Category Archives: Trading

Maverick Managers Say Short the S&P, Bonds, and Goldman

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A Barron´s interview with Bearing Asset Management´s Kevin Duffy and Bill Laggner, via Lew Rockwell:

“Do you see the S&P 500 retesting its lows of this year?

Duffy: It’s difficult to know. It depends on how much money gets printed. In real terms, can we get cut in half from here? We think so. S&P earnings are distorted because of accounting changes for banks and brokers; if banks were marked to market, S&P earnings next year could fall to $45 a share. Bullish sentiment is rivaling the 2007 top, and volatility has fallen dramatically. We like the VXX, an exchange-traded note that’s based on S&P 500 short-term volatility as measured by the VIX index. It’s down 67% this year, and fits into the whole idea that complacency is very high. Continue reading →

SEC To Look At High-Frequency Trading and Naked Access

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From Reuters, a report shows sharp rise in “naked access” to markets after 2005:

“NEW YORK (Reuters) – A report says that 38 percent of all U.S. stock trading is now done by firms that have “naked sponsored access” to markets, the controversial trading practice said to imperil the marketplace, and which faces a regulatory crackdown.

Naked access gives trading firms, using brokers’ licenses, unfetted access to stock markets. The firms, usually high-frequency traders, are then able to shave microseconds from the time it takes to trade.

Aite Group, a Boston consultancy, found that naked access accounted for just 9 percent in 2005.

The U.S. Securities and Exchange Commission is set to make changes to naked access and less risky forms of so-called sponsored access, when it releases a document expected next month.

The document is also expected to look more generally at high-frequency trading — where proprietary trading firms, brokers, and others use algorithms to make markets and profit from narrow market inefficiency.”

Gold Sinks Further, Dollar Surges..

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We will need to see a few more days of supporting action, but as of now, it looks like gold might be beginning the long-awaited correction.

How deep that will go is anyone´s guess, though the recent central bank buying is supposed to lay a floor for it above $1000. Now, normally I wouldn´t bet the house on that, but I´ve come to see that pronouncements from insider analysts (at GS) are no longer just market analysis to be weighed. They are announcements about the course of action the banking cartel is going to be supporting.

The trigger for this? I think it´s that upbeat jobs number, which is probably taking some speculative money out of gold …especially as gold is technically very overbought and institutional buyers want to lock in profits before the year end.

Dubai is more important than most commentators think, even Marc Faber. They say the numbers involved are  too small.

But, as I blogged earlier, they´re  not seeing the contagion possible.

Here´s what they´re discounting:

1 We don´t know what the numbers from Dubai really are.  We can´t be absolutely sure. They keep changing them.  $125 billion (the highest figure I´v heard) may not be enormous in a global context, but we don´t know how its tied up with investments and where. A firesale of Dubai Worlds real estate could have unsettling effects all over the world.

2. Dubai has an impact on the property market, not just in Dubai, but in London and New York where Dubai Worlds has holdings, and also in India, where real estate and employment could take a hit.

3. Banks have leveraged exposure through derivatives, beyond what they are admitting in public.

4. These are banks that are already broke, for all purposes.

5. When the banks involved are not themselves broke, they are backed by governments that are broke, or near-broke.

6. The government with likely the most exposure is Britain. Britain is on the verge of sovereign default.

7. This happens just as the second down-leg in real estate is unfolding, and along with it the just-as- leveraged commercial real estate market (see the recent zero hedge post on an ongoing  CRE failure in Chicago), where there´s little pressure for the Feds to step in.

8. This happens after a 10-month run up in the stock market in what is essentially a bear rally, according to many experts.

9. This happens when the government has escalated an unpopular war in Afghanistan, calling for more troop commitments and more money

10. This happens after massive further government commitments in health care and other social spending.

Would the dollar move up just on the back of an employment number that was widely acknowledged to be misleading? I don´t know.

Do I know if gold will sink below $1000? No.

But CB (central banks of India etc.) buying is said to have set the floor. Me, I  think that was a bit of help given by the RBI (CB of India, Sri Lanka, etc.) to the IMF, seat of power of the globalists. Even the IMF admitted it got lucky.

Will that bit of market manipulation to the upside be enough to stave off the deflationary effect of develeraging asset derivatives?

I don´t know, but I suspect it won´t.

I’m anticipating  a rush into the dollar like we had in 2008…maybe not as strongly…
maybe gold will sop up some of the rush this time. I think that´s what the CB´s are hoping will happen.

But again, one can´t be sure, for the simple reason no one knows how much more bad debt there is and where it is.

Gold Down On Biggest Volume In History..

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Via Economic Policy Journal:

“The exchange-traded fund, SPDR Gold Shares, that holds gold bullion was down 5% Friday afternoon on record trading volume as the gold price fell. More than 70 million shares have traded hands with an hour of trading to go. It’s the highest volume in its history. The gold ETF was launched in late 2004 and has assets of more than $40 billion”

China Beware: Gold Price Skating on Thin Data (Update)

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Update (November 14, 2009)

This isn’t an update so much as an additional note on the Van Eeden excerpt below.

*Van Eeden has a good track record, but he’s also a disbeliever in any CB or Fed conspiracy to intervene in the markets. Since that intervention is not conspiracy but fairly well-documented, I’m less confident of his opinion.

*Faber, on the other hand, seems to have his ear much closer to the ground.
For instance, he called the RBI one of the best banks in the world on November 6 (see my blog post).

That was just before the Indian bank’s gold purchase. Now, doesn’t it look as if he knew something was coming up? Either that, or he is doing some clever PR for the IMF.

*Faber’s recently (Nov 11) called $1000 the floor for the gold price and has said that it won’t be breached to the downside again.

[However, just a few days ago, on November 6th, he also said gold could drop to $800. I don’t know how to explain this sudden change. It wasn’t the IMF gold sale to the RBI, because that was completed in mid-October and went public on November 3, before both of Faber’s comments].

*Faber argues for much higher inflation than Van Eeden…who doesn’t believe we have inflation..yet.

Now, Faber’s analysis might be overblown, but his conclusion could still be right. Since he’s based in Asia, he could be privy to information that American money managers might miss.

Conclusion: while Faber’s analysis doesn’t seem as sound to me as Van Eeden’s, Faber might just end up being right because he’s factored in market manipulation.

*In response to a reader comment below:- I know Eric Janszen has also called for very high inflation in the 4th Q, which would indicate a high gold price.

************************

From Paul van Eeden:

“The Chinese Communist Party apparently learned from America that debt financed consumption was not a sustainable economic model. Their solution, it seems, is even more absurd: debt financed production in the absence of demand…..

Earlier we reached the conclusion that interest rates could potentially start increasing and cause the US dollar exchange rate to strengthen, which, in turn, would cause the gold price to fall. We can now add that the massive inflation of China’s money supply can cause the renminbi to collapse and send another currency crises rippling through financial markets. A collapse of the Chinese renminbi could also result in a stronger dollar and lower gold price…….

What would happen if China were the epicenter of an economic collapse? What happens when the gold and commodity bulls realize China cannot continue to consume at an even greater pace than it had been when the world was buying its goods, but, instead, now has to work down the excess inventory it built up? It would be a good bet that the US dollar would rally and the gold price would fall.

Given that the gold price is trading at a 25% premium to its fair value and that we can imagine several scenarios whereby the US dollar could rally and the gold price could fall, it seems to me that betting on a higher gold price right now is merely a bet on the Greater Fool Theory.”

SFO Magazine Picks Mobs as Top Ten Trading Books of 2009

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Stocks, Futures, and Options Magazine will be out with an article in December on its top ten trading books for 2009 – the list includes Mobs.

This really tickles me, because at heart, I’m a trader, albeit an amateur. Nothing like watching the charts – the heart-beat of the great capital markets. There’s a real romance to it. Had I been born some place else, I think I’d have run away from school and gone to work in one of the exchanges.

I also just saw that Mobs was on the list of top ten best-selling finance books on Amazon for 2008. That’s great news, but a bit of a surprise, because there were so many books published on the economy that year, I thought it would get edged out. Hopefully, the book will sell well this year too, because it really does have a lot of good information for anyone who trades/invests.

I’d advise you to especially read Chapter 16, which is a mini-manual that’s as insightful a look as you’ll find anywhere about what it takes to make good decisions on trades (It’s my co-author’s work, so you know that’s an honest opinion, unbiased by my problems with the book’s promotion, about which I’ve written at length before).

My contributions – such as they are – to “trading psychology” are Chapters 10 and 11 of Mobs, where I deal with “herd mentality” and how it affects and eludes quantification in economics. It’s more of the macro view. I think parts of that can be found on the web in articles I wrote for Endervidualism..

The rest of Mobs is more historical and less immediately relevant to trading per se. although the history of the housing and credit bubble will help give you the background you need to understand what’s going on now.

Gold Action Vindicates Caution

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All the bugs who were rah-rahing and telling people to buy gold over $1000, instead of cautioning them to take profits and watch out must be feeling subdued. Despite the thrust upward to yearly highs, the gold action this year never struck me as spectacular at all. Considering everything that’s gone on, it’s been rather staid.

The most common explanation for that from the gold bug community is manipulation.  GATA has recently got confirmation of Federal Reserve gold swap arrangements that would certainly fall under the category of market intervention.

A second reason is that we still haven’t come out of the deflationary movement of the economy. We had the first wave of contraction last year, followed by an artificial bounce provoked by stimulus money and a lot of happy talk from the pundits. Now the second contraction has begun. Gold might do well in a deflation relative to other commodities, but so far it’s tended to sink when the market sells off, and that’s precisely what happened yesterday. No surprise there for me at all.

But it seems to have been a surprise to some traders out there. Rick Ackerman at Rick’s Picks expresses his puzzlement over the rush to dollars – it’s a rush to the Titanic, he argues.

Well – that’s why fundamental analysis is something you need to put on the back-burner when trading. I don’t care how bad fundamentals are. Nothing moves in a straight line down or up. Besides that, Ackerman, like many American commentators, assumes that his view of the dollar is the world’s view. That simply isn’t so. The dollar has terrible problems, but at least for now, there aren’t that many currencies that are free of problems – some of them worse than the dollar’s. And since the dollar is the currency used in a majority of transactions, moving out of them (which would be the case if you felt the economy was contracting) would entail buying dollars. It’s simple logic.

Finally – never pile onto a trade that has too many people on one side. That’s logic too.

Gold rose, but only wishful thinking would call it as powerful an upthrust as the gold experts have claimed it was. If you watch gold prices regularly, you’ll know it’s nothing for gold to move $40-50 in a day. It’s volatile. That’s its nature.

Add to its inherent volatility, the other things going on – the G20 meeting, much talk about altering the SDR’s backing, Bernanke’s comments about the recession ending, international tensions over Iran, the fact that September is usually a strong month for gold, Chinese comments about walking away from derivative contracts, China’s instructions to its population to buy gold — put all of that together and it’s not surprising that gold should have moved up by about $70.

If you bought earlier, you should have taken profits and you should be watching to see how things play out. I didn’t buy earlier, so I’m just watching.

I still firmly believe we are due for a correction – and a relatively big one. I’ll buy then (with reluctance – since I think it’s a terrible industry in many ways).  But what if we don’t correct, and gold shoots up?

Well, what if? Then I’ll be out. So what? if it goes up, it’s likely to go to $1200 or so. That’s a 20% upside. It could also go down to $800. Equal downside.

That’s not a good ratio of reward to risk. There are any number of stocks which will give you that kind of movement if you like gambling. But if you’re investing – and not gambling – then you should act like an investor and ask if you really want to buy at prices that high at the end of a long upthrust.

It doesn’t make investing sense.  So wait and buy on dips.

That said, I’m prepared to eat my words…

PS: Seems like Ackerman is in the deflationist camp (along with Shedlock, Prechter and others) – as opposed to the hyperinflationists like Schiff. [Correction: I accidentally had this in reverse, with Shedlock as inflationist. I’ve posted on why both Schiff and Shedlock are correct – and why that sort of face-off is misguided. Deflation in some areas and over a certain time frame can certainly take place with inflation over other areas. But if you consider inflation to be only the kind that shows up in CPI and on the grocery shelves then obviously, we haven’t see the kind of hyperinflation that gold bugs are waiting for. One thing I fail to see from a lot of people is an awareness that what’s anticipated from the Fed might already be priced into the dollar.]

Rick Ackerman’s Response:

RE: gold and the titanic?
From: Rick Ackerman
Sent: Fri 9/25/09 10:00 PM

Hey, Lila!

I’m using a $1074 target for Comex December Gold and have told my subscribers, many of whom are hard-money guys, that I can’t promise them any higher than that, at least not based on the evidence of GCZ’s daily and weekly charts. My gut feeling is that this is not the rally cycle that will take gold into the Promised Land, assuming it gets there at all. I’m still a hard-core deflationist who believes hyperinflation must ultimately play out, but not in time to save 80 million underwater U.S. homeowners from going through the ringer.

No matter what happens, the Baby Boomers’ retirement plans have already been deflated away to nothing. And concerning the dollar, I’ve moved beyond the idea that the currency is fundamentally worthless, accepting the reality that it trades, simply, as a share in USA, Inc.

With kind regards,

Rick

That’s a pretty good take on things from one of the more astute traders around.

The Carbon Credit Scam – Another Public-Private Boondoggle

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“Dr Alison Doig, senior climate-change advisor at Christian Aid, says, ‘Live’s investigation highlights exactly what’s wrong with this flawed system, which is focused only on exchanging carbon credit globally, with no accounting for other environmental or social damage. All carbon credits are doing is making some companies rich, while doing nothing to prevent global pollution. It needs either abolition or total reform.’”

That’s a quote from a piece on how the much-touted carbon-credit trading scheme actually works on the ground in combating pollution. The idea of the scheme is to give industries a cap below which they have to operate. To exceed the cap, they have to purchase carbon credits from manufacturers in the developing world, who receive them in exchange for every cut in emissions they make.

The credits trade in private and international exchanges like any security, one ton of CO2 emission being equivalent to one Certified Emission Reduction (CER).

Carbon trading was one of the fastest growing sectors in 2006 and 2007, doubling in value, but like everything else, when the market took a hit, it took one too. With manufacturing output falling, emissions also fell, and with them carbon, making it more profitable for companies to pollute and buy the credits rather than cut back on emissions from fossil fuels.

And how does the scheme work on the ground? As Carbon Trade Watch documents in this revealing account by Nadene Ghouri, a company can actually be receiving tax-payer funded “green reward points” from the UN, and using the money for operations that are highly polluting – which is  what GFL (Gujarat Fluorochemicals) was doing.

Gold Spike Related to Chinese Derivative Contracts Busting?

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Here’s a zinger that might explain gold’s sudden spike since yesterday:

“Some of the State Owned Enterprises that stated their potential intentions to default were Air China. China Eastern and Cosco. Mainly in part because they took major derivatives losses over the past year but also, concerns are arising that the derivatives that they were sold by these foreign institutions are garbage, underwater and may never see the light of day. So why continue to pay for them? So the concern in the financial world is that holders of these losing products may just walk away, not unlike a home owner with a $600,000 mortgage on a home valued at $475,000 deciding to just hand in their keys. However, read on…this has nothing to do with morgtgage backed products.  This time, the concern may be over Oil.

They (Reuters) cited 6 foreign banks. Where the story gets really intriguing is that among the major derivatives providers according to Reuters but also widely known in the industry, are Goldman Sachs, UBS and JP Morgan.

Here is the looming problem. These products are worth billions. One report that a good friend of mine did showed that if  Goldman Sachs for example were to take this one up the rear, they could stand to lose 15 billion dollars. (This number is by no means confirmed)……. I would imagine that China, being the biggest purchaser of US debt, could surely collapse the US institutions that were at one point deemed too big to fail if they decide to go ahead with this plan.

This is why I don’t take tonight’s news that China purchased 50 billion dollars of IMF bonds lightly. In fact, I take it very seriously. This is why I take the buzz on the floor over the past two days very seriously as well as I do the incredible spike in Gold today. Most importantly, I do not take lightly the recent 25% correction we have seen in the Chinese Stock Market. Can all these events be interconnected some how? Is the Chinese stock collapse giving us a hint?”

More here.