- I have been a Treasury bear for a long time and will remain so, because I do not see much value in the Treasury market as a long term investment. After all, Treasuries are nearing the end of their 30 year grand bull market. Having said that, I am not short Treasuries just yet. I believe that the current cyclical bull market in government bond prices might have a little bit of juice left, because EU problems have not been resolved and the up-and-coming recession has yet to play out. This week the Long Bond ETF (TLT) broke out between its tight range between the 50 MA resistance on the upside and the 200 MA support on the downside. The majority were caught off guard yet again (including Bill Gross), as expectations for rising yields due to QE3 reflation was a major consensus trade, already signalled with break evens overheating. This shouldn’t have been a surprise to readers of this blog, because whenever traders turn extremely bearish on the Japanese Yen, Bonds also tend to rally due to their close correlative relationship. Furthermore, I have also outlined that global funds have been net sellers of Treasury Bonds since June, when the S&P 500 bottomed, and it seems that the trade is now reversing. I hope I am smart enough to short Treasuries over the coming months and quarters, if they spike to a new high as risk assets sell off in a panic.
- Japanese individuals have amassed one of the largest levels of private household wealth in any country around the world. But with local interest rates so low for so long, Japanese money tends to search for investments abroad and retail investment always has the same mentality everywhere – that is why we call them dumb money. The chart above shows that when Japanese households become net buyers of foreign equities, price usually tends to sell off rather sharply. On the other hand, when Japanese households become net sellers of foreign equities, the opposite happens as the price usually tends to rally. To explain this contrarian indicator better, consider this chart linking those important dates to the price of the S&P 500. We can see that Japanese retail money was euphorically buying foreign equities coming into August and September. Most likely, Draghi & Bernanke’s one-two punch sucked in the rest of the retail crowd from there onwards, so the chances are high regarding a major top in stock prices, all while fundamental conditions were deteriorating.
- Following on from the previous post written in late October and titled “Which Assets Will Benefit From QE?“, I argued that certain assets will benefit much more in an up-and-coming currency devaluation period than others. While further QE might not increase corporate profits, it might actually increase the price of food and precious metals (currencies in their own right for over 5,000 years). The chart above shows the analogue of Silver I have been tracking with the recent rally comparable to those in late 2007 and early 2008. Both bottoms occurred from depressed sentiment readings and within the good seasonal time period. Finally, both rallies ignited as Ben Bernanke started to ease monetary policy to combat economic slowdown – in 2007 Bernanke was cutting interest rates, while in 2012 QE infinity was launched. While I do not believe in plain technical analysis too much, this analogue continues to work and implies Silver to reach $45 to $47 by April 2013. Disclosure: I personally remain long the PMs sector with the largest holding in Silver, but without any targets.
- Even though the Federal Reserve has announced QE3 or as some call it QE infinity, most have now noticed that the Fed’s balance sheet is actually not expanding. The Fed’s balance sheet will naturally shrink as various bonds mature, so the Fed has to be active and aggressive to increase the size of its balance sheet. As the news came out that QE3 will be $40 billion per month, I’ve stated many times on this blog that it only adds up to $240 billion over the next 6 months (much smaller than QE2) and it will not be enough. With that in mind, the Federal Reserve will most likely engage into further QE expansions as soon as they can, as the top ten global economies have over 15 trillion dollars maturing into 2015. Chris Puplava recently wrote that: “…there is just too much debt maturing over the next couple of years for capital markets to absorb and it is highly likely we will see global quantitative easing occur as central banks step in to be buyers of last resort to help suppress interest rates and keep debt servicing costs low.”
- There is an above average probability that Apple’s stock price has topped as its parabolic trend starts breaking down. As we can see from the chart above, the orthodox top most likely occurred into March 2012 with a huge vertical parabolic rise. A follow through into September did manage to break above previous resistance and make a new high into $700 area, but has now reversed, creating a huge bull trap aka 2B pattern. Apple’s 200 day moving average has also been broken for the first time since 2008. Whenever bull market leaders and darlings of the investment world start to under-perform and disappoint, the bull market itself has most likely come to an end. You might remember my real time post and short position disclosure from 23rd of September 2012 (the day of the record high) that was titled “Is Apple The Biggest Mania Of Our Lifetime?” With so many investors on CNBC and Bloomberg defending the stocks decline, we are now watching a classic “slope of hope” emotional reaction to the reversal of a parabolic.
- Focusing on lagging economic indicators (e.g. no use in tracking employment data)
- Focusing on incomplete / untrue data (e.g. almost all data is revised 3 & 12 months later)
“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession]” ~ Alan Greenspan, July 1990
“Moreover, with all our concerns about the next several quarters, there is still, in my judgement, ample evidence that we are experiencing only a pause in the investment in a broad set of innovations that has elevated the underlaying growth rate in productivity to a level significantly above that of the two decades preceding 1995.” ~ Alan Greenspan, May 2001
“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” ~ Ben Bernanke, October 2008
- Economic Outlook: The global economy continues to slow towards a recession, as we find ourselves in the very late cycle of the expansion. United States growth remains below 2% for five out of the last six quarters, with durable goods new orders collapsing recently. Eurozone remains in a recession, as Germany dangerously flirts with a contraction in growth. German CEOs see the business cycle moving deeper into a downturn with a high probability of recession. Japanese growth rates are once again anaemic post earthquake recovery, with Industrial Production slowing meaningfully. Chinese growth continues to slow for the seventh quarter in a row, however many do not believe official growth data. Business confidence is decreasing rapidly, while the manufacturing sector is in doldrums for a year, confirmed by the slowest electricity consumption since 2009. More importantly the price of cement, iron ore and steel has crashed recently, indicating the end of the property building boom. Finally, exports are now slowing rapidly, while railway cargo freight is looking very weak.
- Important Indicators: Cash levels within mutual funds, retail investors, hedge funds and money market funds are at extreme lows, volatility is at historically low and credit spreads are very narrow relative to fundamentals. While clam at present, financial stress conditions could start to rise in coming months. We are witnessing bubble-like record fund inflows into Junk Bond market, a very concerning signal. All in all, complacency is the main investment condition right now.
- Long Positioning: Long positions are held in Precious Metals weighted heavily towards Silver, Agriculture including individual position in Sugar; and finally Japanese Yen. Put options have been sold on Japanese Yen.
- Short Positioning: Short positions are held in US equity sectors including Dow Transports, Technology, Discretionary and Industrials. Put options are held on Apple (long dated OTM). Put options are held on British Pound & Canadian Dollar. Call options have been sold on various risk assets like Junk Bonds, Homebuilders sector, JP Morgan, Amazon, IBM etc.
- Watch-list: A major short in due time will be US Treasury long bonds, as they are extremely overbought and in the midst of a huge bubble. While Grains have exploded, Softs present amazing value for investors. Japanese equities are down about 80% from their all time high over two decades ago and offer great value.