FOMC Statement

Today the Fed reaffirmed its commitment to QE II. No real shocker here. I think it will be quite some time before a policy change...

Fed´s QE Ponzi Scheme begins to Backfire

Here is the beggining of a very good piece by Gary Dorsch, from December 8th:

"In a taped interview with CBS’ “60 Minutes” that aired on December 5th, Federal Reserve chief Ben “Bubbles” Bernanketried to brainwash the American public, into believing that “Quantitative Easing” (QE), is absolutely necessary in order to prevent further losses of jobs, and tried to assure his listeners that he has the skills to keep inflation under control. The US-jobless rate would have been far higher, “something like it was in the Depression, at 25%,” -- had the Fed not provided tens of trillions in loans to Wall Street banks and other financial companies, he said.

Two-years ago, the Wall Street Oligarchs played the central role in the greatest financial scandal in the history of the world, - one which wiped out tens of trillions of dollars in wealth, nearly bankrupted giant corporations and entire countries, and plunged the world into the deepest slide in global trade since the Great Depression. Huge profits were made in sub-prime mortgages, based on a Ponzi scheme of exotic financial derivatives and packages. When it came crashing down, the public treasury was looted to cover the financial aristocracy’s losses.

Since then, the Fed has carried QE-1 between March 2009 and March 2010, in which it bought $1.45-trillion in mortgage-backed securities and $300-billion in Treasuries. Together with pegging interest rates at zero-percent, printing of hundreds of billions of dollars, and flooding the financial markets with cheap credit, - the Fed enabled US banks and S&P-500 companies to record bumper profits, even as they slashed jobs and capital spending, and suffered revenue declines.

With QE-1, the Fed channeled interest free money into the coffers of the Wall Street Oligarchs, which in turn, was used to buy higher yielding Treasury bonds. In a single stroke, the Fed monetized the US-government’s debt, and at the same time, bankers earned double or triple the interest rate at which it was borrowed. They pocketed billions under the scheme. Wall Street banks also bought high-grade corporate and junk bonds, and emerging market bonds, to fatten their profit margins. At the end of the day, QE-1 was utilized to recoup the gambling losses of the financial aristocracy, and created fertile conditions for driving-up equity markets."

For the rest of the article click through the link http://www.sirchartsalot.com/article.php?id=149

Rosenberg's Ten Themes for 2011

Below are David Rosenberg's Ten themes for 2011. Though he has been overly bearish on the stock market for some time now, Rosenberg without question, IMO, is one of the best economists out there.


1. Consensus views of 1,350 on the S&P 500 and 4% real GDP growth are far too high. Not one strategist polled by Bloomberg is bearish on equities. So we have a complacency problem on our hands, the exact opposite of what we experienced at the March 2009 and the July 2010 lows. For that reason, the outlook for at least the first half of 2011 is less than positive.

Moreover, equities are at the high end of the range and are priced for good news on earnings and economic growth. Valuations are not at extremes (however, according to the Shiller normalized P/E ratio the market is still on the expensive side) but sentiment is. Negative divergences are increasingly apparent and momentum is actually subsiding. We see better buying opportunities ahead but continue to favor companies that are “special situations” – consistent dividend growth, undervalued, strong balance sheets, and non-cyclical in the sense that they have low correlations with the direction of North American growth.

2. In my view, real GDP growth in the U.S. is set to slow from around 3% in 2010 to 2% in 2011, or possibly even lower. This is not a double-dip but it is a slower growth profile. We went to 3% in 2010 from -2.6% in 2009 so the second derivative was positive. But for the coming year, the second derivative is likely going to decline. This augurs for a non-cyclical exposure; more defensive and still yield-oriented. As the Bank of Canada strongly suggested, global growth is going to slow and hence a sense of caution over global multinational cyclicals is warranted.

3. The fiscal and sovereign credit problems in Europe are not going away. Neither is the instability in the U.S. state and local government sector. Policy tightening in China is also a source of uncertainty. Volatility is likely to intensify with this outlook.

4. The U.S. dollar is likely to strengthen, particularly versus the yen (the Bank of Japan and Ministry of Finance want the overvalued yen to weaken) and the euro (they need it since Eurozone is tightening fiscal policy more dramatically).

5. Emerging markets will struggle as central banks move more forcefully to curb accelerating inflationary pressure. The Chinese stock market may have already signalled that a major top in the region has been achieved.

6. The U.S. fiscal borrowing need for 2011 is no higher than it was for 2010. As such, fiscal concerns in terms of what it means for lower long-term rates are misguided. The yield curve is too steep and will flatten, led by lower bond yields. The recent increase in long-term rates is very similar to what we saw happen in December 2009 and helped ensure that bonds would enjoy a year of positive returns in 2010.

7. The Canadian dollar is overvalued by at least five cents and is likely to succumb to a softer profile for commodity prices. Basic materials appear over-owned in the short-term and bullish sentiment is at a high. The policy tightening effect out of emerging Asia is an obstacle, especially at current price levels. There is likely an election in Canada and the U.S. will not be beset by political uncertainty until 2012. Hence some caution as it pertains to the outlook for the loonie (though I would look to get more positive at 93 cents).

8. Deflation remains the primary intermediate risk for the U.S., notwithstanding the prospect of a near-term follow-through from the recent surge in many commodity prices. Money velocity remains dormant despite the Fed’s reflation efforts. There remains far too much excess capacity in the labor market. This requires an ongoing focus on SIRP (safety and income at a reasonable price) strategies for investors.

9. Corporate bonds are no longer inexpensive but within this space, financials and utilities screen best for value in terms of sectors, the 5–7 year part of the curve in terms of duration, and the BBB-BB area in terms of ratings.

10. One of the most pronounced macro risks is another leg down in U.S. home prices, which actually seems to be underway but is currently receiving very little attention.

Our preferred “buy list” are out-of-favor groups that are not priced for accelerating growth: Utilities, pipelines, oil income, pharmaceuticals (dividend focus as well as being out of favor), food products, and grocery stores.

Real Estate Bubble in China

Question: Is China experiencing a Real Estate Bubble? and what are the long term implications for China?

Answer: In all likely hood China is experiencing a real estate bubble, that will burst at some point in the future. However, throughout history all powerful emerging economies have had set backs and bubbles. So, while it is necessary to be cautious when things move too fast in one direction, it is wise to keep this all in perspective.

Take for example the US in the 19th century; the US had both the Civil war, and the railroad bubble.

I can only imagine that investors in Europe must have looked around the US and said "their just laying too much railroad track-no way their economy can support that, eventually when the money dries up the whole things gonna tank." Well the RR bubble did burst, but that obviously was not the end of the story for US which still went on to be a HUGE growth market.

Point is investors need to see the forest through the trees.

CYS

I am putting a strong buy recommendation on Cypress Sharpridge Investments (CYS), at its current price of around 12.65. CYS's share price has recently been knocked down after having just gone ex-dividend (at a whopping $.60), and then having announced a secondary of 12 million shares at 12.46.

CYS is a an MREIT, that at these prices, is paying out over 19 % in dividends. The two ways to play CYS is to A. continually buy post the ex-dividend and then to sell prior to the next ex-dividend, and then rinse and repeat, OR B. buy after it goes ex-dividend and hold for the long haul.

At the moment I am using the latter strategy (CYS is about 6 % of my portfolio). So long as the Fed keeps rates low, MREITs will be in the proverbial sweet spot.

Treasury Yields, Stocks, and Precious Metals

I received the comment today: "...what effect do you think these rising yields [in treasuries] will have on stocks and PMs? "

My Response:

Though in general rising treasury yields are negatively correlated with stock and commodity prices, in this case, I dont think the rising yields will have much of an impact on the price of either (at least for the time being-this early in the cycle). That is because, to reiterate my thoughts from my last couple of posts, yields are not increasing because of a belief in a reinvigorated economy, rather they are rising in anticipation of an onslaught of treasury supply in 2011. This means that despite the rising yields, the Fed will continue to leave an easy monetary policy in place which will benefit both stocks and precious metals.

BTW, I think the question and answer format is great for this blog, and I encourage readers to continue asking questions.

Jim Rogers

Jim Rogers drops some knowledge:

http://watch.bnn.ca/squeezeplay/december-2010/squeezeplay-december-7-2010/#clip386056

Treasuries

I just received the comment: "Are treasuries getting slammed because of the tax cuts and the implied/intended increase in economic growth? or is it more than that?"

My take is that treasuries are getting hurt not because the tax cuts will lead to an increase in economic growth, remember these are extensions not cuts, but because the extensions lock in the deficit, and imply an increase in treasury bond issuances.

Also I find it very telling that the world over is referring to these extensions as cuts, this is propaganda of the first order.

Tax Cuts May Fuel Economy, Limit Need for More Fed???

Bloomberg's lead article today was Tax Cuts May Fuel Economy, Limit Need for More Fed, by Ian Katz and Rich Miller. This article, as the title hints, asserts that the tax cuts (which are in fact extensions) will somehow allow for LESS future purchases by the Fed . Below is an excerpt:

"The proposal removes 'what would have been a potential headwind' for the economy and takes 'some of the pressure off the Fed,' said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. The tax agreement means the Fed 'may not need to do more' than the $600 billion in asset purchases planned through June to boost the economy, Behravesh said."

I find this article to be almost laughable...

In what universe does an increasing deficit require LESS Fed purchases?? These tax extensions will quite obviously come hand in hand with larger future bond issuances, of which the Fed will be forced to pick up a greater share. There is simply no other way.

Note, I am actually in favor of these tax extensions given the fragile nature of the economy, but lets be realistic this will only cause an INCREASE in fed purchases.

Should US Investors Fear a "Japan Scenario"

Below is a fairly good article, by Nilus Mattive, on the parallels between Japan's Quantitative Easing, and the actions by the Fed today. I write fairly good, because I think the author misses a HUGE point, which is that Japans Central Bank purchases were a mere drop in the bucket compared to what the Fed is doing.

Should US Investors Fear a "Japan Scenario"

by Nilus Mattive

December 7, 2010

With Ben Bernanke and the Federal Reserve now into their second round of quantitative easing, a lot of investors are becoming increasingly worried about the U.S. "becoming like Japan." In short, they're starting to wonder whether the entire U.S. economy is entering stagnation so deep that all the money pumping in the world won't get us out of it — the very same condition that Japan has been suffering with since the early 1990s. I can see where the fear comes from, especially with Bernanke going on 60 Minutes two nights ago and saying things like, "We're not very far from the level where the economy is not self sustaining." And ... "It could be four, five years before we are back to a more normal unemployment rate." Bernanke even went so far as to suggest that the Fed may expand its current $600-billion program to purchase government bonds! So today, I'd like to talk a little bit more about "Japan scenarios," and whether stock investors should be concerned.

Let's Start With a Little 1990s History ... Japan's economic malaise began with twin bubbles — first in its stock market, which peaked in 1989, and then in real estate two years later. Since then, the country's overall debt levels have skyrocketed to more than twice the country's GDP ... its economic output has been rising less than 1 percent a year on average ... and consumer prices have fallen in seven of the last ten years. And all that has happened in spite of the fact that the Japan's central bank has kept interest rates at or near zero for nearly a decade! But what many folks don't realize is that Japan's zero-interest-rate policy was spurred on by none other than a group of U.S. academics, including a Princeton professor by the name of Ben Bernanke! Sure, Japan had already been ratcheting rates down after its crisis began — and by 1996 they were well under 1 percent. Ben Bernanke was one of the academics who told Japan to use zero interest rates and quantitative easing. However, it was Bernanke who said Japanese policymakers were making a major mistake by not committing to keep interest rates at rock bottom for as long as it took for signs of growth to emerge. Ultimately, officials listened to that advice ... along with suggestions that they try other relatively experimental approaches such as "quantitative easing," in which the central bank openly buys loans, securities and other assets. For a few years it looked like a turnaround was coming, but those hopes were dashed by the recent global economic meltdown. And today, despite all its efforts, Japan is still waiting for a sustained rebound. Today, Our Federal Reserve Has Gone from Armchair Quarterback to Throwing Its Own Hail Marys Ironically, Bernanke and his colleagues now find themselves trying many of the same tactics they once recommended to Japan. And while there's no way to know what would have happened without their massive intervention, I don't think anyone would say they've had resounding success yet. So is that it? Is it the endgame for the U.S. economy? Will deflation take hold? What's interesting this time around is that we're seeing a huge divergence in prices. Some things, especially commodities, have been rocketing higher and higher ... and creating pockets of inflation. Meanwhile, many other goods and services continue to get cheaper or have stagnated at best. There are also plenty of other things that are different this time around. For starters, this battle is far more global in its nature — especially because Europe is wrestling with its own massive problems. The U.S. is also much different than Japan in terms of its demographics, trade balance, financial system, savings rate, and position on the global stage. And even the fact that the Fed remains extremely concerned about the risk of deflation represents a level of commitment that Japan's policymakers lacked in the first few years after their crisis. So What Should Stock Investors, and Anyone Else Interested in Income, Make of All This Then? First and foremost, I don't think there's any way to predict exactly how things will go from this particular point in history. If anything, we simply need to continue watching the Fed's moves vigilantly, as well as other developments around the globe, and adjusting our strategies accordingly. But even if you assume that the U.S. economy will tread water for another ten years ... that still doesn't mean there won't be plenty of money to be made in stocks. After all, even during Japan's 20-year market malaise there were individual shares that performed strongly. Moreover, there were plenty of major market swings for investors to capitalize on with good timing. Plus, if you started buying after the major implosion, you had a much better chance of making solid profits over the long term. And if you were collecting dividends along the way, your total returns would have been even better! All of those same things have held true during the past decade here in the States, where major stock indexes have basically gone nowhere. So in the end, I continue to believe there are plenty of ways to make money with U.S. shares, whether your goal is long-term income or shorter-term capital gains, and whether the current environment is inflationary or deflationary.

Best wishes, Nilus

Holdings

I did not make any changes to my holdings last week (which can be found HERE), having only made the lone swing trade in SODA for a < 5 % gain.

My portfolio was up 3.5 % for the week, which I am very happy with.

I would not be surprised for the market to consolidate this week, but overall feel there is a definite, short term, upwards bias to it.

Option Strangle

I want to talk today about a fairly risk free option strategy known as a strangle.

A strangle strategy involves buying both a Call and a Put option, on a single security, in anticipation of an increase in volatility. The maximum loss on this trade is the price of the Call and the Put, while the upside is unlimited. The beauty of this strategy is that the direction of the move in price is not important, only the magnitude of the move.

This strategy is ideal when dealing with small companies, with publicly scheduled announcements whose results may have a dramatic impact on the share price. One type of company, that fits the above criteria, are small pharmaceutical companies, with FDA announcements approaching (The FDA schedule can be found HERE). Before the announcement, an out of the money Call and Put option should be bought, as the results of the test could very well make or break a company, leading the share price to soar or crash.

I will be using this strategy more and more throughout the following year, and will update the blog with any and all moves I make.

Currency Wars

It is important to realize that currency devaluation is a worldwide phenomena and not just limited to the US. In a very real sense the world is undergoing a 'currency war,' in which competing countries actively seek to cheapen their respective moneys. Take for example recent news from the EU, in which European Central Bank President Jean-Claude Trichet stated, that the EU bailout, already one trillion dollars in size, should be increased. This bailout is just one more nail in the coffin for the Euro.

Historically, the average life span of fiat currencies is 40 years-I would seriously consider taking the under on the Euro (at least in its current form).

Employment numbers disappoint and the market...

Today's employment numbers were a BIG miss. The street was expecting +130,000 in nonfarm payroll employment (http://briefing.com/) and only got +39,000 (BLS).


Sooo the market had a HUGE selloff, right? WRONG.


This is the era of the Bernanke put. A bad employment number means more money will be printed. Look at the dollars reaction, down over 1 percent on the news. This market loves a weak dollar; today should have been a BAD down day-instead the market remains virtually unchanged. Eventually it will get to the point where the market will no longer to be able to rally on a weak dollar, but until then...

Gold

I recently received the following comment on my post china-implores-its-citizens-to-buy-gold: "Couldn't disagree more with your gold position. The west is going through a long deleveraging process, and this will have a deflationary bias."

Lets jump right into that comment:

First, I wholeheartedly agree with you that the US will be going through an arduous deleveraging period: easy credit and low interest rates created an untenable situation which will slowly be unwound (A great book on this is "The Age of Deleveraging," by Gary Shilling).

That said, it is not inflation or deflation that is driving the price of gold. The price of Gold is being driven higher by unabashed currency depreciation. The central banks around the world have been scrambling to fill the void in consumer demand (employee demand/housing demand/bond demand) , by printing dollars, and every new dollar printed, is one further step fiat money is taking towards oblivion. Whether or not these dollars succeed in combating deflation, at this time, is besides the point (in many cases the excesses were just too great).

So long as central banks continue to monetize debt, and leave interest rates low, the price of gold will rise. In other words so long as Ben Bernanke has free control of the Federal Reserve there is no ceiling to the price of gold.

China Housing Bubble?

The Telegraph recently ran the story "Hedge Fund Manager Mark Hart bets on China as the next 'enourmous credit bubble' to burst"; Below are three of Mark's more important points on China's housing situation:
1. "China has consumed just 65pc of the cement it has produced in the past five years, after exports. The country is currently outputting more steel than the next seven largest producers combined – it now has 200m tons of excess capacity, more that the EU and Japan's total production so far this year."
2. "An excess of 3.3bn square meters of floor space in the country – yet 200m square metres of new space is being constructed each year."
3. "The average price-to-rent ratio of China's eight key cities is 39.4 times – this figure was 22.8 times in America just before its housing crisis."
...
It seems excess liquidity is wreaking havoc on the Chinese economy and it is in danger of overheating.

Buy The Dip Scheme

It works-until it doesn't

Vietnam ETF-VNM

With VNM breaking out to the upside today- rising over 7 %- I thought I would post Marc Faber's view on Vietnam, and other frontier markets:


Frontier Investing


Marc Faber
[Ed. Note: The following is an excerpt from the November edition of Dr. Faber’s indispensable monthly newsletter, The Gloom, Doom & Boom Report.]


"I think there may be a window of opportunity left in frontier markets. Let me explain. In last month’s report, I noted that we should think of the US as a “huge money-printing machine that produces an unlimited quantity of dollars”.

Most of these dollars flow to the corporate sector, wealthy individuals, and financial institutions. A large proportion of these dollars is then transferred to emerging economies through the US trade deficit and investment flows, where it boosts those economies’ economic activity and increases wealth relative to the US. I also warned that potentially spectacular bubbles could develop in emerging stock markets, as well as in selected hard assets (i.e. in precious metals, art prices, and prestigious properties). I am now beginning to think that even more spectacular bubbles could develop in frontier markets. How so?

I mentioned that the US transfers dollars to emerging economies through its trade deficit and investment flows. Emerging economies are then faced with the decision of what to do about the dollar inflows. If they let the currency appreciate, a temporary loss of competitiveness may result. (This is not my view, however.) If they do nothing, spectacular asset bubbles can occur that are accompanied by high consumer price increases. In either case, the price level (especially of assets) in traditional emerging economies initially increases compared to the level in frontier markets. What happens next?

International investors, sovereign funds, and wealthy individuals who live in more advanced neighboring emerging economies become aware of the huge differences in price (for everything, including all kinds of assets and services) between their own economy and that of the frontier region. As an example, wealthy Hong Kong, Singaporean, Korean, Taiwanese, and Japanese businessmen and investors (and their sovereign funds) won’t fail to recognize the enormous difference between real estate prices in their own relatively advanced economies and those in countries such as Cambodia, Vietnam, Myanmar, Mongolia, and Laos.

Now let us go back to the huge money-printing machine in the US, which transfers economic activity (including employment) and wealth to foreign countries.

First, US dollars flow to the countries with the highest current account surpluses and, as explained earlier, push these countries’ asset prices up either through appreciation of the currency or through high domestic price increases – or a combination of the two. In a second instance, this “additional liquidity”, which created enormous wealth in Asia, will flow to the least developed countries. I believe that in this context, Vietnam is currently an attractive investment destination.

I was recently in Vietnam and, as on previous visits since 1989, I was immensely impressed by the dynamism of its population and the ongoing economic growth. This is not to say that Vietnam is problem free (witness the struggle between the reformists and the hard liners in the government, the large trade deficit, high inflation of between 12% and 15%, a weakening currency, etc.), but for the first time in years the valuation of the equity market has become compelling.

For a modest exposure to Vietnam, investors may consider the purchase of the Market Vectors Vietnam ETF (VNM), which is listed on the NYSE."

SODA

I exited this position today for a <5 % gain. The price action was extremely volatile and I decided I would just take my profit and run. In general, I tend to avoid trading like this, but yesterdays decline, ending right at the 38.2 % fibonacci retracement, seemed too good to pass up on.