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).

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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.

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Corn, wheat prices dip after US lifts supply hopes

by Agrimoney.com

Corn and wheat futures extended losses after US farm officials lifted estimates for supplies of both grains – in contrast to a cut to expectations for inventories of soybeans, which maintained small price gains.

The US Department of Agriculture, in its much-watched monthly Wasde crop report, surprised investors by raising its estimate for the domestic corn harvest by 80m bushels to a record 13.843bn bushels, rather than making the small downgrade they had expected.

The revision reflected a upgrade of 0.9 bushels per acre, to a four-year high of 155.3m bushels per acre, in the yield estimate, with USDA officials noting that the crop was in far better condition than a year ago "despite soil moisture concerns".

Although the US had used up more corn in the newly-finished 2012-13 season than officials had thought, in making ethanol and in exports, the extra output prompt the USDA to lift its estimate for domestic inventories at the close of 2013-14 by 18m bushels.

It also, unexpectedly, raised its forecast for world inventories, highlighting too lower consumption in Canada, which is enjoying a bumper wheat harvest.

Canada upgrade

Indeed, the USDA cited an upgrade to its estimate for the Canadian wheat crop to a 22-year high of 31.5m tonnes as a key reason behind its decision to lift its estimate for world wheat production to a record 708.9m tonnes.

"Production is raised 2.0m tonnes for Canada as cool July weather supported flowering and reproduction, and abundant soil moisture and favourably warm, dry weather in August aided grain fill and maturity across the Prairie provinces," the department said.

With the estimates for European Union and Ukraine harvests also upgraded, the estimate for world stocks at the end of this season was lifted by 3.3m tonnes to 176.3m tonnes.

This included a small upgrade to the forecast for US inventories, reflecting increased imports from Canada.

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British pound faces bearish reversal on Elliott Wave and Fibonacci

By Gregor Horvat

The British pound (FOREX:GBPUSD) is in a bullish mode and reached our projected zone for this week (1.5800-1.5900), which is actually a very important resistance zone in combination with the wave principle and Fibonacci levels. As you can see on the chart, we are tracking a huge wedge pattern called an ending diagonal, which usually predicts a very strong reversal. With that said, we are keeping an eye on potential sell-off on this pair from current resistance zone. This sell-off can happen soon if we consider that prices are in late stages of wave 5 now, testing 61.8% Fibonacci projection compare to wave 3 and also approaching 161.8 % extension of wave 4.

However, as always, only price can confirm the direction you anticipate. In other words, we need a five-wave decline from the highs to confirm further bearish waves for the pair. Only then trader could be interested in short opportunities; until then stay aside.

GBP/USD 4h Elliott Wave Analysis

What is Diagonal Triangle?

A diagonal is a common 5-wave motive pattern labeled 1-2-3-4-5 that moves with the larger trend. Diagonals move within two contracting channel lines drawn from waves 1 to 3, and from waves 2 to 4. There are two types of diagonals: Leading diagonals and ending diagonals. They have a different internal structure and are seen in different positions within the larger degree pattern. Ending diagonals are much more common than leading diagonals.

Ending  Diagonal

An ending diagonal is a special type of pattern that occurs at times when the preceding move has gone too far too fast, as Elliott put it. A very small percentage of ending diagonals appear in the C wave position of A-B-C formations. In double or triple threes, they appear only as the final "C" wave. In all cases, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement.

• Structure is 3-3-3-3-3
• A wedge shape within two converging lines
• Wave 4 must trade into a territory of a wave 1
• Appears primarily in the fifth wave position, in the C wave position of A-B- C and in double or triple threes as the final "C" wave

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Dismantling the Chinese cotton monster

By Sholom Sanik

Turning bearish on the cotton market back in July after a long stint of bullishness gave us a severe case of whipsaw. December cotton (NYBOT:CTZ13) sailed right through our 88¢-per pound buy stop, on its way to 93¢. Within a few days of the peak, prices plunged, on their way back to 82¢.

During the planting-decision season, there was little incentive for farmers to plant a large cotton crop. Global inventories were burdensome, to say the least, and soybean planting was a more profitable alternative. The most recent estimate for U.S. cotton acreage was 10.2 million acres, down from 12.31 million acres in 2012-13 and 14.74 million acres in 2011-12. The smaller crop seemed adequate to meet both domestic and export requirements.

As the growing season progressed, however, the crop was hit with bad weather. Yields deteriorated, and estimates for a high abandonment rate grew. The Aug. 12 USDA monthly crop report lowered the crop estimate to 13.05 million bales, down from the 13.5-million-bale July estimate. More importantly it was significantly below the average street guesstimate of 13.75 million bales. The abandonment rate rose to 25%, about the same as last year, but not as bad as the 36% seen in the disastrous 2011-12 crop year. Still, it was much worse than the previous 10-year average of only 10%.

Weather has improved since the August crop report and is likely to be reflected in the September crop report estimates, but much of the damage is likely done.

The status of the U.S. crop, however, is merely a diversion from the broader issues, which are decidedly bearish. Actually, to be more accurate, it should be issue, in the singular.

There is an ongoing uncertainty regarding the future of Chinese imports. As we discussed in our most recent article on cotton, Chinese carryover stocks have ballooned to over 58 million bales. That’s up from 50 million bales in 2012-13 and dramatically higher than 31 million bales in 2011-12.

The Chinese government is reportedly in the process of overhauling its stockpiling policies, which effectively made it cheaper for cotton users to import rather than buy domestically grown cotton. The USDA estimates that Chinese imports from all sources will fall by close to 50% from 2012-13, although some analysts see continued robust Chinese imports for the foreseeable future. Hard evidence suggests that Chinese imports have already slowed down materially. For the new 2013-14 marketing year, which began Aug. 1, total Chinese purchases from the U.S., including shipped and unshipped, total 488,000 bales. In the comparable period last year, 1.821 million bales were sold to China.

The forecast for global ending stocks was revised in August to 93.77 million bales, or 85.36% of usage, down slightly from the July estimate of 85.9%. Lower production estimates for the U.S. and China were partially offset by an increase in the estimate for carry-in stocks from the 2012-13 marketing year. But with the magnitude of the overhang we’re looking at, the downward revision in ending stocks is largely meaningless.

If China were to start chipping away at its stockpile, the market would collapse. The rally that stopped us out of our short position was the result of an unwarranted focus on the U.S. crop. We do not believe these price levels are sustainable. Cotton is a particularly volatile market. Look to reestablish conservative short

positions in December cotton on rallies. Place initial stops at 90¢ per pound, close only. Risk averse accounts, not prepared to risk such large losses, should avoid the trade.

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How Japan Pretends To Fight Debt And Deflation, But Doesn't

by The Automatic Earth

Ansel Adams Biology class 1943
Japanese school at Manzanar War Relocation Center, California

Let's see if I can keep this nice and short: in my view the article below from Reuters correspondents Yoshifumi Takemoto and Yuko Yoshikawa, while looking innocent enough at first glance, in fact borders on nonsensical disinformation.

The background is familiar: Japan has been in deflation for decades, falling prices, falling wages, falling spending (velocity of money). Then recently, Shinzo Abe became PM and started spending big time (Abenomics), in yet another attempt to halt the deflation. And then today we read this:

Japan mulls $50 billion stimulus to offset sales-tax hike

Japan is considering $50 billion in economic stimulus to cushion the blow of a national sales-tax increase that is meant to rein in the government's massive debt, people involved in the decisions said on Thursday.

Prime Minister Shinzo Abe is set to raise the tax to 8% from 5% in April, rejecting calls by some advisers to delay or water down the fiscal tightening in order to keep the economic recovery on track.

The tax hike is the biggest effort in years by the world's third-largest economy to contain a public debt that, at more than twice the nation's annual economic output, is the biggest in the world.

But Abe has said he must balance the long-term need to balance the budget against his top priority of breaking Japan free from 15 years of deflation and tepid growth. To offset the drag from the tax increase, Abe this week instructed his government to craft a stimulus package by the end of the month.

One option is a spending package worth 5 trillion yen ($50.01 billion), one of the sources said. The government estimates that each 1 percentage point rise in the tax will generate roughly 2.7 trillion yen in revenues.

Chief Cabinet Secretary Yoshihide Suga said Abe has not yet decided on the tax increase, a move expected on October 1 after a key survey of business sentiment from the Bank of Japan. Suga, the top government spokesman, said Finance Minister Taro Aso and Economics Minister Akira Amari will work out the size and contents of any package.

Aso's ministry, concerned about getting Japan's finances in order, is a strong proponent of the tax increase and wants to minimize any further spending. Amari has said the economic package must be bigger than 2 trillion yen to avoid an economic relapse.

Options include payments to lower-income people to promote housing purchases, tax breaks for companies that increase capital spending and possibly a one-off income-tax cut, sources said.

The prime minister has been proceeding cautiously since many politicians blame the last sales-tax hike, in 1997, for plunging the country into recession. The economy has improved smartly since Abe came to office in December on a platform of fiscal stimulus, monetary easing and growth-promotion measures, but the rebound remains fragile.

With a big upward revision to second-quarter GDP this week and the feel-good boost of Tokyo winning the right to host the 2020 summer Olympics, "the justification for delaying or changing the tax hike disappeared," one source said.

Political leaders from a spectrum of parties agreed last year to double the sales tax to 10% in two stages by October 2015. But the law requires the government to certify that the economy is strong enough to weather the drag from the tax hike.

For starters, it's of course kind of funny to see that the Finance Ministry wants to "minimize any further spending", while the entire Abenomics idea is based on spending more, and everyone recognizes that "the rebound remains fragile". But that's not what irks me most.

If you look through the numbers here, you see that the tax hike from 5% to 8% is supposed to bring in 3 times 2.7 trillion yen, or 8.1 trillion yen, about $81 billion. Abe wants to spend $50 billion of that on more stimulus, so net revenue is $31 billion. This is ostensibly "meant to rein in the government's massive debt". However, according to Wikipedia, Japan's public debt was over 1,000 trillion yen, or $10.46 trillion, for the first time ever on June 30, 2013 ("twice the nation's annual economic output").

Which raises the question how on earth $30 billion can "rein in" a debt of $10.46 trillion. If I'm not mistaken, that comes to just 0.28%. Maybe something got lost in the translation of the term "rein in", but even then. Note: the article calls it "the biggest effort in years by the world's third-largest economy to contain [the] public debt".

And sure, there's a little more in the pipeline. If I may quote Wikipedia again: "In order to address the Japanese budget gap and growing national debt, in June 2012 the Japanese diet passed a bill to double the national consumption tax to 10%. The new bill increases the tax to 8% by April 2014 and 10% by October 2015." So yeah, maybe the tax hike increases revenue by 0.5% of public debt or so 2 years from now. Big whooping deal.

You know what I thought, right off the bat, even before I'd seen the exact numbers, and what I think even more now that I've seen them? That a higher sales tax may not have much noticeable effect on public debt, but that it does have such an effect on inflation numbers. Well, at least the faulty ones everybody likes to use.

If deflation in Japan ranks somewhere in the 2% per year range, a 3% across the board sales tax increase sounds like a gift from heaven for Mr. Abe. As long as he can count it towards Japan's inflation numbers.

The problem with that it it's silly. And wrong. Because if you do that, and make no mistake, it's generally accepted to do it, any government on the planet could solve inflation and deflation problems by simply raising or lowering taxes. If this were true, every government through history would have tried that, and twice on Sunday. The reason it does not work is the same reason why "cost of living" numbers or rising consumer prices do not tell you what a nation's real inflation is.

Inflation and deflation are defined by rising or falling money and credit supply multiplied by the velocity of money. If you can't raise the velocity of money, i.e. you can't force people to spend more, you have no real control over inflation/deflation. If the Japanese people pay for that tax hike by spending less elsewhere, as a government and a central bank you're stuck. Japan's successive governments over the past 20-30 years can tell you all about it. And they haven't succeeded in getting people to spend more in decades (not for lack of trying), so why should they this time around?

Still, that obviously doesn't keep Abe from performing his sleight of hand, nor the media from reporting on it as if it were what it is not. But at least you know now. Japan's sales tax hike has hardly any effect on public debt (which in itself is a very strong indication of how huge the debt really is, if that wasn't clear yet), but it does push up inflation, provided you get everyone to use the faulty "cost of living" definition of it. And then, if you're Shinzo Abe, you - at least temporarily - get to look like a very smart man, able to solve the deflation problems your nation has suffered for a long time. Even if that's not at all what you actually do. Politics equals Kabuki.

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