There were plenty of mixed signals to end the holiday-shortened trading week. The most important, however, was the somehow unexpected non-farm payroll decrease of -465k and new unemployment claims of 614k.
|Unemployment Rate||NF Payroll Net Change||New Unemployment Claims|
There is a serious cognitive dissonance in modeling and reporting of employment statistics. Reality lost 107,000 more jobs than predicted, yet the unemployment rate was 0.1% better than expected, all while the new unemployment claims were essentially as forecasted. Seriously? The numbers are essentially meaningless on their own. The forecasting bias has more economic and trading value.
10-day global index returns have turned positive. Most markets were open on Friday. European equities were mixed, but in Asia, they were mostly up. The winners were the developing world, and the losers were the developed world. Expect this trend to persist.
China continues its torrid pace of growth and recovery. It is up +85% since its October low. We’re going to need China to perform like this to drag us out of the abyss.
Still, since June the 1st, only 9 of 22 major global indices have posted positive results. The results are top heavy, though: the big gainers were a lot larger than the big losers (+15.74%, +8.23%, +3.14% vs -5.69%, -5.23%, -4.11%). This is decoupling. That said, decoupling won’t occur if the entire world is in the toilet – everyone will suffer in that case. The process will be most evident when you compare performance over a long stretch of time. Daily beta is still typically 1.0-1.5.
I will continue to not argue with China. Its price has been riding at the edge of 2 stdevs, and it has now closed twice in a row above its 2 stdev bollinger band. This means that China’s gains in the past few days are even more rapid than what is normal in the contemporary. The question is: can we expect China to maintain this? I suspect not, but the answer likely is in liquidity theory. It probably explains the performance difference between China (+15.74%) and the Dow Industrials (-2.91%) since June 1. I cannot easily verify this, as I can’t find Chinese equity supply on a cursory search. Think about it like this: money base globally has been skyrocketing. As all of the dollars, yen, yuan and euros try to find homes for themselves, if they went into global equities equally — ignoring everything else — prices would go up as a function of supply. Equities world-wide boomed. As the developed world banks needed to raise cash, they added a tremendous amount of new supply with new stock issuance and competed with the demand by new bond issuance.
Trimtabs founder & CEO Charles Biderman says that sideline cash seems to be nearly exhausted. What about in Asia? The massive saving rates in China and Japan, they theoretically could maintain very significant demand on their equities. This trifecta of extreme savings, rapidly developing economy and favourable supply conditions make China the place you want to park your money while it is on the up-swing (which will likely be the majority of the next 10 years). On the same token, I really doubt the Chinese economy and stock market will continue to boom if the developed world is completely falling off a cliff.
My prognostication is that China is a great momentum play on both sides, and right now, they’ve got upward momentum. Maybe they’ve got a little too much for the moment given that nobody else does. Watch this carefully, and be ready to jump off the train.
Implied volatility as measured by the VIX is now 27.95 while the S&P 500 is at 896.42. Consider that it was 32.68 while 911.97. Options participants clearly think that equities pose less of a risk than they did on June 16th. They’re usually right. Max pain on SPY is at $92.00. These things make me modestly bullish about the very near-term.
Building upon my arguments on Saturday, global markets have become even more opaque for me. Despite cash gaining against assets all around the board yesterday, the number of global indices with a positive 2-week return has turned positive (the first time since the 15th). That said, this is not a short-term timing indicator — rather, it is measure of momentum globally. It also does a much better job of predicting high-beta markets than US stocks.
Volatility indicators outright are telling us to buy. I discount the VIX for past movement, however, and the reality is that we still have a very large risk overhanging priced into options. Additionally, as I mentioned in my previous article, the VIX is at the same level it was just before the Lehman and Bear collapses. No-one knew what was going to happen, and volatility measured at tops is always massively understated.
The Birinyi OB/OS indicator, which measures how many S&P 500 stocks are more than one standard deviation above or below their 50-day moving average, started June at +413. In the past few days, it’s gotten as low as +5, but it snapped back yesterday to +275.
Charles Biderman, the founder of Trimtabs, had a great interview on NBC on June 18. His statement was that insider selling and corporate actions were all adding a glut of new supply to the market. At the same time, sideline cash seems to be close to exhausted.
That we have had a pause in the market is no real surprise, as a consequence. Reggie Jackson wrote this morning in his fantastic newsletter about the growing influence of programme trading. The people left holding the bag are almost always retail investors, and the market seems to have been given enough bid support to be kept high to get them in on the action. Now that they are committed, add in the new supply, and we are trading on very thin bid support.
Prices are set at the margin, but when the bid depth at the margin is very thin — which it is — things can move very quickly. Momentum has dried up on the upside, and the bid support seems largely maintained by — as Zero Hedge likes to put it — some SPARCstations in the closet of some investment banks.
I leave you with some Oscar Peterson.
The past several weeks have marked a divergence in the path of global indices. With most of them actually down (21 out of the 23 I measure), Shanghai (+6.72%) and Taiwan (+0.24%) contrast with London (-4.52%) and Germany (-5.78%). Starting from the 15th, and extending through Friday’s close, this marked the first time the number of global indices with 2 week gains had fallen negatively sustained for more than 2 days since the up-turn. There were some shorting and convergence arbitrage opportunities, specifically in Malaysia earlier on in the divergent down-turn. I suspect that ship has now sailed. There are probably, however, convergence arbitrage opportunities in China (short) and Germany (long).
A look at volatility
My long-term volatility model — which takes the VIX value and discounts it for recent price movement — is still very pessimistic about future prices.
Implied volatility itself gives us two tells. The first is that we are at a crisis low. Despite this past week’s global stock markets drifting down, implied volatility still crept lower. This, in conjunction with a strong China, is what led me to tweet “If I were a more active trader, I’d be buying equities for a bounce right now” on the evening of June 22nd after the market had lost -6.78% from the June 11 highs. A fortunate call, but I’d be more lucky if I were a more active trader….
On the flip side, volatility is also at the stage where the market was before it really collapsed in September of 2008. The market had a lot of uncertainty, but it underestimated the carnage which would follow. Given that we’re at the same implied volatility as we were in August, just -9% off all-time highs, is it possible that future volatility is understated yet again?
One thing which we haven’t yet considered is the psychology effect on voltility premiums. Options writers are the most sophisticated sub-group of investors, and they are also the only type of investor who actually have a historic edge over the market. That said, they may write options to generate income for their bonuses now, and worry about the ramifictions/unwinding their positions later.
Implied volatility is also a far more reliable indicator at bottoms than it is at the top. My conclusion is that volatility is understated. Now is the time to buy volatility for the mid-term. The macro-economics at play — chiefly the mortgage reset schedule — are going to return to the foreground. In the very short term, I suspect the markets won’t do a whole lot, and this is probably a good time to scope out inflation sensitive assets which have been inordinately beaten down recently.
Fixed income taking away risk dollars
My bullish argument to explain the past few weeks of weakness is that the yield on bonds had become more attractive than domestic equities. The risk chasing dollars haven’t receded so much as shift asset classes. Wilfred Hahn made part of this compelling argument in his fantastic Global Chart Panorama (100 pages of nothing but charts you need to see).
There are major risks associated with various interest rates, however. The Federal Reserve has allowed the Fed Funds rate to hit their target of 0.25%. The recovery has shifted the structure of the lending market so that the US government is the source of all lending. The balance sheet is providing the bid support for everything from government securities, mortgage backed securities to simply giving banks newly created money in the form of reserves to encourage them to lend. (Note that this was tried in every crisis like this – namely Japan and the Great Depression, and it didn’t work either time). Despite this, yields have been pushed higher, signalling that foreign investors, global soverign wealth managers, pension funds, and other very large long-term players don’t think they’re attractively priced.
At the same time, residential housing prices haven’t even hit their median prices for lows, and interest rates are fast threatening to derail the extremely modest recovery attempted there.
Equity valuation modestly improving
There are actually people in academia who disbelieve the idea that there are secular bear and secular bull markets. Surprisingly, Professor Shiller is one of them. He certainly has implied a belief that exist in other asset classes (like real estate).
The Big Picture wrote an article back in June of 2006 that had a 100 year chart showing that secular markets in equities were identifiable through the consistent expansion or contraction of the earnings multiple. I tend to agree. It is now obvious that the markets priced the S&P 500’s earnings very cautiously.
The P/E multiple has bottomed out for the moment. It’s important to note that the mark of a new bull market, if indeed this is one, does not necessarily mean that stocks — particularly domestic — are a great asset to exchange your cash for. In the most in the most optimistic of economic projections, US equities are going to trail emerging markets and commodities. The financial sector, which recently accounted for half of corporate profits, is in the process of being neutered. Asian banks, on the other hand, didn’t recently suffer from the leverage gluttony, so they have plenty of reserves, margin and limited regulation.
The conclusion I come to is that this is the rising tide of inflation where everyone goes up, but there are certainly better boats to park your cash.
- Chinese equities didn’t participate in the pause
- Risk premium search still appears active in other asset classes than stocks
- P/E multiples have, at least temporarily, bottomed
- Implied volatility is lowest since Bear and Lehman collapsed
- Implied volatility is the lowest since Bear and Lehman collapsed: it mispriced the risk then, so is it now?
- Macro hasn’t stopped falling off a cliff
- Mortgage resets
- 21 of 23 largest global indices have had negative 2-week returns since June 15
My holdings represent the belief that foreign economies (particularly Asia) will grow faster than the domestic, US assets will continue to drop in value and are in fact in a bear market rally, and PPI inflation will run high.
Ordinarily, I would say that if one major economy index did not confirm the other in a bull market, the action was a bear market rally. What I believe to be happening is the long process of grand decoupling. This picture is being obscured by monetary inflation.
Monetary inflation does make things more difficult to price, and if the professionals and well informed amateurs do not do a good job of out-performing the broad indices (which we don’t – there are only a handful of people in the world who can claim multi-decade outperformance), this spells an even greater trouble for the financial planning of the common household.
Further aggravating this is the sinking quality of economic reporting by government agencies. The Federal Reserve removed the M3 (the broadest measure of money) statistic in 2007, and is now involved in a scandle involving billions of dollars in off-balance sheet transactions. The US government has been consistently revising labour and inflation statistics for decades. Economist John Williams’s site is an excellent resource to understand this better.
The end result is poorer financial decisions by consumers, governments and businesses made with less overall financial resources using consistently poorer information.
The end result is poorer financial decisions by consumers, governments and businesses made with less overall financial resources using consistently poorer information.
Asian Bank Spreads: The Asian economies have been growing at a much higher pace relative to the West. Their banks are stronger, better capitalised, and their economies are becoming less regulated — not more encumbered with government intervention. I started out long 33% SKF (ProShares UltraShort Financial), 22% KB (KB Financial Group), 22% HDB (HDFC Bank) and 22% MTU (Mitsubishi UFJ Financial Group). Since then, I have done some rebalancing, but the positions have run into needing to be rebalanced once again – especially since I think we are likely ready for some sort of correction.
US Equities: My US equity exposure is limited to three companies: GS (Goldman Sachs), AEA (Advance America) and DV (DeVry). Goldman Sachs is the most well connected company on the planet. Alumni occupy many important government and central bank positions in the world. Even the most naive interpretation of this has extreme implications.
AEA is a cash advance company which operates in the USA, UK and Canada. I selected it because of its attractive valuation. Initially, I took a fairly hard hit on this position, but it’s rewarded me for my patience with a present gain of 39%. Trading at 7 times earnings, I still believe this to have some room.
DeVry is on of the largest vocational colleges in the United States. My treatise on investing here was that recessions provided a catalyst for people to ‘upgrade their skills’ and make career changes. DeVry is one institution primed to take advantage of it, and this was confirmed a few months ago with their highest enrollment rate ever. It still hasn’t recovered very much ($43.57 from a low of $38.19 from a previous high of $64.69), and I think there will be positive surprises as earnings news comes through for this stock.
Commodities: Marc Faber says that he is 100% certain that the US will experience hyper-inflation, and that buying agricultural commodities will be like investing in the oil sector in 2001 and 2002. With the monetary base more than doubling in the last year, the only alternative I see is more vicious deflation. The gold market put much stock in the deflation theme — at the worst of it, it was down -13% from peak in 2008. It’s a few bucks away from all-time highs now. Even bonds don’t believe it. The 10y rate has gone from 2% to 3.8% in less than 6 months. Government spending in both absolute and relative terms is pushing new records every day. Any gain and any rally in USD is ultimately temporary.
That isn’t to say that there aren’t valid shorter term reasons for commodities to fall against the dollar. There is so much oil supply, and so much potential supply in paused production that I doubt we’ll see oil pushing $100 for perhaps years. Deflation is another reason. Inflation and deflation is and will simply happen at the same time in different assets. The cost of food to the consumer hasn’t had a single decrease throughout this recession, yet the average metro home price has fallen -20%. This is one faucet of the grand decoupling.
This is implemented by long positions in OIL, DBC (Deutche Bank Commodity Index ETF) and DAG (Duetche Bank Agricultural Commodities ETF).
Any gain and any rally in USD is ultimately temporary.
Net Short US Assets: I am short industrials via SIJ, and I am about to make a lot of money on it as GM goes into bankruptcy tomorrow. Additionally, I am short US housing via SRS. My belief is that the US housing market hasn’t even corrected to mean, and it has at least 10% farther to go.
The Other Stuff: I am long volatility through the wonderful ETF VXX. This is a liquid ETF which correlates extremely well with the theoretical index. I also have positions in Chinese real estate (TAO), and roughly 17% cash.
With tomorrow’s “stress test” results coming out tomorrow, I am taking a look at which banks the market likes and dislikes in anticipation.
- Bank of America (BAC) +6.46%
- Capital One (COF) +16.6%
- Wells Fargo (WFC) -8.61%
- JP Morgan (JPM) -5.48%
- Goldman Sachs (GS) -4.34%
- US Banccorp (USB) -8.31%
- Bank of NY Mellon (BK) -4.99%
- American Express (AXP) -4.27%
- HSBC (HSB) -0.46%
Just for fun, let’s look at the other important stuff in the market today:
As always, the price is set on the margin, and yesterday’s bids are working on on different themes to today’s, but what’s changed? No significant information has been released yet, and almost all of today’s performance is a perfect opposite mirror of yesterday.
If we are assuming rational investors, why? They are afraid of the results? Really? The same results that use a 2010 GDP growth of +0.5% as the more adverse alternative assumption? How damn bad can the capital requirements be if they are predicting a baseline unemployment rate of 8.8% for 2010 – just 0.3% worse than we are now? Why is the government entering the credit rating business, anyway…?
- AEA (Advance America) is a national payday loan company. This is one of the few outright longs I like in this economy.
- SKF vs HDB, MTU and KB — American financials vs Asian financials spread trade. This is for the long term.
- OIL (GSCI Crude Oil Total Return) – the underlying commodity can go to $25, but it also can go to $100. It is impossible to argue that it will closer to the former in the next 5 years.
- TBT (UltraShort 20-year Treasuries) is another long term bet. Despite the Fed printing 1/3rd of this year’s projected deficit, the yield is still pushing 3%. Perhaps the Fed is allowing it to rise so that it may attract some foreign capital before pushing the yields down again. I jumped into this far too early in November by underestimating how many long dated bonds the Fed was going to buy. I am reducing my exposure to this position in the coming days.
- QID (Nasdaq 2x Inverse) is one of the few short term trades I’m taking. I think there is 6 or 7% on the downside, much like Marc Faber predicts.
- GS (Goldman Sachs) knows exactly what it’s doing.
- DV (DeVry) does vocational education, and this is where people go when they are unemployed. Their enrollment continues to rise, and it’s just going to continue. I’m going to be increasing my small position in this company.
- WAB (Wabtec) – geez, did I recommed this?
Let’s examine Marc Faber’s recent history:
3/24 7:00 PM: “The US stock rally may have more legs”. The S&P 500 is +7.75% since. “We can go to around 880 on the S&P”. We’ve hit 875.63.
3/30 8:44 AM: “Rapidly growing countries have setbacks from time to time,” Faber, the publisher of the Gloom, Boom & Doom report, said in Hong Kong. “I think we’re going to test the lows again, but over the next two years, it’s probably a good time to invest.” EEM (Emerging Markets ETF) is +7% since.
4/4 12:23PM: “From here on, the government bond market will fall. In other words, the trend will be for interest rates to actually go up.” TBT (UltraShort bonds) is +3% since.
4/7 6:30AM: “Rally Will Go On, After a Correction” The S&P 500 fell -2.4% that day, and is +6.63% since.
4/7 6:30AM: “But I have been buying some banks here and there, for a trade. If I look at Citigroup, it dropped from 57 to 1 dollar. It is around 2.5 dollars now and can easily rebound to 5 dollars a share.” Citigroup is more than +45% since.
4/13 6:00PM: “You have essentially a government that gives financials free money at the expense of the taxpayer. With this free money, they may actually have decent earnings in the near future.” Citigroup, Goldman Sachs and JP Morgan (the largest US banks) all “surprised” on the upside.
4/17: “The market very near term has become somewhat overbought, and the correction should essentially follow, but I doubt it will go and make new lows in the intermediate future. The lows in early March at 666 in the S&P will hold, and we’ll have another push up into July.” We shall see…
He’s been knocking them out of the park.
Preamble: I initially wrote this on April 5th. It takes a long time to do research and articulate it. I am releasing what I wrote, and will release further sector research later. Positions: Long XLV, Long XLU, Short XLE, Short XLK, Short XLB. Portfolio +1.68% since established on Monday.
After a spectacular March, valuations are all over the place. The S&P 500 has turned overwhelmingly into a growth index.
|Sector||% of S&P 500|
The stock market is now dominated by Information Technology and Health Care, which now make up 1/3rd of the US stock market. They will be a very strong determining factor of future stock index performance. Naturally, the financials are probably the strongest determinant. They are the focus of trillions of dollars in government spending, and their leverage and integration with every other part of the economy makes them an automatic focal point of economic analysis.
This sector hasn’t climbed to nearly 18% of US stock market capitalisation through fundamental growth so much as not being quite as badly beaten as their counterparts in other sectors. On January 19th, 2001, the IT sector peaked at the height of the dot-com boom with 24.41% of the S&P 500 market capitalisation. Strengthened by continually easing monetary policy, the financials took the torch from the tech companies. As the tech boom imploded, capital fled to banks, who were able to translate equity gains into greater and cheaper borrowing for their risk arbitrage business. This shift caused the financials bubble, which eventually pulled the economy and stock market out of the 2001-2002 recession.
The question I pose is whether the emergence of IT is our saviour, like the financials were 8 years ago. I put the following points for consideration:
- The deregulation and fractional reserve model isn’t available to companies in this sector
- American technical knowledge is mostly realised through Asian manufacturing, and although there may be IP agreements in place, the diminished political strength of the USA along with the enhanced political strength of China probably means that foreign manufacturers will simply take what they’ve learnt and sell it themselves. Asus is an example of this. They have gone from producing components and hardware for Western companies (Apple MacBooks are produced by an agreement with Asus) to brand and resell to producing their own wide range of consumer electronics products.
- The profit margins are likely going to thin out dramatically as consumers and businesses get squeezed more
The top contributors to the IT sector are computer hardware (26%), systems software (19%), semiconductors (12%) and internet service & software (9%). The rest is comparatively tiny business.
This industry is dominated by Big Blue (NYSE:IBM). Their reputation, generally recognised quality, political connections and existing accounts likely put them in a good position moving forward. As government expands, it is probably safe to say that government accounts at IBM will do the same.
Apple (NASDAQ:AAPL) is far more exposed to fluctuations in consumer spending. Despite excellent products and a rabid following (I am typing this on my much loved MacBook), they are having an increasingly difficult time selling their expensive computers and consumer devices. That said, they have no debt, more than 25B in cash, and a towering profit margin of nearly 15%. Compare this with our next largest company in this industry, Hewlett Packard (NYSE:HPQ), who have a profit margin of just 6.78%. This is an excellently run company, but they are consequently no bargain – currently trading at 20 times earnings. Their tremendous profit margins will allow them to cut prices, but I don’t think they will be anywhere near the biggest beneficiary of the new and yet unallocated capital, which will likely be put into companies like IBM, Hewlett Packard and Dell (NASDAQ:DELL).
Hewlett Packard is somewhat of a fusion of IBM and Apple business models. Their low profit margins and relatively high debt to cash (12B in cash, 20B in debt) have them in a relatively precarious long-term situation if the economy continues to tumble.
I see this industry generally outperforming the broader market for the next 6-18 months due to new government spending.
The 800lb gorilla Microsoft (NASDAQ:MSFT) MRQ showed 20B in cash, 2B in debt, and a 28% profit margin. With their political ally controlling all branches of government, a seemingly unshakable monopoly in every country, every government and every business for operating systems & productivity, it seems to deflect attacks on every market it serves. It has been steadily gaining market share on its chief web service software, Apache. It went from approximately 20% of market share to 35% — mostly to the detriment of Apache — in 2008. Both have retreated slightly since to smaller competition. Their real bread and butter, of course, is the operating systems and Microsoft Office. At a P/E of 10, you get a growth stock at a value stock multiple. This company has challenges, but it has more than enough advantages.
Google (NASDAQ:GOOG) remains somewhat of an enigma. The market believes more great things are yet to come of it as it still sells at a towering P/E of 27.79. It already has had three rounds of job cuts, while hiring out mostly in overseas offices. They remain quite profitable (margin of 19%), have 15B in cash and no debt. Google might get a lot of secondary business from people who are downgrading from Microsoft Office to Google Documents, Microsoft Exchange/Outlook to Google Mail (Google Mail does integrated corporate calendar), and from more expensive advertising mediums to Google Ads, so it might be at least temporarily insulated from recession.
Oracle (NASDAQ:ORCL) continues to steamroll along. Larry Ellison is shamelessly embedded into delivering products to the US government. After its low of 8 bucks in May of 2002, it’s increased more than 100%, and currently at $19.29 – just shy of its 52-week (and 7 year) high of $23.62. Big government means big profit for this company, and their fairly rich valuation of 17.41 means the market already knows that. This might not be the right time, but this is the right stock.
With big government and infrastructure spending in vogue, I’d expect to see quite a lot more deployment of Cisco (NASDAQ:CSCO) hardware. They have good profit margins (19%), but sinking overall business (-27% YoY earnings growth). They are in a healthy financial position to take advantage of their opportunities, though, with $29B in cash and $6.85B in debt.
As we near the end of March, the new year has brought stock returns of close to -20%. We’ve seen the Dow touch 6,469.95. This was almost inconceivable, and one of the few people who were calling this level while the Dow was hitting 14,000 was Bill Cara.
We’re in a very different political, social and economic climate than we were a year ago. Central banks around the world have abandonded their coy monthly meetings, opting for bold statements and massive monetary actions that would have not been thought possible two years ago. Major news outlets used to report if Ben was carrying his briefcase in his left or right hand!
Calculated Risk, excellent as usual, has the state of the present economy presented in graphs (link will open new window). This is prerequisite viewing for the rest of this article.
Every valuation starts with the denominator on the other side of the trade. Cash historically has had very simple relationships. The USD moved with yields, and inversely to risk and inflation sensitive assets. Since the beginning of the year, USD cash has outperformed euros, stocks, oil and yields while underperforming silver and gold. Far more money is in each of assets than the total size of the gold market, so it’s clear that deflation is still the most significant risk.
Inflation and deflation are a big see-saw which largely reflects the net increase in borrowing. Looking at the Fed Funds graph, it is clear that the prime broker/dealer appetite for borrowing money (and consequently taking risk to commit risk arbitrage) has certainly become far more stable than it has since the fireworks began.
The question is: where is this borrowed money being relent? Examining the asset classes in the USA yields a clear answer. We can assume that the dominant buying force on the market is this money since everything else in hard deflation.
In the past, I wrote about the curious relationship between different government borrowing and lending instruments. I found a curious divergence in the 5 week t-note and all other treasury borrowing. Instead, it seemed to follow the path of Federal Reserve lending through the discount window, but most especially through repurchase agreements. The obvious reason is that money created and lent by the FRB was being used for risk-free arbitrage on higher yielding government securities.
I think it’s safe to say the same is happening here, except on a much larger scale. The bubble in government securities is probably being directly funded by the government! The Fed lends cheaper money to big banks who will buy up higher yielding treasuries.
The conclusion I come to is that central banks now, more than ever, are the greatest influence on asset prices. The balance sheet has become a giant juggling game of replacing maturing lending operations with new ones. If they slip for even a minute, violent deflation will return, and probably more quickly than we’ve seen yet. The New York Fed Open Market Operations should be monitored very closely for this. In the absence of violent deflation from a flaming torch juggling error, I think we will see momentum carry over from the recent movement: precious metals and bonds will increase in value while stocks decline. General economic pressure — mostly stemming from declining home values — are putting far too much pressure on deflation for a different outcome to take effect.
It’s almost been a quarter since I last wrote, but the themes are very much the same. Let’s examine some of the last predictions:
- January 2nd/09:
- Pair trade: Long Oil & Short Exxon Mobil: It’s taken some time, but this pair trade is in positive territory. XOM is down close to 20%, and oil is down about 9%. I think this is still a good bet. I don’t think anything has really fundamentally changed with the supply/demand dynamics, or with XOM’s business model. One of Exxon Mobil or Oil is priced incorrectly, and this trade will make money either way. Currently +5.5%.
- Pair trade: Short BGZ (2x big caps), TNA (2x long small caps): Statistics and the January effect did not play out. This trade closed out at -4.35%.
- November 30/08:
- TBT (2x Long 10y Bond Yields): This trade is essentially even so far. The bubble in treasuries bottomed yields out at the end of December. There was some queer behaviour in treasuries this week where yields dropped 50 basis points over 5 minutes on Wednesday. The EUR/USD rocketed from 1.3036 to 1.3485 the same day. The Fed printed a _lot_ of money to buy treasuries on Wednesday.
- November 20/08:
- Long XLV (Healthcare ETF): Currently sitting at -0.01%. This was a great call relative to stocks. The S&P 500 is -15.51% in the same period.
- Short XLE (Energy ETF): Energy is down modestly for a profit of a +6.75%.
- Short XLI (Industrials ETF): Industrials are down mostly in sympathy to the rest of American stocks to yield a short profit of +15.38%.
- Short XLY (Consumer Discretionary ETF): This sector seems to be by far the most sensitive to positive sentiment. In the recent rally, it’s put our short -6.92%.
- November 3/08:
- Long SLV (Silver ETF): +41.48%. Go team!
The markets haven’t been very efficient, have they?
- Bitumen & Bolts
- What do new believers buy?
- Birth of the Perma-Bear
- Fundamental Playbook for 2010
- Reflecting on Obscure late 19th and 20th Century Composers
- End of Year Strategy
- Global Market Overview
- Themes & Forces for 4Q
- Observations & VIX Interpretation
- State of the Global Markets
- Another Bounce To Buy
- Answer Unclear; Try Again