Source: Short Side Of Long
- The chart above shows the S&P 500 together with an indicator I call Weekly Internals. Basically it tracks the direction of the NYSE breadth and volume readings over five trading days or one week. Readings above 70% (inverse on the chart) tend to signal short term wash out. With the recent S&P decline of about 3%, many have proclaimed that the correction is over. However, according to the Weekly Internals, the stock market is not even remotely close to being oversold over the short term, let alone long term oversold. While this does not tell us the future direction of the market, it disregards the notion that the market is ripe for a rebound based on technical merits alone, as many pundits on CNBC would have us believe.
Source: Short Side Of Long
- The recent consumer data from the University of Michigan showed that confidence has now reached a five year high. Economists, investment bankers, strategists and advisors all claim that this is a very bullish signal. I disagree. This is actually a contrarian signal to sell. First, I wouldn't invest in stocks when consumer confidence is at five year highs, but rather when it reaches five year lows. Second, one should notice that the public is almost always wrong near major stock market turning points. Third, the current secular trend for consumer confidence is still negative since the bear market started in March 2000 and it will most likely continue to trend downwards until the middle of the decade.
Source: Short Side Of Long
- The recent CFTC Commitment of Traders report showed that hedge funds and other speculators increased bearish bets against Cotton, with the largest net short positioning since the middle of 2007. Such bearish conditions must have at least something to do with Cotton world inventory estimates being raised yet again by the recent report by the USDA. As a matter of fact, Commonwealth Bank of Australia commodities analyst Luke Mathews termed Cotton's stocks-to-use ratio as "staggering". Another investment bank analyst stated that he was "amazed" with Cotton's price resilience, saying that: "I am perplexed. We keep thinking the market ought to take a tumble to about the low-50s cents a pound." Despite such negative supply news, the price is failing to make a new low. Why, when the conditions are so bad? It was Marc Faber who first taught me that when the price of an asset fails to make a new low on unfavourable news, it could be starting to price in more favourable conditions. The inverse is true for an asset that fails to make a new high, under very favourable conditions.
Source: Merrill Lynch Newsletter
- Many of you already know that I have shorted Apple with long dated Puts at the end of August as already disclosed here on the blog. Doing my regular four to five hours of reading per day, I came across an interesting chart from Merrill Lynch research department showing that as of late August, Apple's market cap was worth more than the whole of Italy, Portugal, Turkey, Chile, Peru, Austria, Egypt, Czech Republic, Philippines, Finland and Norway combined. That is right... combined! At its peak of $700, Apple was up more than 110 times since its 2003 lows. Regardless of any reasoning anyone comes up with (PE ratio, cashflow, market share, balance sheet, iPhone demand, etc etc etc), when an asset goes up 110 times in a space of less than a decade... I'm pretty sure it is in a MEGA MANIA!
Featured Article
Source: Merrill Lynch Newsletter
How many times have you heard the phrase "bond bubble" over the last 12 months? I'd assume probably a lot, enough that you couldn't keep a count. I do not blame you because the phrase is thrown around just about everyday on any major financial media outlet. I guess I am in the consensus right here, but I too believe bonds are in a bubble, especially when one reads that Fidelity (a famous stock shop of the 80s and 90s) now has more Assets Under Management (AUM) in bonds compared to stocks. Therefore, it shouldn't be to hard to conclude that we are slowly nearing the end of the secular bond bull market, which started in September 1981. Interestingly, since we are now in October 2012, the chart above shows that the great bond bull market just recently turned 31 years of age (it is actually older than I am).
Now, this post has started just about similar to every other blog post which usually warns you about how risky Treasuries are, states that all the money has been leaving stock funds for bond funds and concludes how you should open up short Treasury position. No, I am not doing any of those... even though you might make a serious fortune over the next couple of decades if you did decide to do that.
What I will do is cover the "other" bonds also known as the riskier, higher beta, higher yielders, which the majority of the time aren't discussed. These include High Yield Junk Grade Bonds, Corporate Grade Bonds and Global Emerging Market Bonds. So let us begin. The most common phrase you hear from an average investor, especially those that are bullish on equities, goes something like this:
"Negativity persists among investors, as evidenced by the ongoing stream of money leaving equity funds into bond funds."Now, while that is not a wrong statement, it is taken out of context and not properly explained. When that statement is made, the majority of retail investors think that because money is leaving equities for bonds, one should buy equities as a "contrarian" investment because Treasuries yield next to nothing. But who said anything about Treasuries? Treasuries are not the only bonds in town and here is where the misconceptions and misunderstanding occurs.
Source: Merrill Lynch Newsletter
Yes, mums and pops are leaving equity funds and yes, they are putting their money into bond funds, but the more important question is... which bond funds? According to EPFR Global, a world leading fund flow tracking company, the majority of the billions leaving equity funds are going into Corporate and Junk Bonds (not just Treasuries as you thought before).
Source: Merrill Lynch Newsletter
There is a bubble building in these risky bonds and its fooling the majority of the investors into thinking they are buying safe assets. This can be far from the truth. The chart above shows that Junk Bonds do not hold government bond like behaviour and instead hold equity like behaviour. In other words, mums and pops are taking money out of one risky asset (equities) and putting that money into another risk asset that correlates at a 90% rate (junk bonds), because their "financial advisor" told them bonds are much safer than equities. And then we have the so called "contrarians" amongst us, who constantly quote that "equities are experiencing outflows, while bonds are experiencing inflows". The question I have for these so called "contrarians" is: what do you think will happen to the stock market, when the Corporate Bond bubble bursts?
Source: Merrill Lynch Newsletter
Monetary policy has unintended consequences, that goes without saying. By lowering rates to virtually zilch, so that the debt burden becomes easier to bear for borrowers, Ben "Helicopter" Bernanke has created a condition where savers like pension funds find themselves chasing yield further up the risk spectrum.
Source: UBS Newsletter
Funds which use to mainly invest in 10 Year Treasury Notes yielding around 4 to 5 percent only a few years ago, now find themselves starving for yield and taking more risk on board by participating in the Corporate Bond or Emerging Market Bond chase. And the funds which use to mainly invest in Corporate Bonds yielding around 6 to 7 percent only a few years ago, now find themselves starving for yield and taking more risk on board by participating in the Junk Bond chase. And the list goes on. However, as already stated above, these bonds have equity like behaviour and aren't as "safe" as the majority think.
The current conditions within the risky bond market is one where valuations are at extremes with IG and HL bond yields reaching historical record lows, the issuance (supply) is starting to overwhelm the market, credit quality is starting to deteriorate and investor optimism is ridiculously high. Consider some of the following articles I have been reading in recent times on these topics:
- Bolivia plans first bond since early 1900s
- Bubble-Era Financing Returns as Profits Falter
- Investors Indulge in Below-Grade Bonds
- Investment Grade Corporate Bonds Are Priced To Perfection
- Junk Fervor Blinds Buyers as Loan Gap Vanishes
- Junk-Bond Bears Squeezed With Fed Unleashing QE3
- The US HY bond market looks overheated
- Junk Bond Stress At Record Low As Defaults Slow
- BofA Cools on Junk Priciest to Stocks Since ’93
- Lack of product... driving HY valuations to new highs
- Junk Yields Fail to Deter Investors Seeing No Recession
The simple fact is that the majority of the money that is rushing into the so called bond funds, is finding home in the riskier bond assets including; Emerging Market, High Yield and Investment Grade Bonds. These bonds are not as "safe" as the retail and institutional crowd thinks they are, so when the next downturn does come, the losses in this sector will be very similar to that of the Nasdaq bubble in 2000 and housing bubble of 2006.
Bernanke's policy action has created unintended consequences within the bond market, where pension funds and savers are now investing in riskier asset classes that behave like stocks... and trust me these retirees and risk averse investors cannot hold through a 20% or 30% drawdown. Bernanke's policy actions will once again end in tears... but this time most likely on the chairmans watch (which he will be blamed for).
If we see a downturn starting soon with the economic activity, money will leave both the stock and bond funds very rapidly and will most likely move into Treasuries for safety. While I am not advising to buy the overvalued Treasury market either, it is quite interesting that this asset class has been one of the most unloved areas of investment since the S&P 500 market bottom @ 1,266 in June 2012. I personally do not hold any bonds in my portfolio and have also been short Junk Bonds since late July of this year (already noted on the blog many times before). Finally, make sure you stay away from Bolivian Bonds!
As a side note, the next time a person tells you, he or she is bullish on stocks because money is flowing into bonds, just ask them what bonds do they mean precisely? Because when investors herd, the mob mentality repeats similar phrases time and time again, but without actually doing any thinking (or researching) themselves.
Bernanke's policy action has created unintended consequences within the bond market, where pension funds and savers are now investing in riskier asset classes that behave like stocks... and trust me these retirees and risk averse investors cannot hold through a 20% or 30% drawdown. Bernanke's policy actions will once again end in tears... but this time most likely on the chairmans watch (which he will be blamed for).
Source: Merrill Lynch Newsletter
If we see a downturn starting soon with the economic activity, money will leave both the stock and bond funds very rapidly and will most likely move into Treasuries for safety. While I am not advising to buy the overvalued Treasury market either, it is quite interesting that this asset class has been one of the most unloved areas of investment since the S&P 500 market bottom @ 1,266 in June 2012. I personally do not hold any bonds in my portfolio and have also been short Junk Bonds since late July of this year (already noted on the blog many times before). Finally, make sure you stay away from Bolivian Bonds!
As a side note, the next time a person tells you, he or she is bullish on stocks because money is flowing into bonds, just ask them what bonds do they mean precisely? Because when investors herd, the mob mentality repeats similar phrases time and time again, but without actually doing any thinking (or researching) themselves.
Trading Diary (Last update 09th of October 12)
- Outlook: The Global economy continues to slow rapidly towards a recession. The United States GDP has grown below 2% for 5 out of the last 6 quarters. German GDP is also at stall speed, while China & India are slowing meaningfully with an increasing risk of a hard landing. US corporate earnings and gross profit margins are at record highs, so mean reversion is likely. Corporate revenue growth is already slowing.
- Important Indicators: Cash levels within mutual funds, retail investors, hedge funds and money market funds are at extreme lows, volatility is at very complacent levels and credit spreads are very narrow relative to fundamentals.
- Long Positioning: Long focus is towards the secular commodity bull market, with positions in Precious Metals, especially Silver, and Agriculture, with Sugar recently added. NAV long exposure is about 100%.
- Short Positioning: Short focus is towards the secular equity bear market. Short exposure is held in Dow Transports, Technology, Discretionary and Industrial sectors. Apple and Amazon have been shorted with long dated OTM puts. Pound and the Loonie (long USD) have been shorted with long dated OTM puts. Junk Bonds are also shorted. NAV short exposure is about 80%.
- Watch-list: A major short in due time will be US Treasury long bonds, as they are extremely overbought and in the midst of a huge bubble. While Grains have exploded, Softs present amazing value for investors. Japanese equities are down about 80% from their all time high over two decades ago and offer great value.
I've always love listening to jim rogers but one has to admit that he just talks his book.
ReplyDeleteAnother of his famous lines is when somebody else buys something, he says, 'it's already gone up'
but, when he buys something that's gone up, 'it's gonna go up more'.
He always has interesting and original things to say, but you have to know what you are getting from him. I've watched him all the way back to the original fnn days and that's what i've concluded.
The man is a legend. He became a billionaire from $600 and also absolutely killed it back in his hedge fund days. He just knows how markets work, as he has done this for decades. Everyone should listen when he speaks, because all of us can learn something. That is just my view.
DeleteThis is really informative stuff you've put into this article. Really good info.
ReplyDeleteThe question in my mind is who is going to take the blame when it hits the fan.
Will ben? Or will the talking heads somehow convince everyone that capitalism and the banks and blah, blah, blah did them in.
Unfortunately it makes a difference because whoever takes the blame is going to get the punishment. I think.
Yes, this is a really good question that I have been thinking about and I am actually rather optimistic that the blame will go to the right place, but we'll see. Not much else to hope for right now, so why not this?
DeleteThanks Tiho for clarify the treasuries outflow vs corporate and EM bonds inflow in the last graph. I was personally unaware of the marked treasures outflow and need to factor that into my thoughts about topping. I do know that bond put/call ratio is alarmingly high nowadays though. I'm still perplexed by the very low treasures yield like you showed in one of the above images. That is usually associated with good investing opportunities: 1983, 1987, 1994, 1998, 2003, and 2008.
ReplyDeleteLike I said before, I agree with you that top is very near. The exact timing is the problem. It's quite possible 9/15/12 was the ultimate top.
Now, I'm just waiting for a second shoe to drop in dollar to retest the recent low.
Jacek
Looking at the Yield on 30 Year Treasure, we have 2 scenarios in play. Either a break out to the upside or a Bear-flag. A Bear-flag will bring yield towards 15 - 20, that will give us higher price on 30 Year US Treasure Bonds. This could be a result of a serious drop in Stocks. As money will seek safe haven !!
ReplyDeletehttp://stockcharts.com/h-sc/ui?s=$TYX&p=D&yr=4&mn=0&dy=0&id=p39769681853&a=213788312&r=1350411237641&cmd=print
I also DON'T think that the market is ripe for a rebound based on technical merits alone. This rally smells of squeeze to me. I made some comments on the subject earlier in the Disqus world. Will repost the entire comment here for reader's ease.
ReplyDelete----------------------------------------------------------
We're already back up to the upper wedge boundary on the INDU, SPX, OEX, and WLSH (and they all flip back to momentum buys if they close up there). Got a ways to go on the NDX and COMP which are still below the falling 5dma. The RUT is right at the top of its symmetrical triangle (which it had fallen back into) and below the falling 5dma. The DAX closed right on its 5 year descending downtrend line (but it flips back to momentum buy).
What do you think? A great shorting opportunity? With momentum going back to daily buy status and the IT moving averages still aligned bullish, I'd say hardly. But how does anyone buy this at these levels? The whipsaw probabilities are very high I'd say. Tough market. I wanted to see more downside before seeing a ST low. October 15 was a turn date for my 35.21 cycle analysis (probably a low) and I give it a +-5 trading day window. It sure looks like it hit dead on. Or did it? With this monster rally, it could still be a high, especially if it's a short covering shakeout. Wild price action to say the least, and not uncommon at all to see this in the "last gasp" position at the end of a rally . . . or in the "kick off" position to a new sustained rally. If it's the latter, then I'd be expecting a blowoff finish to this 2009 to who knows when rally. I don't like the odds of that though, but what I "like" amounts to a hill of beans.
Another gap and go tomorrow up over resistance? I don't like rallies that get going on gaps higher and don't wash out before rallying. They reek of short squeeze. BTW, have I mentioned what I like amounts to? ;-)
----------------------------------------------------------
I really like your high yield piece. Would you mind if I reposted sections on my blog so long as I cite the source and link to the original?
Of course not. Glad it helps.
DeleteFYI, I read somewhere today - think it was an article on seekingalpha - that US cotton quality is poor this year because of the drought.
ReplyDeleteI don't follow cotton so only caught mention of this whilst glancing through some articles.
Otherwise, the stock markets that will not die continues to not die.
Intel's results this evening are interesting. I wonder - dare I call it - that this is now the NASDAQ top?
The chip bell-weather is reporting things are not so good in the PC market. Is this just because everyone has cut back on PC buys waiting for Windows 8, or major move to pads which is a market Intel is not big in... or just that the consumer is all spent out?
For a couple of weeks ago Coffee was the topic, what is your view on coffee and the bearish positions from the hedgefunds..?
ReplyDeleteThank you for all the comments. I am very optimistic on Soft commodities today, just like I was optimistic on Grains during the recent summer. I think we are bottoming and building a base. Sugar, Coffee and Cotton will all be good buys, but I prefer Sugar because it is so depressed historically. It definitely makes much more sense to buy out of favour assets like Soft commodities, than it does to invest into Junk Bonds right now!
ReplyDeleteTiho - What do you think about getting exposure right now to soft commodities through an index etf like RJA? RJA includes grains and grains have exploded recently. Would you wait for them to correct further before getting into the index? I prefer an index as its much easier to manage than buying the individual components.
DeleteStill waiting for a high volume capitulation dump and a nice double bottom on coffee here. Seems too early to run; the dead cat has to bounce again to scare the bulls into thinking it's never going to rebound. The train always leaves the easiest when no one is on board.
DeleteCotton looks great. Watching to see if it can take out and hold it's 100ma for a few sessions, before I jump in.
Sugar still looks ugly. Staying far away till it decides to pick direction.
Cotton looks great? You told us Cotton looks ugly from the long term just recently... and I quote:
DeleteFunky TapeOctober 9, 2012 1:55 PM
No positions in cotton and it looks ugly from a long term perspective.
Now we see that Cotton has rallied 10% since you made that statement and you are telling us Cotton looks great today.
What did you mean by long term perspective? Were you looking at the 1 hour chart or something? As Paul Tudor Jones famously said:
"When markets are making new highs and look the best, that is the best time to sell them"
I never invest based on what the chart "looks" like. As I always say to my co-workers, save the "looks" for picking a pretty girl and when it comes to investing, stick to being a contrarian and understanding conditions / fundamentals.
Yes, from a very long term perspective...monthly...going back to before the bubble in 2010. It still has yet to show the ability to break the long term down trend and establish higher highs on the monthly. All it is doing is working off very oversold conditions. There's a solid "floor" at $60, but there was also a solid floor at $90 that did not hold.
DeleteThe near term looks great. Higher highs and what looks to be accumulation buying.
Ok, well I ONLY trade (not invest) based on charts/price action. You've heard of the "efficient market hypothesis?" no? Price is everything, all the fundos you need to know about are presented in real-time right in front of you. The charts are a blueprint of everything all wrapped into one.
You "invest" your way and make money. That's good. I invest my way and make money. That's good. What's the problem; you don't like someone making money because they don't know a single thing about the underlying and don't care? Get real.
Also, I listened to your interview with Jordan RB yesterday. I do like what you have to say and agree with you on many many things. Not everything. Never. That's what makes the market tick, sir.
"The near term looks great. Higher highs and what looks to be accumulation buying."
DeleteWell, now Cotton has collapsed straight back down to the point where you called it ugly, despite saying saying it looks great only a week ago.
OK, I give up on the long side. Tiho convinced me, but also dollar just retested its low, as I expected, and XIV made a new high. I just sold all my PM miners and bought financials puts. I still have an uneasy feeling going against the fed, but sometimes the best investments are hardest to make.
ReplyDeleteI'm still holding to my long coffee position, but it's not doing well and close to being stopped out.
Good luck everyone!
jacek
Bear trap last week, short squeeze till Santa rally.
ReplyDeleteI think we just put in the fall low and will rally all the way till spring of 2013. With the exception of 07 and 08, the Russell has peaked higher in March the following year than low October of the previous year since 1998 at least.
Plus the Russell has attempted the 850-860 level more than a dozen times since 07 including coming within .07 of the all time high on 9/14.
Risk on. The market chooses Obama. It's not what I want because that's irrelevant, it's just the data.
I don't think you will have that short squeeze now, simply because there are hardly any shorts left around these levels (if you ignore Tiho and similar types). Check Rydex data if you don't believe me. There was a major short squeeze into september and a minor one in the last couple of weeks. Now, we just had major unexpected great news and markets barely budged.
DeleteGood luck!
J.
Did you just say we put in a low?
DeleteWill check Rydex, thanks. Was looking at equity P/C ratio and the 10MA on the daily is still above .65 so it seems there could be a few caught off guard.
DeleteTiho - Yes. A fall low for 2012. Again, RUT failed at 868, has formed a bear flag into significant support including a nice little bear trap last week and looks to want to break and head higher being propelled by seasonality, election cycle odds and perhaps jump on the Santa rally that's right around the corner. I don't think it *should* nor do I think it's *good* for the long run, but that's just what I see.
Also, the central bankers have engineered one hell of a wealth effect for the deaf, dumb and blind American's and that's, in part, why consumer sentiment is up and (IMNSHO) could climb right out of the gutter here. There's just too much riding on this to yank it anytime soon.
So since we have put in a bottom, you are long stocks or are buying stocks today and tomorrow?
DeleteHi Tiho I sold my position in BOND about a week ago because of this.
ReplyDeleteThe slowing economies should put a pin into the balloon of junk bonds. IBM's results were punk and should be a good representation of business world wide. China slowing is another pin in the balloon of emerging debt markets and should burst Bolivia, too, unfortunately.
ReplyDeleteThere are always bonds from the State of California, though...............they have a bullet train under construction and need funding.
Hi Tiho,
ReplyDeleteDo you have an opinion on the senior bank loan market, some people have lately said that it's one of the few bond markets where there's still some value. E.g. James Grant and Jeffrey Gundlach have lately spoken favorably about that market.
Thanks for great stuff on the blog.
Hi there Anonymous,
DeleteI do not have much of an opinion on the senior bank loan market nor am I an expert on it. I too think there is some value there. I am not sure how much. However, I only see "relative value" compared to other bonds. For example, junk bonds have no become more expensive than senior bank loans. Regardless I have no exposure in this asset class. Also, I don't see too much value in the overall Bond space, be it Junk or Emerging Debt, all the way to Government Debt like Treasuries.
Another day, another day higher for the markets. Nothing will stop these markets rising... Where is the correction let alone the crash?
ReplyDelete14,000 DOW by Christmas? Even getting a day with a few red points down is rare let alone 2%, 5%, 10% down - those are things to dream about. Wishful dreams.
The same was in 2007. I thought it would never go down. It went....
DeleteMietek
LOL, this exactly how it felt in 2007 when my early summer shorts were stopped out and I decided to not fight Feds that were hell bent on destroying dollar. That didn't stop the market to do what markets do.
DeleteJacek
Thank both - it is always good to get some reminders of 2007 when I am feeling like the last bear in the forest.
DeleteEverywhere I look I just see bulls and more bulls. Comments on how retail traders are "feeling" are all about giving up on the short side.
ReplyDeleteNasdaq is looking terrible and yet everyone is throwing in the towel on the short side. As a matter of fact a lot of tech stocks are breaking down. These include Apple, Amazon, IBM, Microsoft, Intel etc etc. Market is just taking its time doing what needs to be done, so if you wait for it, you will be rewarded by it.
Remember, top is a process, it takes weeks and months to form a top and start declining... so don't just give up on the deteriorating fundamentals which point to a market decline and a fall in earnings into 2013 and even possibility 2014.
Short term traders will tell you one day that S&P 500 looks good and next week that same trader will tell you that S&P 500 looks bad. These guys don't know anything about fundamentals and what is truly about to happen, they just look at charts and say one thing one week, followed by another thing another week. What did a talk about just a few posts ago?
Conviction should have nothing to do with price. This is where majority of the inexperienced ones amongst us fail. They let daily or weekly price swings, swing their emotions and convictions. Just because S&P rallies or fell 5% or 10% from ones entry, does that mean you are wrong? Don't let short term price movements distract you from the big picture and change your opinion due to emotional swings.
The market has been roaring since October 2011 when I was bullish and telling other bears we won't go lower. These same bears, who expected levels lower than 800 on S&P 500 in August 2011, are today expecting levels of 1,600 on the S&P 500. But those days of a bottom are long past us. This is not a bottom, this is a top, but it just takes time. To quote Livermore:
"A man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. You need not only the courage of your convictions but the intelligent patience to sit tight."
Very well put, but please take a look and comment on this blogger's analysis on where the market is relative to history:
Deletehttp://elliotwavetrader1.blogspot.com/2012/10/end-of-12-year-correction-update-and.html#disqus_thread
He is pointing out how fundamentally similar the era is while primarily uses waves and moving averages as indicators. He is VERY bullish on the future prospects of the market and expects new highs soon.
Which fundamentals is he studying? The ones I am looking at, which show record profit margins, record earnings, speculation in junk bonds, GDP at stall speed etc, do not signal markets will rally 20% or 30% from here. It actually signals markets will most likely drop by that amount.
DeleteTiho, please don't shoot the messenger :) I will cut and paste a small excerpt from his fundamental summary: "And if you take a clear look, years from 1967-1977 are almost identical to 1998-2012. The US dealt with long wars, recessions, high unemployment, high oil prices, etc. But what happened after the 1977 period was a couple of years of slight higher highs and lows before breaking out of the pattern and tripling in price within 10 years time, this after being stuck in a trading range for almost 10 years. So now we find a very similar situation and there is a good possibility markets are about to break out of the pattern and go up for 10 years as other breakouts in the market in the past. And while I understand there are many bad news around, how do you think the news were in 1977? .... As to what will fuel the new multi-year bull market is anyone's guess. It could be an inflation driven rally, emerging markets, etc. But what matters now is that the long term trends on all major markets are pointing up, so maybe is time for a good ride up."
DeleteSo is he long stocks or is he buying today, tomorrow or next week?
DeleteHe is currently 100% long in emerging markets ETF, EEM, where he believes the next bull market has already begun. From what I can gather, he believes the emerging markets have the most upside from its current levels. He recently switched out from being long the $SPX and China so he may feel that a correction is in order (a small one), but overall he is basically calling for a new 10 year bull market worldwide to begin shortly. He also feels that the recent QE is exactly what the US economy needed to inflate the housing prices again; hence, more fuel for being bullish.
DeleteRE: "And if you take a clear look, years from 1967-1977 are almost identical to 1998-2012."
DeleteHe might be right here, except for the fact that he failed to mention that markets were absolutely destroyed (in real value terms) at the late 70's/early80's and gold went to the stratosphere before things got better.
I think this will actually happen soon too.
But, we will not have the 1980-2000 type of recovery as that was caused by demographic shifts, falling rates, and falling commodities. The secular trend in demographics, rates, and commodities is exactly the opposite now and for many years to come.
Stagflation is the best it could happen in the next 10 years of so.
Jacek
Actually, from Jan 1977-March 1978, the $SPX corrected 18% before beginning it's unbelievable bull market run and never looked back:
Deletehttp://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbol=%5Egspc;range=19770103,19780301;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;
http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbol=%5Egspc;range=19780403,19850103;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;
Thank you for those charts and historical observations.
DeleteI have to make a comment about how prices of S&P 500 rose in late 1970s and early 1980s. Yes in nominal prices of stocks did hold up, but the inflation was in double digits and unto 15% via government stats (probably even higher).
The 1970s secular bear market occurred during Kondratiev Summer, when inflation runs wild and stocks tend to move sideways (down a lot in inflation adjusted terms). However, the 1930s and 2000s secular bear market in stocks is occurring during Kondratiev Winter, which tends to be deflationary.
Therefore, I do not think stocks will keep rising as inflation isn't running at 15% to 20% like it did in late 1970s.
I'm watching the USD to see what happens now. Lots of bullish pendants being formed which really confuses the heck out of me. I'm just sticking to the plan and not changing my outlook with PM's. I just wish the markets would finally do something :-).
ReplyDelete"Never short a dull market. Don't fight the Fed". But what if the Fed is the actual problem? I certainly think so.
And to answer the long question... As you know Tiho, I have always been a long investor. Would I buy stocks now in the "leaders"? Not on your life. You buy long in sectors when they are beaten down - not the other way around. That's the best way to increase your odds.
I feel bored sticking to the plan. That's what gets one into trouble!
Mitch
A new secular bull is about to begin? haha. These elliot wave traders often speak conflicting stories. Some are calling for dow 4000 and others like this guy are calling a new secular bull.
ReplyDeleteIn think Tiho is right. Secular bulls don't begin with valuations where they are today. They begin when stocks generally traded sideways at or below a Shiller P/E of 10 for quite some time. We traded down to 13 in 2009 but bounced immediately and never looked back (currently = 23).
Do not listen to the pundits who claim that stocks are hated. They arent. If they were then we wouldnt be sitting at S&P of 1450. People loved the market which is why they bought to cause the market to get to where it is. The market didn't just magically arrive at near all time highs.
Hugh Hendry of Eclectica recently got the tone right in his concerns about the endgame we are facing:
"Today, the world is grotesquely distorted by the presence of fixed exchange rate regimes. There are two. There is the Euro, and there is the dollar-remnimbi. All of Europe has defaulted. There are many stakeholders in the European project. There are financial creditors and then there are the citizens of Europe. Remarkably, the political economy of Europe is that the politicians chose to default on their spending obligations to their citizens in order to honor the pact with their financial creditors. And so of course what we're seeing is that as time moves on, the politicians are being rejected. So when I look at Europe, the greatest source of inspiration I have is fiction... We have the longest-serving Prime Minister, the Prime Minister of Luxembourg Mr. Juncker, who is on record as having said that 'when times get tough, you have to lie.' … the truth is unpalatable to the political class, and that truth is that the scale and the magnitude of the problem is larger than their ability to respond, and it terrifies them. The reality is that you just can't make up how bad it is. But it has precedent, and precedent perhaps offers us some navigation tools.
"The number one rule in terms of looking after wealth is preserving that wealth... I think we are single digit years away from the most profound market clearing moment - a 1932 or a 1982, where you don't need smart guys or girls, you just need to be bold. The crisis started here, it went to Europe… we could see a hard landing in Asia, coinciding and indeed being encouraged by the problems in Europe, and if you get those two events colliding, and given the lack of protection on such a scenario in Asia, then you would have another profound dislocation. And that's the point where you reach the bottom, and you don't need wise guys, you just need courage."
Thanks for that - haven't heard any of Hugh's stuff for ages.
DeleteThank you for some very nice comments. For me, I have always been transparent. Everyone can see that my fund is heavily exposed to PMs and Agricultrue on the long side and heavily exposed to short US equities on the short side. Therefore, it shouldn't be too hard to figure out how I went in coming quarters and years based on this simple information.
ReplyDeleteHowever, what will be hard to figure is how these same guys, who are bullish on stocks today, will very quickly start claiming that they were bearish when stocks topped. It will be a repeat of 2007, when majority where bullish on the top, until prices decline a lot. Than these same guys will claim they shorted stocks at the top, but today they are all long this and long that...
The hard decision I made yesterday to sell miners (GDX -2% today) and go short was a good one. I only wish I had shorted goggle (GOOG -9% now) instead of financials (XLF essentially flat).
ReplyDeleteThanks Tiho for hand-holding and sharing all that knowledge.
Jacek
Now MSFT... hmmmm.
DeleteMitch
Not just GOOG and MSFT disappoint tonight.
DeleteCMG down 12% including after hours
AMD down 6% including after hours
SNDK flat including after hours
Finally, public at large will realize economy is slipping down.
Is anyone preparing to celebrate the 25-year anniversary of the 1987 crash on Monday, October 19?
ReplyDeleteJacek
My previous posts title was Stock Market Troubles, signalling that there will be a lot of trouble ahead. I'm short the whole Texh sector, as well as Apple and Amazon.
ReplyDeleteHI Tiho,
ReplyDeleteSome recent US and China data showed sign of improvement(Retail sales, Housing,China IP).
Do you think these numbers sustainable? Or these are just another short term rebound?
Rgds,
K
Dollar getting stronger. Gold, silver and stocks about to plunge?
ReplyDeleteK - I don't pay much attention to lagging data like Chinese GDP or US retail sales. Even more importantly, I do not believe any data from any government prior to elections. If you want to know what the economy will look like in 6 months from now, follow the market. But when I say "follow the market", I don't mean follow the trend, but try and anticipate what will happen next!
ReplyDeleteBob - My next post is about Stocks vs Precious Metals.
I've also bought some long dated OTM Calls on Japanese Yen last night.
ReplyDeleteTiho - no messing with the puck. (Expression = no f*ck with the puck, since I'm in hockey country with the NHL on strike). You're putting your money where your talk is. Rock on! Anxious to hear what you say about the PM's.
ReplyDeleteI'm hoping the PM's have a flash crash so I can dive in :-).
Mitch
Fair point Mitch. Tiho talks his book and puts his money where his "blog post" is. So guys come on here stating how Tiho is a fundamental investor and that his thesis will eventually play out but stocks could run for months and months from here first. You have all seen these short term bulls pretend they are long term bears and tell Tiho his timing will be off. But what if, and I agree that it is an if, Nasdaq topped in September and Tiho nailed it? Remember guys tops happen when no one expects them. Everyone said that top couldn't happen just as QE started but it will be funny if it did. - Ellen Armstrong
ReplyDeleteTiho, good job on your shorts. Too bad I had no balls to short AAPL or technology. My financial shorts are doing OK but not as well as I thought.
ReplyDeleteI plan to cover on Monday or early part next week and reevaluate (too high leverage to risk the profit).
Here is the big question: How come PM miners (like GDX or similar) are up when gold/silver/platinum and general stocks are down big time. I haven't seen that before.
Anyone?
Jacek
OK, I did some limited search and it appears that particular miner/gold divergence is bearish for miners.
DeleteJ.
There are major bull trap warnings on a lot of critical stocks as well as stock indices. For example, Nasdaq broke above the March 2012 highs last month but failed to hold and has now sharply reversed. Darling of the investment world, Apple also broke down in a bull trap, just as everyone starting coming on CNBC predicting $1000 plus targets.
ReplyDeleteFurthermore, consider the following. US equity internal breadth recorded its first 90% down day (90% down on AD breadth and Up/Down Volume) since June of this year. When 90% down days occur near intermediate bottoms, like in June, it could signal a possibility of a short term wash out and a rally. That is what we got. However, when 90% down days occur near the top, as S&P was within a point or two of its bull market high, that could signal a trend reversal and intermediate top.
Also, rising volume near the bottom could signal panic selling and accumulation by smart money / contrarians, but large volume near the top could signal distribution by smart money / contrarians. I know for a fact that I've been selling against so much complacency, not that my volume would make a difference. These tend to be classic and traditional occurrences seen near the bottom and top, if one knows what they are looking for.
But as all of us say, one day does not make a trend. We will see how things play out.
By the way, the best performers yesterday were Sugar, Coffee and Cocoa. Even Rice and Wheat did ok. I think Soft complex, as well as the whole Agriculture, will surprise many investors during the next bear market. Agriculture always tends to do very well during economic turmoil and this time shouldn't be any different.
ReplyDeleteStock bull topping
ReplyDeletehttp://www.zealllc.com/2012/bulltop.htm
I hope you have a nice day! Very good article, well written and very thought out. I am looking forward to reading more of your posts in the future.hgh
ReplyDeleteI'm late to the party on this one, and a fairly new investor. This is a well written article. I agree with the thesis of the junk bond short, but am wondering what the best way to create this type of position for a retail investor is.
ReplyDeleteI thank you for attractive your time sharing your thought and dreams to a lot of reader away here.
ReplyDelete