Monday, October 8, 2012

Zen Slap

Don’t look now, but after last weeks dramatic divergence in the Aussie and the SPX – everyone suddenly became an expert on the Australian economy and their important currency to foreign exchange markets. 

Markets have a way of lulling ones concerns to complacency – and then slapping them in a sudden moment of clarity. Generally speaking – its a good idea to take notice. 

Although the analog has recently strengthened its correlation proportions to the model, it would be a bit presumptuous to expect the middle of the move to unfurl with like distribution. As I have noted before, these models often replicate most acutely at pivots. Like a rock lobbed into a pond, the geometry will replicate with great congruency at the point of entry and dissipate as you move further away from the epicenter of disturbance. 

With that said – and as mentioned in previous notes,  I do have an initial target of ~ 84 for FXA. 

As always – Stay Frosty


Wednesday, March 12, 2014

Yield Notes

Since testing and ultimately being rejected by the upper limits of last September’s highs, 10 year yields have consolidated in a narrow 20 basis point range between ~ 2.6-2.8%. 

Our general take on long-term yields has been that despite their historically low disposition, they became comparatively stretched to an extreme last year after the Fed pivoted their policy posture with respect to QE. We have been looking for a long-term range to develop between the extremes of the past two years, naturally with yields working their way lower through the balance of this year. 

In the near term, we see the prospects for an acceleration of trend lower – should yields breach the recent lows from early this month. 

The banking sector, which has benefited from a strengthening yield environment over the past few years, looks particularly vulnerable and at a curious retracement position. 

Gold, which took the brunt of collateral damages from a rising rate backdrop last year has been leading the reversionary charge higher. 

Friday, April 11, 2014

Yield to Yields

10-year yields slid into their skipped-stone support from the breakout range they have meandered in since last summer. They then broke through mid-morning, accelerating the downside reversal in the equity markets and a strengthening bid beneath the yen. 

Clearly depicted in the chart below, the strong inverse relationship between these two risk proxies have tightened considerably as our own domestic equity fronts have collided with several different pressure systems. Namely, the trap door we have expected would open in Japan – and participants beginning to come to terms with the end of QE. As the markets flounder further and volatility creeps higher, we suspect that the discussion surrounding QE and its impact to the market will only grow louder and more confusing.  

What we do know is that while correlations may be strengthening in some corners of the market, the indiscriminate tightness we witnessed across assets in 2011 as the Fed last attempted to step away, or 2008 as the Fed rushed to the accident scene – are not present. It really has become a market-picker’s market in 2014. 

A snapshot of this weeks performance through Thursday’s close tells the story. 

                  SPX  -1.75%                                       US Dollar Index -1.35%
                  IBEX -3.19%                                      Euro +1.33%
                  Japan   -4.49%                                   Yen +1.72%
                  EEM +1.28%                                      Australian Dollar +1.34   

                  CRB +1.78%                                     Gold +1.21%
                  FXI +2.98% (SSEC + 4.43%) 


As the banks (already down ~ 4.0% for the week) get hit once again this morning on the back of considerably weaker then expected quarterly profits from JP Morgan, the downside catalyst will only reinforce the trend and negative divergence that long-term yields had pointed towards in the financial sector over the past few weeks.

An inverse to last years sentiment and structure, participants need to yield their considerably misgiven perspectives to yields. Those that have followed our work over the past four months (see Here) will know that this has been a major theme and imbalance that we have positioned off of.  

Closing out an important and powerful week, we updated several different ongoing series.  

Wednesday, November 23, 2011

You Say Tomahto I say Tomato


I typically laugh out loud when I hear a pundit refer to technical analysis as voodoo. Am I offended because it’s one of the tools in my approach? 

Certainly not. 

I really could not be bothered, as long as I am on the right side of the market. If I didn’t use TA, there’s no way that I could be consistently profitable in a market such as this. When you think about it – broadly speaking, the way I approach technical or relationship analysis is no different than the fundamental guys philosophy. We both contrast current data to past performance to make an estimation about future expectations.  

It’s just in this circumstance their PEG Ratio is my U.S Treasury/Equity Ratio – and in my experience I can’t predict with any probability where the market will trade next week, month or year based on PEG ratio’s. 

Maybe it’s just me.

Judging by this chart, we are very close to a short-term low – which will likely be SPX 1125-1135 over the course of the next several sessions. 

With that said, have a wonderful and warm Thanksgiving for those American’s here and abroad. 

For everyone else, stay frosty – this market is very dangerous. 

Wednesday, October 16, 2013

Yield – at the Fork

After breaking down in September, 10 year yields have crept up and kissed the backside of their 50 day moving average. From a reference perspective to the two previous cycles (94′ & 04′) in which the Fed rattled the markets with motions to withdraw monetary accommodations – there lies a fork in the comparative road. 

Although the kabuki theater in Washington has muddled the intentions and postures of the Fed, we continue to work from the perspective that most of the heavy lifting has already been done in the bond market this year. 

From an intermarket and momentum perspective we very much prefer the route taken by yields in 2004, but will keep a close eye on the 94′ roadmap which would push a prospective high well into 2014. 

Wednesday, November 16, 2011

XLF Update

This week is a perfect example of why many traders stay away altogether from trading options expiration. Considering this market was already difficult to appraise – it’s sound strategy. I decided that after the XLF broke through the bottom hourly rail this afternoon that I would widen the time frame out to a weekly chart for better perspective. Here’s a quick update of the weekly XLF analog from a few weeks back (see Here). 

Long and short of things is the market has followed script lower, albeit with less velocity and conviction. 
Could the market be getting ready to close the performance differential- as illustrated in the video segment Monday (see Here)? 

To be quite honest, I have very little confidence in the short term machinations of this market because of OPEX and because of the fluid newsreel out of Europe. It does appear though from many perspectives that the market has in fact topped. 

Monday, April 18, 2011

Y2K=QE2

History shows us that each bubble needs a tragic muse. 
The Nasdaq Bubble had both the allure and fear of a new millennium. Y2K was on one hand a software and infrastructure motivator, as well as a philosophical romance; drunk on the notion of a new era that would transform all that we understood and perceived about the world through technology. 

With gold and silver today, it’s just as manic, evermore disturbingly romantic – and really just plain dark.


It’s a bubble with a raging mood disorder. 


At once both manic and depressive. Currency debasement! Manipulated markets! The experiment that was the fiat monetary system is over! Raging inflation is coming! 

Protect yourself! 


In the end, the inflation debate is a matter of relativity and coordination. We are not the only ones intervening in the marketplace with a monetary policy stopgap approach – it is entirely a global effort. And while it does make for a juicy soundbite (that is typically 9 times out of 10 either politically motivated or borne out of ones position in the market), there’s a lot less hyperbole and a great deal more logic behind the Feds efforts than most give them credit for. Here’s the byline for the Financial Crisis for Dummies softcover:


The private sector stopped spending – the government filled the gap. 


And although it is quite true that our current fiat monetary system is inflationary over the long run, the degree of distortions that are currently being reflected in both the precious metals market, the commodities market and the currency markets – likely do not reflect a representable correlation to inflation today, but more of a serious bubble in the commodities sector. I believe this minority opinion will prevail in the not so distant future as we emerge from the crisis relatively intact, albeit bruised nonetheless.


FT/Alphaville had a very interesting piece detailing the work from the boys at Deutsche Bank – that succinctly describes what I believe has been a massive misinterpretation by the risk trade into the commodity and currency markets. 


“The $2 trillion in purchases have literally gone down a black hole. Required reserves haven’t been required to increase and the Fed reserve add has literally simply been hoarded as cash. Excess reserves at the Fed have subsequently soared by the same. In short, QE has been a spectacular disappointment in its impact on bank lending, whether via whole loans or securities. It was as if the banks conducted the very sterilization of QE that many thought perhaps the Fed should do to “contain” inflation expectations.


Risky security prices have risen since QE but not Treasuries, the main instrument of QE2. Yet banks’ balance sheets have gone sideways. Effectively investors have marked asset prices higher by the Fed from an investor simply triggered a series of deposit for security switches through the investor base with banks never making an additional loan. This is consistent with a greater concern for risky asset post QE2 end, than Treasuries. The danger for investors is that they confuse the result of higher asset prices as reflecting excess liquidity rather than “irrational” exuberance given that actual liquidity (as broadly defined by the banking system) hasn’t gone up at all


– Dominic Konstam and Alex Li, Deutsche Bank”


While I agree with their descriptions of a rather large miscausation within the risk trade, I disagree with their disappointment with bank lending. Once critical mass arrives in the economy – bank lending will resume a glide path towards normalcy. Post financial crisis, both the private and government sectors perceive critical mass through the lens of the stock market – not lending. To their detriment, economist always seem to forget the psychological perspective to the argument. It is why accurate market forecasts are a hybrid discipline of both art and science. 

  • From Lemons to Lemonade 

Personally, I would never advocate the path that the Fed and Treasury have embarked on in the last 40 years. However, to the best of his ability, Bernanke has utilized the tools at his disposal to mitigate the collateral damage to the broader financial system.

I like Ben Bernanke, I really do. 

There, I said it. 

Don’t hate me because I chose the unpopular position – it’s an inherent character trait. 

During these contentious times, I think he is about as balanced – without ego, smart and creative as we could hope for in a central banker. The pundits will always use every opportunity to argue his ignorance towards what they perceive as practical banking methods and how they should function during ideal market conditions. They will cite example after example, such as his downplay of the subprime crisis right before the broader credit crisis erupted, as proof that he is unfit to lead the worlds largest economy. And although he surely deserves criticism towards aspects of his communications and transparencies with the market, the net result of his bold monetary approach has been a system that avoided catastrophic failure and recovered much faster than almost anyone predicted.


And while I would never willingly choose the Too Big To Fail paradigm, it has facilitated the efficiency and efficacy that the Fed could respond to illiquid market conditions. Granted, the crisis was magnified by the Too Big To Fail model, but the rapid recovery was also a direct result of their size and scope and considerable bandwidth within the global economy. Dealing with only a handful of mega banks with very similar infrastructures is infinitely easier to navigate and dispense stopgap capital, then thousands of separate and smaller entities with disparate business models and means of capital conveyance. No doubt about it, it’s a house of cards in the right market conditions, but it also can be utilized to neatly reflate a deflationary market environment in a crisis. 


With that said, there can be some rather large side effects of operating capital within such a dynamic system – even if they are just figments of the markets imagination (see below). 

  • The Bubble that is Silver
Since I last checked in on the state of the precious metals market (a whopping three weeks ago – and 400 posts before Silver Bubble Mania hit the blogosphere), the silver bullet train has continued its ascent higher – in what I like to refer to as its quest for its ephemeral peak. 

It’s not a matter of if, it’s a matter of… yada, yada, yada – you’ve heard it all before. 


It is a very crowded topic to broach these days. Definitely a bit disconcerting from a contrarian perspective, if you are positioned on the opposing side of the plate. You may ask, why would anyone ever willingly step in front of a train such as silver?


(thick BBC english accent)


Purely Ego. 


I’m smarter than the market; I’m smarter than you; therefore…(insert tragic personal anecdote here). It’s typically a widow maker towards your net worth. Trust me. 


We all know, as so eloquently stated years back by the godfather of our modern fiscal debate, John Maynard Keynes,  “that market’s can remain irrational longer than one can remain solvent.”.


Truer words have never been spoken. 


With that said, there are a number of reasons – both fundamentally, technically and psychologically speaking that silver’s historic rise is running out of motivational propellant. The crescendo of central bank fedspeak towards quantitative easing exit strategies and inflation concerns has reached a dissonant pitch in the market. What’s the old market axiom, “Buy the rumor, sell the news”? Well the news flow has been absolutely tidal towards inflation expectations as of late. 


Internationally, the drumbeat from China has been as steady as Ringo’s right foot in Come Together. They have raised rates twice since October, and just yesterday, their central bank governor declared they would continue to raise rates, “for some time”. Meanwhile, the ECB has eschewed Bernanke’s willingness to give the markets the benefit of the doubt and have followed rhetoric with action. 


Domestically, the inflation debate has intensified, and although the governing powers that be have yet to align a concerted approach towards addressing inflation expectations – the wheels are in motion and proceeding along that path. 


Two days ago, it was Fed Governor Plosser declaring his concern with “choreographing” an exit strategy towards quantitative easing. Moments before, it was Federal Reserve Bank of Richmond President Jeffrey Lacker stating his concerns with the, “need to heed the lesson of the last recovery that inflation is capable of rising even if the level of economic activity has not returned to its pre-recession trend.”.  


First rhetoric then action. 


Technically speaking, the silver market is as exuberant as the Nasdaq was in March of 2000.



I also like to look at the monthly charts as an apples to apples comparison of these two historic bubbles. For comparison, I bracketed both the Y2K hysteria trade in the Nasdaq and the current QE2 trade in silver. 


The RSI, MACD, Full Stochastics and CCI have all exhibited very similar artifacts of manic market conditions. Namely, a slope as steep as the current monthly MACD for silver is almost always immediately followed by only one phenomenon. 



Exhaustion.



Not a correction or consolidation of trend. 


Exhaustion. 


The Nasdaq had Y2K as its tragic muse. Silver, and by extension the entire commodity sector, has QE2. It’s ending in one month. Best look for a seat before the music stops. 


Just remember, Y2K=QE2

_______________________________


I just joined Twitter, you can find me here

Thursday, November 14, 2013

Yellen – a – mania

Although we don’t really subscribe to the notion that an extension of the taper or further easing by the Fed is gold and silver’s primary motivation these days (see 3 year returns for gold & silver since QE2+), we couldn’t help ourselves as the miners set-up in the elusive Hulkamania formation as the feisty future Chairwoman made her first substantive policy remarks since being nominated by President Obama in October. 

(In our best Hulk) 

Sister – what could go wrong?

As he use to say, “To all my little Hulkamaniacs, say your prayers, take your vitamins and you will never go wrong. “

Clearly Hulk was also a Keynesian. 

Sunday, July 6, 2014

World Cup Showmanship

“When judged against current and likely future trends in the terms of trade, and Australia’s still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents.

…Nonetheless, we think that investors are under-estimating the likelihood of a significant fall in the Australian dollar at some point.” – RBA Governor Glenn Stevens



If managing the perceived imbalances placed on their economies were as easy as the short-term currency reflexes imparted from the monetary pulpits suggest – the RBA and the ECB’s jobs would be considerably less challenging. But, alas – the currency markets are played out on a world stage, with an overarching federation still administered through a dominant US dollar referee – that appears to share the likeness and performance trajectory of the American World Cup team. 

The long and short of things: Despite Draghi and Stevens’s contractual agreements to persuade their respective currencies lower, until the US dollar materially strengthens – the efficacy of their efforts will fail to find much lasting traction. From our perspective, the US dollar does not appear poised to cooperate with these coaches very best intentions. Conversely – and likely apparent to both the RBA and ECB, the dollar still presents a rather weak disposition relative to the Aussie and the euro and a strong tendency to take a fall towards the bottom of its long-term range.

Tuesday, November 8, 2011

XLF Comparative Study – Update

Here’s an update of the XLF comparative study from after the close today. While the market followed the script of strength over the past two sessions, it was actually weaker than I anticipated. Perhaps tomorrow it will fulfill the proportion of the analog, but there were more than a few cracks in the markets short term technical picture that it looks increasingly unlikely. 

For that reason, I included an additional study that is a little further down the road in the financial crisis – where the rebound failed to exceed the previous highs.