September Thoughts From Marc Faber

Here are some highlights from Marc Faber's Gloom, Boom and Doom Report:

1. Equity Markets--Everyone is bearish--individual investors and institutions alike, but this extreme negative sentiment should prevent stocks from falling in the short term (September). Faber thinks stocks could rally to 1150 then fall to 875-900 by mid-October. Superbears should consider shorting Apple. Investors should not be making big bets at this time,either long or short. Capital preservation is more important than capital gains. Overall, Faber is underweight equities, but likes Asian equities with high yields.

2. Bond Market--US government bonds have been in a 29 year rally. It is getting long in the tooth and should be avoided at all costs. At 2.5%, the 10 yr is near the all time low reached in 1947. Faber compares buying government debt in Sept. 2010 to buying tech stocks in early 2000--you may a few more months left, but not much before the bull market ends. The time to be buying bonds was back in 1981 when the 10 Yr was yielding 15.84%. Back then no one wanted bonds and inflation expectations were high. Today, everyone wants bonds and inflation expectations are very low. The herd is going to get slammed.

3. Gold--Faber still likes gold and notes September is usually a good month for gold. The people who say gold is in a bubble are wrong, but this does not mean it will not experience severe corrections from time to time. In the very short term silver could have more upside (if it breaks $20) but Faber likes gold better because it is more of a monetary metal. Investors need to have a large amount of gold in their portfolio for proper diversification.

4. Agriculture--Still bullish. Faber likes the fertilizer stocks and expects them to outperform the general market. In particular Potash One.

5. Yen--Faber thinks the Yen is extremely overbought right now and is one of the worst currencies to be long. The Yen and the 10 Yr treasury are highly correlated and will likely top out at the same time. The economic fundamentals of Japan do not merit a strong currency. People who think the Yen is a safe haven currency will be disappointed in the next few years.

Previous articles on Marc Faber:

Thoughts From Marc Faber--- Aug 1
Get Ready For More Money Printing--Faber Says
Thoughts From Marc Faber--July

Happy Trading!

Black Swan Insights

Read more >>

September Thoughts From Marc Faber

LMAO-- China's Ten Day Traffic Jam Could Last Until Mid-Septemeber

   After living in Los Angeles and communting on the 405 freeway, I thought I had seen it all. Apparently not. From the WSJ:

A 100-kilometer traffic jam near the Chinese capital that officials say could last until mid-September has become a symbol of the dark side of China's love affair with the automobile. Officials say traffic has been snarled along the outskirts of Beijing and is stretching toward the border of Inner Mongolia ever since roadwork on the Beijing-Tibet Highway started Aug. 13. The following week, parts of a major road circling Beijing were closed, further tightening overburdened roadways.

As the jam on the highway, also known as National Highway 110, passed the 10-day mark Tuesday, local authorities dispatched hundreds of police to keep order and to reroute cars and trucks carrying essential supplies, such as food or flammables, around the main bottleneck. There, vehicles were inching along little more than a third of a mile a day. Zhang Minghai, director of Zhangjiakou city's Traffic Management Bureau general office, said in a telephone interview he didn't expect the situation to return to normal until around Sept. 17 when road construction is scheduled to be finished and traffic lanes will open up.

Villagers along Highway 110 took advantage of the jam, selling drivers packets of instant noodles from roadside stands and, when traffic was at a standstill, moving between trucks and cars to hawk their wares.  

So much for Chinese efficiency.

Read more >>

LMAO-- China's Ten Day Traffic Jam Could Last Until Mid-Septemeber

Financial Globalization Has Rendered The System Increasingly Susceptible To Collapse

   A published report by the Hong Kong Monetary Authority titled "Analyzing Interconnectivity Among Economies" found that the trend of financial globalization has weakened the world economy by making it vulnerable to systemic collapse resulting from external shocks. The report goes on to state that individual countries have lost control over their own economic security as a result of this financial interconnectivity, creating policy problems for government leaders and central bankers. One of the major findings of the report was that "economies register a significantly higher sovereign risk once the condition that another economy is in distress is imposed." The problem is that traditional CDS pricing does not correctly price this risk, leaving market participants exposed to billions in potential losses. The threat becomes more severe if systemically important institutions like money center banks are affected by this mispricing of risk because of the domino effect during financial crises.

Read more >>

Financial Globalization Has Rendered The System Increasingly Susceptible To Collapse

Eric Sprott on King World News

Hat tip to King World News for again delivering another insightful interview with Eric Sprott, of Sprott Asset Management. He has an excellent track record of navigating the markets and the economy. He is a highly respected financier who does what financiers used to do--provide capital for new and emerging companies to grow, create jobs, and benefit society. Unlike today where financiers have become parasitic viruses who steal money from the real economy and threaten the world's financial system.  In the King World News interview Sprott discusses everything from failed bailouts, QE 2, insolvent German banks, gold, and more. Of note Sprott says that QE 2 might already be occurring through a backdoor arrangement between the Fed and the banks. Fed lends banks money at 0% and and the banks buy treasuries at 3-4%. Sprott also sees the economy falling off a cliff and that QE 2 from the Fed will not work this time. The bond market will not get fooled again. Finally, Sprott says there is a possibility for hyperinflation which makes gold a must own asset.

Here is the link for the entire interview.

Read more >>

Eric Sprott on King World News

Crazy Day so Far in the Market

    Today's market action shows how schizophrenic the market is acting. We get the 1% gap down at the open due to poor earnings from IBM, AK Steel, and others. Economic news this morning was not positive with new housing starts missing expectations. A rational person would assume that the market would decline, but you would be wrong because the only thing that matters is what the computers think (yes with neural networks they can now think for themselves). The market has staged an impressive intra-day rally so far with the major indexes up .3-.5%. Not bad, but we are still below the 200 DMA which is a good marker of whether we are in a bull or bear market. The market environment remains challenging. There is no trend, just wild fluctuations up and down dictated by computer algorithms.

    Does anyone have a problem with the fact that we no longer have a market made up of people? Computers dominate the entire market and account for up to 70% of total volume. You could walk into work in the morning and see the market down 6,000 points on the Dow. CNBC tells you that the reason for the decline was because the computer algorithms decided the US was going to have a depression. What are you supposed to say? Well I guess those computers are smarter than people so let's have a economic depression, after all they have been back-tested thousands of times by Ph.D's and are correct 99.999% of the time.  

    Anyway, the big news after the bell will be Apple's earnings which will have a huge impact on the markets tomorrow considering Apple makes up almost 20% of the QQQ's.

   On a side not cocoa prices are down again-good luck Anthony Ward.



Black Swan Insights

Read more >>

Crazy Day so Far in the Market

Port Volumes: Stormy Weather Ahead?

    Yesterday we took a look at railroad carloads which showed a weakening in June. Today let's consider port volume out of Los Angeles and Long Beach to see if they confirm the double dip scenario. In June the port of Los Angeles handled 730,317 TEUs (20 foot containers) compared to 551,679 TEUs last June, which is up 32% year over year. However, you can see in the chart below, the main growth was from inbound containers (imports) and empty containers, which increased 32% and 53% respectively. So we can see from the numbers that Americans are back to buying useless trinkets from Asia (the consumer is back?), and exports increased by 13%, which is positive. Note that total volume for the port's fiscal year (ends June 30) is 7.2 million TEUs, which is flat with last year's numbers, but port volume is still down from the high of 8.5 million reached back in 2006.  Not exactly a sign of a healthy and growing economy. 

June                                     2010               2009             Change         %Change

Loaded Inbound             371,888.60       281,175.05     90,713.55        32.26%
Loaded Outbound          154,558.00       137,214.40     17,343.60         12.64%
Total Loaded                 526,446.60       418,389.45     108,057.15       25.83%
Total Empty                   203,871.25       133,290.25      70,581.00        52.95%
Total                             730,317.85        551,679.70     178,638.15       32.38%


    Looking at the port of Long Beach you will see similar numbers across the board except for a smaller increase in outbound containers(only 1.8%) year over year in June. Long Beach's volume benefited from a surge in inbound containers and empty containers. According to the port, the reason for the increase in empty containers has to do with a shortage of containers in Asia as a result of higher import volumes. So these empty containers are returning to Asia again.

 Port of Long Beach

                                               June                            Fiscal Year to Date

                                 2010       2009     %Change     2010       2009     %Change

Loaded Inbound      262,053   206,358   27.0%     2,088,297   1,915,664    9.0%
Loaded Outbound   116,112   114,107    1.8%      1,108,373    983,492      12.7%
Empties                  141,935    92,882     52.8%     965,723      1,016,513   -5.0%
TOTAL (T.E.U.)    520,100    413,347   25.8%     4,162,393   3,915,669    6.3%

    We can conclude from these numbers that yes, volumes have increased year over year (signaling a slight rebound in the economy), but volumes are still lower than the peak years of 2006 and 2007. It certainly does not indicate a V-shape recovery in the US economy, especially if you exclude empty containers from the numbers. These numbers largely correspond with the railroad carloads that we looked at yesterday, which show that the economy remains very weak. Right now it is too early to tell based on port volume, whether we are entering a double dip in the economy.   

Read more >>

Port Volumes: Stormy Weather Ahead?

Some Humor

Read more >>

Some Humor

Lumber--a failed market

    I always get a kick out of people who say the market is a discounting mechanism that anticipates things 6-9 months ahead. My opinion is the market is nothing but a bunch of people trying to predict the future. Sometimes they are right and sometimes they are wrong. The market is not always correct as some market aficionados claim. This is evident in the recent action in the lumber market. As you can see from Nov 2009 to mid May the price of lumber surged from 190 to 320. To a casual observer this would indicate that the housing market would do well over the next 6-9 months. Some pundits even used this as evidence of an improving economy. But as we all know the housing tax credit expired in June, so the idea that we are going to see a dramatic turnaround seems unlikely. The government simply pulled demand forward which will depress home sales after the expiration of the credit. But the question is why did lumber surge in the first place? Does it mean anything? If you believe in the efficient market hypothesis this would be proof of a rebound in the lumber market. If you are like me it means almost nothing. During the price surge in 2010 the market was betting that there was a real rebound in the housing market which would be bullish for lumber.  The market was wrong and quickly corrected this mistake by sending prices down $140 in less than 2 months.

   The reason I bring this example up is because it is important to remember that the market is not always forward looking, so don't obsess about what the market is telling you. The only way to make money is follow the trend even if it goes against fundamentals.

Read more >>

Lumber--a failed market

Market note--Bizarro World

    

   After watching today's action in the market you really start to believe you are living in bizarro world where up is down and black is white. The ISM services report came out below expectations (signalling a slowing in the economy) and that is credited with spurring a rally in the markets. Sell the dollar, buy the euro, sell gold and we are off to the races. Technically this rally does not change anything. The market is still below its 200 DMA and as long as it does we have to consider this a bear market. The only thing that would reverse this situation is if the market closed above the 200 DMA on a weekly basis.

     Meanwhile what stands out today is the poor action in gold. At the time of this writing it is down approx. $15 and is below $1200. In a previous article I mention that weakness in gold is probably due to the unwinding of the long gold/short euro trade. How long will it last? Who knows. If you remember Marc Faber's comments he thought gold could be susceptible to a decline into July and August, but said it would represent a buying opportunity. Personally I am hoping it falls to around $1050.

Black Swan Insights

Read more >>

Market note--Bizarro World

Market Wrap-- June 28, 2010

    Stocks remained largely unchanged as the major indices fluctuated between gains and losses. While stocks showed little directional bias, bonds remained well bid with the 10 year yield falling to 3.04% which indicates concerns about growth in the economy and deflationary fears. The 10 year is getting close to its lows back in the fall of 2008 of around 2.65% which has to provide some caution to equity bulls. Gold was the standout today falling from an intraday high of $1260 back to $1239. Some have suggested the rising dollar as the reason for gold's decline but that would go against the way gold has been trading recently (as a safe haven currency/hedge against the Euro). On the forex side of things markets remained largely neutral with the dollar increasing against most counterparts. The euro was down on market concerns regarding Spanish banks and Romanian sovereign debt problems.

We also had some economic indicators which were largely positive with personal income up 0.4% and personal spending up 0.2% indicating that consumers are still spending money and for at least now ignoring the European debt crisis.

Big economic news tomorrow with the Case-Shiller index and Consumer Confidence. Both of these should be large market movers as they provide a look at the state of housing and consumers willingness to spend money.

Black Swan Insights

Read more >>

Market Wrap-- June 28, 2010

The Keynesian disease strikes again--Krugman warns of third depression

     Keynesian aficionado Paul Krugman is out with another article today which claims we are entering a third depression because policy markers are not spending enough money to support growth. Apparently the US running 1 trillion + deficits for the foreseeable future and money printing by the Federal Reserve is not enough. You see when you have the Keynesian disease as Krugman does money printing and deficit spending are considered good and proper. Because after all, it kicks the can down the road until you end up like Greece which ran out of time (do we really want to end up like Greece?). Politicians love inflation and irresponsible spending because the majority of the population have no idea what inflation is (including the financial community) and love getting "free stuff" from the government. You can temporarily live in bizarro world where there are no consequences of your actions. Hey it worked in Greece for quite a while but when it ended it ended in the blink of an eye.

    Krugman tries to play the beneficent economist who is worried about the workers of America and demands that money printing accelerate to help the people. No matter that inflation has destroyed the middles class as wages adjusted for inflation remain stagnant for 40 years. The Krugman (Keynesian) solution of course was to get the desperate population addicted to debt (mortgage debt, credit cards, HELOC) which temporarily helped families maintain their lifestyle without more income. But then of course we have the housing bubble created by the Federal Reserve (following Keynesian principles) which put the final nail in the coffin of the US middle class. Today you now have debt slaves who owe $500,000 to the bank when their home is only worth $300,000. Don't worry though, Krugman and his Keynesian lunatics have a solution for this: inflation. If they can debase the purchasing power of the dollar enough, it will wipe out the majority of debt in the economy and magically allow consumers to releverage again with another fantastic credit bubble. It's going to be one hell of a ride.

Black Swan Insights

Read more >>

The Keynesian disease strikes again--Krugman warns of third depression

Weekend Reading and Audio

Here are a few interesting reads and audio.

1. Nations Must Resist Protectionism, G-8 Leaders Say

2. Gulf oil spill: Could 'toxic storm' make beach towns uninhabitable?

3.King World News Interviews--Technical Analyst Robin Griffiths and James Turk

4. Top Small Cap Stocks of the Week

5. Gold Seek Radio--Peter Schiff & Keith Schaefer

6. China’s Export Economy Begins Turning Inward

7. Trader's Narrative Weekly Sentiment Update

Have a great weekend!!


Black Swan Insights

Read more >>

Weekend Reading and Audio

Evaluating Risk versus Reward in Stock Analysis

One of the biggest mistakes people make when investing in a stock is failing to consider the stock's potential risk versus reward. Oh sure they fantasize about the upside while dismissing any thought of a serious decline in the stock. Other more prudent investors think they are being sagacious by purchasing "safe" blue chip stocks like Bank of America, Procter & Gamble which will protect them from a declining market. what these investors forget. Unfortunately these investors have seen there supposedly safe stocks fall by large amounts   In this article I will postulate that purchasing safe stocks with limited upside is the most dangerous kind of investment and that it would be safer for investors to set aside 20-30% of their portfolio in a basket of 20-30 high-risk high-reward small cap stocks.

The line of reasoning behind risk/reward analysis is that a stock's potential reward (appreciation) should greatly out way its risk (substantial decline) by a large margin. Why? Because when you invest in a stock (or even index fund) you are assuming a major risk that you could permanently lose your investment capital. I know that this is somewhat of a controversial statement to some investment advisers who believe that stocks always do well over the long term and that you should assume 10% stock appreciation. However as most investors have learned the hard way over the last decade it is not your divine right to 10%+ returns in the stock market. Many investors thought buying big blue chip stocks like Citigroup, AIG, or Enron would be a conservative way of protecting their capital and providing a decent and reliable return. I would argue that contrary to their intentions these investors were actually recklessly gambling because they forgot to consider the risk/reward that these stocks presented. When you purchase large (above 50 billion market cap) stocks like I previously mentioned you know that you will never achieve large returns (3-10X) and at the very most will likely receive 7-15% per year. Even these returns are only achievable if the general stock market itself rises. So you can see that the upside to these stocks is severely limited and this assumes favorable market conditions.

Now lets consider the downside (risk) of these type stocks. You will have noticed that over the last 10 years there have been two occasions where the market itself has fallen by approx 50% which took down all stocks with it. We have also witnessed formerly reliable companies like Citigroup and AIG fall 90%+ in less than a 1 year.  If you look at a chart of almost any stock over the last 10 years you will see that it has had at least 1 period where it fell at least 50%. I realize that there always the exception but my point is that stocks often have the ability to fall significantly for no other reason than the general market did. So when considering the downside risk of a stock I like to assume that any stock has the potential to fall between 50-70% and the worst case 100%. I realize that some may argue that this is a purely arbitrary assumption that cannot be relied upon but I would counter that investors should always assume the worst so that can prepare for it and not be shocked and panicked when it does occurs. After all no professional analyst thought it was possible for Citigroup, Bank of America, etc to fall as much as they did. i remember an analyst who thought Citi was a buy in 2007 at 55 and had a price target of 65 based on "strong fundamentals." So lets consider the risk/reward in this case: the upside is 10 dollars or 20% and the downside is assuming 50% is 27.5 points. Would you invest with these kind of odds? I certainly would not because it does not present a favorable risk/reward.

One important thing to remember regarding risk/reward analysis is that it is entirely subjective. You ask 10 different people to analyze the risk/reward of a company like Apple and you will probably get 10 different responses. However there are few principles which can help determine a company's true risk/reward. The larger the company (by market cap) the slower the growth rate and as such the lower the capital appreciation potential of the stock. This obviously favors small cap companies because it is much easier for a 50 million market cap company to double than a 100 billion company. Another principle is to be conservative with future estimates and not over exaggerate a company's prospects.

I know at this point you thinking I must be crazy for saying that it is safer to put 20-30% of your portfolio into a basket of  high-risk high-reward micro cap stocks compared to safe blue chips companies. It's an understandable first impression but give me a change to explain the logic. First, I would say that it is important to adequately diversify your micro cap stocks picking say 25-30 companies (from different sectors and industries) so they would only represent around 1-1.5% percent of a portfolio. This will help mitigate the effects of a company blow-up due to unfortunate events, fraud, and mismanagement. Second, this strategy puts the odds of finding a few success in your favor. All you need is 2-3 big winners to offset any losers and then some. To someone like myself this really appeals to me because I do not have to be right very much in order to make a nice return on capital.

So you have heard the advantages of this strategy but it is now important to understand the risks as well. This strategy only works in a rising market--if the market crashes 50% like in 2008 all stocks will drop and micro caps because they are smaller and less liquid will likely fall much more than the market. For example in 2008 junior resources companies fell on average 80-99% regardless of fundamentals. Now some foolish experts (Greenspan, Bernanke, etc) will postulate that 2008 was a 1 in 100 year event that should never be expected to occur again (LOL). Personally I am not satisfied with this conclusion and believe that the stock market could easily fall 50% again in the next few years. So the question is how to know when it is safe to buy these micro/small cap stocks? Generally speaking when the S&P 500 is above its 200 day moving average the market is in a bull market and below it is in a bear market. So as long as the market sustains the bull market (above 200 day) it would be all right to maintain this strategy.

One other consideration with regards to this strategy is obviously stock selection. Theoretically an inexperienced (or simply unlucky) individual could pick 25-30 losers and sustain a large loss for his overall portfolio. This is why the only person who could attempt this strategy would be someone who has the time and inclination to do the research on individual companies. Believe me is is quite tedious finding information regarding these companies because there are no analyst reports or anything. You have to do your own primary research surveying the general industry including competition, regulatory problems, and other variables.

In conclusion I am not telling anyone to do implement strategy but hope to help investors by showing them how to apply risk/reward analysis to stock investments. As we have seen bigger and safer stocks recommended by investment advisers are not as risk free as they would like you to believe. Even indexes like SPY can and do fall 50% and rarely offer an attractive risk versus reward to most investors. The only talk of potential risk/reward that I have ever read relates to active traders and not investors. I think it is a valuable tool in evaluating stocks rather than the usual technical and fundamental analysis.

Black Swan Insights

Read more >>

Evaluating Risk versus Reward in Stock Analysis

Market Thoughts 4.19.2010

Asian and European markets fell quite hard (over 1%) overnight but that meant little for US investors who in normal Pavlovian fashion bought the correction (defined as 1.5% drop in the market). All Us indices except for the Nasdaq closed higher by about .5%. However commodities got knocked with oil closing lower by $1.55 to 81.69 and copper ending fractionally lower. Its days like today when you feel the markets are being rigged. Unusually large block trades in SPY and S&p 500 futures jams the market higher on no news is always suspicious.

Even though the market was higher and I am mainly short the market, today was a good day. My oil short is finally getting back to even and my puts in OI are looking up. I am also short AUD/JPY at 86.88 which has been working. I am still short and have not covered any positions. I still think we are going to have a 10% correction in US markets and preparing accordingly. I think today's action was simply idiot dip buyers who desperately want in the market and will view any dip as an excellent buying opportunity. These people will get steamrolled during the real market correction.

Black Swan Insights

Read more >>

Market Thoughts 4.19.2010

Market Thoughts 3.25.2010 Watch Out Below

If you are a bull you despise days like today. All market gapped up strongly at the open and continued to surge throughout the day. Then during the the last 2 hours the markets started to fall off a cliff. Only the Dow was able to hold on to menial gains. The S&P and Nasdaq closed slightly negative.

Commodities followed equities and closed mainly unchanged with oil still above $80. The only market where fundamentals rule is natural gas which fell another 3% closing below $4. Gold is was slightly higher at 1094 while silver closed up 10cents at $16.74.

The major news of the day was the announced Greece bailout which will now involve the IMF in cooperation with the EU. The EURO did not like the news and closed below 1.33. Weakness in the euro translated into strength for the Federal Reserve Note. Overall the dollar index remained flat.

Today could be the start of a reversal in equity markets. If you follow candlestick charting, today's action would constitue a gravestone Doji which is bearish. But these patterns are never 100% accurate. I am still short oil, fcx, x, and hold OI puts. Long natural gas, Limoneria, Dean Foods, MO, and Afrcia Oil.




Black Swan Insights

Read more >>

Market Thoughts 3.25.2010 Watch Out Below

Market Summary 3.24.2010

All of the media outlets will tell you that markets declined on "debt woes" out of Europe and Fitch's downgrade of Portugal. In reality the markets declined because there were more sellers than buyers. You never really know why the markets go up or down on any particular day but the media feels compelled to give you are reason.Anyway the S&P 500 closed down 6.38 to 1,167.75.

Economic numbers out today were mixed with new home sales falling to a new record low (actually good for the housing market) and Feb. durable goods rising 0.5%.

Anyway gold, oil, copper, and most commodities were lower with the Dollar Index climbing to 81.83. EIA oil inventories (+7.4 million barrels) confirmed our suspicion that we now have a huge oil glut yet the price of oil remains above $80. Gotta love the speculators who keep pushing the price higher thanks to Ben Bernanke's cheap money. If fundamentals meant anything, oil would be around $50. Gold was a major disappointment today as it broke through the key support level of $1100.

Tomorrow we will get initial and continuing jobless claims with consensus estimates of 450,0000 and 4,562,000. The markets will largely ignore these numbers as they seem to do every week. After all you can apparently have a V-shape recovery with millions jobless. Its called the "Goldilocks economy."

Black Swan Insights

Read more >>

Market Summary 3.24.2010

Thoughts on today's market action

Markets gapped lower to start the session and then quickly melted-up as usual. The bears(me) looked like idiots once again. S&P and other indices closed higher along with commodities. Gold and the dollar closed fractionally lower. About the only standouts were the big pharma companies, which caught a strong bid due to the healthcare bill passing (good for pharma bad for US citizens). My positions did not work well considering I am short oil and the market in general. I have not made any changes and don't plan to. The market is still overbought and could easily correct if the Greek debt crisis intensifies and or the Germans put the brakes on the Greece bailout. One of the main reasons I am bearish on the market and commodities is because I think China is going to slow dramatically in the second half, which would have negative consequences for the global economy. A look at the Shanghai stock exchange(SSEC) confirms this. The SSEC peaked in August in 2009 and has been trending down since. If you look at a chart over the last few years you will notice that China often leads other markets. Chinese market peaked in late 2007 and begun to crash. Western markets held up for a while but eventually followed China down.




Black Swan Insights

Read more >>

Thoughts on today's market action