Monday, March 27, 2017

This reminds me too much of what happened in 1972 to 1974

This is the start of at least a 5 percent correction, and perhaps something far worse than that over time. I take this very seriously. This is not just a one off circumstance in the equities market. This has something that has happened across all over the universe of capital markets. I think there's something to the downside that could become quite serious and one should be very careful. If we stop at 5 percent.... Let us hope it's merely a 5-7 percent correction and nothing more than that.

We've been saying that we expect a 5 to 10 percent correction. We've been saying that for weeks now. At the end of bull markets, earnings always look great. Earnings don't look bad until you've gone somewhere into an economic downturn. Earnings lag by at least a quarter, and usually by a half, so you're going to get the best earnings right at the peak of economic activity.


Wednesday, March 22, 2017

Bear markets are ugly and depressing

STOCK PRICES ARE DOWN MARKEDLY AND UNIVERSALLY as every market of the ten markets comprising our International Index has fallen with five of the ten having fallen by more than 1% and with two markets…. Japan’s and Brazil’s… have fallen by more than 2%. Allow us to be quite blunt here and acknowledge that something “broke” in the markets across the board yesterday, and we said in an interview earlier today with CNBC Europe, it is not just that stocks broke to the downside, but that precious metals “broke” to the upside along with bonds, and that the base metals broke to the downside following equities. The psychology of the market has taken a very real and very severe beating and we fear, of a sudden, that something more than a mere long-awaited correction has fallen upon our shoulders.

We would like very much to believe that all we are about to see is the normal… the standard… the again, much-awaited 5-7% correction in equity prices that shall be that proverbial “pause that refreshes.” We would like to believe that imperatively for as we have said before, “Bears don’t eat.” That is, bear markets are ugly; bear markets are depressing; bear markets weigh heavily upon the nation’s and the individual’s psyche and so we want to believe that this shall be something less than the beginning of a bear market and shall indeed by nothing more than the first day or two of a correction. This we truly want to believe, but we fear otherwise.

Time of course only shall tell what is happening or is about to happen. Trend lines cast back months rather than weeks can still hold. The market may reach such severely over-sold levels and may reach them so quickly as to render the market given to a rally. We may see the CNN Fear & Greed Index rush downward toward 15 and turn higher. We may see the clouds part and the sun come out again… but again we fear otherwise.

In our own retirement account yesterday we took very  real action to protect ourselves on the downside, for we stepped in early in the session and bought Japanese equities via the Wisdom Tree ETF, DXJ, but within an hour, with the market moving quickly against us, we cast it overboard, taking a small loss in the process. Then as prices continued to deteriorate we actually ventured to the short side of the market, buying bearish derivatives and by 1:00 in the afternoon, doubling those positions and carrying them “home” through the close of trading. This is the first time in a very, very long while we have actually gone short of equities, but it is our intention to become even shorter of them, hoping to sell a bounce that might develop intra-day.

Finally, always remember this, that as our old friend Doug Kass reminds us, ‘Risk happens fast.” Perhaps the FBI’s investigation shall stop at Mr. Manafort and maybe even Gen. Flynn and perhaps it shall not go any further. But for the umpteenth time here this morning, we fear otherwise. Discretion being the far better part of trading/investing valor, it is time to take some money off the table. 



via zh

Bullish Japanese stocks but hedged against the Yen

We are bullish of Japanese shares and have an initial position in place long of the Japanese stocks via ETFs here in the US, but we wish only to be long of those ETFs that hedge away our exposure to a weaker Japanese Yen.

Our preferred position then is in DXJ:Wisdom Tree’s currency hedged Japanese ETF. Further, it is our intention to add to this position but not until such time as the “spot” Nikkei closes “materially” above 16,600. 

Tuesday, March 21, 2017

Gold miners vs Physical

No one shall be surprised to read that we have not changed our thesis on gold at this point for we remain bullish of gold in EUR and Yen denominated terms as we have for the past several years, noting once again that gold in EUR terms leads the way higher and is up 9.6% year-to-date while gold in US dollar terms is up 9.2%. 

Gold in Yen denominated terms is lagging behind the other two prices thus far this year as capital seems intent upon moving out of Europe and to other venues, with Japan being a prime venue thus far, perhaps simply because of the geographical separation of Japan from the political problems attendant to Europe presently and thus keeping the Yen “bid” vs. the EUR. However, we shall suggest that that Gold/Yen’s three year out-performance vs. gold in US dollar terms… unchanged vs. -7.5%… does “trump” the year-to-date figures.

As gold has risen in all currency terms in the course of the past several days there is some very real concern that gold mining shares have seriously under-performed. We share that concern for historically the mining shares are leaders to the upside and to the down, thus when we are bullish of gold but see the mining shares lag behind we become openly concerned that something is amiss. 

Nonetheless, the political confusion that does seem to reign at the moment in Europe generally as elections loom in the Netherlands and France does tend to keep us viewing gold positively.

Monday, March 20, 2017

You should buy Gold in dollars, Euros or Yen terms


For the first time in a while, I think you should own commodities in general. You should own gold in dollar terms; you should own gold in euro terms; you should own gold in yen-denominated terms. Gold has started to be a bull market.


Friday, March 17, 2017

Stocks vs Real economy

Mr. Trump's agenda is bullish for the economy, but not necessarily bullish for stocks. That sounds illogical, but it's not illogical at all.

Why do stocks go up before economies come out of a recession? Because at the bottoms—when the monetary authorities become expansionary—that money finds its way into the capital markets, because it isn't needed in plants, equipment and labor.

You get that period of time that stocks take off on the upside and the economy continues to dwindle, and everybody wonders how stocks can continue to go up. That's what happens at bottoms.

On the other hand, at the tops of economic expansions, when there’s demand for plants and equipment and labor, money has to come from somewhere―especially if the monetary authorities are starting to err on the side of being restrictive rather than expansionary, as the Fed currently is. At that point, money comes out of the capital markets and goes into plants and equipment and labor.

Trump's proposals and his agenda are very bullish for the economy. By definition, therefore, it's somewhat bearish for equity prices after this sort of extended rally.

Wednesday, March 15, 2017

Valeant stock lessons learnt from Bill Ackman


We have focused attention for the past year and one half upon the demise of and the unwise handling of the stock in Valeant Pharmaceuticals by the hedge fund community. We never understood the business plan adopted by this company and we never understood the stock’s sky-rocket move higher from ’12-mid’15 when it rose from $40/share to just “north” of $260. It made no sense to us then and when the stock fell from $240/share to $200/share in the early autumn of ’15 we argued then that the “There-is-never-just-one-cockroach” Theory was almost certainly to be in effect and that VRX’ shares were headed toward eventual failure.

When it gapped from $150/share to $120/share we argued again that lower price would prevail and that Mr. Ackman… and others following his lead into the company’s shares… was making a possible careerending decision when he averaged down on the trade. As our old friend, Paul Tudor Jones, has always said, “Losers average losers.” Further, when Mr. Ackman argued for a seat… or seats… on the company’s Board of Directors, thus making it almost impossible to sell his shares without doing even more damage to the company’s stock for sales then had to be made quite public, we argued that this was a truly ill-advised decision on his part and that it would serve only to tell the market that his block of shares remained as over-head supply that eventually shall have to be sold, likely in a forced manner.

Yesterday, Mr. Ackman announced that he had indeed sold his remaining shares in VRX and has asked to have himself and an associate released from their Board seats. This was a very public capitulation on his part and quite honestly we feel very sad for him to have fallen this hard and this publically for no one deserves that sort of ignominy. Nonetheless, it was his selling, we are certain, that drove the stock down in the course of the past two weeks from $17/share to under $12. Now he is gone and the market knows that his shares have been distributed into the stronger… or at least broader… hands of other investors. There is no longer a huge block of shares dangling like the sword of Damocles over the market’s head.

Ackman was not alone in this trade. Other skillful and formerly wise hedge fund managers followed him into Valeant and followed him all the way down. But we are rather convinced that those “hedgies” are out now that Mr. Ackman is out so perhaps a “punt” from the long side is reasonable. The coast is now clearer. Lessons have been learned… we hope.

Gartman warns in 2016 that Bill Ackman averaging down in Valeant could end badly



Tuesday, March 14, 2017

30 year bond rally is over

That 30-plus-year bull market, which began in August 1982, is over. It's hard to believe, but I was there at the beginning. I was there at the end of the previous bear market, and I was there at the beginning of this long, protracted bull market in bonds (or the long, protracted decline in interest rates). It's hard for me to make people remember, but in 1982, the 30-year bond had a coupon of 14.75%, and you couldn't give them away at the time. It was astonishing how bad the psychology was.

But since 1982, we've been in a 30-plus-year bull market; that bull market has ended. The trend is for higher interest rates, not lower. But you must also remember the bond market tends to move in multidecade, long-term trends. If we're in for 20, 30 or 40 years of higher rates, for the first 15 or 20 years, we'll see rates go up very slowly, and very marginally.

It's at the end of this next bear market―the last quarter―that rates will go up the fastest and prices of bonds will fall the most dramatically. So while interest rates are going higher, there's no reason to be panicky about that right now.

Monday, March 13, 2017

Markets could disappoint investors


I would counsel people not to be a buyer of equities up here. If you’re an owner of equities, I would counsel strongly to bring stops up behind your positions, buy puts to protect those positions, sell futures to protect those positions, or write covered calls to protect those positions. I would tell you not to be a buyer of new equities. And anything that you had in the past, do something to protect those profits.

Trump Effect

Will there be tax cuts as consequential as Mr. Trump has indicated? There'll be tax cuts, but will they be as consequential? Probably not. Will there be infrastructure spending? Not a question. But will there be as much infrastructure spending as the markets seem to anticipate? Probably not.

Those things make it difficult to remain bullish of stocks at these levels. The market can go higher, but it is at levels I find to be nosebleed territory. People should be very careful up here. New purchases are to be avoided; old purchases should be hedged up in some fashion using derivatives or options; and bring stop orders up close behind the market.