More about gold

More about gold.
You never will hear me say this market is manipulated, but sometimes argumenst are tempting to change your mind.
A very convincing piece was written by a Canadian columnist, Rob Kirby.
He starts with a chart with the price of gold (POG) over the past year with some ‘milestones’.

The milestones are all indicative of systemic financial collapse. Each time you think the price of gold should propel higher, the price is getting hammered.
How is it done?

By selling derivatives. Rob points to the Quarterly Derivative Fact Sheet published by the US Office of the Comptroller of the Currency. There one can read that JPM Chase has roughly 100 billion worth of gold derivatives on his books as per September 30, 2008.

But paper alone is not enough. Besides the futures market some odd things can be observed in the physical gold market. Look to the lease rates.

Leasing is preferred to outright sales because you can only outright sell something “once” – and it is gone. By leasing, the physical gold leaves the vault to be sold in the open market but Central Banks replace the missing physical gold with an I.O.U - for accounting purposes – and claim that they still posses the same amount of physical bullion! So, by leasing gold instead of “outright sales,” Central Banks can and do double count [cheat] – a la Enron – their gold stocks!

Now as long as the borrowed gold returns to the vaults, there is no problem. But this game can not go on. Because at a certain point in time the physical commodity would decouple (as the world dicovers this house of cards) from the paper market and the real stuff will start to trade with a premium.
This development is already underway for a couple of months.
Conferatur all the stories about the scarcity of golden coins…

Always denied by central banks, we observed the spike in lease rates in the second half of 2008.
Or there was less gold available or the central banks were less willing to lend out their bullion..
For the moment everything seems to be calmed down a little, but for how long?

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Big Oil reports

Big Oil is reporting. Today. Big time. We had Royal Dutch Shell (ticker: RDSA) this morning and we hear Exxon (ticker: XON) later today. RDSA suffered a sharp decline in Q4 profits, but so far they still win the title for the largest annual profit for a European company. Remarkable: Shell maintains it capital spending program that soared 40% last year to 38 bln USD.
But for the moment it’s not the time to buy – yet.
Our renko-charts don’t offer any clue that this is the very moment to get in. Even more: the CCI is overbought.

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Gold and Bonds

Yields on American Treasuries continue to rise. Yesterday saw a record 30 bln USD auction of 5-years notes sell at a much higher yield than forecast.
January 2009 was one of the worst months for US Treasury prices on record.
Is this another bubble bursting?

Gold is soaring. Right on the moment everybody thought it was the time for a small consolidation after the race from 810 USD/oz to 900 USD/oz, gold refused to give up the 880 USD support and went today straight up to 920 USD.
It’s remarkable how freaky Fridays can be for the goldtraders. Or there is a large correction or prices swing higher. But a Friday is never dull.
Rumours are floating around about wealthy individuals buying the metal.

Remarkable is the fact that the dollar is strengthening, which is rather unusual. Normally there is an inverse correlation between these two.

Look to the goldmines - a 100% gain is in the making

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We don't need no education...

We have a rally since almost a week. Was last week still awful and creating an oversold condition, than the market crawled back this week. Not really flamboyant, but still…

Now just to illustrate that on a technical basis not all is well, we show a chart of one of the market darlings of last week: the (adult) education sector.
Is the magic gone?

For Grand Canyon Education (ticker: LOPE) that seems to be the case. The 60-minute renko-chart is is turning negative.
The CCI is already going down for some time and now this downward movement is confirmed by the SAR.
So beware…..

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This deal is on....

Things are on the way back…
We mentioned earlier infrastructure stocks. And ABB.

Here is another one. Power-plant specialist Shaw Group (ticker: SGR). The stock jumped 8% yesterday. I love Obama. Because at the end of the day all this proposed infrastructure projects will end up costing twice as much as the original estimates.
But the American people love the idea of these big infrastructure things and taxpayer money will flow.

And that’s what the market is telling us: ‘the infrastructure deal is on’.
The daily renko-chart is illustrating this phenomenon. After a double bottom in December, this stock is flying.
We have to mention that positive volume is especially high of late.

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Existing home sales: it's going better

This is a graph of the existing home sales of December in the States.

Offering some relief in a down beaten housing market.

One swallow does not make a summer.

But if we suppose only just for a moment things start to go better in this sector, it will offer an enormous psychological relief to people.
No, it’s still too early to cheer.

Because the current existing home inventory is falling to a 9.3 months of supply and the above figures can be solely reflecting this smaller inventory improvement compared with the month before.
Although this is the lowest supply level in a year and significantly lower than the 11.2 of April 2008.

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Super Stocks

Which stocks are going fastest since the start of the year?Answer: the so called penny stocks.Here’s a list with the super performers.Not only in their own right but for the whole stock universe. This what they did until now:

ICOP Digital, Inc. (NASDAQ: ICOP) engineers, produces and markets mobile and stationary surveillance solutions for law enforcement. ICOP shares started the year at 16 cents and have quickly risen to $1 over the past few weeks.

Targanta Therapeutics Corp. (NASDAQ: TARG) is a biopharmaceutical company focused on the development and commercialization of antibiotics for infections treated or acquired in hospitals and other institutional settings. The Medicines Company (NASDAQ: MDCO) recently announced that it would acquire 100% of Targanta’s outstanding shares. This news helped launch the stock from 61 cents to $2.50.

Zoom Technologies, Inc. (NASDAQ: ZOOM) designs, produces, sells, and supports broadband and dial-up modems, voice over Internet protocol (VoIP) products and services, and Bluetooth wireless products.

Grill Concepts, Inc. (NASDAQ: GRIL) develops, owns, operates, manages and licenses full-service upscale casual dining restaurants under the name Daily Grill and fine dining restaurants under the name The Grill on the Alley. With a market cap of only $6.8 million, GRIL shares have spiked from 24 cents to 77 cents over the past month.

North American Scientific, Inc. (NASDAQ: NASM) designs, develops, produces and sells products for radiation therapy treatment, primarily in the treatment of prostate cancer. The recent jump in NASM shares has helped the company regain compliance with the NASDAQ Capital Market listing regulations.

California Coastal Communities (NASDAQ: CALC) is a residential land development and homebuilding company with properties owned or controlled primarily in Orange County, California, and also in four other Southern California counties. On Jan. 2, the company sold 17 model homes for $25 million. The news helped push their stock from 56 cents to above $1.

Anadys Pharmaceuticals, Inc. (NASDAQ: ANDS) is a biopharmaceutical company focused to develop medicines in the areas of hepatitis C and oncology. Due to some positive news on a recent drug study, shares of ANDS have risen from $1.81 to $5.

Quantum Group, Inc. (AMEX: QGP) is engaged in providing consulting and sourcing services for HMOs that market Medicare Advantage managed healthcare plans, as well as to healthcare providers in the state of Florida. In mid-January, QGP announced a multi-year service agreement with IBM.

Nextwave Wireless, Inc. (NASDAQ: WAVE) is a mobile broadband and multimedia technology company that develops, produces and markets mobile multimedia and wireless broadband products, including fourth generation (4G) wireless broadband semiconductors.

Aviza Technology, Inc. (NASDAQ: AVZA) designs, manufactures, sells and supports semiconductor capital equipment and process technologies for the global semiconductor industry and related markets. In early January, Aviza raised their net income guidance, which helped launch the shares from 10 cents to 30.

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Let's buy a new car...

Big winners today are car makers. It were the European car makers which are the main outperformers in the credit markets. Yesterday the UK joined France and Germany as the latest EU member promising support for their local ailing auto industry. Does it mean we have to buy the Big Three of Detroit en masse? Or flocking to Toyota and Honda? And what about Volkswagen?
We remain careful as throwing money to an industry doesn’t mean the consumer is ready to go out and buy ‘stuff’ again.

We can ask ourselves: what sector will be next?

Airlines?

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Gold takes a breather

The sudden move of the gold price is difficult to sustain. As anxiety concerning the financial system is waning, pressure on the price of gold seems to be mounting.
But before we let gold go down into some form of correction, we thought it would be useful to observe the consequences the rally of last couple of weeks had for some currencies.
Last week gold appreciated 10.9% versus the GBP and 6.5% versus the EUR. And if we look to the performance of the yellow metal since the start of this year, there are only two currencies which are goldwise priced even or below their year-starting levels. These are the JPY and the USD.
An indication that disinflation is the strongest in those two countries.

Now it is waiting for the reflation scenario to start.
Will commodities be the likely winners?

So far so good: the PowerShares DB Commodity Index Tracking Fund are going nowhere so far….

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Bouncing

Things come alive. As there are: financials, some commodities but also big infrastructure companies. There is Obama and also China and India will not abandon the path of growth completely.
In the US means the infrastructure renaissance big business for the government. And the biggies will profit from this. We think that companies as Fluor (ticker: FLR), United Technologies (ticker: UTX), Siemens (ticker: SIE), Caterpillar (ticker: CAT), Veolia (ticker: VE) en Jacobs Engineering will be in the driving seat.

We observe that ABB is breaking out on our renko charts.

The CCI passed the -100 mark and is rising and also the SAR flipped under the price action

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Golman Sachs warns against speculation - the world has changed

What’s happening to oil prices?
The bubble which exploded last July, resulted in a collapse which was seldom observed for a major commodity. Now, this is leading to a rare and huge contango situation.
And the last days we see an unprecedented inflow in oil ETFs.

ETF owned barrels were at a low in November with 10 million. Now it is at a high of above 100 million.
Now, we mentioned before how this contango is influencing the roll-over factor in the pricing for an ETF as this ETF’s are based on futures contracts.

An ETF as USO is not longer reflecting the correct spot price due to this phenomenon. This roll-over cost is eating away possible profits.
What if losses are showing up soon and investors are pulling out?

It is Goldman Sachs who pointed out that the number of barrels owned by investors is only down 13% from peak prices, despite a 70% decline in notional value of the price of oil.
But in the mean time GS thinks that the type of investors owning barrels, has changed. Retail and private banking investors are coming in while institutional investors abandoned ship some while ago.

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We like this one

Crucell (ticker: CRXL) makes a tumble after it was announced that Wyeth no longer is interested in taking over the Dutch biopharma company. This news comes after the recent announcement dated from 8th January. Now Wyeth became itself a takeover target, the deal is put on hold.
As Big Pharma continues to feel the pain with blockbusters going off patent, they subsequently find themselves with a need to buy revenues to fill the gap through biotechs. There exists a Biotech ETF Long (ticker: XBI).

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Please, go shopping...

I read one survey where was stated that one-third of women in the US said they planned no clothing purchases in 2009. Normally this figure is just 4%. We expect that in the retail sector more pain will come. We had already Circuit City, Linens ‘N Things and Mervyn’s going out of business but it will not stop here.
Forbes has come out with a list of names that will suffer in the months ahead. We mention Lane Bryant, Gap (ticker: GPS) and Starbucks (ticker: SBUX). The real big one would be Sears Holdings (ticker: SHLD), operator of Sears and Kmart stores.

Narrow specialties (Sprint cell phones) or high prices (Starbucks’ coffee) will suffer too. Also other high scale outlets like Applebee’s and Cheescake factory (ticker: CAKE) could be a casualty this year.

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Darlings

Adult re-education is one of the new market darlings. Always dangerous. Names in this domain are ITT Educational (ticker: ESI), DeVry (ticker: DV) and Apollo Group (ticker: APOL).
Take ESI: this stock shot up 44% in two weeks time. Almost parabolic. Now, I am wondering what is driving the price? Earnings? I think some shorters of the sector are covering their bets. As soon as the action normalizes, lower prices will show up.

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Dry Ships Inc

Cool, DRYS is sinking. Our renko-stuff showed the down trend a couple of days ago. Another 10% was earned in less than a week.
This darling of global trade is tanking as the latest news is not so good. The quarterly dividend is suspended and previous agreements to acquire vessels are cancelled. A net loss will be registered this quarter.

Not good at all.

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UniSource Energy

The renko chart we’re showing today is from UniSource Energy Corporation (ticker: UNS).
There is a negative signal.
The CCI is overbought and the developing correction tends to accelerate. The SAR just flipped above the price action.
A sell candidate…

UniSource Energy Corporation (UniSource Energy) is a holding company that conducts its operations through its subsidiaries. UniSource Energy owns TEP, UniSource Energy Services, Inc. (UES), Millennium Energy Holdings, Inc. (Millennium) and UniSource Energy Development Company (UED).

The Company conducts its business in three segments: TEP, UNS Gas and UNS Electric. TEP is an electric utility that provides electric service to the community of Tucson, Arizona.

UES, through its two operating subsidiaries, UNS Gas, Inc. (UNS Gas) and UNS Electric, Inc. (UNS Electric), provides gas and electric service to 30 communities in Northern and Southern Arizona.

On March 31, 2006, Millennium sold its interest in Global Solar Energy, Inc. (Global Solar), its largest holding.

Ok my friends. The pub is waiting. TGIF.
Have all a great weekend.

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The game of gold

Moneyweek published an interesting batch of charts about gold. And gold futures. Something strange is going on. The increasingly large amounts of gold futures in the front months prove that there is a problem.
There seems to be a steady growth in the futures with less than one year maturity.
On the other hand we learn from the data from the Office of the Comptroller of the Currency – a FED institution – that two banks (JP Morgan Chase and HSBC) are holding almost 124.000.000.000 dollars in gold derivatives. Or almost 98% of all gold derivatives known on this planet.

So something is going wrong there...

As the tides of monetary bubbles recede, curiosities are turning up on the beach every day (Jesse)

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Government bonds in the US are not longer 'hot'

We have a bank crisis. And a strong dollar. But is there any flight to safety? No. The American Treasury bonds are not sought and declining in price. So the paper is sold in an era that the FED tries to organize so-called quantitative easing?
If we look to the 20+ year Treasury Bond Fund iShares, one will notice that the price of this fund is declining (so rates are going higher). An attempt was made to get out of the negative trend but unsuccessfully. The downtrend visible in the 60 minutes has now also become clear in the daily renko chart.

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The market is still overbought

The New York Stock Exchange (or NYSE) Summation Index gives an indication about the breadth of The NYSE index.
It ‘s a momentum indicator.

We can add a moving average convergence/divergence indicator in order to look for buy and sell signals.
The signals are generated by crossovers of the MACD and the control line which is nothing else than a 9 period average on the difference between a 12 en 26 day average.

This summation index was developed by Sherman and Marian McClellan and is derived from the number of advancing and declining stocks in a given market. In fact it’s the daily accumulation of an oscillator based on this principle.

Apart from the original method used by the McClellans other versions exist. We use the following formula:

Summation index = 1000 + (10%trend – 5%trend) – [(10 x 10%trend) + (20 x 5%trend)] where
5%trend = 39-day exponential moving average of (advancers – decliners)
10%trend = 19-day exponential moving average of (advancers – decliners)

This market is not in a good shape and way overbought. So be careful in the comingweeks/months as this overbought condition can be reversed

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Jump off this ship

For today’s renko chart we selected another name which is not too afraid to expose some volatility. The price can dance as Obama on his inauguration night. We’re talking about Dry Ships (ticker: DRYS). We know that rate for ships came down dramatically as the freight traffic imploded. But containers and/or bulk commodities have to be moved. And not for free.
As one looks to the normal chart nothing seems to be moving. But the renko chart shows us that a negative trend is evolving.

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Banks are toast

What is happening with financial institutions? Suddenly there is a worldwide destruction going on. Not only in Europe as some pretend. Bank of America, American Express, Charles Schwab, Wells Fargo, Citi… all touching new lows.
Where is this coming from?
I can only give my humble take of the situation: a central bank ‘conspiracy’.

They waited until year end passed but are now taking the punch bowl away. Meaning: they limit the funding they provide to banks and adapt the value the collateral banks are giving in repo and other transactions, to more realistic (read: lower) levels.

Less funding, more trouble.

This is a coordinated move.
Banks were warned in September/October this would come. It seems they were not able to clean up the mess. So this is going to end in tears… Err: in nationalizations.
Dollar strength is the direct consequence: the use of bilateral swaplines makes the dollar rise temporary. Just as three months ago.

More will come:

Jan. 20 (Bloomberg) — The U.S. Treasury, under pressure to revive lending, is demanding monthly reports from the banks that received the most capital from the government’s $700 billion rescue program.

Neel Kashkari, the official who administers the Troubled Asset Relief Program, wrote to Citigroup Inc., Bank of America Corp. and 18 others on Jan. 16 seeking figures on business and consumer loans. Treasury also wanted details on purchases of mortgage-backed and asset-backed securities, according to documents obtained by Bloomberg News. Kashkari will stay for a few months after President-elect Barack Obama is sworn in today.

The message is clear: we gonna clean up this mess.

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They have Obama, we had Bertie - our Bertie

Oh my.
My pub is less crowded these days. Fishermen and out-of-job bankers alike.
The latter however have a worrisome burden: they bought all those beautiful houses in the surroundings of Dublin. The classic housing trap sprang up and now everybody is in trouble as payments have to be made while the price of the underlying asset is deteriorating.
We see the colleagues of the New European Union members leaving the Emerald Isle in droves.
This is war, said Dave (McWilliams, a former official at the Irish central bank). Of course, but the enemy is not visible. Except in the middle- and back offices of banks. So where to fight?

Now, Dave is a good lad. Especially when he raises his voice after a nice dinner. He gets even better with a pint in his hands.
Speculation is rampant that Ireland will default on his debt obligations – just like Iceland – and then everybody starts to talk about Austria, Spain, Greece and Italy.

Most important observation: the dollar is getting stronger but also gold has a nice run, today.

Adieu, mon Celtic Tiger.

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Sinking

The next shoe is dropping. This time currencies are involved. So much money is needed to save local financial systems, that printing presses are working non-stop. A paper currency society has no limits in issuing money. There are no constraints. The only question is how much damage will occur when the inevitable inflation arrives. But first comes a currency crisis.
Ask Iceland.
And now Great Britain.
The British economy is bigger than tiny Iceland, of course.
But the road taken is the same. Sterling dropped today to a record low of 127.44 versus the yen and to 1.4130 versus the dollar. And the slide is far from over.
More is coming: a downgrade of the UK-debt in the near future can not be excluded.

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Margin debt

Where will stocks bottom?
Nobody really knows. But there are indicators which can help to gauge the risk on further detoriation.
One of my preferred indicators is the amount of shares trading above there 50-day moving average.
Another one I found is the margin debt for NYSE stocks from Brett Steenbarger from traderfeed.blogspot.
Margin debt gives an indication of risk appetite. The more appetite, the more margin debt is taken on. As markets are deleveraging, margin debt fell off the cliffs. The 20 week average change contracted around 42% the last 20-weeks.
An unprecedented decline. As long as this trend is not changing a reverse of the bear trend seems to be premature.

Data of margin debt can be found here.

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Passage to India

Exchanges worldwide tumbled last week as the overbought conditions were squeezed out of the system. Indian stocks had to cope with another factor: the Satyam scandal drove down the complete local stock market.

And now? Is it time to buy? If we look to the chart of the WisdomTree India Earnings Fund we don't have a clue what to do here.

But if we take a look to the renko-chart something else is revealed. Strength is building. The commodity Channel Index is climbing and the SAR is on the verge to reverse. A promising set-up.

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General Growth Properties

This is a nice one. General Growth Properties (ticker: GGP). This is a mall operator on his way to oblivion. Soon, thinks Porter Stansberry, one of my favorites. And he has a point here. Or better: several. Commercial Real estate is in dire streets. But for the moment this sector manages to stay afloat. But the situation becomes unsustainable. GGP is an example right of the copy book. In December GGP had debt coming due. Almost 1 bln USD. No way to refinance because the underlying asset – a mall in Vegas – is property nobody wants to touch. But instead of going broke, the passed the payment date and were even able to announce they received an surprising extension from Citigroup to which they own 2.6 bln USD.
Are they saved? Apparently not as they have two dozen other loans coming due later this year. March will be particular difficult because GGP has to cough up more than 2 bln USD.
The problem is clear: tenants are walking away from their leases in droves. And rental income is plunging.

Looking to the renko-chart we see that the price development went negative: the CCI was already announcing a negative stance and is now followed by the SAR flipping above the rate.

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Bye bye Best Buy

A farewell to Best Buy (ticker: BBY).
With the uptick in our renko chart, time has come to say ‘adieu’ to this short. It was a nice run. We pocketed 10% with our simple system in less than 3 weeks. Not too bad. I admit: we could wait longer to see lower prices but we prefer to take the money from the table and run away.
Hey, it’s Friday anyway and the friends are waiting in the pub….

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Downhill

Don’t be fooled – the worst is still ahead of us.

A prediction that cannot be ignored as we receive the news over Anglo Irish Bank. My favorite bank. Where’s the time of the liquid lunches? 3 Guinness and 1 Irish coffee, chicken wings included. And then strolling back to the office in the IFSC.

Don’t be fooled – banks and other financial institutions are still sinking. We’ve lost AIG (ticker: AIG), Lehman (ticker: LEH), Bear (ticker: BSC), Merrill (ticker: MER), Fannie (ticker FNM), Freddie (ticker: FRE). This week we lost Citigroup (ticker: C) and now it ‘s up to Bank of America (ticker: BAC).
Citi just reported a loss of 8.29 bln USD.
At the end of the day we will end up with one or two ‘super’banks. It’s amazing we don’t hear something about JP Morgan Chase (ticker: JPM). Yet…
Indices tracking the distressed assets fell sharply this week, pointing to further detoriation of the balance sheets of financial institutions

Yesterday the ECB brought down rates with another 50bp to 2%. Since October the reference rate went down with 225%. This is the lowest level in more than 3 years. However, rather than being pro-active and bringing rates below the inflation level, the ECB prefers to sit back and observe how bad things get before cutting again. With 22 members trying to figure out what is happening, we understand this kind of non-action. But we don’t mind: the market will do their job instead.

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Russia

What are the intentions of Ukraine in blocking the Russian gas? What started as the annual stand-off seems to be escalating. If it is really Ukrainia refusing of transitting gas to Europe than these girls/boys are playing with fire. Hey, let’s start a major political crisis. Because Russia is certainly feeling the bite. Alfa Bank Research estimates that Gazprom is losing up to 120 million USD a day. No harm done so far, but it can not continue too long. Even more, Russia is losing another 50 million USD per day in forgone export duties.

Bad timing. The Russians are on a full scale currency devaluation to adjust to lower oil prices. The ruble is on a 6 year low versus the dollar with 31.704. The Russian Micex follows the currency and is going down. Not the right time to tease them.

And Ukraine is also feeling the heat as investors are leaving the local stock and other financial markets.

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Waiting

In Frankfurt the talking heads of the ECB are debating a euro rate cut. What will it be? 75bp?
Lately we saw that currencies are reacting more actively on these decisions as they did in the past. That’s called competitive devaluations in the race to the bottom. So it will be interesting to observe the reaction of the euro. Versus the dollar, sure. But even better: versus the GBP.
How is Europe going to cope with the fast growing divergence between the large countries and the PIGS (Portugal, Italy, Greece and Spain)? And Ireland, too. Questions. No answers.

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Sun, sun, sun... here we come

One more week to go and then Obama takes the White House. As we live in the age of Harry Potter solutions to economic problems, everybody tries to get a piece of the 1 trln pie. Alliances and lobby groups are growing faster than mushrooms for the moment. Commercial property, carmakers, casino’s, Fannie&Freddie, insurance, schools…
Its becoming epidemic
Santa is coming twice this year.

Alternative energy hopes to fork 25 bln USD in their direction. That’s quite some monopoly money. No goals are clear or set, but Wall Street tries as usual to talk involved stocks up.
There is a song asking ‘do you believe in magic?’
We would dub it ‘do you believe in all the BS coming out of Wall Street ?’
A lot of people do.
Time to do the Obama rally.
A lot of pro’s are waiting to short this move.

We’re not buying it.
Neither are some analysts cutting estimates all along the alternative energy coast.
The solar sector was downgraded yesterday.
Which is interesting, because a lot of names in this sector are not American but Chinese. Only a year ago this sector was partying.
How quick can the tables of fortune turn.
R. Stone from Cowen & Co downgraded China Sunergy (ticker: CSUN), Energy Conversion Devices (ticker: ENER), Evergreen Solar (ticker: ESLR), First Solar (ticker: FSLR), SunPower (ticker: SPWR) and Trina Solar (ticker: TSL).

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Don't bank on it

It’s Wednesday and there is drama.
Let’s start with banks. Citi is breaking up, as a ship that hit the iceberg. Nice if you are a shareholder. Once the biggest, now humbled jus in an effort to survive. But also elsewhere it’s gloom and doom. Morgan Stanley thinks HSBC need another 20 to 30 bln USD of capital to survive. And forget about the dividend. Royal Bank of Scotland is selling their stake in Bank of China. Barclays is ready to ax 2100 jobs. And Deutsche Bank has his own Madoff or better: a massive profit warning for a fourth quarter loss of 4.8 bln EUR is announced – unaudited – and one of the key drivers are losses in the prop trading department on equity derivatives and credit trading.
Bernanke is in London and called for fresh efforts to clean up the US banking system.
And so on… So even the financial crisis has sailed a little to the background, the mess is far from over.
It’s clear that the financial system, as we knew it, is gone. A couple of markets will not make a come back, destroying a lot of capital in the process.
Read my lips: banks are a mess.

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A bond bubble?

And then everybody starts to advise of buying corporate bonds. Your local banker or adviser is tipped by head office that there is something going on in this universe and hey, we even see some activity coming back to the bond market.
Well, it’s very posh to ditch Treasuries for the moment and invest in high-grade debt or even junk. The reason corporate bonds look attractive, is that more and more companies carry the silent guarantee from the US government but/and they are far, far cheaper than the governments’ own paper.

A red light flashes.

We read on the Alphaville site:

There is a bubble in Treasuries. But it is an engineered bubble. One which has been encouraged and one which will only pop as rapidly as the economy recovers. Given that the weight of macroeconomic turbulence has yet to hit, that popping shouldn’t be total and shouldn’t come all at once or for that matter, anytime too soon. And while other areas of the bond market are looking attractive, they are so only because fears of the worse corporate default rate since WW2 are very real and very persistant.

And for the moment this thesis seems the right one: after a rush into high grade bonds, the dust is settling down. Our renko-charts are proving this.
We look to the iShares iBoxx USD High Yield Corporate Bond Fund (ticker: HYG) and mention that after the rally in December the tide has turned. For the moment. Profit taking? Or is it rather cooling down of a hype?
The CCI went below 100 and the SAR switched above the price. A copybook set-up of a turning trend.

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Retailers are sinking in the US

Something odd is going on in euroland.
Well, something strange is always going on over there as all nations and tribes have there own particularities and Europeans make it a point not to stop to surprise.

We observe that the ECB is building reserves. They are doing this already for some longer time, but last couple of weeks weeks the building process became steep.
How come?

Spontaneous I would suggest that it has to do with the aftermath of the financial crisis. A lot of money has to be invested in the States to absorb the expansion of the monetary basis. In buying dollars, Europe tries to keep his currency competitive in order to survive this depression. So selling euros seems to be a solution.

This is fine as long as the monetary base in Europe is not expanding too rapidly. If Europe is joining the States in the race to the bottom and start to participate in the game of expanding debt beyond imagination without being sure what can be the outcome, than this exercise makes no sense.
After all: twenty year of consumer debt accumulation must be unwound and this deleveraging process is not a pretty one to be part of. Elimination of 2 to 5 trln USD of household debt will result in something nobody can envision for the moment. We only see the beginning: retail figures are plunging and the actors are forced to leave the market. Yesterday it was Goody’s (ticker: GDYS) to go under. But as malls empty and the industry biggest lenders are tightening lending terms and try to reduce exposure, this bodes ill for the retailers.

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2D:4D - no kidding

Oh my.
What do we read on the blog of the Financial Times?
Researchers at Cambridge University have discovered a strong statistical link between the profitability of male traders at a London bank and the ratio of index to ring fingers on their right hand. The longer the fourth digit in relation to the second, the more money the traders are likely to make.
The explanation: the ratio (known as 2D:4D) is affected by the amount of male hormone to which people are exposed while growing in their mother’s womb.
I would rather say: the amount of booze consumed the evening before is at least as important….
Anyway… who wants to be a trader at a London bank these days?
Staring at screens but not allowed to trade…
Someone suggested: makes you wonder what Madoff’s index-to-ring finger ratio looks like.

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Best Buy Co - follow up

Last week we showed a renko-chart of Best Buy (ticker: BBY).
This chart pointed to the direction of the start of a negative trend. Did you buy our message? The close on Friday was 28.08 USD. Or a daily loss of more than 5%. We continue to follow this stock.

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Stealing wealth from the future

During the Second World War the FED drove the 10-year bond to yield 2.25%. It helped America win the war but it ended in teas for bondholders as inflation in 1946 jumped to 18%. Are we observing the same thing now?
Difficult to tell.
Fresh data suggest that economies all over the world are imploding. Japan’s economy seems to be contracted in the 4th quarter with 12% on an annual basis, the US, France and Germany shrank with 6% and Britain is following suit.

The BRIC countries - and others – are bleeding as exports collapse. Russia has lost 27% of their 600 USD bln reserves since august and had to devalue their currency two times in two days. Capital flight is looming for these countries. And China’s 1.9 trln USD holdings of foreign bonds in order to hold down the yuan to boost exports are not longer necessary as the currency is weakening. Beijing needs to bring the money home to prop up their local economy. This will result ultimately in a sell-off of their holdings.

No wonder that the FED has to ‘monetize’ their debt in order to keep USD rates low. Printing money looks easy, but maybe it isn’t that simple: if these actions lose traction you have a big problem.
But that is for later.

On this very moment the FED started to buy 600 bln of mortgage bonds in order to force home loans down to 4.5%. US mortgage rates dropped 150 basis points in 2 months.
In expanding the FED’s balance sheet from 800 bln USD to 3 trln USD, the bank will find themselves with an overhang of bonds that must be sold again.

To whom?

That’s exactly the meaning of the phrase: ‘stealing wealth from the future’.

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Best Buy Co

Renko-time.
There is a change in the short term trend. Is the honeymoon with the new year already over? Is the rally already evaporating now?
We live in exciting times. Fundamentals are no longer important; it’s all herd-driven. I mean: if you buy one stock or 223, the price action is all the same for them as computers are buying or selling indexes and dictating in the mean time the price action for individual stocks.
We saw it over and over again, the last 9 months.
A very good chart is offered by the price action of Best Buy, one of the darlings in those dark November and December months. Together with WalMart and other discounters.
The one-hour renko chart shows how close we are to a negative breakdown. The CCI paved the way with a negative signal and the SAR is very close to flip above the price action.
A perfect short candidate…

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What to short? Treasuries or dollars?

Has the US Treasury bubble already popped?

If so, than it went quick and swift. We observed a huge rally in December of the US Treasury complex. All maturities rallied till mid-december, than traded in a quiet range til year’s end but went in a freefall as soon as the New Year set in.
How come? The most logical explanation seems to be a mix of end-of-year accounting factors and a supply-limited window for foreign investors. And now?
Maybe these bonds tumble further, but the situation is not clear enough to build on. Especially because everyone ‘knows’ that treasuries are overvalued. So a lot of plays on the short side (price wise) were set-up.

I don’t like crowded trades. Barron’s added to this feeling by putting up on his cover ‘Get Out Now’.

If everybody is yelling to get out, than we know that the probability the opposite will happen, wins in force.
That’s one thing.

Another important factor is the FED. It’s clear that the FED doesn’t want higher interest rates. And that it will use all means to prevent rates to go up. Hey, the US faces deflation and all economic data are pointing that way. So the FED will intervene. And that brings us to something else: the dollar.
If the FED buys Treasuries in order to keep rates low they will do so at the expense of the greenback. You have to print dollars if you want to buy UST’s in the market. A weak dollar is supportive for exports. And foreign investor inflows are disappearing. Another support for the dollar is fading.
One can develop different scenarios – the economy bounces, the economy gets worse or the economy gets much worse – but never emerges the dollar as a clear favorite.

Maybe it’s not UST that one has to short, but the dollar instead.

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The rally of the oil price is moving oil related shares. We selected Royal Dutch Shell Plc (ticker NYSE: RDS/A). On the daily renko chart we see that the CCI crossed the minus 100 mark some time ago, but it’s only now that the SAR switched under the price.
A rather small resistance level of 51.75 USD was broken and the next goal is the former top of 58.50 USD. A stop is handed out by the SAR at 42.50 USD.
Why do we follow this Dutch/English combination in dollars? Because our trading account is in that currency. Of course we realize that there is some currency risk.

As mentioned earlier: we prefer to deal on basis of a one hour renko chart. Not on a daily basis.

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Another country, another scam

News from India.

The chairman of Satyam Computer Services, one of the biggest IT outsourcing companies of that vast country wrote a letter to his board, offering his resignation. And confessing he was cooking the books for years and inflating margins in order to let the world believe his company was in excellent condition. Now India has his first scam and shares of the company – listed in Mumbai and New York – lost almost 80% of their value. The SENSEX declined with more than 7%.

The interesting thing is that the game started when the global financial crisis struck this planet and lenders started to sell shares of Satyam pledged by the chairman as collateral.
This was done in order to raise money which was injected into the company to cover costs in an attempt to hide away the fictitious cash reserves as a consequence of the inflated margins.

It was like riding a tiger, not knowing when to get off without being eaten, Mr Raju said in his letter.

PricewaterhouseCoopers was Satyam’s auditor.

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Potash Corp of Saskatchewan (ticker:POT)

A renko chart based on daily prices of one of the highflyers early 2008. The bottom is in - as it seems -. For the moment. A buy momentum is created as the herd is forced back to stocks.

The first vertical line shows the set-up of a classical sell occasion: the CCI went below +100, soon followed by a flipping SAR.

The second vertical line looked like a buy opportunity. The CCI went up above -100, followed by the swich of the SAR. But the SAR flipped back above the price action and that was an indication to get out of this long position.

The third vertical line - with a false signal in between - was only formed recently. The CCI indicated that the possibility to install a long position was coming up and the SAR-switch confirmed the positive tone.

Normally we like to look to renko-charts based on a 1-hour interval, because we think they are more appropriate for the current markets.

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Danger ahead?

Something dangerous is going on in the markets. Very sudden we see people flocking to risky assets. This goes very fast. Prudence is out. Risk is in. With interest rates at zero, Treasury bills close to zero, the FED mispricing assets of Fannie Mae/Freddy Mac, MBS-paper and municipal bonds, investors and fund managers are forced to hunt for far more risky assets in order to realize a decent return.
This deliberate plan to funnel money into risk can be dangerous if a situation is created where the fundamentals are ignored.
Unemployment is rising, tax receipts are going down, the bond market –except the artificially supported part – is still very illiquid, earnings will be tumbling and all economic statistics are imploding.
Once the flush of last year will be digested and the buyers buying the dip, the question arises: where will money come from to keep the momentum going.
Or as Bennett Sedacca, president of Atlantic Advisors, is writing:

Forcing money into risky assets is perhaps the most dangerous experiment ever done, and is so large in scale and so unprecedented that we have no idea how it will end. I expect it to end poorly and with hyper-inflation.

Having said this: it would be rather painful to miss the boat for the next couple of weeks/months, but the buyer beware … jump off when appropriate.

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The stealth rally - more

In Barron's we read this weekend a nice article about the bond market in the States. More proof where investors are looking at for the moment.

It is difficult for individuals to sell Treasuries short, but two exchange-traded funds, the Ultrashort Lehman 20+Year Treasury Proshares (TBT) and the smaller Ultrashort Lehman 7-10 Year Treasury Proshares (PST), offer a bearish bet on the Treasury market. Both these securities are designed to move at twice the inverse of the daily price movement in Treasury notes and bonds. Since the summer, the 20+Year Proshares has fallen almost 50% as Treasury prices have surged. If Treasury yields return to June levels, the ETF could double in price. Another alternative for T-bond bears is to sell short the iShares Barclays 20+Year Treasury Bond Fund (TLT), an ETF that gives exposure to the long-term government-bond market.
While Treasuries look rich, other parts of the bond market beckon, including municipals, corporate bonds, convertible securities, some mortgage securities and preferred stock. The average junk bond now yields 20%, compared with 9% at the start of 2008.
Triple-A-rated munis with 30-year maturities are yielding about 5.25%, almost double the yield on 30-year Treasuries. The yield differential between the two markets is unprecedented. Until this year, munis almost always yielded less than Treasuries because of their tax benefits.
Long-term corporate bonds with investment-grade ratings of triple-B now yield an average of 8%, nearly 5.5 percentage points more than Treasuries of comparable maturity. They rarely have yielded more than four points above government debt. Preferred stock of financial companies such as Bank of America (BAC) and Morgan Stanley (MS) yields 9% or more, and many preferreds carry tax advantages because their dividends, like those on common shares, are subject to a 15% federal tax rather than rates on ordinary income.
"The only part of the bond market that you need to be bearish on is Treasuries," says Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. "The other sectors are attractively priced."

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The stealth rally

A couple of things. We observe that a stealth rally is taking place in the bond department. From high grade bonds over high yield paper to preferred stuff: a rotation movement is propelling the price of these assets higher. The whole sector is revalued. The ETF’s of these three categories have a nice run.

This is a sign that liquidity is coming back: investors try to pick up these assets because risk wise they offer a very generous premium.

This means also good news for some European banks whose portfolios are frozen for the last six months and this positive action helps to improve the mark to market of these assets. This will at least stop the bleeding of the balance sheet. It is too early to say a bottom is in, but we see some nice price movements for the moment in the European bank names, battered the most.

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