gucci and Hermes will fare better over the next two years than those who focus on high fashion, such as Christian Lacroix.

While many luxury industry experts are in agreement that the sector will rebound in 2011, there are still others who believe that this downturn is different from others, and that consumers will permanently cut back on spending, particularly in the U.S. We shall see... Click here for the full story from Forbes...

Latvia’s Unique Economic Cheer!

According to The Sovereign Society’s latest Offshore A-Letter, Latvia is facing the worst recession of all 27 EU members.

As a solution to cheer up its citizens, Latvia has come up with the First Annual Blonde Parade. The LINK to The Sovereign Society is http://www.sovereignsociety.com/

A Day at the Races in Old Shanghai?

It appears that people in China, paticularly in Shanghai really miss horse racing, a sport that thrived before the Cultural Revolution.

They miss racing so much that they are even prepared to participate in a new horse racing game set in old Shanghai...more from Shanghai Daily...