February 2012

The Looking Glass Market

If you feel like this market has sucked you down a rabbit hole, you have plenty of company.

I have never seen such a profusion of contrary cross market indicators. Traders are running up shares prices while companies are cutting earnings forecasts. Economists are raising GDP forecasts as rising energy prices are taking them the opposite direction. Natural gas is crashing as oil spikes up.

The bond market has gone catatonic, with billions pouring into bond mutual funds to keep them on life support. Dr. Copper, that great leading indicator of global economic activity, has gone to sleep, with investors pouring money into the entire spectrum of risk assets. An increasing share of the buying in equity markets is focusing on a single stock, Apple (AAPL), the world?s largest company.

They say the market climbs a wall of worry. This one is climbing the Great Wall of China. You have to assume that the people buying stocks here are doing so only for the very long term, Warren Buffet style, and are willing to look past any declines we may see this summer. They don?t care if the market drops 5%, 20% (my pick), or 50%.

In my new year Annual Asset Class Review I thought that markets might peak in January. I lied. Thanks to a global quantitative easing program, it is increasingly looking like 2012 will be another ?sell in May and go away? year, the fourth in a row. You might as well book that Mediterranean super yacht, the beach house in the Hamptons, or the bucolic chalet in Switzerland now to beat the rush.

Another ?looking glass? element this year is the extent that last year?s dogs became this year?s divas. Just look no further than Bank of America (BAC), which did a 67% swan dive in 2011, but has soared a blistering 51% this year. This is a stock with a PE multiple of 812 and more investigations underway than Al Capone every saw.

It goes without saying then that those who did terrible in 2011 are looking like stars today. Look no further than hedge fund titan John Paulson, whose flagship fund was down 50% at the low last year, thanks to a big bet on financials. This year it appears his super star status is restored. Other funds that made big bets last year on European stocks and sovereign bonds have been similarly revived. If MF Global had only lasted two more months, John Corzine would be looking like a genius today, instead of a goat.

When I realized that this could be a ?dogs of the Dow? year with a turbocharger, I quickly reviewed by own money losing trades in 2011. That prompted be to rush out but puts on the Japanese yen, which doubled in short order, and haven?t looked back since. Now you really have to ask the question, will my other 2011 losers perform similar turnarounds? What?s at the top of the list? The (TBT), my bet that long term Treasury bonds would go down, which inflicted my biggest hickey last year.

By the way, I?m kind of liking the volatility ETF (VXX) here. If the markets keep going up forever you might lose 10%. If they don?t, you will make a quick 30%, and 100% if volatilities return to the highs seen in October. The cost of carry is modest, there is no time decay as with options, and there is no contango. In fact, near month volatility is trading at half the levels of long term volatility. That is the kind of risk/reward ratio that I am constantly looking for.

Taking a Bite Out of Stealth Inflation

Diary

When I visited the local Safeway over the weekend, I was snared by some uniformed pre-teens, backed by beaming mothers behind a card table selling Girl Scout cookies. I was a pushover. I walked away with a bag of Thin Mints, Lemon Chalet Creams, Do-Si-Dos, and Tagalongs.

I have to confess a lifetime addiction to Girl Scout cookies. During the early eighties, one of the managing directors at Morgan Stanley's equity trading desk had a daughter in this ubiquitous youth organization. One day, she pitched to all 200 traders on the floor, going from desk to desk with sheets of paper taking orders. I used to buy two of everything she offered, as some clients preferred a few boxes of these delectable treats over lunch at the Four Seasons any day. Other's ordered hundreds. I later heard that the girl was the top performing scout in the greater New York area two years running.

But this year, when I got home and opened the boxes I was shocked. While the price was the same, the number of cookies had shrunk considerably. I knew it was not my waist line the scouts were concerned about. I was seeing the dastardly hand of 'stealth inflation' at work. In this deflationary environment, companies loathe to raise prices. Food companies are especially hard hit, with many commodities like wheat, corn, sugar, soybeans, and coffee up 50%-300% in a year. Any attempt to pass these costs on to consumers is punished severely. So companies cut costs, quantity, and quality, instead, by shrinking the size.

I think you are seeing stealth inflation breaking out everywhere. It is not just in food. Many products seem to be undergoing a miniaturization process while prices remain unchanged. It also extends to services, where a dollar buys you less and less. This is how the consumer prices index is staying in low single digits, despite anecdotal evidence everywhere to the contrary.

Meet the Ugly Face of Stealth Inflation

March 1, 2012 - Quote of the Day

Diary

When I left the Treasury Department, 92% of the American public were against the TARP, but only 60% were against torture. That gives you some idea how much Americans are against bailouts,? said for Treasury Secretary, Hank Paulson.

Trade Alert (VXX) February 29, 2012

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

Trade Alert - (MSFT) Update February 29, 2012

Diary, Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

Trade Alert - (MSFT) February 29, 2012

Diary, Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

It?s All About the Euro

Diary

Wednesday will be all about the Euro. That is the day that the European Central Bank announces the result of the next tranche of its quantitative easing program, the LTRO, or Long Term Financial Reorganization policy.

This is the program that allows European banks to borrow unlimited funds at 1% with no questions asked. This is very important for all asset prices worldwide, since the cash pouring out of the continent has been the primary driver of asset prices skyward since December.

It is safe to say that ?500 billion is in the price. That is what the beleaguered currency?s rally from $1.26 to $1.35 has been all about. The unwind of Euro shorts in the sterling and yen crosses have also been a factor. If the ECB delivers ?1 trillion instead, the Euro will pop to $1.37 and risk assets everywhere will rally. If they don?t, expect a low volume bleed off in prices, and the long awaited correction to begin. It is a coin toss which way it will go, so I shall watch from the sidelines.

Anticipation of more sugar infusions from the government has sparked the monster rally in the sovereign debt markets that I predicted last month. Spanish ten year bonds have fallen from 5.8% to 5.5%, while similar Italian yields have made it all the way down from 6.0% to 5.4%. That is quite a long way from the 8.0% peak we saw as recently as December.

Oil has been another new assist juicing the Euro. If the Euro falls, then the local cost of fuel in Europe would rise sharply, as oil is prices in dollars. This would exacerbate the recession already in progress on the continent. These concerns could prompt ECB president Mario Draghi to delay further interest rates cuts, generating more Euro strength.

If we do get the move to $1.37, that should clean out a big chunk of the remaining shorts, which have dropped recently, but are still huge. Since January 24, total shorts have fallen to 142,000 contracts, down from the all-time high of 171,000 contracts. That works out to $17 billion of underlying remaining on the short side.

Get the Euro back up to $1.37 and it might become an attractive short again. It?s just a matter of time before the market refocuses on Europe?s underlying fundamentals, and those are dramatically worsening by the day.

Check Out Obama?s Latest Stimulus Package

Diary

There is no limit to how far president Obama is willing to go to stimulate the economy and reassure his election. So I had to be amused when a friend sent me a link to his latest proposal. Warning: the source is a college humor website, so I would take it with so many grains of salt. For a good laugh, click here. Fellow writers should be prepared for the worst. The economy will not be the only thing stimulated.

February 29, 2012 - Quote of the Day

Quote of the Day

I don?t know that the retail investor matters anymore. They didn?t come back to the market after the 2000 crash. The idea that the individual investor believes in the stock market now is challenged. We have a market that is increasingly institutional investors trading back and forth with each other?, said Dan Greenhouse, chief global strategist at BTIG.

Trade Alert - (AAPL) February 28, 2012

Diary, Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more