JP Morgan Says Not To Worry About Surging Bond Prices

   JP Morgan is out with a report telling investors not to worry about surging bond prices and that they do not necessarily mean we are entering a deflationary spiral as some have postulated. Looking back at prior economic cycles, JP Morgan notes that bond yields often bottom out approximately 2.5 years after the end of a recession. So the current rise in price of the 10-year Treasury is not completely unexpected and is simply following the pattern from previous recoveries. The firm also says that the two primary catalysts for the recent rise in bond prices are a decrease in inflation expectations and record buying of US bonds by US households. The current 5-year break-even rate on bonds is 1.3%, down from around 2% reached backed in June. Furthermore, US household purchases of treasuries has surged 46% year over year in Q1 2010. In fact, households are the second largest holder of US treasuries, ahead of Japan and only $100 billion behind China. If that was not enough to arrest deflationary concerns, JP Morgan goes on to mention that the strong resiliency of commodity prices indicates that deflation is a remote possibility at this point. I agree, oil at 75, copper at 3.30, and gold at 1238 hardly make sense if we are entering a deflationary period. The deflation scare mongering is just a ploy by central bankers to print more money. Below is a chart which shows the 10-year Treasury over the last 35 years.

Here is the full report from JP Morgan:

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JP Morgan Says Not To Worry About Surging Bond Prices

Federal Reserve Loses Bid To Keep Bank Bailout Secret

Per Bloomberg Article :  In another defeat for the illegal Federal Reserve, the New York Court of Appeals refused to consider the central bank's appeal to withhold records relating to the 2008 bank bailouts (amounting to over $2 trillion). The ruling by the Court of Appeals affirmed a decision by a lower court, which ruled that the Federal Reserve must disclose the documents. While this is a temporary victory for transparency and democracy, it could to be short lived as the Fed and its owners (JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Bank of New York Mellon Corp., Deutsche Bank AG, HSBC Holdings Plc, PNC Financial Services Group Inc., UBS AG, U.S. Bancorp and Wells Fargo & Co. ) will likely appeal the decision to the Supreme Court. The Fed claims that disclosure of the documents will cause institutions "severe and irreparable competitive injury.” This is nothing but bullshit from the privately owned Fed. The truth is that the bankers (shareholders of the Fed) want their illegal bailouts hidden from the public to avoid congressional scrutiny. Perhaps the tide is turning against the once untouchable Federal Reserve. Or will the Supreme Court sell out America to the bankers again?

Hats off to Bloomberg for taking legal action against the Fed.


Black Swan Insights

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Federal Reserve Loses Bid To Keep Bank Bailout Secret

Weekend Reads and Audio

1. We are running out of helium--only 25 year supply left--maybe helium is the next great investment

2.  The Death of Quant Funds

3. Stock Market is Still for Suckers

4. King World News Interview-- John Williams of ShadowStats

5. Goldseek Radio--Ron Paul and Harry Dent

6. Peak Oil Theory Has Peaked

7. The Stealth Debt Restructuring: Inflation

8. Emerging Markets are Still Looking Good--Deutsche Bank



Posting will be lite over the weekend. I am recovering from food poisoning courtesy of the Getty Villa Restaurant. Don't get the triple cheese pizza and cheese platter!!!

Black Swan Insights

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Weekend Reads and Audio

Is The Fed Really Out of Bullets?

   A common slogan by economic pundits is that the Federal Reserve is "out of bullets" when it comes to monetary policy. They note that the Fed funds rate is already at 0% and QE 1 has failed to stimulate the economy. With banks not lending the Fed has fallen into the dreaded liquidity trap as de-leveraging mitigates expansionary monetary policy. The pundits say that we are destined to end up like Japan and stagnate for 20+ years in a deflationary environment.  What people forget is how devilishly creative Ben Bernanke is when it comes to monetary policy. But what choices are left for Zimbabwe Ben?

I have outlined a few possible tools still available to the Fed:

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Is The Fed Really Out of Bullets?

Market Update

   The market has failed near the 200 DMA, which would go along with the idea that we are indeed in a bear market and the 200 DMA is now resistance. So at this point I am looking to short select stocks with a perhaps 6% stop loss on any one individual position. Right now I am looking at shorting/purchasing puts (3-5 month duration) in FCX, X, POT, short oil (DTO), short AUD/JPY (the infamous carry trade). I am still long Africa Oil and Stans Energy which I consider call options. At this point I do not think we are going to have a crash in the market, but we are going to continue to decline to around 850-900 on the S&P.

Black Swan Insights 

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Market Update

Markets at Key Juncture: make your bets

    Well, the market certainly liked the news out of Alcoa even though I think the market reaction is somewhat misguided. Alcoa did beat earnings, but they were reduced estimates from 30 days ago. It is a really simple trick: under promise and over deliver (and Wall Street will love you). Anyway, with Wall Street optimistic about company earnings, the market is up strongly today. This brings us to an interesting level in the market, which sets up for a good risk/reward trade--the 200 DMA. If we are indeed entering a bear market, the market should stop its advance at the 200 DMA, which makes this a good place to begin shorting. You can put a stop-loss at say 5% above the 200 DMA to give the trade some leeway. If you are a bull, you can wait until the market holds the 200 DMA for a week and then go long with a similar stop-loss for protection. Personally, I am taking the bear side because we are already below the 200 DMA and have been repulsed here before in June. Furthermore, the slowdown in China and the US is going to continue since the stimulus packages have both run their courses. Also, the real estate market rolling over should put strain on the already fragile banking system as well as the consumer. Hard to see a sustained recovery under these conditions.  Gentleman, make your bets

Disclosure: None--yet

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Markets at Key Juncture: make your bets

Market Wrap--Happy days are here again

    All three major indices closed about 1% higher thanks to a late day surge. This marks the 3 straight day of gains.  No real reason for the rise except that we are working off recent oversold conditions(mission accomplished). Right now the markets are in no-man's land and are bouncing up and down with little clear direction. The real test for this market will be what it does at the 200 DMA, which for SPY is around $110. Personally I am waiting for a test of the 200 day before I make any new trades. It has hard to make trades when there is a lack of trend and choppy action. Because we are below the 200 day I am going to be taking a bearish stance if or when the market gets close to testing the moving average. The trade will be relatively simple--short high beta names and place a stop loss at 8%. If the market breaks convincingly through the 200 DMA I will cover shorts and go long.

    The only other trades I am looking at right now are gold and gold stocks. I happen to believe that gold is going to fall back down to $1050-1100 level which will present a great buying opportunity. I am somewhat cautious on gold stocks because of their anemic performance against the yellow metal. This situation cannot last forever and I expect them to surge higher eventually. The only question is when. I was reading a piece from Pierre Lassonde (chairman of Franco-Nevada) in which he said now is the time to stock up on gold stocks because they will deliver strong near-term results. He notes that energy prices have stayed low (as compared to gold) which should boost mining profits and serve as the catalyst for higher prices. I hope so. Over the last 3 years gold stocks have largely disappointed.

Good Luck

Black Swan Insights   

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Market Wrap--Happy days are here again

The Yen Carry Trade: Are you feeling lucky?

What if I told you there was a trade where you could earn 20-40% annually and had a high success rate. The only downside is that it occasionally collapses and completely wipes you out. Would you consider this trade? Welcome to the carry trade.

The carry trade is relatively straightforward--you purchase a high yield currency and short a low yielding currency. For example AUD/JPY. Australia has high interest rates compared to Japan. Currently Australia's interest rates are at 4.00% while in Japan is at 0.10% making for a 3.9% difference. Theoretically you could buy 100,000AUD/JPY and make an easy $3,900 or 3.9% annually. That is pretty good considering US interest rates are at 0-0.25%. Now what if I told you that if you use leverage say 10-1(forex dealers give away leverage like candy) you could earn $39,000 or 39% per annum. You are probably salivating at the opportunity right. The best part of this trade is that AUD/JPY does not even have to move up for you to make money (even though that would be nice). It could simply remain flat and you still get your 39%. This seems like free money doesn't it?


But what are the risks?

Because this is a leveraged position your greatest risk is that AUD/JPY could decline from say 83 to 74. When you are using 10-1 leverage you will lose your entire investment if AUD/JPY declines by 10% or more (unless you are willing to put up more margin). However carry trade supporters note that this only happens a few times a decade. On most days you will win and get to collect your interest. This is what makes the carry trade so desirable and dangerous. Statistically you will win but when the trade blows up, you expose yourself to huge tail risk.

The Yen can surge 10% very quickly during market crisis like the Asian financial crisis. In one famous week in October 1998 USD/JPY fell (yen surged) from 136 to 111. We also saw a dramatic rise in the yen in late 2008 with AUD/JPY falling from over 100 in July 2008 to 55 by December 2008. Anyone who was long the carry trade got destroyed.

Conclusion

Anyone contemplating the carry trade needs to be aware of the perils of such a strategy. Yes, you can make good money during normal market conditions but you always know in the back of your mind that it will eventually collapse (just ask Julian Robertson of Tiger management who lost $2 billion overnight). The only question is when and more importantly will you be able to get out. If you still think this is a great trade make sure you put on the trade during an economic expansion with low volatility. In my opinion the benefits do not outweigh the risk of 100% capital loss.

Black Swan Insights

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The Yen Carry Trade: Are you feeling lucky?

Market Thoughts 3/23/2010 Up, Up, and Away

All major indices were higher and recording 52-week highs. Oil and gold were higher along with the dollar index. Volume was fine but not spectacular. I am really glad the Federal Reserve outlawed down days in the market (Federal Reserve Board Directive 88907621) because it was so depressing and inconvenient for an economic rebound. I always considered the question: Can the market (tail) wag the economy (dog)? It sure looks like it can. All you need to do is engineer a stock market recovery and presto--banks can issue 100's of billions in equity. Is it really that easy?

Anyways, the only fools of the day were the shorts (sign me up) and the winners anyone who is long any asset class (except treasuries). Even the dog of the energy market natural gas was up a little (good for my position). Call me ignorant but I find this type of market difficult. I do not like markets that go straight up because I always fear the downside (that line of reasoning saved me from 2008 massacre). It is almost impossible to run a balanced trade book because you want to kill yourself for shorting anything.

The only thing I will say that might show a negative divergence in the markets is the relative weakness of some key commodities (Oil,Gold,Copper) and commodity related stocks like FCX,APA,BTU,X, etc. All of these have not made new highs along with the general markets. Does this mean anything? Normally it would but we are not in normal times. That said this market is egregiously overbought I am not establishing any new long positions. Still maintaining oil short and May puts on Owens-Illinois. But will not be including any other shorts.

Black Swan Insights

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Market Thoughts 3/23/2010 Up, Up, and Away