November 2010

November 2, 2010 - Catching Up With Charles Nenner

Featured Trades: (CHARLES NENNER)

1) Catching Up With Charles Nenner. I managed to catch up with my friend, technical analyst to the stars, Charles Nenner, and quiz him about his recent relative silence. It has been many months since he predicted that the yen was going to soar from ?95 to ?80, that you should dump your longs before a plunge in the S&P 500 from 1240 to 1,000, or that the Australian dollar would rocket from 78 to 100 cents.

The wily Dutchman explained that he was been sitting on the fence because there is really nothing to do here, echoing sentiments from my own piece on market turning points last week (click here for 'Contemplations in Risk'). His longs in NASDAQ, the ags, and emerging markets were working fine, but he was not inclined to initiate new longs here, and there was no point in stepping in front of the train on the short side.

Charles' daily, weekly, and monthly cycles were drawing sharply diverging conclusions. Take a look at the stock indexes, where the weekly cycles show the Dow and S&P 500 possibly peaking this week, the NASDAQ not until January, and the emerging markets not for the foreseeable future. The best thing is to wait for these conflicts to resolve over time before making any big calls. After all, no one stood over Beethoven and demanded he finish his symphony by Friday.

Charles thinks we are about to enter a period of major dollar strength, but not yet. One area that is starting to look interesting was the volatility index (VIX), which seems to be bottoming out in the high teens, presaging times that the Chinese describe as 'interesting.' One could easily envision a scenario where the dollar is strong, and everything else goes to hell in a hand basket. I plan to get together with Charles in early January to review his 2011 calls across all markets. Premium subscribers can look forward to getting e-mailed a strategic advanced peak.

November 2, 2010 - The Treasury Bond Dilemma

Diary

Featured Trades: (THE TREASURY BOND DILEMMA), (TBT), (IEF)

2) The Treasury Bond Dilemma. There is a very interesting divergence going on in the Treasury bond market which readers should be aware of. The leveraged short ETF for long dated paper, the (TBT), looks like it bottomed in the end of August, indicating that the collapse I have been predicting has already been started, just five days before my seminal post on the topic (click here for 'The Great Bond Market Crash of 2010'). The ETF for seven to ten year paper (IEF), motored on to a new high six weeks later, and has been grinding sideways since, the ten year since levitating at an amazing 2.60% yield.

This is happening because many bond traders believe that Ben Bernanke is going to focus his QEII on durations less than ten years, and will leave long dated paper, like the 30 year, out in the cold. Which is another way of saying that without temporary, artificial government support, all bond markets would be in free fall by now. This gives us all a wonderful insight into how bonds will behave, once QEII is finished, is thought to be halfway done, or gets canceled (click here for 'Ha, Ha, I fooled you' in 'Contemplations on Risk'). I think what these two charts are telling you is that if the great bull market in the (TBT) hasn't started yet, it is not far off.

November 2, 2010 - There is Less Than Meets the Eye in Q3 GDP

Diary

Featured Trades: (Q3 GDP)

3) There is Less Than Meets the Eye in Q3 GDP. There was much celebration that the US economy managed a 2.0% growth rate in Q3, sending double dippers to the dust bin of history, where they rightfully belong. Of course, you already knew this was going to happen last January, because this is exactly the number I predicted then in my 2010 Asset Allocation Review' (please click here for the call) . I made this prediction because I thought that American companies doing business with the white hot emerging markets would generate just enough growth to offset the huge drag created by moribund industries, like housing, real estate and every shrinking state and local government portions of the economy. This is precisely what unfolded.

A closer examination of the breakdown show that even this modest, lackluster figure may be overstating the true level of business activity. By the time you strip out the 2.2% GDP deflator and the inventory build of 1.4%, real GDP growth was actually negative. The GDP deflator is no doubt being overstated by the huge expansion of the Fed balance sheet. Much of the inventory build was a one time only affair which has since ceased and can't be counted to repeat in the future.

What all this says about the US stock markets is that further rises are going to be driven mostly by a QEII that will lift all boats, especially the yachts. They will be supported less by actually profit making activities of US companies. That is sort of a long winded way of saying that we are in the middle of a mini stock bubble. Party away, but stay close to the exit at all times.

November 1, 2010 - Is the Rare Earth ETF Calling a Market Top?

Diary

Featured Trades: (RARE EARTHS), (REMX), (MCP), (LYSCF), (AVARF)

2) Is the Rare Earth ETF Calling a Market Top? It looks like the Van Eck mutual fund group reads the Diary of the Mad Hedge Fund Trader, because last week they launched the first ETF (REMX) dedicated to rare earth and strategic metals. The move comes on the heels of incredibly bullish developments in this space over the last six months. These include a ban by China, source of 97% of the world's rare earth supplies, to Japan, a temporary export ban to the US, and a 30% reduction in global export quotas next year.

The new issue immediately gave a boost to the shares of the several names in this sector you have all come to know and love in the pages of this letter, including Molycorp. (MCP), Lynas Corp. (LYNCF), and Avalon Rare Metals (AVARF) (click here for 'Rare Earths Are About to Become a Lot More Rare'). That's becasue the launch of a new ETF in a thinly traded corner of the commodities markets is well known to suck in a ton of new money, as it did with Platinum (PPLT) and Palladium early this year (click here for the call).? MCP alone has moved up a stunning 240% since the end of August, partly on anticipation of the new ETF.

It even includes some outliers in the strategic metal area, like Titanium Metals Corp (TIE), which I mentioned earlier in the year (click here for 'Playing Catch Up With Titanium'). As if the issue needed any help, Secretary of State Hillary Clinton (see above) warned that the world needs to start developing alternative sources for rare earths. I have included the ETF's top ten holdings below.

I have been flooded with emails from readers this week asking if they should pile into the issue. Right here, I wouldn't touch with a ten foot pole. The deal comes on top of underlying equities that have rocketed by 400% and metals prices that have roared tenfold in six months. Great idea, but a little late.

When the CEO of Molycorp says his company's primary product is caught up in a bubble, you have to take notice. I think it's safe to say that if you are not in now, you have missed the move in this cycle. The train has left the station. Better to wait for the inevitable sell off that will come sometime next year, or find a completely different field which offers more immediate upside.

Lynas Corp Ltd (LYSCF.PK)
Iluka Resources Ltd (ILKAF.PK)
Titanium Metals Corp (TIE)
Thompson Creek Metals Co Inc (TC)
OSAKA Titanium Technologies Co
RTI International Metals Inc (RTI)
Toho Titanium Co Ltd
China Molybdenum Co Ltd
Kenmare Resources PLC
Molycorp Inc (MCP)

November 1, 2010 - Pricking the Bubble in the Yen

Diary

Featured Trades: (JAPANESE YEN), (FXY), (YCS)

3) Pricking the Bubble in the Yen. Analysts have been puzzled by the relentless appreciation of the Japanese yen, which went out at ?80.40 on Friday, and seems poised to break out to the ?70 handle and an all time high. Having written the authoritative tome on the Japanese banking system 30 years ago (it's in the Library of Congress), I can shed more than a little light on why.

Unknown to most in the trading community, foreign banks have engaged in a massive recapitalization of their Japanese subsidiaries since over the last six months. Since May, excess foreign bank reserves held in yen have soared from $246 billion to $562 billion, an increase of a staggering $316 billion, creating immense upward pressure. Some $136 billion of this poured into the yen in September alone. By comparison, there are only $7.3 billion worth of net longs held in futures markets by speculators.

Ask Japanese senior bankers why this is happening, and you get lame excuses, like anticipation of stiffer capital requirements from the Bank of Japan to head off any future financial crisis. The truth is that banks are using their balance sheets to speculate in the currency markets and boost profits. Adding fuel to the fire has been efforts by the People's Bank of China to diversify out of the dollar as a reserve asset by pouring new cash flows into the yen. This is showing up in a huge jump in overnight bill purchases by foreign investors.

In days of old, countries used to destroy their neighbors by sending in invading armies of screaming warriors swinging great long swords. Today, you simply buy their currency; drive it to ridiculous heights, making its industry hopelessly uncompetitive in the global market place, thus collapsing its economy. This is what China is doing to Japan today.

This explains why the central bank's intervention efforts to slow the yen's appreciation have been an abject failure. In September, total BOJ sales of yen amounted to only $61 billion, and has been spread among a range of lower tier assets, like 'BBB' rated corporate bonds, exchange traded funds (ETF's), and REIT's. The Japanese government is slumming with its own version of QEII. But the amounts so far are miniscule compared to the inflows. They might as well be pissing in the ocean.

There are two ways this kabuki play will go end. The obvious one is for the BOJ to boost its intervention to the $1 trillion that worked the last time it was in this pickle eight years ago. I sense that a Pearl Harbor type surprise attack of this sort is setting up. Suck the shorts in with a series of small, ineffective interventions that invite laughter and derision, and then all of a sudden, its tora, tora, tora and bombs away. The shorts get taken to the cleaners.

The second approach will be more subtle. Banks are currently earning 10 basis points on their excess reserves. Turn this number negative, as Germany and Switzerland did, and the banks will bail on their excess reserves in a heartbeat. It's not a matter of if, but when they do this. Then the 15 year double top chartists have been waiting for will be in place, and one of the great shorts of the decade, and the (FXY) and the (YCS) will be in play. This all may happen very fast, so keep you finger poised over that mouse.

Is the Bank of Japan Planning a Surprise Attack on the Yen Shorts?

Why the Bank of Bank of Japan's Intervention Efforts Aren't Working