Sunday, August 17, 2014

Even A Permabear Doomster Can Be Bullish About the Short Term Outlook for U.S Stocks - 8/17/14 and 8/24/14

As the title of this blog indicates, I am a doom and gloomer in regard to the future we are leaving for our grandchildren to inherit. However, in regard to the U.S. stock market, over the next couple of days, I am a raging bull. The reversal in the market on Friday after the fake news story about Ukraine attacking a Russian convoy has me convinced that the U.S stock market will be going higher over the next couple of days.

So if I am right, it is appropriate for active traders to get long the U.S. stock market. However, it is so unusual for me to be bullish, that this post may serve as a contrary indicator. 

If the stock market is indeed headed up on Monday and Tuesday, it still makes sense to have stops in place. There is so much turmoil in the world that bad news could derail the bulls. But at least for now, the bulls seems to be in control of the market.

8/22/14 Update

The fact that 1) the news out of Ukraine today, and 2) Janet Yellen was not as dovish as expected during her presentation at Jackson Hole, did not lead to a big down day, makes me bullish for next week as well. "Be long or be wrong" at least in the short term. The magnetic pull of round numbers should lead to a good run to 2000 for the S & P. However, no change in my long term permabull doomster stance., although after being bullish two weeks in a row, I may have to temporarily let my membership in the the permabull club lapse.

The Information on this blog is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. YOU SHOULD NOT MAKE ANY DECISIO upN, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS BLOG WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR. 

Friday, August 8, 2014

The 10 Year U.S Treasury Note at 2.37 percent as a Safe Haven Investment? Really?

There are lots of investments that make sense as a flight to quality during a time of crisis. And there is no question that over the last few days, buying U.S Treasury Notes and Bonds has been a very profitable trade. However, for anyone with a time frame of more than 60 days, this is a total head scratcher. Given that the Fed wants 2% inflation, QE is proposed to come to an end in a couple of months, and fed funds are likely to be increased next year, buying the 10 year note at these levels seems like a bizarre investment to take "risk off".

Looking to park some money in these times of turmoil. Why not take a look at gold mining stocks that pay a reasonable dividend. Given that we are close to the cost of production for gold, there is not a huge amount of downside risk, and the upside could be quite significant.

For those that are looking for a short term trading idea, consider shorting the SPX four minutes before the close today, and closing out the position 5 minutes after the close. This tactic is based on the assumption that traders will not want too much risk over the weekend and will sell off right at the close. Of course, then again traders may not choose to sell off at the close. Also please beware that even if this tactic works and you have a profit on your trade at the close, it is incredibly risky to be short over the weekend.. If we have a quiet weekend, the futures may go back up before trading starts on Monday morning.

8/16/14 Update
As a perma-bear, many of my investing/trading predictions posted in this blog have been painfully inaccurate. But dang I nailed the above. The market did go down on the close on 8/8/14, and it was a quiet weekend on the news front and the market opened up big on Monday 8/11

The Information on this blog is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. YOU SHOULD NOT MAKE ANY DECISIO upN, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS BLOG WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR. 

Monday, August 4, 2014

Why I Am Not Shorting Facebook

The majority of the analysts covering the social media space are missing the main story, and that is that social media sites simply do not offer terribly compelling advertising opportunities. A significant portion of the advertising spending they are pulling is coming from advertisers utilizing media allocation models. However, if an advertiser is allocating 10% of their media spend on social media sites, a rise in the views of the social media sites will not lead to a proportionate increase in advertising revenue (at least during the current fiscal year). The potential ROI from advertising on the social media site varies, but the site that is generating the most dumb money from advertisers is probably Twitter. For most businesses, Twitter advertising is too expensive to pay-out.

Most of the social media sites are great shorting candidates. However, there are two that I would stay away from shorting, Facebook and Linkedin.

I am not going to short Linkedin because there is the potential for them to ramp up their revenue from employment recruitment activity. I doubt that this potential revenue source justifies Linkedin's valuation, but it is outside my main thesis in regard to advertising revenue potential being overvalued on the other social media sites.

The other social media site that I would not short is Facebook. While I am dismissive of the advertising opportunities on Twitter and some of the other social media sites, I am a Facebook advertiser. Further, I have money in my budget to advertise on Instagram if Facebook ever launches advertising availability on Instagram. So, I am literally waiting to throw my company's advertising dollars at Facebook via Instagram, once there are opportunities to do so. Given that Facebook has an opportunity to create another huge revenue stream if they can figure out how to monetise Instagram, my suggestion is to be wary of shorting Facbook

The Information on this blog is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS BLOG WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR. 

Tuesday, July 22, 2014

How Long Until the Japanese Yen Collapes? Months, Years, or Another Decade?

The collapse of yen is inevitable. No government can fund half of their spending with debt forever. The Japanese government debt burden is so enormous that the Bank of Japan must hold down the cost of  borrowing by funding the debt via being the primary buyer of Japanese government bonds (aka money printing). With Japan's aging population leading to increased demands for government spending, there is no way out for the Bank of Japan's (BOJ) program of buying up government debt. The debt issuance is so enormous, and the bonds are such a risky investment that it is totally unrealistic to think that market would soak up all the debt issuance without the BOJ's buying. Thus, this massive debt buying/money printing by the BOJ can not be halted. This massive debt buying/money printing will eventually lead to the debasement of the yen and a run on Japan's currency.

The eventual collapse of Japan's economy has been widely predicted for years. I came across a 2001 article on Japan's Runaway Debt Train. And even back in 2011, shorting Japanese bonds was referred to as "the widow maker" because it had been such a disastrous trade for so long. However, at this point, with the interest rate on the benchmark Japanese government 10 year bond at just 0.5%, further declines are getting close to being mathmatically impossible.

However, the "widow maker" trade is to short Japanese bonds. It's my opinion that the smarter trade in the near term may be to short the yen, as bond buying by the BOJ may hold down interest rates on government debt at artificially low levels until well after the decline in the value of the yen is well underway. Given the goal of the government bond buying by the BOJ is to increase inflation while holding interest rates low, in the near term going with the flow and assuming the BOJ will have some success at both goals, shorting the yen may be a quicker route to profits.

Eventually, shorting the yen is going to be spectacularly successful. The critical question, and one that is frustratingly challenging to answer is, "when will the yen collapse?". It seems almost impossible to believe that the crash of the yen will not occur within this decade. Yet on the other hand, there is little to indicate that the crash of the yen is only months away either.

Here is why the yen is destined to collapse sometime in the near future. Both Japan's total government debt and the annual deficit are insane and unsustainable.

Japan Government Revenue and Expenditures

Revenues (2013) - $460 billion
Expenditures (2013) -  $945 trillion
(source - WSJ)

The gap between revenues and expenditures is enormous - $485 billion

Projected Interest Expense (2014)  - $224 billion

Funding half of government spending via debt/money printing is not sustainable, particularly given that the Japan's government debt has now passed a quadrillion yen. According to Japan's budget forecast, revenue from bond sales will pay for 43% of the 2014 budget, down from 46% in 2014. This  is the official number and is likely highly optimistic - my guess is that final 2014 numbers will equal or exceed last year's 46% (the official numbers for deficit percentages do not match up with the WSJ revenue and expenditures totals shown above in part due to off budget items, thus the government figures understate the depth of the problem).

And the BOJ is not printing money solely to buy up newly issued government bonds. The BOJ has pledged to increase the money supply by 60-70 trillion yen ($589-687 billion) in 2014, an even larger amount than the deficit.

Interest payments of $224 billion essentially eat up half of all revenue, and that is with the BOJ holding down interest rates on Japan government debt under 1%. Without BOJ's bond buying, higher interest rates would result. Simply a small rise in interest rates would lead to an enormous budget busting cost of debt financing

Putting further pressure on the yen will be Japan's total debt of $12.7 trillion (which expressed as percent of GDP is 242.3%, and $99,725 per person according to Bloomberg). To date, Japan deficit financing has not led to a crash of the yen. But the huge deficits have led to Japan's government being even more indebted than even the PIGS (Portugal, Italy, Greece, and Spain) as a percent of GDP. No nation in history has been able to sustain money printing for a prolonged period without eventually causing a crash, and the Japanese economy is not so exceptional that it will be able to escape this trend.

The yen did decline by 20% in value in from October 2012 to May 2013, from 87 yen to the dollar to 103 yen to the dollar. But it has since stabilized and is back to 101.5 yen to the dollar. When the yen does finally crash, as is absolutely inevitable, the future decline will dwarf last year's 20% drop . And it seems likely that the crash of the yen may not be too far off.

       click chart for current Yahoo Finance report

The fact that the Yen has not collapsed is in part due to the claim that Japan is moving toward a budget surplus in 2020. That claim seems about as likely as peace in the Mideast, the fountain of youth, or turning lead into gold.

The Information on this blog is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS BLOG WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR. 


Saturday, May 3, 2014

The Propaganda Battle Over The Fatal Odessa Trade Union Building Fire

Russia is using the fatal fire in the Odessa Trade Union Building in a matter right out of the Joseph Goebbels playbook. The Russian claim "Odessa slaughter: How vicious mob burned anti-government activists alive" is a terrific way to get a population stirred up to support an invasion.

On the other side of the coin, the Ukrainian authorities are claiming "pro-Russians accidentally set fatal Odessa fire with Molotov cocktails"

This is one of those cases where perception matters far more than reality. The flames are being fanned for more violence to come. The truth of how the fire was really set is not a very important issue in this propaganda battle. 

Odessa could be a flash point for an escalation of the conflict. Ukrainian authorities are unlikely to allow their remaining Black Sea port to fall into the hands of the separatists following the loss of Sevastopol in Crimea. Yet with a majority Russian speaking population in Odessa, the potential for strong separatist opposition is almost certain

Is Russia setting the scene for another invasion of Ukraine?. Time will tell, but more violence in Odessa is a highly likely outcome. And violence in Odessa could be the excuse that Russia utilizes to expand their occupation of Ukrainian territory. They are already using the media to get their populace ready to support an invasion.



Wednesday, March 5, 2014

Cutting Through The Global Warming Debate: It's the Rising Sea Level, Stupid!

Every day brings a new report on some obscure impact of climate change by 2050. Today's headline is almost comical, "Chipotle Warns It Might Stop Serving Guacamole If Climate Change Gets Worse". Along the same lines, a typical example of a news story about the impact of global warming is the claim that "climate change may cause major lizard extinctions by 2050". The cacophony of claims about all the catastrophic events that may occur by 2050 become little more than white noise to climate change deniers and skeptics. 

Here is the climate change impact that most resonates with climate change skeptics. "The sea level is rising by 1/10" per year". It may be that the sea level rise of 1/10 inch per year is such a slow trend and is so lacking in shock value that it is not much of a headline generator. However, it's easy to understand and fairly linear. It's also one of the most worrisome aspects of the millions of metric tons of greenhouse emissions gases being emitted annually.

Here is another tactic to take with global warming skeptics. Make a wager that 2015 will be the warmest in recorded history. If James Hansen is correct, you have a good chance of winning the wager, and it refutes the denialism that has been fomented due to the decade long pause in the increase in global surface temperatures

And for those living in areas of the U.S. that have suffered through a brutally cold winter, suggest they visit this site that shows the global temperature departure from average. The maps on this site visually show that while some geographies are unusually cold, they are more than compensated by areas that are unusually warm.

Global warming deniers may try to refute the fact that the seas are rising. Of course, many of the same folks will tell you that dinosaur fossils were put here to test our faith. However, I'll take the word of NASA scientists that confirm that the sea level is rising. If the folks at NASA are good enough at math that they can put a man on the moon, I trust their capability to measure the rising sea level

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Tuesday, March 4, 2014

Is The Impact of Japan's April 1 Consumption Tax Increase Being Underestimated?

The general consensus seems to be that the upcoming consumption tax increase in Japan has been so thoroughly analyzed that its impact is baked into future projections. My crystal ball in regard to the impact of the 3% increase in the consumption tax from 5% to 8% is rather cloudy. But it seems like the impact could be more severe than most analysts seem to expect. The sales tax increase could set off an ugly downward cycle.

Here are a couple of other events that led to the type if forward shifting of demand that the upcoming tax increase is producing

Japan - The April 1, 1997 2% increase in the consumption tax from the then 3% to 5% led to a huge increase in sales of big ticket items in the run-up to the hike in rates. However, it was followed by a year and and half recession.
Global - The boom and bust in purchases of high tech capital goods due to Y2K compliance led to a recession in 2000 that hit virtually every developed economy.

Japan's economy is already under huge duress due to an aging population. With 24% of the population age 65 or older, no other country in the world has so many senior citizens to support. Japan still has a labor force participation rate of 59% (versus 63% in the U.S.), but it bound to decline over time.

Japan government spending, deficits, and debt make one dizzy just pondering the numbers, as pointed out by Wolf Richter. The Japanese government's Ponzi game of borrowing half of spending and creating demand for the borrowing via money printing will ultimately lead to a collapse. The $70 billion a month of "quantitative easing" by the Bank of Japan to soak up demand for Japanese government debt is ultimately a recipe for a Weimar Republic like collapse.

The Japanese economy is headed for a calamity at some point in the future due to the massively excessive debt and deficit. Will the April 1 consumption be the straw that breaks the camel's back? Probably not. However, don't be surprised if the boom bust impact of the April 1 consumption tax increase is worse than most analysts are projecting. It seems reasonably likely that Japan is in for a nasty recession during the balance of 2014.