Sunday, October 30, 2011

Emerging markets in 2012

 David Knox Barker

The cycles in developed markets such as the S&P 500 in the U.S. and DAX in Germany have recently had key cycle turns several months behind those in the emerging markets. This means developed markets may roll over to one more low, after the latest European debt intervention euphoria wears off. Investors and traders need to be tracking the cycles and the Fibonacci support and resistance targets to identify optimal entry, exit and stop targets in these volatile markets. The cycles in emerging markets may test recent lows, or even drop to new lows as cycles in the developed world put in new lows in the current cycle.

The global economy and financial markets are a complex system. The Internet bubble and the housing bubble in the developed world appear to have also juiced economies in the emerging markets beyond their natural stage of development. Although growing, emerging markets are not growing fast enough to save the developed world from their bad fiscal and monetary policy that has made the long wave winter worse than it had to be.

A strong rally in emerging markets from current cycle lows is expected. More trouble is then coming to emerging markets as exports to a developed world tank. The long wave winter will get a lot colder in the developed world and emerging markets next year. New lows are expected in emerging markets along with the developed world in 2012-2013. Following the coming bottom of the final business cycle of the long wave in the next eighteen months, emerging markets will lead international free market capitalism into the next long wave spring. A new golden age of rapid growth and prosperity is coming, but first we must pay the long wave winter piper for the global debt binge.

Bear market facts

Investec Research

Generational bear markets, with losses exceeding 40% are the exception, not the norm. Since 1940, only one in four bear markets reached such a loss.
• The 2000-02 bear market was so severe because of record overvaluation extremes at the start, and the washout of the high-tech bubble with a -78% loss in the Nasdaq (of which many of the largest stocks were also components of the S&P 500).
Unweighted indexes declined only ~25% in the 2000-02 bear market;
• The 2007-09 bear market was extreme because the collapse suddenly exposed all of the mortgage derivatives on the balance sheets of major banks. The extent of this exposure was not well known — even to CEOs of the banks.
• Bear markets without recessions are more of a rarity. Since 1940, when they have occurred, the declines are usually milder. The 1987 Crash, with a loss of -34% was the exception; but ’87 was triggered in a monetary climate where interest rates were soaring and the U.S. dollar was tumbling.
• Average valuation, as measured by the P/E ratio of the S&P 500 Index, at the start of all the bear markets exceeding 30% was 21.8. Today, the P/E ratio of the S&P equals 14.7.

Saturday, October 29, 2011

Bill Bonner on Education

Bill Bonner
Markets Rally. Details to Follow...

What set off yesterday’s big blitz to the upside? Two things...

..first, the Europeans seemed to be getting their act together. There’s a big headline in today’s Financial Times:

“China set to aid Europe bail-out.”
The Chinese are looking at an investment of up to $100 billion in Europe’s stabilization fund. Details to follow...

The Greeks are to get another $130 billion of bailout funds. Details to follow...

Bondholders are going to go along with a 50% haircut. Details to follow...

And the EFSF (the stabilization fund) is to increase to $1 trillion or more. Details to follow...

The marching band set the pace yesterday. But in the parade of details to follow we wouldn’t be at all surprised to find a few sour notes. And we wouldn’t be at all surprised to find that investors sell their stocks when they hear them.

In resume, the Greeks can’t pay their bills because they don’t have enough money...which causes the Greek economy to go flat...reduces revenues to the government and makes it even harder for them to pay their bills. This problem will be overcome by borrowing from other Europeans, who can barely pay their bills either. And, thank the mischievous gods, China has come to the rescue too. China has real money...which it makes by selling products to the people who can’t pay their bills.

But investors are ready to believe anything. First, they thought they could borrow and spend their way to prosperity. Now, they think they can avoid the consequences of too much borrowing, by borrowing from each other.

We’ll keep an eye on it, dear reader, and let you know how it works out.

The other big news that set off yesterday’s rush to buy stocks came from the USA, where it was reported that the recession is off. That’s right, according to the feds the US economy grew at a 2.5% rate in the last quarter. Details to follow.

Says The Financial Times...the growth was “led by an encouraging jump in consumption.”

What is encouraging about that?

The report tells us that “consumption rose 2.4% at an annualized rate, adding 1.7 percentage points to growth.”

We also learn that “personal disposable income fell by 1.7%, annualized.”

How were people able to spend more when their disposable income and wealth were both going down? Good question. The answer is in the report too. The savings rate went down from 5.1% to 4.1%.

Now, let’s see... Households lost $800 billion of housing value over the last 12 months — or about $8,000 per family. Their incomes fell too. And the largest group of them is facing retirement sometime in the next 15 years, totally unprepared, financially. tell me that the economy is picking up speed thanks to their increased spending? And you tell me too that consumer sentiment — how consumers see their own situation — is at its lowest point in 40 years.

Our forecast: recession ahead...if not in 2011, in 2012.

And more on the General Theory of Zombieism:

When the financial crisis of 2008 hit, we saw how state-managed capitalism works. Favored companies are allowed to make as much money as they can. But they are protected from going broke.

Certain firms are deemed “too big to fail,” by virtue of the key role they play in the economy, or at least by the role they play in a politician’s plans for re-election or future employment. But state-managed capitalism is very different from the real thing. It is capitalism in a degenerate form.

Real capitalism progresses in fits and starts, described by Josef Schumpeter as “creative destruction.” It is like a jungle...not like a zoo. It cannot be managed. You cannot take out the predators or feed selected species without upsetting the balance of nature. Take out the destruction, and you block the creative process too. Since the beginning of the Industrial Revolution, most real wealth has come from real capitalism. Not from “playing the market.” Not from getting a good job. Not by trying to cadge favors from the government.

So, what is real capitalism? It is what we’ve seen in the computer/Internet industry over the last 20 years. This was a new industry. It had not yet been tamed by the government. Regulations were few. There were no large, entrenched companies to block start- ups. There were no lobbyists to curry favor from the politicians. There were no subsidies...and no barriers. It was young, dynamic, chaotic...and very prone to blow-ups.

The whole industry blew up in January 2000. Mistakes were not bailed out. They were corrected. Money moved from weak hands to strong ones. Many companies failed. The companies that survived, and prospered...went on to glory. Amazon. Google. Microsoft. Apple.

And who was behind these new companies? College drop-outs, computer nerds, products of teenage mothers and broken marriages. They did not enter the ranks of existing technology companies, work their way up to senior management and then create new product lines. It is almost as if they succeeded not because of advanced American capitalism, but in spite of it. They created an entirely new industry...with new companies nobody had ever heard of. And then, they destroyed some of the biggest businesses in America.

Typically, in a correction, asset prices fall and unemployment goes up. Misallocated resources — including labor — needs to be re-priced and put back to work. But when markets are not allowed to work the bid and ask spread in the labor market can stay out of whack for years. Joblessness becomes a structural problem, not a cyclical problem. People do not find new jobs. Old businesses are not swept away and new businesses do not start up.

A zoo economy keeps the old animals alive as long as possible.

Let’s look at education. Now, there’s an industry — we can all agree — that adds value. You could look at it as a charitable activity. Or as a profit-making business. Either way, education has to be a plus for the individual and for the society, right?

Wrong on both points. Education is only a benefit when freely floating prices are allowed to determine what it is worth. First, let us look at the whole industry. Since the 1960s spending on education, in raw terms, in per capita terms, in terms adjusted for inflation, has soared. From the 1930s, when the first careful records were compiled, to the 1990s, real spending on education multiplied 5 times per student. It more than doubled from the ’60s.

Did this increase in spending do any good? Not on the available evidence. Test scores — measuring achievement — have not budged in 40 years. In other words, the additional investment over the last 40 years has been wasted. We might as well have thrown the money down a well.

But while tests of achievement have not moved...the tests of potential achievement have improved. For whatever reason, IQ tests and SAT tests show young people are getting smarter...or better able to take the tests. This may seem like good news. But not when it is set alongside the performance tests. What we see is that the investment in education over the last 4 decades has actually had a negative return. The raw material was better able to learn. But the investment in the teaching industry produced less in the way of actual learning.

Today, the US stands out for its educational spending, as it does for the bombs it makes and the drugs it distributes — it is on the top of the heap, by a wide margin. Spending per school aged child in the US is about $8,000 per year. In Japan, it is half that. France is in-between with about $6,000 spent per child per year.

Which country has the best scores? The one that spends the least — Japan. On math tests, Americans score 474 (out of 600). The French do a little better at 495. And the Japanese get a score of 523.

Science, the same thing. US students get an average score of 489. Japanese students are at 531.

There is nothing very surprising about these figures. Nearly thirty years ago, American researchers found that there was no connection between spending and educational results. They just looked at different school districts in the US. Spending was not correlated with results, they concluded.

And yet, studies continue to show that people with more education do better in life. We doubt these studies have much validity, at least as interpreted. It is surely true that people with a lot of education have lower unemployment levels and higher incomes, statistically, than those with little formal schooling. But we have no way of knowing whether any individual student would have been better staying in school...or dropping out like Steve Jobs or Bill Gates.

But we will take a guess: the typical young person would be better off getting out in to the real world and learning as much as possible from working, than he would by staying in school. After all, that’s how almost all the world’s great geniuses, inventors, scholars, and entrepreneurs learned. It has only been in the last 100 years that public education has been ubiquitous...and only in the last half a century that ordinary people felt they should go to college. But as more people went to college, the less dynamic...less creative...and less productive the US economy became.
Our colleague, Gary Gibson puts it this way:

College is not necessary for most people. It never was. In fact, the preoccupation with college has left America bereft of its former ability to create wealth.

An unhealthy cultural myth has flourished that says everyone must go to college and get an advanced degree, even if it’s something for which there is virtually zero market demand. Meanwhile, below-market interest rates and government-backed loans have lured a couple generations of Americans down the road to higher education.

Further, the kind of education colleges provide — indeed, all of American schooling from kindergarten onward — doesn’t produce innovators, entrepreneurs and job creators.

In a recent article for The New York Times titled “Will Dropouts Save America?” Michael Ellsberg writes:

  • “American academia is good at producing writers, literary critics and historians. It is also good at producing professionals with degrees. But we don’t have a shortage of lawyers and professors. America has a shortage of job creators. And the people who create jobs aren’t traditional professionals, but startup entrepreneurs.
  • “No business in America — and therefore, no job creation — happens without someone buying something.”
Wealth is only created when value is added (You didn’t think it was when money was printed, did you?) The Austrian school of thought reminds us that value is subjective. People, ultimately, buy what’s worth buying to them with the money they’ve earned.

We cannot put too fine a point on this. It doesn’t matter what the seller thinks the item is worth. It doesn’t matter how much time, energy and material went into making the product or service. You can waste a lot of time, energy and material producing something no one will want to buy. The buyer determines the ultimate value...and whether he will part with his money for it.

There can be misallocations of resources. And when the central bank and government get involved, these allocations can grow very large and go on for a very long time before violently correcting.

So it is that, increasingly over the past couple of generations, there has been a gross misallocation of time and resources into higher education, aided and abetted by the central bank and the federal government.

Millions have been misled into pouring their young adulthood into endeavors that won’t pay off...and going deeply into debt for it. The federal government has encouraged this higher “education,” much like it did home “ownership.” The central bank made the borrowing easy with low interest rates — which powered the real estate bubble as well as the higher education bubble — while government entities backed the loans.

Now the education bubble is bursting. The bubble’s start can be traced to the GI Bill, whereby the government got into the business of shoving more people into college than the market would bear. Over time, the same easy loans and guarantees got extended to most of the population.

Over time, some bad notions gained traction. College came to be seen as the ticket to the good life as opposed to something that people already destined for greater things might undertake to help get them there. As often happens, causation became confused with correlation.

In the last 30 years, higher education has come to be viewed as a human right, something that governments are obliged to guarantee. Lost is the notion that a higher education is a path for the exceptional, particularly those exceptional people going into the hard sciences.

Of course, this doesn’t do anything to change the essential ability of the people now being shoved through the system. All it’s done is water down the quality of what’s being offered so that everyone can join in.

Exceptional people still become scientists and engineers. Everyone else gets a master’s in some field that was recently invented to meet the artificial demand for advanced degrees, for people who couldn’t be scientists or engineers, but who had a head full of misguided notions and a boatload of borrowed money.

Worse, this “education” came to supplant things like entrepreneurship, initiative, the willingness to take risk, to accept and learn from failure. As Ellsberg says in his article:

“But most students learn nothing about sales in college; they are more likely to take a course on why sales (and capitalism) are evil.”

Indeed. We hate to keep turning to the Occupy movement, but it is full of the poster children for this. They came out on the other side of the system unemployable and in debt. They feel lost and angry, unable to think of life past the burden of their student loans. And many of them (not all) feel that “capitalism” is somehow to blame, that the world of profits is somehow divorced from the well-being of people.

It’s criminal when “profits” are doled out to banks and “too big to fail” businesses by the government, with money taken from the taxpayers. But what about the real profits — not stolen goods — in which entrepreneurs take risks and business people add value, when the profits are the reward for serving people’s needs?

So the bamboozled have taken to the street. They would like their student debts to be wiped out, that “the people” be bailed out like the bankers and crony big businesses were. Or even worse, they get it in their heads that all higher education, henceforth, should be paid for by the government. It doesn’t matter whether there is a market demand for expertise in a course of study or not.

A system has grown up that encouraged enormous debt for nonperforming assets, namely, schooling in things that won’t pay off. People are still falling for it. But markets aren’t mocked forever. There has to be some painful write-down in central bank- distorted asset values before the economy can regain solid footing. This is just as true for higher education as it is for real estate.

It won’t be pretty. We’re not sure how this will play out for those who’ve misallocated their time and energy based on false signals, and with nothing but debt to show for it. But the stories that we told ourselves about what’s valuable were built on distortions that are now coming to an end.

Reality is asserting itself. And the reality is that entrepreneurship is what drives wealth creation, not going into debt to be taught that wealth creation is secondary to cultural studies or worse, that wealth creation is downright evil.
The education industry has been corrupted by too much easy money. It is now zombified. Sclerotic. And parasitic. It now subtracts value. It takes valuable resources...not the least of which are the minds and bodies of people at their most energetic stage in life...and squanders them, making us all poorer.

Still, parents are terrified of the idea that their children may not get the “education that they need” and may be condemned forever to the lower rungs of the socio-economic ladder. The unemployment rate for college graduates, for example, is only half that of the rate for the rest of the population — less than 5%, even in the high- unemployment slump since 2008. Parents are afraid an uneducated child will not only be a failure, but will be forced by joblessness and poverty to move back in with mom and dad.

Yes, they will tell you, a degree from a Podunk University in the Midwest maybe be worthless. But get a degree from Harvard or Yale and you are on the train to status and prosperity. They are prepared to mortgage the house...and take out hundreds of thousands in student loans to buy the kid a ticket.

And they may be right. But only because the whole society has been corrupted by the same zombie virus. It has shifted the economy from one that cares if you can one that cares if your papers are in order. A small businessman will not particularly care if you have a college degree or not. He only cares if you can do the job. But big government and the big businesses it manages are different. They use education as a qualifier. Anyone who can sit still in class for 16 years — without questioning the nonsense that passes for knowledge — is a good candidate for bureaucracy.

What have been the growth industries of the last 10 years? Government is the main one. Obviously, government doesn’t care if you can produce or not. Who’s measuring? Its output is un-priced. Who’s to know if you handled your paperwork well...or made the right decision? Likewise, in the education industry, who’s to know if you are productive? What does it mean to be productive? Imagine that you have a job at a major university. You are an assistant director of its Local Community Outreach Program...or its Special Gender Enabling Group...or even its Career Placement Office. Who’s to know...or care...if you are doing a good job? All you have to do is to look and act in a presentable professional way. The rest is BS.

In the absence of any market-based test, you can get away with anything. All you need is a bright smile and a good line of talk. And a college degree, of course!

In non-market sectors, mistakes are eventually corrected, but the Soviet Union...after decades of misery, and a final breakdown or revolution. In the meantime, the mistakes compound. The education industry takes more and more of the national resources while producing less and less real output. And if you want a job, you are better off as a well-credentialed zombie than as an energetic (often disruptive) producer.

But what if you were to start up a new business...a private school, with a clear profit-oriented, market priced output? With modern e- learning tools, you could reduce the cost of a real university education, to a fraction of the price people currently pay.

Mr. David Van Zandt of the New School in New York:

“I apologize to anyone here from Nebraska, but there is no reason to teach introductory chemistry in Nebraska in a classroom of 500 students. Not when you can pump in, say, someone from Harvard,” to give the lecture on video.

It is just a matter of time before the cushy, over-rich education industry meets destruction at the hands of new technology and new entrepreneurs. But don’t expect it to go gently into that good night. It has lobbyists by the score. It has money by the billions. It has its men and women in Washington...who will continue rewarding the failed, zombie schools, while regulating, squeezing out and crushing start-up competition.

That’s why, sometimes, it takes a revolution.

Friday, October 28, 2011

The nay sayers don't stop

Jim Chanos

China is on “a bigger and faster treadmill” than ever as property sales slow, said Jim Chanos, the hedge-fund manager who’s shorting banking stocks on a bet the market will crash.

“The Chinese are beginning to realize that property prices can go down as well as up and this is going to be a very, very troubling development for the Chinese property market,” Chanos, president and founder of $6 billion hedge fund Kynikos Associates Ltd., said in a Bloomberg Television interview from Singapore with Susan Li today.

Chanos has forecast since at least February 2010 that the property market will slump, saying that China is Dubai times a thousand and on a “treadmill to hell” because of its reliance on real estate for growth. Home prices rose in fewer than half of 70 Chinese cities in a nationwide survey in September as sales eased after the government restricted home sales and imposed curbs on some mortgages in an attempt to cool prices.
“All the way down, there were 30 percent and 40 percent rallies from new lows, yet things kept deteriorating,” Chanos said, adding that he’s nowhere near covering his short positions in China as “the property slowdown has just started in the third quarter. Stocks are going to go up and down like yoyos. But we are keeping an eye on the fundamentals and they have just started to deteriorate.”

Property Stocks Climb

The gauge tracking property stocks on the Shanghai Composite Index climbed 3.5 percent at the close, the most in two months.
Real estate transactions in the past two months, in the so- called tier-one, two and three cities the firm tracks are down 40 percent to 60 percent year on year, said Chanos.
“The property slowdown or worse has started,” he said. “The question is how it’s resolved.”
Chanos is on a trip to Asia, including Hong Kong and Singapore. He said trips to visit Shanghai and Beijing are “probably some ways away” because he has analysts going to China all the time.
I guess one has to watch China real estate stocks. The Chinese stock market has just completed double bottom with their Premier giving some hint of controlled slow down. The real estate slowdown story is for sure. Back to whip saws !

Jim Rogers on the Eurodebt band aid

However, the veteran investor warned eurozone leaders have failed to address the crux of the problem, by only enforcing haircuts on holder of Greek debt. He said the problem is likely to come back to haunt investors in the near term.

"It is good news. It is about time they started doing what is necessary. The problem is they have not dealt with anyone except Greece," said Rogers.
"Politicians have delayed addressing the problem yet again. It will come back in a few weeks or a few months and the world will still have the same problem, but this time only worse because the European Central Bank and other countries will be in deeper in debt," he added.

Rogers was surprised by the scale of the Greek bond haircuts, which will see boldholders accept a loss of 50% as part of the deal.
"Never in a million years did I expect them to impose a haircut of 50%, this shows at least somebody is starting to accept reality," he said.
However, Rogers reiterated that widespread haircuts across Europe are necessary to truly resolve the crisis. "Greece is bankrupt, but others are too, and these haircuts will have to come back and be wider," he said.

Rogers added that this morning's global stock market rally had the potential to last for a while.

"There has been a major overhang, so we will see the easing of some pressure, but the problem will come back because the Western world still has not dealt with its debt," he said.
"Most European countries are increasing their debt rather than decreasing their debt. Until that changes, the problems are going to continue, just as they will in the US," he added.

Friday, October 21, 2011

Euro solution

Martin Armstrong

Europe will fail and the only open question is "
when?" They simply resist crating a real single currency and lacking trading experience, they just do not get it that I can still short currencies that no longer exist by shorting bonds issued by individual member states. Each currency was accepted according to the Free Market. Europe M U S T do this or die a slow death.

Europe has to swap the bonds of each member state according to the free market price. It will then swap and create a Eurobond. Each state retains its sovereignty and customs. Going forward, each state would then rise or fall according to its own debt credit rating. However, banks MAY NOT use new debt as reserves, ONLY the Eurobonds.

This is the ONLY structure that will survive. As a trader, the only play will be spreads. But if I sell Greece, I do NOT threaten the whole European Union. Just as it is in the United States, each state must clean its own house to get more money. It will NOT necessitate Germany bailing out Greece any more than the US Federal Government is compelled to support the debt in California.

Thursday, October 20, 2011

John Taylor

Washington, London, Zurich and Tokyo are all creating billions of their own currencies and casting

them into the financial world, and there is no sign this flood will be stopping soon. What happens to all

of this money? One would think this profligacy would lead to inflation. Certainly there are analyses that

Bernanke’s excess billions have driven up the equity markets and commodity prices, but the argument

is also persuasively made that none of this money has reached Main Street, or at least not much of it.

The recent data hint that bank lending has modestly increased, but most of this is directed toward the

strongest corporate and consumer borrowers. The small businessman and the bottom 95% of

consumers are out in the cold. Why hasn’t all this money given us the kind of inflation that Zimbabwe or

the Weimar Republic experienced?

The simple answer is because the banks have all the money. We poor mortals have gotten none of it,

and if we don’t have it we can’t spend it, creating the excess demand that would cause inflation.

Because excessive debt built up during

the good times must be paid back, investors are forced to sell assets and drive down financial markets.

The liquidation even hits 'safe' investments like gold. Until the debts are paid back or written off, the

economy must suffer through stagnant periods with no inflation. In the current political climate

“helicopter Ben” won’t be able to release his dollars until it is clear to all that the economy is back in

recession. However, this is a foregone conclusion as further austerity seems to be in America's future.

Tuesday, October 18, 2011

Chanos on Exxon

Chanos: Exxon and Other Big Oil Names are “Value Traps”

  • By Avi Salzman
Famed short-seller Jim Chanos raised a red flag in a speech at the Value Investing Congress in New York Monday about integrated oil companies, saying that their costs to find and produce oil have gone up considerably in the past decade.

Chanos singled out ExxonMobil (XOM ).

“It’s still not generating enough cash to cover all its cash needs. There’s a reason this stock has lagged despite its being the bluest of blue chips.”
Chanos is bearish on the entire sector. “The cost structure has grown dramatically.”

In 2000 average exploration costs for the big names were $5 per barrel, but had risen to $22 last year. Production costs have risen from $5 per barrel to $15.

“The cost of finding a marginal barrel for the big behemoths is up and rising — a very very negative trend,” Chanos said. He warned that deals by large integrated companies with countries like Russia are not necessarily a good thing.

Unintended consequences of currency wars?

Bud Conrad

And yesterday Bud was talking about the plunge in U.S. Government debt held for foreign Central Banks… “What could be the cause of all this? The Senate passed a controversial bill that threatens to punish China for "currency manipulation" which will bring mandatory tariffs. China's opposition to the Senate action could be the power behind the big shift in direction of these custody holdings. In an election year, government action against Chinese imports may be seen as supportive for US jobs, thus garnering votes. But unintended consequences of decreasing liquidity in the credit markets will put pressure on financial markets. The movement shown in these charts could be the result of China's reaction to some of those anticipated policies. We can't tell what country is doing the selling until two months have gone by and the TIC data are published. In some senses, it doesn't matter which country is behind the shift. If rates begin to rise rapidly, even in the face of continued Fed manipulation, it could call into question confidence in the Fed's ability to keep supporting the economy. The rate on the ten-year Treasuries jumped from 1.8% to 2.2% in the last week. Foreign selling of this magnitude is dangerous for the dollar, and it could be very bad for US interest rates.”

But, to keep interest rates from soaring when foreign buying of U.S. debt wanes, the Fed is going to have to step in and buy what the foreigners don’t… Can you say Quantitative Easing? I thought you could !

Monday, October 17, 2011

Debt by nation

What distribution looks like

Distribution area is where the Supply overcomes Demand and stops the upward move and eventually begins the downward move. Distribution refers to the elimination of a long investment or speculative position and often involves establishing a speculative short position by professional interests in anticipation of a decline of price. In the distribution area the professional investors or speculators who had previously had bought stock, sell there stock to the public. The public buys and it generally buys because of good news of various sorts. Good news on the company, its product, the economy or any news which will entice untrained people to rationalize there buying decision. The best news of all is the advancing of the price of a stock. Often the reason that untrained people buy is that they do not want to miss out on the anticipated profits they think there are going to get as the stock continues to move up. Or they may buy because the stock has reacted a few points from the top and they think they are getting a bargain. After having sold there long stock professionals have no reason to support the stock on reactions and so they cancel there bids under the market, they may not only cancel the bids but they may establish short positions in anticipation of a large decline in price. Distribution is usually accomplished in a relatively SHORT TIME, Whereas accumulation takes MUCH LONGER, sometimes over many years. MAJOR distribution occurs in only a few weeks or perhaps a few months very rarely over a several year period. Distribution is usually characterized by wide price movements and heavy volume and GREAT activity.

SP500 distribution

Friday, October 14, 2011

Possible rally since late last week

I have been long since 7th October in India (see the 6th Oct blog, "New Trades") and long US markets close after that date. Closed my dollar long / euro short for a good profit. Close my earlier puts and bought a few calls then.

Looks like the rally for the year may have come. I am up for this year compared to a 20% retracement in the index year to date.

Wednesday, October 12, 2011

Occupy Wall Street movement

By Bill Bonner

The Occupy Wall Street movement is getting a fair amount of press. The movement, as you know, dear reader, is a loose assembly of the jobless, the homeless and the shiftless. Troublemakers, every one of them, with no coherent or sensible view of what is wrong or how to fix it. But what’s wrong with that?

The Occupy Wall Street protests started on Sept. 17 with a few dozen demonstrators who tried to pitch tents in front of the New York Stock Exchange. Since then, hundreds have set up camp in a park nearby and have become increasingly organized, lining up medical aid and legal help and printing their own newspaper, the Occupied Wall Street Journal.

About 100 demonstrators were arrested on Sept. 24 and some were pepper-sprayed. On Saturday police arrested 700 on charges of disorderly conduct and blocking a public street as they tried to march over the Brooklyn Bridge. Police said they took five more protesters into custody on Monday, though it was unclear whether they had been charged with any crime.

On Monday, the zombies stayed on the sidewalks as they wound through Manhattan’s financial district chanting, “How to fix the deficit: End the war, tax the rich!” They lurched along with their arms in front of them. Some yelled, “I smell money!”

The US is probably getting ready for a revolution. Back in the Cold War days, the CIA was asked to do a portrait of a country that might have a revolution. It decided that such a country would have three characteristics:

A big gap between rich and poor.

A middle class that was disappearing...or one that never existed in the first place.

A lot of people with a grudge.

The US fits each of these criteria. And then some others the spooks hadn’t thought about. The U6 broad measure of unemployment is going up...with 16.5% of the population without work. There are 6.2 million people who have been looking for a job for more than 6 months.

Americans are $7 trillion poorer, according to David Rosenberg, than they were 4 years ago — and property prices are still going down.

Yes, there’s also a Great Correction in progress. It, along with the policies of the US government, grind the faces of the poor.

Millions of marginally successful people think the system has failed them. Youth joblessness is at Great Depression levels. More than 45 million are on food stamps.

People come to think what they must think when they must think it. So, a person who feels he has failed must come to terms with it. He must find a reason that gets himself off the hook. It must be someone else’s fault.

It was not his fault he failed his chemistry exam. The ‘system’ should provide him with a good job anyway. It was not his fault his house got taken away; the system caused prices to fall...and his job got exported to Mumbai. It was not his fault he didn’t save any money; the banks took advantage of him mercilessly. He may even get a “deficiency notice” — telling him he has to pay the bank for its loss on his foreclosed house.

Add insult to injury, why don’t you!

The guy has a legitimate beef!

It wasn’t his fault that the Nixon administration cut the link to gold in 1971. It wasn’t his fault the Chinese produced things better and cheaper. It wasn’t his fault that the feds kept stimulating the economy...and encouraging him to go deeper and deeper into debt at artificially low interest rates. And it certainly wasn’t he who caused the housing bubble to blow up...or who caused it in the first place.

But one thing you can depend on. Not many people will do the hard work of connecting the kneebone of this disaster to the legbone that caused it. And he won’t want to make the sacrifices necessary to protect himself from it either. (Our advice: cut expenses to almost gold...become a bankruptcy lawyer.) Instead, he’ll join the revolution.

Of course, people do not join revolutions for good reasons. They join them for bad ones. They expect miracles. One wants free money. The other wants power. One wants to see his brother-in-law, who earns big money as a currency trader at JPMorgan, brought low. Another just wants to get high. One expects his mortgage to disappear. Another wants the whole neighborhood to disappear. One hopes to see his dead wife rise from the grave...the other hopes his live wife will fall into it.

One believes the bankers are rich and evil. Another believes the oil companies are rich and evil. A third thinks all rich people are evil. And a fourth believes that all people are evil, even those in the Occupy Wall Street movement.

Some want to save porpoises. Some want people to use only natural deodorant. And a third thinks the world uses too much oil...and that only people who drive Priuses should be allowed on the road on Sunday. He owns a Prius dealership.

It is fun to mock the protestors. That’s why we do it. They are such easy targets.

But here at The Daily Reckoning we always stand with the powerless, the aimless and the witless. We are champions of the underdog...the lost cause and the diehard. So, we lock arms with the protestors and pledge our solidarity.

Vive la revolution!

But the poor protestors are just victims of history. When the US embraced its empire it condemned its middle classes. Why? Because that’s how empires work. They bring in cheap goods — and sometimes money itself — from outside. Whether they are taken as booty or traded for the imperial currency, the effect is about the same; they undermine local industries and local wages.

Ancient Rome imported wheat from Egypt, by the boatload, and gave it to citizens (an early form of food stamps). Result: the price of wheat collapsed. Small farmers couldn’t compete with free wheat. They couldn’t earn a living.

The Romans also brought in slaves. Rich, politically-connected Romans took over the small farms, consolidated them into big plantations, and ran them with slave labor. Again, the local labor was out of luck.

Things got so bad for the small farmers that they sold their children into slavery...and then, themselves. Then, in alarm, an edict prohibited Roman farmers from selling themselves into slavery. They were required to remain on their farms...and at work.

Spain ran a very different, short-lived empire in the 16th century. It conquered New World civilizations and imported gold and silver on a colossal scale. It was as if they were printing money! This easy money made the Spaniards rich. They used it like America uses her dollars — to buy things from overseas. Pretty soon, the Spanish neglected their own manufactures and their own farming. Prices rose. Spain’s nascent middle class was smothered in the crib.

Are things so different now? The rich get rich. The middle classes get poorer; they have to compete with imperial plunder...riches coming from Asia, bought with dollars that were never earned...and never will be redeemed.

America’s middle classes were happy to sell their own children into perpetual debt servitude. The kids face obligations 5 to 15 times as great as annual output. Unless they revolt, they will have to work their entire lives to pay for their parents’ excesses.

But what will they do when future generations can take no more? They cannot sell themselves into slavery. They’ve already done so. Most face a lifetime of student debt, mortgage debt, and medical debt (aka Medicaid and Medicare), already.

What can they do? Join the revolution!

Tuesday, October 11, 2011

Bailouts, TARPs, TALFs, ZIRPs, QEI, QEII and now the ‘twist’? Nope,time for Samba.

Just realized that China has reached 2 years low.
So has Rio Tinto and BHP Billiton !
Surprisingly, the Brazil market has also made a double bottom. Time to Samba? I am buying Brazil !

Central Huijin, the domestic arm of China’s sovereign wealth fund, will purchase shares in Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China, the official Xinhua news agency announced on Monday. Xinhua added that the purchases by Huijin – its first such public intervention since a similar decision at the onset of the financial crisis three years ago – would “support the healthy operations and development of key state-owned financial institutions and stabilise the share prices of state-owned commercial banks”.
The announcement came too late for the Chinese stock market, which had closed at a 30-month low, but had an immediate effect on late trading in Hong Kong. ICBC’s Hong Kong-listed shares, which had been down 3 per cent, rallied to close up 1 per cent.

The E.U. summit meeting has been postponed to October 23rd to give policymakers more time to hammer out the details. They really need to get this right.

Thursday, October 6, 2011

China credit default rates

 5-year credit default swaps of the People’s Republic of China .

In “China’s Worsening Credit Crunch,” published at Pragmatic Capitalism, Nomura analysts are quoted saying that some of the rise in the discount rate may be caused by financially stressed property developers. The article further observes that the gap between the commercial acceptance bill discount rate and the Shanghai interbank rate has widened to 5.7%, the highest level since data became available.

Steve Jobs gone

Their is a lot this man taught. Still most never learned.
What's worse is that so many nincompoop managements continue to sit in companies.

As Jobs said, several of the old failing Apple management pretended that Microsoft was the enemy- them versus us.  But as Steve summed his philosophy - Apple is about a lot more than competing with Microsoft. Its extraordinary that even after his "Think Different" tag line, no one else ever did ! Petty minded managements continue to run companies. There is no originality. Steve pooh poohed Microsoft and did never even consider them personally worth competition. As far as he was concerned they were just poor little copy cats with no gut, no soul.

He grew so big in terms of his diversity in influencing products and industries, he proved what a good mind ought to focus on.....originality and ideas. This is what he meant by saying follow your guts and instinct. You cannot connect the dots forward, only backward.

He truly thought differently.....and lived it as such.
So what is his lesson to us all ?


New Trades

I had gone short last week end and successfully covered yesterday.
Today being a holiday, I could not go long.

Below is S&P 500 from 1987 from Jeff Clark.

I intend to go long again tomorrow.
Good luck

Tuesday, October 4, 2011

Next- Land of milk and honey

With my blog stating that China may be the net shoe to fall, its likely that in the next upturn India may be the leader till our political hoodlums screw it up the way they do in all countries.

This makes me realize that India will have a strong currency gain in the future years followed by a weakening as we do the usual overcapacity over indebtness game replay of China and US.

It follows from this that the offshore currency yuan weakening in Hong Kong is suddenly making sense.
Chinese are selling out. The money from the cute politicians "transferred" offshore is running away ?

For now, my dollar play looks dominant. Perhaps long 'long term US bonds' are indeed a good play. But they are already at 2007 levels.

Having missed the boat, I have to wait and watch now.

Medusa- Curse of the Greek Gods

Bert Dohmen

"A Greek default is now inevitable and will result in restructuring of the debt. This means that the holders of Greek bonds, primarily the large European banks will have to write down tens of billions of dollars of bonds. And that is the problem, not Greece. This is why the global stock markets are responding immediately to any news coming out of Europe.

You can be sure that the focus in Germany, France, and other Euro-zone countries now is to build a wall around their domestic banking system, protecting it from a Greek default. "

Saturday, October 1, 2011


As Treasurys surge and inflation fails to materialize, Gary Shilling’s macro outlook is once again looking prescient. In his latest “Insight” newsletter he highlighted his portfolio positions in the current environment:
Treasury bonds
Income-producing stocks
The dollar vs. the euro and Australian dollar
Dollar index
Eurodollar futures
Rental apartments
North American energy
Medical office buildings
Sell your house, second home or investment single family houses yesterday, if you plan to do so any time soon.
Sell homebuilders
Developing country stocks
Sell US Major and regional banks.