Thursday, June 26, 2014

Grandma Janet's Desperate Easing May Not Work


Unfortunately, at last Thursday's, June 19, 2014 press conference, Janet Yellen all but admitted that she has no clue as to what the future will bring. She stated that it “depends” upon lots of unknown factors. Furthermore, to the dismay of many economists, she positively shaded what the true economic facts are.  Just about every answer that she gave had a positive incredulous spin. This observer believes that as a consequence of her answers, the Fed has lost much credibility as an institution.

The truth is that the Fed is scared about the future and will keep easing via QE at all costs. The Fed’s fear is based upon Ben Bernanke’s and Janet Yellen’s concern about the USA falling into a 1937 type of depression. http://www.frbsf.org/our-district/press/presidents-speeches/yellen-speeches/2009/june/yellen-economic-crisis-federal-reserve-response/ . In my opinion, they will say anything to back up their policy. Let’s examine the facts



Right off the bat at the press conference, Steve Liesman of CNBC confronted Yellen about inflation.  Yellen had contended that the Fed inflation was under control and she was looking for the 2% inflation as the level to use for a change Fed policy. Liesman stated that we are already there.  Yellen then gave some sort of vague non answer denial of that fact calling it “noisy.”  

 http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20140618.pdf Mind you, this was just after the St. Louis Fed had posted official data showing inflation at 2.1% and GDP year growth at -1%.  http://research.stlouisfed.org/fred2/    

A week earlier, internationally esteemed Harvard economist Martin Feldstein had stated that inflation was already over 2%.   http://online.wsj.com/articles/martin-feldstein-warning-inflation-is-running-above-2-1402356356 

Furthermore, we know that our inflation statistics are outdated and faulty beyond any measure of reasonableness. For instance, skyrocketing food prices, energy prices, asset prices for the rich and so on are not properly weighted. Here is an alternative view from Shadow Government Stats: http://www.shadowstats.com/alternate_data/inflation-charts

Another View Of Inflation



Yellen’s non answer made me question any respect that I had for her.  Steve Liesman was polite in his response to Yellen because he has to get along with the people in power. I do not have to be polite. In my opinion, Yellen did not seem to have a grasp of the different types of inflation that we are facing.  She did not explain that the Fed’s fear is deflation, whereby prices go down in a contracting economy. Yet the current inflation is unlike past inflations where strong economies caused consumer demand or higher wages to increase prices. Rather, much of today’s inflation is being caused by other items that are exogenous to the strength of our economy. For instance, food prices are skyrocketing due to shortages caused by drought and diseased beef. Oil prices have been going up because of war in the Middle East. Asset prices for the rich, such as stocks and homes in wealthy areas like New York, have been rising because of the Fed’s QE policy.  Former Reagan Chief Economic Adviser, David Stockman has broken down the various components of inflation:

http://davidstockmanscontracorner.com/what-inflation-shortfall/

Next came Yellen’s disingenuous insistence that employment is getting better. Based upon the government’s dated unrepresentative numbers, that statement is true. However, we all know that chronic unemployment is at historic highs, many standard deviations beyond anything since the great depression. Numerous people who want to work are not included in the government statistics. They should be included in the government's numbers. Janet Yellen knows that, yet she claimed that the historically high chronic unemployment number was just a “cyclical” factor that would correct itself. The chronic unemployment numbers are anything but cyclical and they are way beyond anything in post WWII history. 

St. Louis Fed's chart of the percent of Americans who are employed: 



From my perch, Yellen's insistence that employment was getting better was strike two in the credibility game. The chronically unemployed in the above chart shows the dichotomy between the flawed headline numbers that the public relies upon verses the numbers that the government does not readily show. Many economists agree that if the government’s dated way of presenting unemployment numbers was true, the unemployment rate would be around 10%.

Chronic Unemployment:




Yellen next stated that the Fed was forecasting an improving economy going forward. Unfortunately, the Fed has consistently been wrong in its forecasts.


For example, the negative 2014 first quarter growth blamed on the weather defies logic. Especially when many economic statistics - such as all housing metrics - since the winter persist on being bad.  Yellen gave no evidence of the economy taking off. Essentially, she admitted that there is only hope. Today’s downward first quarter GDP revision must have scared her.

Below is the latest chart from the St. Louis Fed which depicts the 2014 US economy. It includes the minus 1% “growth” of the GDP.  It does not include the June 25, 2014 shocking downward adjustment to minus 2.9% first quarter 2014 GDP, which they have not updated in their chart yet.

GDP Dive
 

Despite all of the Fed’s monetary pumping, things are not good and may be getting worse. The evidence that this is the worst recovery since WWII is replete. Here is an article from the council on foreign relations that depicts the present weak recovery: http://www.cfr.org/united-states/quarterly-update-us-economic-recovery-historical-context/p25774. The economic community is saturated with similar articles and charts such as the one from PEW Research:

 
 

Contrast the above GDP charts and paltry 5 year recovery with the unprecedented pumping by the Fed as depicted by the following chart of the US monetary base from the St. Louis Fed. Something is very wrong, when the Fed gives it all it has and economy responds so poorly:

Insane Monetary Easing
 
Yellen's statement that stock prices were not in bubble territory was true, but did not paint the complete picture. In fact, stock prices do have room to go higher, but they are relatively high on a historic basis.  http://www.bespokeinvest.com/thinkbig/2014/5/20/sp-500-historical-pe-ratio.html

Stock Valuations



Furthermore, Yellen did not acknowledge that earnings have recently been skewed by stock buybacks and financial engineering while revenue growth has lagged – to wit see AAPL and IBM both of whose revenue growth has slowed while profits have risen due to share buybacks funded by cheap debt made affordable by the Fed’s low interest rate policy. Most important is that higher stock prices are supposed to increase people’s wealth which in turn will be spent on the economy. That “wealth” is not going into the economy.

Lastly, Yellen tried to spin the potential bond market liquidity problem by stating that she knew nothing about any Fed discussions regarding the potential problem.  However, he Fed had previously acknowledged the issue in a prior statement about suspending convertibility or using “gates” or fees for redemptions that could create runs. The problem is that there is not enough liquidity in the bond market for sellers to get out without a severe drop in prices. How is all of that money going to get out of bonds when the cycle changes and everyone heads for the exits? http://www.reuters.com/article/2014/05/15/us-fed-moneyfunds-study-idUSBREA4E0VF20140515  in my opinion a run on the bond market would be the 21st Century equivalent of the 1930s run on banks.

In my view, Janet Yellen is praying that the Fed’s QE policy eventually takes hold. In five years it has failed to do so and with the taper ending this fall, another round of QE is possible. If nothing sparks this economy to have at least average growth, the Fed will have created the greatest monetary easing in history for almost naught. Yes, they saved us from a depression five years ago, but that ship has sailed. Furthermore, blaming bad times on the winter does not jibe with poor economic numbers such as housing starts, which fell 6.5% in May: http://www.marketwatch.com/story/housing-starts-fall-65-in-may-to-1-million-annual-rate-2014-06-17?reflink=MW_news_stmp

Housing Starts And Completion:

 

In sum, we are living in a world where the Fed just does not know the answers, but is hell bent on easing in a make or break attempt to ignite the economy and avoid a 1937 repeat. The thought of falling back into a post 1989 Japan like 30 year malaise is anathema to the Fed. The financial community realizes this, but despite its skepticism of the Fed's policy, is absorbed in a chase for yield fueled by easy money. Hence the bond market and stock market rallies have occuered. What choice do asset managers have when given free money by the Fed?  

After Yellen’s press conference anecdotal evidence from the likes of Art Cashin and Steve Liesman on CNBC questioning the Fed's credibility are but two pieces of evidence of the Fed's shaky rationale of its position.   

In short, the Fed's QE program is no longer just a policy issue. but is being treated by the Fed like a political issue. People do not believe in the Fed's logic and do not see a way out of QE. The Fed does not want to scare people, but the problems are self-evident. The size of the QE Mountain is of epic proportions. The economy’s response has been paltry and the Fed has exhausted much of its ammunition. Plus the inflation picture is potentially bad. Many economists still believe that things will get better in the 2nd quarter of 2014. God help us if this unprecedented QE experiment fails. 


BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.

Thursday, June 12, 2014

Obama's Iraqi Blunder Causes Oil Stocks To Rally

Concho and other USA shale plays are now benefiting from higher oil prices:
 
 
 

 

 
 

 

Iraq is now falling to Al Qaeda because Obama was too inept to sign a status of forces agreement with Iraq. How the hell do you not keep the region stable with virtually no risk to American lives by not doing what we did in Japan and Germany and countless other countries after WWII? We had big time leverage over Malaki, who now turns out to be a bad guy. If your going to start a job, finish it. We could have gotten out with a small peacekeeping force and a strategic base of operations.
 
Now the chickens are coming home to roost. APC and CXO are running along with other oil plays like PXD, EOG, etc.  I fear that this Iraqi chaos will escalate further and oil prices will keep going up for awhile - $106 this morning.  Amazingly I am long these and FB overnight, even with the averages down yesterday.

From Todd Harrison Oil Prices:

 
 
It was impossible to short the market gap down open. Then the market got bifurcated in the opposite direction from the year's start as the NASDAQ 100 rallied and the DJIA stayed down. The $SPX was middle ground.
 
Almost 2 years ago Obama lied to the nation in order to get reelected. He said Al Qaeda was dead. He lied in the debate with Romney. Candy Crowley assisted him in his Benghazi lie. Obama "won" the debate because of his ruse that some unheard of movie caused the attack and that Al Qaeda was dead. The country ate up that BS and now the Al Qaeda cockroaches are all over the place. What screw up! And what a gullible nation.
 
APC is also running on takeover rumors:
 
 
 
We are stuck with a president that has no world strategic vision. I understand the need to not get involved in more wars at the cost of American lives and national treasure. But we do not have to lurch completely in the opposite direction. Surely, there is a way to keep our military presence around the world without getting involved on the ground.
 
I am saddened by the list if incompetence's that this President has assembled. It does not stop and we have no Parliamentary system to throw the bum out. Prepare for more because this President has almost as many days left as JFK was in the White House.

 



BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.
 

 

Monday, May 26, 2014

Vlad Finger - The Case For Gold

 


Just like Auric Goldfinger, the famous James Bond villain, Vladimir Putin has taken it upon himself to try to destabilize and wreck the current world order of the dollar being the world's reserve currency. To that end he is trying to unite the Eurasian countries starting with China and the former Soviet Union satellite states into one trading zone that does not rely upon the dollar. Instead, Russia, China, India and others have been on a gold buying spree as President Obama singlehandedly wrecks the entire post WWII and post Reagan world order. In addition, they all vow not to use the dollar in any trade deals.



Goldfinger tried to knock off Fort Knox and destroy the USA's gold reserves. Putin has bigger plans. In ways that are reminiscent of Henry Kissenger's policy of Detente with China and the Soviet Union, Putin hopes to realign the world geopolitical order and destroy the USA while Obama sleeps at the wheel. To that end he has formed economic alliances with China, Iran, Egypt and to some extent India. He has also been the instigator of aggression against many of the former Soviet Satellite Nations and has Europe over a gas dependent barrel. The Ukraine has been the lynchpin.

James Rickard's new bestseller,  "The Death Of Money" takes off where "Currency Wars" left off.  The aforementioned Eurasian detente occurred after the "Death Of Money" was published. Maybe Putin had advanced copies of the book, which posits a coming collapse of the world monetary system triggered by the irresponsible money printing policies of the world's Federal Reserves. Whatever Putin had, his policies seem to be speeding up the process.



As a consequence, along with my fears about what is happening to our country, for the first time in years I have become intrigued with gold as an investment. I am not yet long GLD, but am watching the chart for signs of a turnaround. We all know the deflation argument against gold. However, we have not thought about the power that the collapse of the international monetary system would have on gold. Here is one interview that James Rickards has given:

https://www.youtube.com/watch?feature=player_embedded&v=GgPyWLr20jk

I am going to carefully monitor the situation and use the GLD chart as my main guide. If GLD starts to run and take out the resistance points on the below chart, I intend to go long GLD and add to my position as each resistance level is popped. To be clear, I view this chart as a set up. If it works fine. If not, there are plenty of more fish in the sea.




BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.

Sunday, April 13, 2014

Why The Market Stinks

A five year bull market fueled by unprecedented Federal Reserve stimulus appears to be at a major inflection point. Is this the end, a cyclical correction or just a pause? Whatever phase one thinks that this market is in, I think we can all agree that it stinks. And Friday was no different than what had preceded it for 2014 as the selling of momentum stocks continued to spread to the rest of the stock market.

So just what is going on here? In a nutshell, the markets are out of gas. The Government does not have the right stuff. And I do not think that our economy can land on it's feet like Chuck Yaeger did when he pushed things too far. In short, Bernanke's deflationary fears are resurfacing:

 

As the great movie clip shows, the Fed has reached the point where the jet plane stalls out:

https://www.youtube.com/watch?v=5uXoQ7cIDXg

At first the institutional community tried to prop up the market indexes by selling all the momentum leaders and buying the "safe" S&P 500 names. Now those names are starting to crack.  Consider the following:

1 - An unprecedented monetary stimulus fuels a strong stock market rally, rescues the economy, but barely gets the economy moving. Despite Paul Krugman's rants, there is and will not be any fiscal stimulus to help matters. Not in this political environment.

St Louis Fed Monetary Base Chart. This monetary growth dwarfs anything in history. The great Milton Friedman who with Anna Schwartz plotted the money supply back to the 1700s,  must be rolling over in his grave.

Add caption
Furthermore, all of the money has gone into stocks for 5 years and not into the economy. Contrast the move in the S&P 500 as represented by the SPY with the growth of the economy - below:

Strong Stocks Were The Only Place To Go:  Stocks always lead, but this is nuts. The troops are not following.




Pathetic GDP Recovery: This is all we get for the above outrageous stimulus?!




 


2 - Hopeful bullish "spinmeisters" believe that the economy will finally catch fire without the help of the Fed.  However, the economy is showing signs of weakening just as the FED is taking their stimulus away. Furthermore, the Fed stimulus has had dramatically diminishing returns.

Impotent QE Results





3 - The Fed has no more tools left in its tool box. It can not do anything more to stimulate the economy except to keep short term interest rates low. But to pump in more money or to borrow more via QE is irresponsible.

4 - There is very strong evidence that the economy is starting to rapidly weaken and the weather excuse is bogus:

For example, New Housing Permits Have Fallen Like A Stone Even After The Bad Weather Ended:



On top of that, the yield curve is flattening as long rates fall. The hell with our artificial short rates. The banking system is still in big trouble. Just read JPM's earning's report. I think Jamie Dimon is brilliant. If he is having trouble, we are all in trouble.

5 - The ever more interconnected world economy is rapidly weakening.  China's GDP is falling rapidly and is much worse than the "Official Statistics" As per David Ignatius of the Washington Post, the Chinese government is clamping down hard on the county's economic excesses.

http://www.washingtonpost.com/opinions/david-ignatius-in-china-warning-signs-of-trouble-in-financial-markets/2014/04/10/f2dad670-c0cc-11e3-bcec-b71ee10e9bc3_story.html

China's Phony GDP Numbers - Divide by two?




As I've said before, the BRIC economies are all slowing and the world's economic fate has now just about reached the point where we are all in this together. Furthermore, China is slowly pulling back their loans to the USA and an economic energy war between the allies of Europe & USA  against Russia is not helping. 

Lastly, there are economic games being played by the powers that be. There is no real way that Belgium bought up all of the USA debt that China and Russia recently said goodbye to.  Yet that is what the statistics say. Belgium has got to be fronting for some one. Also, who in their right mind bought up all of that Greek debt last week? Could it be the fictitious firm of "LeGarde  Freres?" Christine has been making the rounds talking up a very bullish game lately. I can't blame her from trying to do all she can for Europe. But my job is to try and figure out what is behind the recent words of Super Mario Draghi and her.

6 - Global tensions are still rising. I have talked about Iran, Russia, North Korea, Syria, and China in recent posts. All potential large global risk areas.

So where do we go from here? The markets are obviously short term oversold and nearing support levels. But the market is not oversold enough and still has some room before it reaches support. Also sentiment is a bit better, but still lousy. So short term may be a bit tricky as a snap back rally could happen at any time. But this is still no time to invest. This is strictly a trader's market. Sell the rips and short the dips. If you are a fast experienced trader and see some sort of climactic selling or major gap down, maybe buy it for a trade. But you can not lose money by staying in cash. Capital preservation is the watchword.

I do not like this situation any more than the next person. But I can not refute the facts. In my opinion, patience and the strength to avoid temptation is all we have right now. Throughout history the world has gone through economic cycles. Let's hope that this is just a bump in the road. But hoping and praying never made anyone any money.












BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.
 

Thursday, April 10, 2014

The Bitch Is Back - Stocks Crack Up

So much for yesterday's oversold snap back rally. Today the market faced reality and forced selling came back with a vengeance. What a change from yesterday's oversold rally. Then again, the facts have supported the bears and vicious rallies are the norm during market sell offs.  No one believes that this anemic recovery has caught fire yet without the help of the Fed. And The Fed appears to have run out of gas. Hence, the issue of deflation that Bernanke feared is still with us and getting stronger every day. The old expression applies: "Money makes the mare go."






The result is that the major indexes have broken some support levels. As one can see in the below charts, major support lies near the 200 day moving averages. For some reason, ahem, the talking heads on CNBC are all bullish. But that is CNBC's raison d'etre. After all, they need to have a bull market in order to keep up their ratings. Therefore, all we hear are so called experts talking about things like valuation, the long run, and so on. Message to CNBC: where are the people telling us about all of the negative economic statistics?

1 -Why do I have to read elsewhere that the Baltic Dry Freight Index is off to it's worst start in years?

2 -Where is the analyst who will tell us that new housing permits are dropping like a stone to new 2014 lows, AFTER the snow excuse period has ended?

3 - Why does no one talk about the Fed being clueless with weakening QE powers as they flip flop away from the taper while the economy weakens?

4 - Why is China's potential hard landing being ignored? China's phony stats?

5 - What is this media nonsense about the phony unemployment rate? We all know it is around 10%. And I am not talking about the discouraged worker effect. I'm talking about the chronic unemployment that is an aberration from history.  

6 - Why does no one talk about the flattening yield curve?

7 - Finally, how on earth can anyone believe in the jobless claim numbers when they are a fait accompli that proves that more people are ready willing and able to work but are not entitled to get unemployment? Inquiring minds want to know what's up with the CNBC financial media fix.

$NDX made another low for the run and is close to major support





$SPX has some catching up to do but broke down from some sort of head and shoulders top


 
Sentiment still lousy

Put Call Ratio Is Still Low*


The Number Of Bulls Is Still High*




$VIX Inches Up A Bit, But Still Low


McClellan Oscillators Turning Down But Not Oversold:



In sum, I believe there is more downside to go. How far down the market goes is for astrologists and soothsayers. I just say "red light."  This is not a market for bottom fishers or investors. There will be plenty of time to invest in the future. In the meantime, I will short the rips and cover the dips. And I will trade around positions a lot. I may even grab some long exposure during some rips as I did yesterday - see my tweets. But, I am not about to change my bearish stance until this atmosphere changes and a decent bottom is put in.

Unfortunately, in my opinion it is harder to make money as a bear than as a bull. And IMO, despite the momentum stock carnage, this sell off is tiny so far. It certainly can not yet be called anything but a correction within the context of a secular bull market.  That may change into a cyclical bear or worse. But there is no evidence of that yet. I was short QQQ and small caps via TZA today. I held TZA overnight and will short the other indexes as opportunity arises.

*Taken before today's sell off . Charts thanks to Charlie Bilello, CMT

BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.

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