Friday, September 13, 2013

History Speaks: Is War Now The Last and Inevitable Growth Engine?

By Tyler Durden

In a moment of surprising clarity, Deutsche Bank's Jim Reid pointed out what is largely taboo in the financial industry - the truth. "Looking back, real GDP growth in the US through the latter half of the 2000s and the 2010s has been at the lowest levels since the cyclically scarred decades of the Great Depression and the First World War."

What is amusing, is the constant state of shock of supposedly serious people who are stunned that despite the Fed being constantly in the markets, and buying up trillions in securities, the US economy has not responded in a favorable manner. Of course, nobody has pointed out that if all it took to generate growth out of thin air without consequences was for the Fed to print, i.e., monetize debt, this would have started 100 years ago in 1913, and by now the US economy would be so advanced it would be colonizing Uranus. Logic, however, is not a Keynesian economist's best friend.

That said, the reasons surrounding the lack of US growth are secondary for the time being. A bigger question is what happens from here, now that even respected banks, and even ivory tower economists have admitted that QE has been a complete failure for the broader economy, and the common American, benefiting only the uber-wealthy. Which leads us to a different topic. Syria.

With much of the discussion behind the motives for the Syrian (at first, then coming to a city near you) war focusing on gas pipelines, chemical weapons, moral right, exceptionalism or the lack thereof, boosting deficit spending and permitting the untaper, one issue has been left unaddressed. Perhaps the most important one. Economic growth. Which is surprising, it is not as if the US has not found itself in a position in which its real economic output was far lower than its potential output.

For an uncanny historical analogue of the current economic predicament, we have to go back only 70 years or so back, to the time of the first Great Depression: that was the first and ostensibly last time, when the US economy was performing in a comparably subpar fashion to trendline.

So in an extreme (if logically forthcoming) scenario when the Fed's final proposed fallback strategy of "forward guidance" which is destined to replace QE now that tapering is on the table, were to fail, as many already suggest it will (just look at the BOE), the final solution for the US central bank is one - Nominal GDP Targetting, which stripped of its fancy title is really a euphemism for "print until you drop", or rather monetize securities and inject money without regard for inflation (paradropping bundles cash may well be allowed as Ben Bernanke would be happy to admit), with the only intention of promoting growth at any cost.

So here is what Deutsche has to say about this potential outcome:

There has been some debate about possibly targeting the level of NGDP and perhaps such a policy should get more airtime. Such a policy was first mooted in the late 1970s and by the late 1980s was offered as a possible successor to the money targeting of that decade. A NGDPT would embody two major changes from current policy. First the central bank would act to stabilise nominal GDP, rather than inflation, at some constantly increasing level. Second it would target the level of nominal GDP rather than its rate of change.

The special feature of NGDPT is this second distinction. Currently if a central bank aiming to hit a 2% annual inflation target were to undershoot and achieve only a 1% rate then when the next year came around, the central bank would have to enact monetary policy still with the aim of hitting a 2% inflation rate. It’s 1% miss the previous year is forgotten. With a level target if the central bank’s objective is to hit a level of NGDP 2% higher at the end of the year then at the start, and it achieved only a 1% increase, then in the next year it has to make up for lost ground and put in place expansionary policies to grow the nominal economy by an extra 1% on top of the +2% it would have been expected to hit anyway.

This demand to correct for past mistakes can have big implications down the road. Let’s continue with the above example of the central bank who undershoots by 1%. After 5 years (see Figure 90) the central bank would have to try to generate 7% nominal growth in the next year. After 10 years it would need 13% nominal growth. After 100 years the hapless undershooter would need to almost treble (x2.7 or +170%) the size of the nominal economy.

This last and rather extreme figure isn’t far away from where a nominal GDP targeting Fed would have found itself in 1933 (see Figure 91, LHS). If the Fed had been told to achieve a level of nominal GDP consistent with a 5%-a-year growth rate (the 1790-1929 average) after 1929 then by 1933, after 3 years of Depression, the Fed would have had to have generated 135% growth in 1934 to get back on “target”. As it turned out, the US economy managed to grow at an average of 13.5% a year over the next 10 years and was back on ‘target’ by 1944.

We'll get back to this key bolded sentence in a second, but first let's conduct a thought experiment of a world in which the Fed was expected to "catch up" to its trendline growth rate until the collapse of Lehman:

Fast forward to the end of 2012 and assuming the central bank was targeting a level of NGDP consistent with an increase post-2007 at its NGDP 1990- 2007 average growth rate of 4.7% (see Figure 91, RHS) then the central bank would need to ensure a 2013 growth rate of 18%. Assuming a more spaced out catch up rate of reducing the gap by 2% a year then the US economy would be back on track by 2019 (see Figure 92), requiring an average growth rate of 6.7% a year.

The key difference between a nominal GDP target and an inflation target is that central banks would, after a period of economic slowdown, be ready to accept a higher inflation level and/or (ideally) above-trend real GDP growth for a time to get the economy back on track. Inflation picking up to 3%, 4% or even 5% a year would no longer be viewed as a failure of the central bank. Indeed it would likely be a central aim of its policy as it seeks to eliminate the nominal GDP “gap”. For this reason adopting a Nominal GDP target would mark a fundamental change in monetary policy, far beyond what has so far been seen. Would it be a change for the better or for the worse?

Rhetorical questions aside, the problem with 5% or higher inflation, aka "central bank success" is now a non-starter for the simple reason highlighed earlier, namely that over the past five years the US has generated $1 of GDP for every $18 of debt, leading to a G7 debt/GDP of a mindboggling 440%, the function of $140 trillion in consolidated "developed world" debt.

And since inflation brings with it a comparable rise in rates, suddenly this mountain of debt would be forced to generate cash interest payments. As Deutsche Bank opined:

In an ultra low interest rate environment (short and long-term rates), it’s possible to carry this debt in a low growth environment but with little deleveraging taking place it creates a fragile environment that leaves these economies vulnerable to shocks and policy errors.

If rates were to rise notably from these ultra low levels, this could be just such a shock. This is why in spite of the recent sell-off, rates are likely to stay lower for  longer as the alternative could be highly destabilising given the extreme debt burden being carried across large parts of the world.

In other words, targeting GDP for the sake of GDP, concerns about inflation aside, when soaring inflation would also lead to surging interest rates, has become impossible.

So what is the only possible way out left for a country in which monetary policy has failed on all fronts except to inflate asset prices to stratospheric levels, and yet the economy still refuses to budge? For the answer we go to Deutsche Bank one last time:

During the US Great Depression the huge declines in consumer and businesses confidence in the face of mass unemployment can be seen in the extremely and persistently low level of velocity.... As it turned out, the US economy managed to grow at an average
of 13.5% a year over the next 10 years and was back on ‘target’ by 1944.... Velocity also moved during the recovery from the Great Depression as the US war machine swung into action in the early 1940s.

In other words, at a time when the US was in almost an identical predicament and GDP catch up would have been impossible by any other means, what happened? World War. Luckily, for the US it generated unprecedented growth and cemented its status as the world's super power, and the USD as the reserve currency. Others were not so lucky.

Are we the only ones who suggest that the only outcome is a military one? No. Recall from Kyle Bass:

Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is aninevitable consequence of the current global economic situation.

"Inevitable"

Which also means preconceived from the start. So despite a recent sense of detente in Syria, pay close attention: never since the cold war has the world been so close to the edge of a full-blown global military conflict. Whether or not the Syria "trigger" has been produced as the catalyst that will spark growth, or is merely a precursor to such an event is still unclear. However with every passing day, the US economy lags ever more behind its "trendline" and the common man gets left ever further behind the superclass of financial asset oligarchs, a state which the president opined recently was unacceptable. The question is whether millions of war casualties for the sake of yet another economic "golden age" aren't.

Oil prices, Syria and the probability of a price shock

By J.W. Jones

Oil prices (NYMEX:CLV13) have been in the spotlight as the Syrian chemical weapons crisis became front and center in the media. As the political process has unfolded, price volatility in oil futures in both directions has been extreme. Oil prices have traded in a wide range the past two weeks between $104 - $112 dollars per barrel.

As a professional option trader, I wanted to look at what the implied volatility within options on oil futures was saying about future oil prices. The oil futures option chain would give me some possible clues about near and intermediate term price direction.

As an options trader, I am constantly focused on implied volatility. I regularly look for stocks or futures that are showing implied volatility levels which are higher than their historical average. The very first thing I look at is the implied volatility skew across multiple option chains with different expiration dates. As such, when I looked at the oil futures option chains I noticed that the longer dated expirations had a slightly higher than normal implied volatility.

It is normal for the longer dated expirations to have higher volatility levels, but what was striking to me was the implied volatility in December was not much higher in the December oil futures options than what it is in the front month expiration. I found this odd so I looked at the spot oil futures prices going out in time. The following chart comes directly from www.cmegroup.com.

As can be seen, as you move out further in time the oil futures prices decline. This is a condition in the oil futures market known as backwardation. According to Goldman Sachs in an article posted HERE:

“This rise in backwardation in oil, in our view, is not driven by the events in Syria, but rather by increasingly tighter fundamentals that are a result of the production shortfalls in Libya and Iraq against improving Chinese demand.”

Essentially Goldman Sachs’ analysts go on to say that they believe oil prices will see modest declines over the next 12 months, but the backwardation will likely lead to returns being mostly flat over the next year.

The fundamental backdrop according to Goldman Sachs appears to be bullish in the short-term based on supply data. Unfortunately fundamentals usually explain why an underlying asset moved the way it did after the fact. Making money in the short term as a trader is difficult when basing entry and exit decisions solely on fundamentals.

With the fundamental backdrop explained, I thought it would make sense to look at key technical levels in the oil futures price chart. The chart below illustrates key price levels based on recent price action in oil.

Obviously the consolidation zone is setting up for a large move in oil prices. The more important question to answer is which direction will oil prices move? Will we see activity or supply data that pushes prices above the resistance zone? Under that scenario, the next logical price target for oil would be between $121 - $130 per barrel.

Should prices reverse course and break below support we should see strong buyers come in around the $90 - $95 per barrel price zone. At this point, the next stage in my analysis is going to be probability based support and resistance for oil futures.

This process has to do with calculations involving implied volatility to derive a probability based on price action today. Clearly those probabilities change constantly, but the probability data set is accurate in real time or at the time of entry.

Traditionally I will use standard deviations to help determine price ranges as well as setting up trades that are directional such as credit or debit spreads. Other times I will use standard deviations to place credit spreads like Iron condors which focus more on the passage of time and are generally more agnostic to price action.

One standard deviation is typically calculated as 68%. Based on the options on oil futures which expire in 36 days on October 18th, a one standard deviation move would place oil prices around $103 per barrel to the downside. A one standard deviation move to the upside based on Wednesday’s closing prices would put oil prices around $110 per barrel.

Interestingly enough, the price range expectations for a one standard deviation move from current prices today (09/11) at the close fits precisely into the price range discussed above using technical analysis.

Varying data lining up like this does not always happen this precisely, however when key price levels line up in this manner it should not be ignored. The option data is basically indicating that there is a better than 68% probability that in 36 days the price of oil will be in the $103 - $110 per barrel price range.

The oil futures price chart shown below illustrates a two standard deviation move. The lines drawn on the chart below demonstrate the next key price levels should a 2 standard deviation move occur from the current price at the October option expiration.

It is important to understand that there is roughly a 10% probability that oil will even touch either key price level shown above before the October 18th expiration. So what do all of these probability calculations tell us?

Right now the implied volatility in the options that expire on October 18, 2013 based on current oil futures spot prices has a low probability of seeing a surge higher or a major move lower. The option data essentially concurs with Goldman Sachs fundamental view that oil prices are likely to stay in a trading range and probabilities do not favor a big unexpected move.

I would point out however, that the probabilities for a big move are not 0%. There is a 1 in 10 chance that we see a big surge or breakdown in price. As far as I am concerned, this is the option markets calculated odds on any major escalation taking place in Syria or the Middle East prior to October 18, 2013.

I think in the short-term we could see oil futures prices move up toward $115 / barrel. However, the probabilities simply do not favor a prolonged move above that level. Furthermore, it seems likely that when the Syrian debacle concludes that prices will be more likely to be in the $103 - $110 price range in roughly one month.

Instead of reading articles written by pundits who are making price projections based on an educated guess, why not let the options market be a guide for where the marketplace is pricing in the next move. The analysts that are calling for a monster move in oil in the near term have roughly a 10% probability of being right. I will let readers decide whether a pundit or the option pricing in oil futures is likely to be more accurate.

See the original article >>

The Best And Worst Performing Assets Since Lehman Are...

by Tyler Durden

No surprises here: Silver and Gold are the best, Banks and Greece - worst.

In USD terms:

And in local currency terms:

DB's commentary:

As one might have expected, on a total return basis (all in $ terms), Silver (100%) and Gold (73%) were the top two performers followed by European HY (60%), US HY (58%) and the S&P 500 (50%). Core rates have also done well as central banks propped up the fixed income markets by artificially keeping interest rates low for many years (even with the recent sell-off). Bunds, Treasuries, and Gilts managed to gain 23%, 20% and 20% respectively over the 5-year period. Despite the wobbles this year, EM equities and bonds are still up 33% and 29% over the same period as they have benefited from global liquidity and a mostly favourable growth outlook relative to DM. At the other end of the performance spectrum, Greek equities, down -66% since the Lehman bankruptcy to rank as the worst performer in our sample, are clearly still bearing the brunt of the European sovereign crisis. This is followed by the Stoxx600 Banks index (-30%), the FTSEMIB (-30%), and the Bovespa (-20%). The overall picture though is one of positive returns for most asset classes. We should add that this period ties in with our 5yr rolling nominal global growth being at the lowest since the 1930s so the performance of financial assets is almost entirely down to liquidity and not growth. Food for thought as tapering starts before growth has proved it’s self-sustaining.

The bolded sentence above, again, comes from Deutsche Bank.

See the original article >>

What Has Your Equity Hedge Fund Manager Done For You Lately?

by Tyler Durden

Still paying your 2-and-20, despite Stanley Druckenmiller's surprise that you would, for someone to pick stocks for you? Perhaps a glance at the following 3 charts will awaken the animal investing spirits in some (or just a 'fold' from many). This is what happens when there is only one economic market-driving factor (cough Fed cough) and too many coat-tail-clinging hedge fund managers (and newsletter writers) chasing too few real alpha opportunities. The correlation between the S&P 500 and hedge fund returns has never been higher and is approaching 1, excess return (alpha) is near its all-time lows, and, sadly, there is an extremely high correlation between styles and tilts. All your hedge fund alpha are belong to Ben.

Hedge fund managers have become high cost version of their index-tracking ETF brethren...

And performance advantages have dwindled...

as style tilts (growth vs value for instance) have seen increasing correlations...

Removing any and all systemic return generation aside from momentum chasing and dash-for-trash, home-run style investing... So lower excess returns and same risk as market?

From Stanley Druckenmiller...

On whether other managers can say ‘I’m going to take 2 and 20 and not invest:

“I don’t know. The way I always approach a business is, you give me a pile of money and I’m going to try and pound the money for you overtime as best I can. This whole quarterly performance and risk-adjusted stuff invading the hedge fund, I don’t get it. I can’t imagine why anybody would pay two and 20 to what is out there. When I started in the business, there was me, George Soros, Paul Tudor Jones, Bruce Kovner. We were expected to make 20-percent a year in down markets. There was none of this ‘Oh, I’ve got a risk-adjusted return of 8. That is how to two plus 20 came about.

On why Hedge Fund managers are less successful:

There are too many, there were eight to ten back then. Somehow, 9000 people are pricing their product off of eight to ten people historic performance. I noticed a lot of the smart early investors and hedge fund clients were leaving, but they were more than replaced by state pension funds, sovereign wealth funds and so far they have been perfectly happy to get returns that our early investors would have never tolerated.”

See the original article >>

Triple Bottom

By Tothetick Education

The Triple Bottom is a reversal price pattern & while not as common as the smaller Double Bottom it is seen in all markets, instruments, time frames, & price ranges. It presents with the immediate background environment as bearish with down-trending price action. The price pattern represents multiple failed attempts by sellers to break through an area of support and traders look for price to bounce back up. The classic Triple Bottom can be an indication that the established downtrend is losing strength & buyers may be gaining momentum possibly creating the end of the decline in prices. The Triple Bottom Reversal usually marks an intermediate or long-term change in trend & is therefore considered to have a definite bullish bias.

Visually the Triple Bottom pattern presents three consecutive minimums in price, ‘valleys or troughs’ that are roughly equal with the requirement of 2 moderate peaks or swing highs in-between. The price level of the highest swing high establishes what is called a ‘neckline’ & creates the immediate resistance for the pattern. Typically as this pattern develops overall volume levels usually decline. After a 3rd effort traders will look for an expansion of volume from the bulls to note conviction. The longer the pattern develops, the more significant the expected break.

Throughout development of the Triple Bottom traders should be prepared for the pattern to possibly resemble a number of other patterns before the third bottom forms. The ‘spirit’ of the pattern highlights a battle between buyers & sellers & it may take some time & not look perfect. Ultimately the ‘final’ picture is not complete until a confirmed breakout has cleared resistance…regardless of the ‘shape’. The inability to break support is bullish but the bulls have not won the battle until resistance has been broken.

Note that in the downtrend there may be many potential bottoms in price along the way down, but until significant resistance is broken, a reversal cannot be confirmed & traders should respect the trend.

Key points to formation:
  1. Background: price action trending Down
  2. 1st trough: marks lowest price point in the current trend
  3. 1st swing high effort: buyers step in & advance price typically to a significant price area also seen in the background downtrend action. This 1st effort establishes the immediate overhead resistance & defines a ‘neckline’. Volume on the advance is often large holders taking profits (‘buy to cover’) & may be inconsequential, but an increase could also signal early accumulation.
  4. 2nd trough: the decline off the resistance usually occurs with lighter volume. Support at the previous low is the expectation & aggressive traders will look at volume activity for early signs from the bulls. Note that there is NO confirmation of a reversal of trend at this point. The time period between troughs can vary but typically they are in-line with the symmetry of the instrument of choice. The 2nd low may offer a perfect double bottom in price but the ‘textbook’ range for price is acceptable within 3% of the 1st trough price.
  5. Advance from 2nd trough: Traders are looking for volume & buying pressure with the lack of sellers to accelerate off of the 2nd trough. The type of activity seen in volume during the effort back to resistance is an indication of strength or weakness. Note that often traders participate with this Double Bottom Pattern & watch prices run right back into resistance instead of getting a breakout. Or it is also quite common for prices to break through the 1st swing high price but then fail to advance much further. Therefore to be a Triple Bottom Reversal the pattern must have a minimum of 3 swing low efforts creating support & 3 swing high efforts creating resistance.
  6. 3rd trough: the decline off the resistance usually occurs with even lighter volume. Support at the previous lows is the expectation & aggressive traders will look at volume activity for early signs from the bulls. Note that there is NO confirmation of a reversal of trend at this point. The time period between troughs can vary but typically they are in-line with the symmetry of the instrument of choice. Seldom is this 3rd low price exactly equal to the previous 2 swing lows of the pattern. How close is close enough is a trader’s nuance to choose while remembering the ‘spirit’ of the pattern as a guideline. Volume ‘thrusts’ are common.
  7. Advance from 3rd trough: Traders are looking for volume & buying pressure with the lack of sellers to accelerate off of the 3rd trough. And again the type of activity seen in volume during the effort back to resistance is an indication of strength or weakness & becomes more important with each subsequent effort.
  8. Resistance break: even after trading back up to resistance a trend reversal is not complete. Breaking the resistance of the highest swing high price effort of the pattern & with conviction seen in volume completes the Triple Bottom Reversal.
  9. Resistance turns into support: broken resistance becomes potential support. Often but not always, there is a test of this newly created support & this effort offers a final consideration for a long entry into a potential change of trend.

While this pattern is fairly straightforward it should be noted that traders often ‘jump the gun’. Not all repeated lows produce a change of trend & traders need to remember that the trend is in force until proven otherwise. Bottom formations can take some time and patience is often a virtue. If a trader will give the pattern time to develop and look for the proper clues & then follow the guidelines, this chart pattern can be well-worth the effort to identify & trade.

Options for Trading the Triple Bottom as a bullish reversal pattern:

There are 4 methods of trading this pattern & it depends on your trading style.

Most Aggressive traders will be looking for the 3rd trough in price as soon as the first 2 troughs show buyer support & the swing highs are in place. As the action comes back to re-test this low support area aggressive traders will be diligently monitoring the volume action looking for clues to the buying pressure. Entries in this area can work with a stop placement just below the lowest low of the formation. Aggressive traders should be prepared for capitulation selling or ‘dump & run’ type price action.

Aggressive traders may wait until a 3rd swing low is made & then monitor the action thru the middle of the reverse pattern. The concept of this option is to identify the reversal price action as being contained in a support/resistance ‘box’. Traders monitor the middle ‘muddy trench’ or roughly 50-50 of the spread in price offered by the pattern for an entry once the bulls control. Stop placement can be fairly tight just below the trench zone. An additional option to add to this set up is to include waiting for 3 solid efforts on resistance & then consider the muddy trench zone entry. This can be an accurate trade offering an entry looking to capitalize on a breakout & potentially a new bullish trend but without the risk of the most aggressive option.

Classic traders will look for a long entry with the breakout of the neckline or immediate pattern resistance. Stop placement right below the neckline price.

Conservative traders will watch the breakout & look for a re-test of that new breakout support price to hold for full confirmation of the Triple Bottom Reversal Pattern. Stop placement right below breakout price. Note that this method of waiting for this pullback may or may not offer an opportunity but statistically it has a high % of success when it does present.

The aggressive trading methods can highly increase the profit potential of any Triple Bottom & may offer more than one entry. However, the trader needs to assess whether the ‘extra’ profits choosing an earlier entry offers a decent risk:reward over waiting for some confirmation of action based on clearing a defined price resistance. Traders choosing these options should look for strength from buyers in combination with the lack of sellers. It cannot be stressed enough that volume is a major key & an expansion of bullish volume aids confirmation.

False breakouts do happen & confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakout above resistance price, retrace holds new support line, price clears breakout swing high price, price clears next swing high of background downtrend price action, larger chart combination.

Stop placement considerations for all trade entry choices can be aggressively raised after the breakout of the price.

Measured Move Target based on structure of the Triple Bottom Reversal Pattern
  • Triple Bottom Pattern measure (added to) BreakOut price = target
  • Triple Bottom Pattern measure = (swing high price of pattern (minus) swing low price of pattern)

Since the Triple Bottom Reversal Pattern once confirmed has such a high degree of success indicating a change of trend, there are additional target considerations based on the knowledge that history repeats. All traders can look for tests on each of the swing highs seen in the immediate background downtrend price action. At any point & for all of these options, traders should gauge the continued conviction of the bulls based on momentum. If momentum is strong stick with the trade, if they get ‘lazy’ then consider taking profits & possibly look for a re-entry.

Examples: Triple Bottom Reversal Pattern

TTTtri bot June 21 es 1m final TTTtribot aug 13 cl 1m final

See the original article >>

Triple Top

By Tothetick Education

The Triple Top is a reversal price pattern & while not as common as the smaller Double Top it is seen in all markets, instruments, time frames, & price ranges. It presents with the immediate background environment as bullish with up-trending price action. The price pattern represents multiple failed attempts by buyers to advance through an area of resistance and traders look for price to fall back down. The classic Triple Top can be an indication that the established uptrend is losing strength & sellers may be gaining momentum possibly creating the end of the advance in prices. The Triple Top Reversal usually marks an intermediate or long-term change in trend & is therefore considered to have a definite bearish bias.

Visually the Triple Top pattern presents three consecutive peaks in price, ‘highs’ that are roughly equal with the requirement of 2 moderate troughs or swing lows in-between. The price level of the lowest swing low establishes what is called a ‘neckline’ & creates the immediate support for the pattern. Typically as this pattern develops overall volume levels usually decline. After a 3rd effort traders will look for an expansion of volume from the bulls to note conviction. The longer the pattern develops, the more significant the expected break.

Throughout development of the Triple Top traders should be prepared for the pattern to possibly resemble a number of other patterns before the third Top forms. The ‘spirit’ of the pattern highlights a battle between buyers & sellers & it may take some time & not look perfect. Ultimately the ‘final’ picture is not complete until a confirmed breakdown has cleared support, regardless of the ‘shape’. The inability to hold support is bearish but the bears have not won the battle until support as confirmed as broken.

Note that in the uptrend there may be many potential Tops in price along the way up, but until significant support is broken, a reversal cannot be confirmed & traders should respect the trend.

Key points to formation:
  1. Background: price action trending Up
  2. 1st peak: marks highest price point in the current trend
  3. 1st swing low effort: sellers step in & retrace price typically to a significant price area also seen in the background uptrend action. This 1st effort establishes the immediate lower support & defines a ‘neckline’. Volume on the retrace is often large holders taking profits & may be inconsequential, but an increase could also signal early distribution.
  4. 2nd peak: the advance off the support usually occurs with lighter volume. Resistance at the previous high is the expectation & aggressive traders will look at volume activity for early signs from the bears. Note that there is NO confirmation of a reversal of trend at this point. The time period between peaks can vary but typically they are in-line with the symmetry of the instrument of choice. The 2nd high may offer a perfect double top in price but the ‘textbook’ range for price is acceptable within 3% of the 1st peak price.
  5. Retrace from 2nd peak: Traders are looking for volume & selling pressure with the lack of buyers to accelerate off of the 2nd peak. The type of activity seen in volume during the effort back to support is an indication of strength or weakness. Note that often traders participate with this Double Top Pattern & watch prices run right back into support instead of getting a breakdown. Or it is also quite common for prices to break through the 1st swing low price but then fail to decline much further. Therefore to be a Triple Top Reversal the pattern must have a minimum of 3 swing high efforts creating resistance & 3 swing low efforts creating support.
  6. 3rd peak: the advance off the support usually occurs with even lighter volume. Resistance at the previous highs is the expectation & aggressive traders will look at volume activity for early signs from the bears. Note that there is NO confirmation of a reversal of trend at this point. The time period between peaks can vary but typically they are in-line with the symmetry of the instrument of choice. Seldom is this 3rd high price exactly equal to the previous 2 swing highs of the pattern. How close is close enough is a trader’s nuance to choose while remembering the ‘spirit’ of the pattern as a guideline. Volume ‘thrusts’ are common.
  7. Decline from 3rd peak: Traders are looking for the lack of buying volume with increased selling pressure to accelerate off the 3rd peak. And again the type of activity seen in volume during the effort back to support is an indication of strength or weakness & becomes more important with each subsequent effort.
  8. Support break: even after trading back down to support a trend reversal is not complete. Breaking the support of the lowest swing low price effort of the pattern & with conviction seen in volume completes the Triple Top Reversal.
  9. Support turns into resistance: broken support becomes potential resistance. Often but not always, there is a test of this newly created resistance & this effort offers a final consideration for a short entry into a potential change of trend.

While this pattern is fairly straightforward it should be noted that traders often ‘jump the gun’. Not all repeated highs produce a change of trend & traders need to remember that the trend is in force until proven otherwise. Top reversal formations can take some time and patience is often a virtue. If a trader will give the pattern time to develop and look for the proper clues & then follow the guidelines, this chart pattern can be well-worth the effort of identifying & trading it.

Options for Trading the Triple Top as a bearish reversal pattern:

There are 4 methods of trading this pattern & it depends on your trading style.

Most Aggressive traders will be looking for the 3rd peak in price as soon as the first 2 peaks show resistance & the swing lows are in place. As the action comes back to re-test this high resistance area aggressive traders will be diligently monitoring the volume action looking for clues to the lack of buying & increased selling pressure. Entries in this area can work with a stop placement just above the highest high of the formation. Aggressive traders should be prepared for ‘thrust’ type price action.

Aggressive traders may wait until a 3rd swing high is made & then monitor the action thru the middle of the reverse pattern. The concept of this option is to identify the reversal price action as being contained in a resistance/support ‘box’. Traders monitor the middle ‘muddy trench’ or 50-50 of the spread in price offered by the pattern for an entry once the bears control. Stop placement can be fairly tight just above the trench zone. An additional option to add to this set up is to include waiting for 3 solid efforts on support & then consider the muddy trench zone entry. This can be an accurate trade offering an entry looking to capitalize on a breakdown & potentially a new bearish trend but without the risk of the most aggressive option.

Classic traders will look for a long entry with the breakdown of the neckline or immediate pattern support. Stop placement right above the neckline price.

Conservative traders will watch the breakdown & look for a re-test of that new breakdown resistance price to hold for full confirmation of the Triple Top reversal pattern. Stop placement right above breakdown price. Note that this method of waiting for this pullback may or may not offer an opportunity but statistically it has a high % of success when it does present.

The aggressive trading methods can highly increase the profit potential of any Triple Top & may offer more than one entry. However, the trader needs to assess whether the ‘extra’ profits choosing an earlier entry offers a decent risk:reward over waiting for some confirmation of action based on clearing a defined price support. Traders choosing these options should look for strength from sellers in combination with the lack of buyers. It cannot be stressed enough that volume is a major key & an expansion of bearish volume aids confirmation.

False breakdowns do happen & confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakdown below support price, retrace holds new resistance line, price clears breakdown swing low price, price clears next swing low of background uptrend price action, larger chart combination.

Stop placement considerations for all trade entry choices can be aggressively lowered after the breakdown of the price.

Measured Move Target based on structure of the Triple Top Reversal Pattern
  • Triple Top Pattern measure (subtracted from) BreakDown price = target
  • Triple Top Pattern measure = (swing high price of pattern (minus) swing low price of pattern)

Since the Triple Top Reversal Pattern once confirmed has such a high degree of success indicating a change of trend, there are additional target considerations based on the knowledge that history repeats. All traders can look for tests on each of the swing lows seen in the immediate background uptrend price action. At any point & for all of these options, traders should gauge the continued conviction of the bears based on momentum. If momentum is strong stick with the trade, if they get ‘lazy’ then consider taking profits & possibly look for a re-entry.

Examples: Triple Top Reversal Pattern

TTT tri top 1m es march 12 final TTT tri top jun 20 cl 1m final

See the original article >>

Cocoa rises as certified stocks dwindle

By Jack Scoville

COCOA (NYBOT:CCZ13)

General Comments: Futures closed higher on ideas of little offer in the cash market and dropping certified stocks in New York at the exchange. Cocoa is between crops, and producers have already priced a comfortable amount of the coming crop and feel no need to sell more now. The lack of offer comes at a time when rains have returned to West Africa. Ideas are that crop conditions there are generally improving. West Africa is expected to get scattered showers, and conditions there are said to be improving for almost all producers. Temperatures are moderate. The harvest will be getting underway soon. Malaysia and Indonesia crops appear to be in good condition and weather is called favorable. Nigerian farmers are drying Cocoa now that rains have passed and the weather has improved. Drying has been delayed over the last couple of weeks from too much rain.

Overnight News: Scattered showers are expected in West Africa. Temperatures will average near normal. Malaysia and Indonesia should see scattered showers, but southern areas could be dry. Temperatures should average above normal. Brazil will get mostly dry conditions and warm temperatures. ICE certified stocks are lower today at 4.466 million bags.

Chart Trends: Trends in New York are mixed to up with objectives of 2610 and 2720 December. Support is at 2540, 2525, and 2505 December, with resistance at 2605, 2620, and 2650 December. Trends in London are mixed. Support is at 1670, 1660, and 1650 December, with resistance at 1710, 1740, and 1770 December.

COTTON (NYBOT:CTV13)

General Comments: Futures closed higher as USDA reduced production potential for the US crop this year. The world data showed increased world supplies and was not considered bullish. Futures initially moved lower on the world data, but then rallied as traders took another look at the reduced production that offset an estimate for reduced demand for US Cotton. Futures could be starting a new leg higher. US crop development remains behind due to delayed planting this year, but crop conditions right now are generally good. Weather is warm in the US, with the Delta and the Southeast expecting above normal temperatures into the weekend. Texas is dry and warm. Weather for Cotton still appears good in India.

Overnight News: The Delta will be dry and Southeast will see a few showers late in the week. Temperatures will average above normal in the Delta and mostly above normal in the Southeast. Temperatures should start to turn cooler this weekend. Texas will see dry weather. Temperatures will average above normal. The USDA spot price is now 82.41 ct/lb. ICE said that certified Cotton stocks are now 0.017 million bales, from 0.018 million yesterday.

Chart Trends: Trends in Cotton are up with no objectives. Support is at 85.00, 83.90, and 82.80 October, with resistance of 86.00, 86.50, and 88.10 October.

FCOJ (NYBOT:OJX13)

General Comments: Futures closed higher on the data released by USDA yesterday that showed poor yields from harvested oranges. The report implies that Oranges are small and do not have enough juice. The poor quality of the crop is most likely due to earlier drought conditions and the greening disease. A hurricane in the Eastern Atlantic was not a force in the price action today.. The storm is not going to come anywhere close to Florida, but it gave traders a reason to buy, anyway. The storm shows that the conditions in the Atlantic might be improving. The historical peak of the season has just passed. There are still no real threats showing in the tropical Atlantic for Florida. Growing conditions in the state of Florida remain mostly good. Showers are reported and conditions are said to be very good in almost the entire state. Temperatures are warm. Brazil is seeing near normal temperatures and mostly dry weather, but production areas will turn warmer again this weekend.

Overnight News: Florida weather forecasts call for some showers. Temperatures will average near normal.

Chart Trends: Trends in FCOJ are mixed to up with no objectives. Support is at 137.50, 134.00, and 131.00 November, with resistance at 140.00, 142.00, and 144.00 November.

COFFEE (NYBOT:KCZ13)

General Comments: Futures were a little lower in consolidation trading. There was talk that current dry weather in Brazil could hurt the flowering for the next crop, but some forecasts expect the rains to develop by the end of this month. Most traders are still bearish longer term on big world supplies, but the bears have been unable to force new lows and the market action appears to be more like at least a short term bottom. Coffee appears to be available in Central America as farmers and mills clear inventories before the next harvest. Colombia is offering Coffee into the cash market at weaker differentials. Buyers are said to be well covered. Current crop development is still good this year in most production areas of Latin America. Central America crop conditions are said to be good overall. Colombia is still reported to have good conditions. Harvest conditions are good in Brazil.

Overnight News: Certified stocks are lower today and are about 2.783 million bags. The ICO composite price is now 114.15 ct/lb. Brazil should get dry conditions through the weekend and some showers next week. Temperatures will average near to above normal. Colombia should get scattered showers, and Central America and Mexico should get showers and rains. Temperatures should average near to above normal.

Chart Trends: Trends in New York are mixed to up with objectives of 123.00 and 127.00 December. Support is at 116.00, 114.00, and 111.00 December, and resistance is at 122.00, 125.00, and 127.00 December. Trends in London are mixed. Support is at 1740, 1730, and 1720 November, and resistance is at 1800, 1825, and 1840 November. Trends in Sao Paulo are mixed. Support is at 139.00, 137.00, and 134.00 December, and resistance is at 145.50, 148.50, and 150.50 December.

SUGAR  (NYBOT:SBV13)

General Comments: Futures traders higher on news that USDA will trade Sugar for import credits in another effort to reduce supplies and keep the market afloat. The program will help remove supplies from the market and cut imports, but is not considered a final solution. USDA is trying to avoid taking a lot of Sugar into its hands once the loans from the government programs expire at the end of the month. But, there will still be a lot of Sugar around, as USDA showed in its reports yesterday. Thailand and India expect more production this year, and both countries are actively offering their supplies into the world market. Demand for ethanol has been good. Chinese demand has been soft, but Middle East demand is good. Price appears to be in a trading range for now due to solid demand and big production.

Overnight News: Brazil could see dry weather and moderate temperatures.

Chart Trends: Trends in New York are up with objectives of 1780 March. Support is at 1740, 1710, and 1700 March, and resistance is at 1780, 1810, and 1840 March. Trends in London are up with no objectives. Support is at 488.00, 486.00, and 479.00 December, and resistance is at 496.00, 501.00, and 505.00 December.

See the original article >>

Goldman, brokers foresee more cuts to US soy hopes

by Agrimoney.com

The latest hike to the official US forecast for the domestic soybean yield will not be the last, according to commentators including Goldman Sachs, which hiked its forecasts for prices of the oilseed by up to $2 a bushel.

The US Department of Agriculture on Thursday, in the highlight of its much-watched monthly Wasde crop report, cut its forecast for the domestic soybean yield by 1.4 bushels per acre to 41.2 bushels per acre, after an unusually hot and dry close to the Midwest summer.

The downgrade, while in line with market expectations, was historically large for a September Wasde report, outpaced only twice in the last 30 years.

And this looks like it will not be the last cut to soybean yield hopes, commentators said, including Goldman Sachs, which highlighted the "potential for further adjustments in similar directions" in the October Wasde report.

'Yield debate'

One factor cited by analysts was the continued dry and hot weather Midwest.

While some rains this week "did bring relief to some areas whose plants are still green, most of the crop is too far gone for the rains to make much of an impact", CHS Hedging said.

At Phillip Futures, Joyce Liu said that "further cuts" in the yield outlook "might be expected for the remaining of the year due to the hot and dry conditions that US soybean crops had been experiencing"

And Steve Kahler, chief operating officer at a Teucrium Trading, an issuer of exchange traded commodity products, told Agrimoney.com that Corn Belt conditions have been "extremely hot", including a "long stretch of 90-100-degree heat in Minnesota", where he was speaking from.

"There will be a debate over what is happening to yield," for corn as well as soybeans, "in that it has been very hot with limited rain," Mr Kahler said.

Weight vs count

Other analysts highlighted Wasde methodology, with Richard Feltes at RJ O'Brien saying that investors were grappling with the USDA's use of its "second-lowest soybean pod count [figure] in a decade, but second-highest pod weight".

Another broker pointed out that "this year the USDA appears to also be using a large pod weight factor.

"If this happens to be overdone and pod counts are as low as they say they are, we could see some more room for final yield to decline."

'Unusually high uncertainty'

Goldman said that "given weather conditions, there is a strong likelihood that the USDA lowers its soybean pod weight assumption, and in turn its soybean yield".

It lifted its forecast for corn yields in the three-month horizon by $2 a bushel to $12.50 a bushel, and in the six month timescale by $1 a bushel to $11.50 a bushel.

"Uncertainty over the size of the US corn and, especially, soybean crops remain unusually high for this time of year," the bank said.

While imminent data on farmer insurance claims for abandoned acres and on US crop inventories "help lift these supply uncertainties in coming weeks, the distribution of potential outcomes remains wide and will likely continue to support prices".

'Way up in the air'

However, some analysts did take a more cautious view of this uncertainty, with Darrell Holaday at Country Futures, saying that analysis of the varied state-by-state data indicated that the USDA had had "a difficult time" drawing up its soybean yield estimate.

"This number is way up in the air. It is generally supportive, but the soybean yield is still very much a wild card in either direction," he said.

CHS Hedging, while flagging the weather setbacks, said that the updated USDA yield estimate "should take some of the worst case scenarios, sub-40 bushels per acre, off the table".

Allendale last week unveiled an estimate of 39.0 bushels per acre for the yield, drawn from a farmer survey.

Not so bullish…

Furthermore, Goldman's forecasts remain well below the futures curve, with Chicago January futures, for instance, trading at $13.99 ½ a bushel on Friday.

"While we see upside risk to current prices given downside risks to US production, we ultimately believe that lower US exports and another large increase in South American soybean acreage and production will leave US inventories above last year's level and prices below the current forward curve," the bank said.

Goldman also kept its forecasts for corn futures at $4.25 a bushel, again a figure below the futures curve, reflecting an expectation that the US yield will end up at 157 bushels per acre, above the upgraded USDA forecast of 155.3 bushels per acre.

See the original article >>

Great Investors ask the Right Questions

by Jeff Miller

I am continuing my work on the Eight Traits of the Insightful Investor.

These are skills that regular readers of "A Dash" will already know as part of their routine. New readers can enjoy the show, and everyone is invited to join in the comments. Please let me know if you disagree with one of my examples or even if you have a different slant. I am also very interested suggestions for future posts.

Background

I have struggled a bit with getting this theme started. The basic reason is that I really want to be positive.

  1. I embrace the openness of the Internet tradition. I encourage other writers, and we all learn from free exchange;
  2. Information comes from many sources. I have cited cab drivers in the past. Eclectic is a motto for me; but
  3. Credentials matter. The flow of information is a fire hose. The investor really does need to distinguish between those who know something and the pretenders.

The story so far….

My first installment got a nice reception. I showed that there was a missing time frame and a missing series. Some thoughtful commenters wondered how they might know that.

Good point!

There are some key questions that the insightful investor should always ask.

Take a look at a chart that has been prominently featured by two of the most widely-read and respected market sources:

Hussman chart via mauldin

In the description, John Mauldin writes as follows:

"Finally, let's look at two charts that my good friend John Hussman has posted in the past few weeks. John is arguing that stocks are now overvalued, overbought, and overbullish."

Mauldin's readers might easily get the idea that this was a "Eureka" moment – a new and exciting new discovery.

Key Questions

The first step is to avoid a knee-jerk reaction to the powerful message of the chart: Beware of another market top, just like the prior two!

Next, think carefully about the chart.

  1. There are only two prior instances. This is not the basis for statistical inference or quantitative analysis. It is more like looking at two former case studies. How is the current situation similar to 2000 or 2008?
  2. What characteristics define the three highlighted points? How are these distinguished from other times? How were these conditions identified?
  3. What about the pre-1995 period? Were there any prior instances that might have been "false positives?"
  4. Were the two former tops predicted in real time?

Doing Your Homework

With the questions in mind, it is possible to do your homework. Since Dr. Hussman has been publishing his views for a long time, it is easy to discover when the "overvalued, overbought, and overbullish" meme began. You can search for those terms and specify specific time periods. I went back year-by-year to find the first instances, leading to this result:

Accurate Hussman Chart

In my version, the red arrow shows when that theme first appeared. It has been a fixture of the Hussman commentary for over three years. If you saw the chart in this form, it would not carry the same persuasive power. Most people would conclude that the methods underlying the chart are in need of revision. That is beyond the scope of the current post, but it is a valid subject for future discussion.

Conclusion

As I emphasized in the introduction, I am not suggesting that either Mauldin or Hussman is intentionally misleading readers. It is easy to get locked into a viewpoint when you really need to step back and examine the fundamental assumptions. The lesson for readers – and we will see this repeatedly – is that even the leading sources provide evidence that deserves further scrutiny.

See the original article >>

Joe Friday…Friday the 13th 2013 could be near an important price point!

by Chris Kimble

CLICK ON CHART TO ENLARGE

What does the 1974 Low, 1987 Crash, 2000 High have in Common? Are they some of the most memorable highs and lows over the past 40 years? Yes, Yes & Yes!

Do they have anything else in Common? Yes!  Each of these important highs/lows took place 13-years apart.

Joe Friday....Friday the 13th 2013 could be near another important/memorable price point in history!

See the original article >>

Ike’s Warning

by Bill Bonner

Ike’s Warning

We must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists, and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals so that security and liberty may prosper together.

– Dwight D. Eisenhower’s farewell address to the nation, 1961

Whoa! Wednesday was another good day for the Dow. It jumped 135 points. Gold, meanwhile, was flat. We caution readers against jumping into US stocks. This trundling buggy could overturn at any moment. Margin debt is well above its peaks before the dot-com crash and the Lehman crisis. And P/Es are so high – 24% above the historical average on a 12-month reported earnings basis – it is almost certain that sellers will fare better than buyers. Moms and pops are back in the market. It’s time for serious investors to bug out.

We leave our “Crash Alert” flag up us a warning.

And we change the subject…

The Most Dangerous Zombies of All

When President Eisenhower made his parting speech to the nation, many people were puzzled. Eisenhower was a career military man. How could he be so disloyal to his professional class, they wondered? But Ike knew something most people don’t. He understood warmongers. And he knew that armed zombies are the most dangerous zombies of all. We saw Ike in the flesh many years ago, just before he died. We were visiting our father in the Walter Reed military hospital in Washington. We were walking down the corridor with Dad – a World War II veteran – when he suddenly stood up straight and saluted. It had been at least 20 years since he had worn a uniform, but the reflex was still there. When General Eisenhower whisked by us in a wheelchair, Dad stood to attention.

Now another 40 years have passed. Eisenhower’s warning, ignored and forgotten, has turned into a curse. For reasons of its own – money, power, status – the military-industrial complex pulls us into war after war.

Our old friend Steve Chapman at the Chicago Tribune:

The US boasts the most powerful military on Earth. We have 1.4 million active-duty personnel, thousands of tanks, ships and planes, and 5,000 nuclear warheads.

We spend more on defense than the next 13 countries combined.

Since 1991, notes University of Chicago security scholar John Mearsheimer, the US has been at war in two out of every three years …

We are more secure than any country in the history of the world. What almost all of our recent military interventions have in common is that they involved countries that had not attacked us: Libya, Iraq, Serbia, Haiti, Somalia, Panama, Grenada and North Vietnam.

With the notable exception of the Afghanistan invasion, we don’t fight wars of necessity. We fight wars of choice.”

Why do we choose to stick our noses in other peoples’ business? What reward do we get for the trillions of dollars we spend doing so… and for the young men who come home with missing limbs and suicidal tendencies? Why do we do it? Hawks, doves, geopolitical strategy, national security – none of them have anything to do with it. They are just wind. BS. TV babble. The real reason we spend so much and get ourselves into so many wars is that we have developed a class of military zombies. Their careers, their wealth, their social standing, their sex lives – all depend on meddling in other peoples’ affairs.

Aspiring to Empire

In 2006, we wrote a book with Agora Financial publisher Addison Wiggin called Empire of Debt. We explained the phenomenon as something great powers inevitably do. As soon as they can push other people around, they aspire to empire, we said. In a new book, not yet released, we explain it in another way …

Humans developed into what they are in the Paleolithic period. Back then, based on bone records and guesswork, if the men of a tribe weren’t ready to defend themselves, fiercely and without question, the tribe might not survive. Their women and their territory might soon be taken from them. Those pre-civilized instincts are now hardwired into the modern human brain. In a modern context, America’s wars seem silly, stupid and counterproductive. But they are as popular as the Super Bowl. Both of those explanations have merit. But Ike understood it differently. He saw how powerful internal forces drive a military machine to become an empire… and to make war.

An educator will try to aggrandize himself by insisting on more education. A butcher will want more meat on the menu. And a man with a gun in his hands will declare – with a straight face and in solemn sincerity – that we need to kill someone in Syria to protect our manhood!

See the original article >>

Corn extends drop to near 4-week low as USDA sees more supply

By Phoebe Sedgman and Ranjeetha Pakiam

Corn dropped for a second day after the U.S. Department of Agriculture said domestic production will be bigger than forecast, boosting reserves.

The contract for December delivery lost as much as 0.6 percent to $4.6325 a bushel on the Chicago Board of Trade and was at $4.635 by 10:51 a.m. in Singapore. Prices tumbled to $4.5625 yesterday, the lowest since Aug. 15, and are set for a second weekly retreat.

U.S. farmers will collect 13.843 billion bushels of corn in 2013, the most ever and up from the 13.763 billion estimated last month, the USDA said yesterday. The average projection of 34 analysts surveyed by Bloomberg was 13.641 billion. Domestic output will rise 28 percent from the drought-reduced harvest last year, USDA data show. Global inventories will jump 24 percent to a 12-year high, it said.

“It was certainly above expectations -- most people were expecting a cut in corn yields and we had a slight increase there,” Michael Pitts, a commodity sales director at National Australia Bank Ltd., said from Sydney today. “We’re now at a very ample, sufficient balance sheet for corn. Overall, that will have a negative effect on other grains and oilseeds.”

Soybeans for delivery in November dropped 0.4 percent to $13.905 a bushel. Prices climbed 2.8 percent yesterday, the most since Aug. 26, after the USDA cut its forecast for the domestic crop by 3.3 percent.

“We had a large soybean rally last night and this is maybe just a bit of profit-taking on the back of that as corn pressures the market overall,” said Pitts.

Farmers will harvest 3.149 billion bushels of soybeans this year, down from 3.255 billion estimated in August, the USDA said. Analysts surveyed by Bloomberg had forecast 3.134 billion bushels. Yield forecasts were cut in nine Midwest states where drought expanded to 32 percent of the region on Sept. 10 from 2.2 percent three months earlier.

Wheat for December delivery fell 0.9 percent to $6.4725 a bushel.

See the original article >>

What's Up With Gold?

by Marketanthropology

It's hard to know exactly what you're looking at - when it's sitting right smack in front of you.
There's a complexity up close that could be confused with many different things. 
Fractals - you ask?
No - we're talking about deflation, disinflation and inflation. 
Last June when the Fed floated the taper trial balloon in May, we had speculated it was akin to lighting an escape fire from the disinflationary tide that was starting to uncomfortably rise throughout the markets. 
__________________

"Whether lighting the brush in the bond market here was a sign of desperation, brilliance or causal coincidence is hard to say at this point. We are reminded of the true story of the Mann Gulch Fire, that although tragically took the lives of thirteen young firefighters in Montana in 1949, rewrote the training protocols for dealing with a fire that was imminently about to overtake its handlers.
To make a long but fascinating story short, a creative and desperate smokejumper named Wagner Dodge lit a fire directly in front of him before the rapidly approaching forest fire overtook him and his crews position. After lighting the fire, he then motioned for his men to step into the newly lit area. Unfortunately, likely believing he had lost his mind - they refused and attempted to outrun the fire, which was burning quickly up the hillside. In the end, Dodge survived nearly unharmed - while the fire killed thirteen of his men. 
Reigning in expectations of stimulus by the Fed in the face of inflation data flirting with historic lows and a global economy dangerously close to stall speed might appear reckless at face value. With that said, the Fed perhaps succeeds at killing two birds with one stone by reigning in risk appetites at large, while also changing the perception from one of disinflation to inflation's right around the corner.
Reflexivity burns bright - assuming we don't perish in the fire. - Lighting an Escape Fire
__________________
Today, standing with several months of perspective between the Fed's first lit matches - the embers have started to cool. 
Is the economy still breathing? 
Yes. 
In fact, we would argue that to a greater degree participants and economists concerns with disinflationary trends and the specter of deflation will soon abate and be replaced with rising inflation expectations. 
The escape fire worked.  
Below is an explanation from the astute folks on The Wall Street Journal - MoneyBeat desk:
__________________
Could the Fed's Taper Prove Inflationary?
Could the Federal Reserve’s decision to slow the pace at which it provides the economy with new liquidity–the so-called taper–force up global inflation?
Paradoxical as this seems, there are a couple of mechanisms by which it can happen.
In emerging markets, the inflationary taper effect has already kicked in. The currencies of many developing economies have been overvalued during the past few years, boosted by hot money inflows. This hot money was a product of central bank liquidity–primarily provided by western central banks trying to shore up their flagging economies–desperately seeking out extra return. But as the hitherto limitless expansion of central bank liquidity winds down, those hot flows have reversed. The upshot has been collapsing emerging market currencies and sudden inflationary spikes in those economies.
Inflation, meanwhile, has been well behaved in big western economies, held down by large rates of unemployment and plenty of spare capacity.
Insofar as the taper anticipates a return to more normal rates of growth, inflation should also start to return to normal. If, as seems likely, the financial crisis destroyed capacity, then inflation should kick in at higher rates of unemployment than in pre-crisis years.
But the taper could well accelerate that growth. As businesses and households anticipate rising interest rates they’ve pulled forward their investment decisions. This, process could well prove to be lumpy. U.S. house prices have jumped this year, though mortgage demand has been hit by the recent rises in market interest rates.
The degree to which credit growth fuels itself will be interesting. As the economy picks up, so too does credit demand. The banking sector’s massive reserves held with the Fed becomes a base against which new loans can be made. Lending begets growth begets lending. - WSJ Allen Mattich 9/5/13
__________________
...Begets inflation. 
So we ask:
Despite the air pocket that the precious metals sector encountered this week (which to be honest was telegraphed in most of our comparative charts), do market participants really expect that gold and silver will continue to move lower in an economic environment - both here and abroad - that finally finds rising inflation in the shadow of the greatest world-wide monetary experiment ever attempted? 
(Remember, this is coming from someone who was a precious metals bear from the spring of 2011 to the spring of this year.) 
Despite its limited ability to affect real growth in our economy, from a purely psychological perspective QE has always introduced a level of hysteria and uncertainty that has driven certain markets to unfounded extremes. 
2004 - Hyperinflation is coming! 
2007 - Hyperinflation is coming!
2010 - Hyperinflation is coming!
Regardless of the ideas validity, when the needle starts moving across the continuum towards the inflationary side of the field - where do you think market psychology will take the precious metals sector this time around? How about the currency of the editors and authors of our monetary manual?
Perhaps those ghosts have been exorcized by the considerable crowds remaining on the wrong side of the tracks over the last few years - but we doubt it. 
They'll likely be back with a vengeance this time - and with a tailwind. 
__________________
Below are several updates from our precious metals and US dollar index series. 
For further explanation of the rationale behind these charts - see our most recent notes:

Quoting Mr. Mattich again, he succinctly sums up the relationship expressed in the chart above and the comparative we have contrasted between the financials and the precious metals sector.

"As the economy picks up, so too does credit demand. The banking sector’s massive reserves held with the Fed becomes a base against which new loans can be made. Lending begets growth begets lending."

...Begets inflation.

As we pointed out in the past and what led us to expect the disinflationary tide before most this past winter - the miners lead spot prices - which lead inflation expectations. Both on the way down and on the way up.  

What does oil, Apple and the gold miners have in common?

Growth - or lack there of.

It isn't a coincidence that Apple and the precious metals sector have trended together over the past year and that their respective structures and momentum profiles have correlated quite closely with our historic comparative with oil, circa 2008/2009.

Like the recovery in oil and inflation expectations in the back half of 2009, we see both assets rekindling growth through 2014.

See the original article >>

BofA-Merrill: “When Excess Liquidity Is Removed, It Will Get ‘CRASHy’”

by AuthorWolf Richter

(Dr. Quest, a California money manager, contributed much of this information).

With Q3 GDP growth tracking 1.6%, according to BofA Merrill’s estimate last Friday, Wall Street strategists – whose bullishness has been deafening, despite realities on the ground – are starting to hedge their bets with some unusually candid analysis.

So today, Jim Reid, Nick Burns, and Seb Barker of Deutsche Bank released “A Nominal Problem,” Deutsche Bank’s 85-page annual Long-Term Asset Return Study. Very predictably, and in line with Wall Street’s addiction to the Fed’s trillions – which the Fed is now thinking about “tapering” out of existence – they clamor for even more QE:

Given the structural issues that we think will continue to hold back growth, unconventional monetary policy may actually need to increase in the years ahead.

But... “Expanding ‘traditional’ QE might not be the answer,” they write. They want a “blurring of lines between governments and central banks.” They specifically mention Abenomics as an example to follow, whose utter monetary and fiscal recklessness rule Japan today, to the benefit, as we have seen, of the largest banks and Japan Inc., but practically no one else [“We Don’t Feel Any Impact Of Abenomics Here”].

“Globally, the next few years may bring politicians and central bankers closer together,” the authors explain. They even see something no one has invented yet, a “monetary policy that directly targets growth over financial assets.”

Thus, Deutsche Bank admits that the global money-printing binge and zero-interest-rate policies have merely inflated financial assets, causing bubbles everywhere, but have done little for real economic growth. And in between the lines it agonizes over the corollary: if QE caused the assets bubbles, what will happen to them when QE gets tapered out of existence?

Other choice quotes (emphasis added):

We’ve previously been of the opinion that the end-game to the 2008 financial crisis is notably higher inflation at some point in the second half of this decade. We still think this is likely but only if unorthodox monetary policy continues over the next few years.

Overall we think many global assets have been inflated by QE and central banks may need to spend the next few years engineering higher nominal GDP to justify such valuations.

    Plaintext: Global assets are overvalued.

    They’re saying: To keep these lofty valuations inflated at their current levels, rather than let them crash, central banks must create “nominal” GDP growth – in other words, inflation. Sufficient inflation will drive up nominal GDP but will do nothing for real GDP. For example, an asset class that has been inflated to double its economic value? No problem. Just create 100% inflation over a few years, and everything is back in line – except that that asset lost half of its real value to inflation, but it looks stable on paper. This sort of desperate thinking shows how convinced the authors are that assets are overvalued. They’re struggling to find solutions, other than a crash.

    And they’re outright bearish on bonds and stocks:

    In a US 60/40 equity/bond portfolio, our mean reversion model suggests 10-year annualized returns of only 2.77% p.a. – the fourth-lowest in the 143 years since 1871

    Indeed our mean reversion exercise suggests that projected 10-year US equity returns are back down to an annualized 3.3% over the next 10 years.

      Forecasting a 10-year return on US stocks of 3.3% per year, which is about the typical rate of inflation in the US, is equivalent to saying that current prices are substantially overvalued.

      The Next 5 Years: Curb Your Enthusiasm

      Another report, “Tinker, Taper, Told Ya, Buy,” by Michael Hartnett (Chief Strategist, BofA-Merrill), also released today, hints at the unstated, unexamined alternative that the US might have followed Japan into a slow-growth era. Excerpts (emphasis added):

      After Lehman

      An unprecedented financial and economic crisis, crystallized by the September 15th 2008 bankruptcy of Lehman Brothers, was followed by an unprecedented monetary policy response, which in turn has been followed by unprecedented bull markets in bonds, stocks, and now real estate. Wall Street has soared, but Main Street has soured. The exceptional “sweet spot” engendered by generous central banks and selfish corporations has been great for owners of capital, but bad for labor....

      The Next 5 Years: Curb Your Enthusiasm

      Significant monetary stimulus, the end of fiscal austerity, a booming housing market, a cheap dollar, record corporate cash balances – if the US economy does not significantly accelerate in coming quarters, it never will. We assume it will, and....

      Asset price will not do as well in the next 5 years, no matter what the “nouveau bulls” say. Central banks will be less generous, corporations less selfish. And when excess liquidity is removed, it will get “CRASHy”. The dollar and (temporarily) volatility will be the last assets to surge as Deleveraging ends and an era of Normalization begins.

      Whether or not – or how – these scenarios will play out is less important today than the message in between the lines: These Wall Street bulls are part of the phenomenal hype machine that has, in conjunction with limitless “whatever-it-takes” QE, inflated the very bubbles that they’re now fretting about, and that they’re now trying to figure out how to navigate. The fact that they’re now pointing out some very ominous clouds ahead gives pause. Are they telling their clients in between the lines to run for cover?

      Dizzying home-price increases fused with pandemic hype and trillions from the Fed into a self-propagating force. It’s now accepted that housing will recover all the way to where it was in 2006, a sign the Fed has done its job, that it cured the ill that has dogged this economy for so long. Prices of 2006 are no longer “the crazy peak of the housing bubble” but a goal. Read... Housing Bubble In Full Bloom, Zany Price Increases, And Now A Sudden Slowdown

      See the original article >>

      Five years in charts

      by Economist

      The world of banking has changed dramatically, if not radically, in the five years since September 15th 2008, the day Lehman Brothers went bust. American and European banks used to dominate the list of the world’s biggest banks (see chart 1); the Chinese have since scaled the charts. The balance-sheets of Europe’s behemoths have got quite a bit smaller (chart 2); consolidation has made America’s giants bigger than ever. Western banks are generating much lower returns on equity than they did in the years before the crisis (chart 3), in part because the industry is being forced to fund itself with higher levels of equity than in the past (chart 4). So cost-cutting is much more important than it was: compensation ratios at investment banks have fallen (chart 5). But those who want a complete reshaping of finance can still argue that change has not gone far enough: more people work in finance in London in 2013 than did in December 2007 (chart 6).

      See the original article >>

      Thursday, September 12, 2013

      Nasdaq Presses on Without Apple Support

      By: PhilStockWorld

      What an exciting index!

      On Tuesday, as one of our "5 More Trade Ideas that make 500% in an Up Market", we went long on 16 QQQ Jan $75/80 bull call spreads at $3 ($4,800) and paid for them by selling 2 ISRG 2015 $300 puts for $23.50 ($4,700) for net $100 on the $8,000 spread in our virtual Short-Term Portfolio.

      Yesterday morning, however, AAPL decided to take a nose-dive pre-market and, because we were stuck in the spread (as well as long AAPL spreads), I sent out an alert to our Members early in the morning (7:22) to cover with short Nasdaq Futures:

      So shorting /NQ at 3,175 is a good way to protect the AAPL longs in the STP. The Nasdaq Futures pay $20 per point so 10 contracts pays $2,000 on a 10-point drop and a tight stop over 3,175 limits the losses.

      We hit our $2,000 goal (3,165) at 9:35, just minutes after the market opened, so my first comment to our Members for the morning was:

      That's the $2,000 goal on the short /NQ futures and the weekly $495 calls can be bought back for $.40 so done with those in the STP and the $490 calls are $.72 and we'll keep our fingers crossed that we get more of our $2.50 back.

      That's how easy it is to use the Futures for quick hedges on your positions when you have market-moving news outside of trading hourse. While we discuss many things at our upcoming Las Vegas seminar, nothing is more important for active traders than learning how to use this valuable tool – the same one that lets us use the energy markets like an ATM!

      The best part is, we got out at just the right time, went even longer on the dip and now we're right back on track. As I keep saying to our Members, it's easy to make money in a mindlessly bull market and, since we already hedged for a downturn, we can now get more aggressively bullish. To that end, we added a big long position on AAPL in our beleagured STP and who should join us but my friendbuddypal, Carl Ichan, who liked my trade so much, he went on CNBC and called it a "no brainer."

      Carl even pushed my proposal that AAPL just take their $150Bn pile of cash and buy back their own stock. I've said this for ages (since $400) but, even at $467, AAPL has only a $460Bn market cap against $40Bn in CURRENT profits and buying back 1/3 of the company for $150Bn of cash that traders are currently ignoring anyway drops the market cap to $300Bn but has no effect on the $40Bn in sales (p/e of 7.5), not to mention their normal $12Bn dividend would shoot up to 4%.

      Hell, I say cut the dividend and borrow $300Bn at 3% and take the whole damned thing private if no one else wants to buy them with a p/e of 7.5! The trading public doesn't DESERVE to own AAPL if they don't think it's worth more than $500 a share. End of rant.

      Meanwhile, in the rest of the World: The Nikkei dove 380 points (2.5%) from Tuesday's high to 14,300 as the Yen rose (lower) 1.3% from 100.60 to 99.30 in the second easiest Futures trade on the planet (shorting oil at $108.50 (/CL) this morning is still #1). So let's see, a 10% run up and a 2% pullback is 20% of that run and a 20% overshoot is another 0.4% – who'd have thought, right? This is why our 5% Rule™ didn't used to have any charts – IT'S JUST MATH!

      15,000 – 10% is 13,500. 13,500 + 10% is 14,850 and 20% of the 1,350 run is 270 points below 14,850, which is 14,580 – which is, as you can see right where the Nikkei hit resistance that was not futile. It's the same place it failed to take back on the first bounce off 13,500. So way back in July the fate of the Nikkei was already sealed but, of course, we knew that – we were shorting the Hell out of the Nikkei back then!

      Chart In FocusBack home we're ignoring something that needs to be taken more seriously – a liquidity crisis! As you can see from McClellan's chart on the left, Closed End Bond Funds have been in rapid, steady decline since May. McClellan warns this is a very reliable "canary in the coal mine" stating:

      In a period of constrained liquidity, the big cap piggies can still garner their share of the milk, while the runts go hungry. That is why it is useful to watch the health of the bond CEFs and the high-yield bond funds. They are the least deserving of issues, and as long as they are doing okay that means liquidity is not a problem. When they start to suffer, the message is that liquidity is getting tight, and the least deserving of issues are starting to suffer. Eventually such liquidity problems come around to bite the bigger capitalization issues, and that is why this is such an important item to keep watch over.

      History shows that the periods when the bond CEF A-D Line is weak are periods when the stock market is in trouble. If there is a stock market dip which is not echoed by the bond CEF A-D Line, usually stock prices recover quickly. But signs of weakness in the bond CEF A-D Line can be a big indication of liquidity problems.

      Just something to consider, before we get too irrationally exuberant.

      See the original article >>

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