A Late Weekly Update Puru

After dark pessimism last autumn, the pendulum has now swung towards optimism and extreme greed.

Over the past few months, we've seen a big rally in risky assets (emerging markets, commodities, junk bonds and major currencies) and on the flip side, we've seen sell-offs in US Treasuries, US Dollar and Japanese Yen. A swift economic recovery is now 'baked in the cake' and most investors seem to be convinced that the worst is over. Put simply, the whole world is (once again) 'long' inflation and 'short' the US Dollar. And as per our expectation, policymakers are fanning the flames of enthusiasm and taking credit for solving the crisis.

In our view however, the market is wrong to worry about immediate hyperinflation and the 'green shoots' hype is pure nonsense. In the real world, unemployment is still rising (America lost another 627,000 jobs last week), millions of people are losing their homes, nominal wages are in decline and private-sector debt in the West is contracting. All these negative forces are ensuring that the policymakers' wishes of further inflation aren't coming true as the private-sector debt bubble isn't expanding. Remember, central banks can take the horse to the water but they can't force it to drink!

In light of the above facts, we are concerned that this year may turn out to be a repeat of last year. It is likely that when investors realise that the economy is in fact getting worse and hyperinflation is a myth, there could be another round of panic selling in the following months. In such an event, emerging markets and commodities may be hit especially hard and we could see sharp rallies in long dated US Treasuries, US Dollar and Japanese Yen. It is worth noting that despite all the bullish noise, the US Dollar isn't falling apart and the Japanese Yen is also showing signs of firming. And over the past few trading days, long dated US Treasuries have carved out a bottom. Furthermore, over the past couple of days, credit spreads have started to widen again and this may be a sign of distress in the credit markets. In any case, we maintain our view that isn't the time to be taking any risk and investors may want to liquidate most of their 'long' positions. It looks as though most of the 'risky assets' made an intermediate-term top earlier in the month and the best outcome here would be a sideways grind. However, another massive sell-off can't be ruled out. So, our recommendation is to get out of harm's way.

Over in the commodities arena, crude oil and copper are in the process of forming a top and they are likely to decline over the following weeks. So, investors may want to liquidate their trading positions. Natural gas is in the process of forming an important low and we still have exposure to this commodity. After a base formation period, we anticipate a big rally in the price of natural gas. In the precious metals department, both gold and silver are caught in a sideways grind and we expect the consolidation to continue for a few more weeks. During this correction phase, we expect silver to underperform gold but once a new upleg commences, both silver and gold are likely to rally.

In the world of currencies, the US Dollar and Japanese Yen are trying to bottom out and all other currencies are vulnerable. Additional distress in the credit markets may be the catalyst which ushers in the next contraction and such an outcome would benefit the US Dollar and Japanese Yen. So, our suggestion is to keep your cash in these pieces of IOUs.

Finally, in the fixed income market, government bonds are in the process of bottoming out. As per our expectation, yields have dropped off over the past few days. At the time of writing, the yield on the 10-year US Treasury Note is 3.55% and the yield on the 30-year Treasury Bond is 4.33%. Considering the pathetic economic environment and negative consumer price inflation in America, real yields are currently attractive and we expect them to decline further over the following months. Remember, at the end of last year, fear drove yields to multi-decade lows and another deflation scare later in the year could do the same again. At this juncture, we are very 'long' US government bonds.

Special Update from Puru

The markets have taken a turn for the worse and it looks as though an intermediate-term top is now in place. Yesterday, global markets fell hard and it seems as though the expected summer contraction has commenced. Yesterday's bearish announcement by the World Bank was the catalyst of the sell-off and weakness continues in Asia this morning. Furthermore, other danger signs have popped up over the past few days (strong US Dollar, rising Japanese Yen, rising gold/silver ratio) and this is enough for us to run for cover.

Accordingly, we're liquidating all our remaining 'long' positions in emerging markets and commodities today (with the exception of physical natural gas). And we're allocating the vast majority of our clients' capital to long dated US government bonds. For our more aggressive accounts, we're also allocating some capital to a leveraged bearish bet on financial.

It is our belief that the market is wrong about hyperinflation and we'll probably see another deflationary scare over the autumn months. It is worth noting that Quantitative Easing (QE) has NEVER worked and the economy is nowhere close to recovery. Under such conditions, hyperinflation (surge in the supply of money and credit) is out of the question and we suspect investors are about to find that out the hard way! We'll discuss this in detail in July's edition of Money Matters but for now, we're giving you a head's up on the looming contraction.

If our assessment proves to be correct, stocks and commodities will decline over the following weeks and the oversold US Treasuries will rally in another flight towards safety. So, we're cutting back on risk and positioning our clients to benefit from the summer/autumn contraction. Even if we're wrong, it is highly unlikely that the markets will rally hard from here, so we'll still have ample time to buy back into our preferred 'long' holdings in resources and Asian emerging markets. But for now, caution is the order of the day.

Insiders Exit Shares at the Fastest Pace in Two Years

June 22 (Bloomberg) -- Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.

Insiders of Standard & Poor’s 500 Index companies were net sellers for 14 straight weeks as the gauge rose 36 percent, data compiled by InsiderScore.com show. Amgen Inc. Chairman and Chief Executive Officer Kevin Sharer and five other officials sold $8.2 million of stock. Christopher Donahue, the CEO of Federated Investors Inc., and his brother, Chief Financial Officer Thomas Donahue, offered the most in three years.

Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.

“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock- price levels,” said Joseph Keating, the chief investment officer of Raleigh, North Carolina-based RBC Bank, the unit of Royal Bank of Canada that oversees $33 billion in client assets. “They’re taking advantage of this bounce and selling into it.”

Full article here...

Gold Breakthrough

Click on the chart for my update...

Weekly Update from Puru

The Weekly Update sent out on 29 May 2009 discussed the 'green shoots' hype and noted the extreme bullish sentiment. Back then, we stated that we'd sold the strength and raised 50% cash in our clients' accounts. Well, the financial markets continued to rally for a few more days but they've corrected sharply over the past few trading days. Our technical and sentiment data suggests that the markets are extremely vulnerable to a sharp contraction over the summer/autumn months. Accordingly, we're cautious and our managed portfolios are diversified and hedged - 50% 'long' stories (emerging markets and commodities), 35% long-dated US Treasuries, 10% natural gas and 5% 'short' financials for our aggressive accounts.

At present, the investment community is positioned for immediate 'hyperinflation' and a further debasement of the US Dollar. We don't think 'hyperinflation' is going to occur in the next 12-18 months and when others come to the same conclusion, we are likely to see a fall in stocks/commodities and strength in US Treasuries, US Dollar and Japanese Yen.

So, why don't we believe in immediate 'hyperinflation'?

Look; much of the Western world is currently undergoing secular deleveraging whereby households and corporations are repaying debt. These people are stuck between a rock and a hard place and there is no way they are going to take on even more debt in order to oblige policymakers. So far, the stimulus has not caused a massive surge in inflation because this money is currently sitting as excess reserves within the banking system. And unless borrowers are willing to borrow and lenders are willing to lend, we won't get any hyperinflation. The fact is that (after years of excessive borrowing and consumption) American households are now paying back their debt; something which hasn't happened in over 5-6 decades! And in our view, it is extremely improbable that people will go deeper into debt. In the past, such debt contractions have occurred very infrequently and none of them resulted in 'hyperinflation'. Therefore, if our view is correct and we don't get an immediate economic recovery, there will be another revulsion towards risk and a flight towards 'safety'. So, our advice is to take some money off the table and stay hedged over the summer months.

The fact is that most stock and commodity markets are overbought from a technical perspective and sentiment is at a bullish extreme. In other words, market risk is currently high and we don't want to take any chances. And neither should you! The best outcome over the summer months would be a sideways grind and there is no reason why you should risk your entire capital in the hope of capturing minor additional gains. History has shown that market crashes usually occur in autumn and we're now approaching 'Disasterville'. Whether or not we'll see another crash this year is anybody's guess but our current investment position has prepared us for (almost) all outcomes.

Over the following weeks, we expect most stocks and commodity markets to correct or consolidate (best case scenario), so wait before adding to your 'long' positions. On the other hand, we expect strength in long-dated US Treasuries, so nimble traders may want to gain some exposure for a multi-week trade. As far as currencies are concerned, both the US Dollar and Japanese Yen will probably rally in tandem with a contraction in the credit markets, so keep your cash in these currencies.

Finally, gold and silver are correcting as per our expectation and long-term investors can start buying both at current levels. The downside in gold is much more limited here and real money should have an explosive rally over the following 10-12 months. Precious metals mining shares are still correcting and our recommendation is to wait before adding to your positions. Once the correction has run its course, we'll allocate a large amount of our capital to this sector which is poised to do extremely well.

Gold Charts

My comments: I just learned how to post charts. Below is a daily gold chart with notes. Please click on the chart for a larger version and to read my notes. Also please forgive my grammatical and spelling errors. Its difficult to edit text on the charts...

Below is a cup and handle formation developing in gold. If we don't break the upper handle trendline and do break the lower trendline on the triangle, this trade would have failed. Read more about a cup and handle here...


My comments: The chart below shows trendline support...if prices move below the trendline we could have a sell off...

China sells US bonds to 'show concern'

A decision by China to reduce its US Treasury holdings suggests concern about the US attitude towards its economic woes, Chinese economists were quoted as saying in state media Wednesday.

The remarks, coming after US data showed a modest decline in Chinese investments in US government bonds, were in contrast to an earlier statement in Beijing which had said the recent sell-off was a routine transaction.

"China is implying to the US, more or less, that it should adopt a more pragmatic and responsible attitude to maintain the stability of the dollar," He Maochun, a political scientist at Tsinghua University, told the Global Times.

According to US Treasury data issued Monday, Beijing owned 763.5 billion dollars in US securities in April, down from 767.9 billion dollars in March.

My Commets: It’s interesting that this comes after the BRIC nation summit. With Russia exiting bonds and now China slowly moving away this must have been a discussion at the summit. However, the amount of bonds reduced was very, very small and seems more like a financial “warning shot across the bow”. But this is creating a dangerous trend…

Full article here…

Key Quotes from Biden on the Stimulus

"No one realized how bad the economy was. The projections, in fact, turned out to be worse. But we took the mainstream model as to what we thought -- and everyone else thought -- the unemployment rate would be."

"Everyone guessed wrong at the time the estimate was made about what the state of the economy was at the moment this was passed."

"The bottom line is that jobs are being created that would not have been there before."

"Can I claim credit that all of that's due to the recovery package? No. But it clearly has had an impact."

My Comments: I guess we all can rest well knowing that Joe Biden is taking out loans in our names and "creating" jobs. I'm glad he's taking the time to pat himself on the back for spending a bunch of money that isn't his. Thanks Joe.

Full article here...

The Myth Of the Rational Market

In the 1990s and 2000s, in fact, this myth of the rational market was embraced with a fervor that even Irving Fisher never mustered. Financial markets knew best, the thinking went. They spread risk. They gathered and dispersed information. They regulated global economic affairs with a swiftness and decisiveness that governments couldn't match. And then, as debt markets began to freeze up in 2007, suddenly markets didn't do any of these things. "The whole intellectual edifice collapsed in the summer of last year," former Fed chairman Alan Greenspan said at a congressional hearing in October.

Well, maybe not the whole edifice. For all its flaws, Fisher's economic approach delivered genuinely important insights. He proposed in 1911 that the government issue inflation-linked bonds; in 1997, the Treasury Department finally got around to doing so. If anybody in power in Washington had been willing to follow his advice in 1930 or '31 (which essentially amounted to "Print more money"), the Great Depression might not have been so great. For the past two years, the Federal Reserve has been working right out of the Fisher playbook, and while the results haven't been perfect, they've been a lot better than those of the early 1930s. The economics that Fisher espoused--reborn after his death in 1947--should not be discarded. But clearly, there are some issues with it.

My Comments: Small excerpt from a soon to be released book. Plain and simple, markets aren’t rational, as in the price of assets rarely reflect their real values...

Full article here...

Weekly Update by Puru Saxena

Global stock markets continue to grind upwards amidst overbought technical and euphoric sentiment. It is interesting to observe that Weimer hyperinflation has replaced the global depression hype and everyone seems to be preparing for runaway inflation. Whilst is it true that our world has never seen such a massive stimulus package, it is worth noting that central-bank sponsored inflation is currently locking horns with private-sector credit contraction.

Our view remains that global stock markets are over-extended and a multi-week correction/consolidation is in order. Whether the trend reversal occurs now or in a week, this is not the time to allocate fresh capital to over-brought assets. If our assessment is correct, a better buying opportunity will probably present itself later this year. Remember, some emerging markets have almost doubled off the crash lows and such moves are unsustainable beyond the short-term. Our preferred markets (China, India and Vietnam) have been amongst the best performers and we’ve recently sold half of our positions in China and India. After the correction is over, we’ll re-invest the capital.

Over in the energy markets, crude oil continues to rally and some froth is beginning to emerge. Only a few months ago, everyone was calling for twenty dollar oil and now, analysts are talking about much higher prices. Our expectation is that crude oil will correct somewhat over the following weeks. So, hang on to your positions but wait before adding new capital. Natural gas seems to have bottomed out and we recommend that investors play the upside on the physical product. After the horrific crash last year, the price of natural gas should rise over the following months and this action is likely to benefit gas producers. So, hold on to your positions in gas companies.

In the world of currencies, the US Dollar remains weak and it is struggling to carve out a bottom. Sentiment is horrendous towards the greenback and the entire world is predicting a dollar crash. Look; we are no fans of the US Dollar but other currencies aren’t much better. And whenever you see universal agreement in the markets, it usually pays to go the other way. Our belief is that the US Dollar is poised for a bounce and major world currencies such as the Euro, British Pound, Aussie and Canadian Dollars are due for a pull-back. The next wave of credit-contraction will probably send the American currency higher.

Real money (gold and silver) continues to consolidate after the recent gains and we expect a further correction over the following weeks. It seems to us that gold’s pullback will end above $900 per ounce, so investors can start buying on any near-term weakness. Silver will probably correct more than gold, so wait before adding to your positions. After the summer correction is complete, we anticipate an explosive move in all precious metals. Remember, so far in this bull-market, precious metals have had huge rallies every two years. So, if this trend consistency remains intact, we’re likely to see much higher prices by next spring. Precious metals mining shares are currently over-bought and investors should wait for a correction before adding to their positions. If our thesis about an explosive move in precious metals is correct, the mining shares will record huge gains over the next year. We’re patiently waiting in cash before we allocate 10% of our clients’ capital to the precious metals mining equities.

Finally, in the bond market, long dated US Treasuries are extremely over-sold and any correction in stocks and commodities will probably be the catalyst for a rally in US government bonds. After touching almost 4% on Wednesday, the yield on the 10-year Treasury Note dropped somewhat on Thursday and this could be the start of a trend reversal. The 30-year Treasury Bond is also very oversold and it may rally over the summer months. Although bonds represent lousy long-term value (you can thank the money-printing central banks), nimble traders may want to play the upside over the following weeks.

Russia to sell U.S. treasuries, buy IMF bonds

MOSCOW -- Russia will reduce the share of U.S. treasuries in its forex reserves, the world's third-largest, a senior central bank official said on Wednesday, driving the dollar broadly lower.

Russia holds about 30% of the reserves, worth US$404.2-billion, in treasuries. Central bank first deputy chairman Alexei Ulyukayev said it would buy bonds issued by the International Monetary Fund and also up the share of reserves held in bank deposits.

Russia had earlier pledged to buy about US$10-billion worth of bonds to be issued by the IMF as part of a fundraising effort to help countries hit by the global financial crisis.

My Comments: I've read further on this and it turns out they wont be selling bonds but they will just roll them over into the IMF when they mature. This could counter the panic of such a large debt holder as Russia selling out. Either way this is a vote of no confidence for the dollar and our debt. And it leads me to ask...Russia is buying IMF bonds...China is still buying bonds but diversifying into commodities...Who is going to buy all of our newly created debt?

Weekly Update

Global markets are overbought and due for either a correction or consolidation. We're now in the seasonally bad time of the year and the best outcome here would be a mild correction. From a sentiment perspective, most investors have factored in the 'green shoots' and they've positioned themselves for a near-term economic recovery. For sure, certain economic data is pointing towards some improvement, however (so far) nothing has been done to help the distressed homeowners. The West is dealing with a massive debt overhang and policymakers are only transferring private-sector liabilities to the state. These gigantic losses are real and politicians have decided to distribute them amongst the unsuspecting public. Unfortunately, a second wave of foreclosures is now creeping in and we may not get a swift and robust economic recovery. If the housing situation worsens, then all bets will be off and the financial markets will probably face a sharp decline. At this stage, we think any correction will end above the March lows and we're sitting on a large cash position to capitalise on such a weakness. After the horrendous crash last autumn, it is unlikely that the markets will continue to head higher without a rest. Look; market risk is currently high based on technical and sentiment indicators and we'd recommend that you keep roughly 50% of your investment portfolio in cash. This way, if the market moves higher, you'll still benefit but if we get a correction, you'd be able to re-invest at lower prices.

Over in the energy complex, crude oil reached $70 per barrel last week and is giving back some of its gains today in Asia. Over the following days, we're likely to witness a correction in crude oil. On a different note, natural gas is still trying to carve out a bottom and should be accumulated by long-term investors. The price of natural gas is extremely inexpensive and should rise significantly over the coming year. So, we'd suggest that you buy into physical natural gas or the producing stocks on any near-term pullback.

In the currencies markets, the US Dollar Index is finding some support around this area and a sharp rally wouldn't surprise us here. Most people are now bearish about the US Dollar and sentiment is at an extreme, so a rally of 5-7% can be expected. On the other hand, most major currencies are now overbought and due for a correction. If our assessment is correct, the next few weeks should coincide with strength in the US Dollar and pullbacks in the Euro, British Pound, Aussie Dollar and Canadian Dollar. So, nimble traders may want to act accordingly.

As far as precious metals are concerned, both gold and silver are likely to correct over the following weeks but we don't expect a major decline. During the correction phase, silver will fall more than gold but both should be bought later this year. Same rules apply for precious metals mining stocks. Our recommendation is to wait before adding to your positions in this sector. If a rally in the US Dollar materialises, precious metals will correct and you'll be able to buy into real money at lower prices.

Finally, in the fixed-income sector, US government bonds are now very beaten down and the next phase of credit contraction should usher in a big rally. At the moment, everyone is convinced that the US will enter hyperinflation and US government bonds have suffered accordingly. However, in last week's speech, Mr. Bernanke made it clear that the Fed wasn't going to keep monetizing debt by printing money. So, we may not get hyperinflation in the near future and the 30-year US Treasury Bond should appreciate over the summer months. Make no mistake; as a result of all the bailouts and stimulus packages, the cost of living will probably double within the next decade, however we don't foresee huge inflation over the next six months. When others come to the same conclusion and there is another flight towards 'safety', US Treasuries will probably rally in tandem with the US Dollar.

My Comments: Sorry for the delay. Next update will be more timely

Thriving firm's new bet: Hyperinflation

A hedge fund firm that reaped huge rewards betting against the market last year is about to open a fund premised on another wager: that the massive stimulus efforts of global governments will lead to hyperinflation.

The firm, Universa Investments, is known for its ties to gloomy investor Nassim Nicholas Taleb, the author of the 2007 best-seller "The Black Swan," which describes the impact of extreme events on the world and financial markets.

The new strategy, designed by Spitznagel, aims to post big gains if inflation and interest rates take off as they did in the 1970s. Universa will invest in options tied to commodities such as corn, crude oil and copper, as well as options on stocks such as oil drillers and gold miners.

"We think these things are going to see massive volatility," Taleb said in an interview.

The fund will also bet against Treasury bonds, which tend to weaken in inflationary environments. Last week, Treasury yields shot to their highest level since November as prices fell on inflation concerns. Oil topped $66 a barrel. Gold is creeping toward $1,000 an ounce.

My Comments: Nassim Taleb is an investment legend and coined the widely used term "Black Swan". More on him here...The markets don't care about his opinions or investments and they are going to do what they are going to do. But high inflation is something I've been expecting to happen and its nice to see bright minds on the same page.

Full article here...

China Laughs at Geithner

Treasury Secretary Geithner is another economic incompetent. He told China that he stood for a "strong dollar," but that China should let its currency appreciate relative to the dollar, which, of course, would mean a weaker dollar. He simultaneously told China that their investments in US Treasury bonds were safe.

His Chinese university audience, being economically literate, laughed at Geithner.

Full article here...

Telling Quote

"The American people will never knowingly adopt socialism. But under the name of ‘liberalism’ they will adopt every fragment of the socialist program until one day America will be a socialist nation without knowing how it happened… I no longer need to run as a Presidential candidate for the Socialist Party. The Democrat Party has adopted our platform.
– Norman Thomas, six-time U.S. presidential candidate for the Socialist Party, 1944

Global Crisis ‘Inevitable’ Unless U.S. Starts Saving, Yu Says

My Comments: Just a few highlights

June 1 (Bloomberg) -- Another global financial crisis triggered by a loss of confidence in the dollar may be inevitable unless the U.S. saves more, said Yu Yongding, a former Chinese central bank adviser.

It may be helpful if “Geithner can show us some arithmetic,” said Yu. “We need to know how the U.S. government can achieve this objective.”

He questioned whether there would be enough demand to meet U.S. debt issuance this year.

Referring to the Federal Reserve “as the world’s biggest junk investor,” and to Chairman Ben S. Bernanke as “helicopter Ben,” Yu said the Fed has dropped “tons of money from the sky since the subprime crisis.”

“The balance sheet of the Federal Reserve not only has expanded like mad but is also ridden with ‘rubbish’ assets,” he said.

Full artile here