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Saturday, April 24, 2010

This Week: Ode to a Grecian TBT Yearn

Stock market trend: Market in Upward Trend 

 
Market Pulse 

Regulators shut down seven Illinois banks Friday, bringing this year's tally of failed U.S. banks and thrifts to 57. The Federal Deposit Insurance Corp. found buyers for all of the failed institutions, and the failed
banks' branches were all expected to reopen Saturday. All of the failed institutions were included in TheStreet.com's list of undercapitalized banks. Ten banks in Illinois have failed this year, the most for any state, followed by Florida with nine -- including three bank failures last week -- and Georgia with seven.
TheStreet.com 



As you may have noticed, I've been off from newsletter duty for a few weeks. It's always tougher around tax season. Plus, I have been working feverishly to put the finishing touches on a book project I've been collaborating on with a former fellow Harvard colleague, Glenn Hubbard. The book is scheduled to come out in August, which means that we have to put the manuscript to bed by mid-May. So again forgive me for the silence.

 

That said, nothing much has changed from my last missive other than the market's upward trend has firmed up even a bit more. From a technical analysis point of view, all major indicators appear to be hitting on all cylinders. Waiting for the "market correction" or market pullback that everyone has been expecting has been much like Waiting for Godot -- who never comes.

 

Despite the market's bullish trend, I continue to be cashed out of most of the stock market and have shifted a significant chunk of my assets into a new piece of real estate. In doing so, I am implicitly calling a bottom in the housing market -- at least as it pertains to coastal California -- and I'm also implicitly calling a bottom in the mortgage market (if I have indeed correctly hit that bottom, I may wind up being one of the last few Californians to have gotten a 30-year jumbo fixed mortgage rate under 5%).

 

As for my trade that is not working for me (yet), I'm down about 6% on my "short the long bond" TBT gambit. The good news here is that the trade has gone sideways on me for a very logical macro economic-based reason. To wit: the trouble in Europe with the PIGS -- Portugal, Ireland, Greece, and Spain -- (particularly Greece) has triggered a flight to quality to the US and bonds have been a major asset of choice. As the dollar has strengthened and the euro has fallen, bond prices have been bid up, yields have fallen, and TBT has been a casualty.

 

The good news here for anyone hanging on to TBT -- or who wants to try this trade -- is that it is difficult to imagine a scenario where TBT could fall much lower. That would require a very unlikely further fall in long bond yields. So at this point, entry into this trade gives you much higher upside reward than downside risk. Ergo, I'm hanging on to TBT.

 

What I'm not hanging onto for now is my most successful biotech trade of all time – Prolor (PBTH). I nursed the stock for several years all the way from less than $.50 to close to five bucks and it's time to take my profits. This is not to say I won't reload. I do see this as a good long-term play. However, right now, a significant retracement looms as a significant possibility and I don't want to get left holding that bag.

 

As for my next highly speculative -- and I emphasize the word highly -- biotech stock, I am building a position in Senesco (SNT). It's a development stage company that has applications for both humans and agriculture. Last week was a good week as it jumped from $.40 to $.60.  I'm always leery about some "pumping and dumping" going on, but this does seem like an interesting stock. Whatever you do, don't buy it based on what I'm writing here. I repeat, don't buy it because of what I'm writing here. Rather, do some of your own research and let me know what you think about this. I really would like to gather some more intelligence about this company.

 

As a final comment, I put that quote at the beginning of this newsletter about bank failures as a reminder that we are hardly out of the woods with respect to the credit and financial crisis. The good news about those bank failures, however, is that there were ready buyers for the failed banks.

 
1:21 pm edt 

Sunday, April 11, 2010

This Week: Big Bets Gone Sideways

Stock market trend: Market in Upward Trend 

 Market Pulse

The upward stock market trend remains firmly intact. All major technical indicators are strengthening, thereby lowering the probability of a correction or pullback. From a fundamental perspective, the macro indicators strongly suggests a resurging American and global economy. So why do I remain such a skeptic?

 

It's a good question.  I believe the answer lies in the fact that while all signs point to a cyclical uptrend and possible stock market boom over the next few quarters, many signs also point to a secular downtrend once we've worked through our cycle of fiscal and monetary stimulus and are left with the largest public debt hangover in our history. Like a Toyota with a sudden acceleration problem, we seem to be careening towards an inevitable crash against an ever higher wall of deficits.

 

What really puzzles me now is the lack of reaction in the bond market to what must be an eventual wave of inflation as countries around the world monetize their debt. A case in point is the exchange traded fund TBT, which is an ultra-short for the long bond. While I've been building a position in TBT thinking that it should soon break out, it's been going in the opposite direction, albeit in very small steps.

 

This trade reminds me of the trade I always used to make towards the end of the housing bubble. Every few months or so, when I believed the bubble must inevitably burst, I would open up options positions on the short side of Centex (one of America's largest homebuilders). And every few months or so, I would lose a little bit of money. Eventually, that bubble had burst; and when it did, being on the short side of the housing market was one of the quickest ways to print your own money that the stock market ever invented.

 

My point and then is that sometimes there are big macro bets that are "when" trades and not "if" trades. What I mean by this is that shorting the long bond is not a question of “if bond yields rise” any more but simply a matter of when the growing mountain of world debt and money catches up with the inflation rate.

 

My bigger point then is that if stock market participants are rational and they know that at some point that interest rates are going to spike sharply and choke off both the economy and the stock market, they should be rational enough not to get sucked in too far to any short-term bullish upward move of the stock market. The clear danger of being sucked in is being caught in the market when the trend aggressively turns. So maybe that is one of the big reasons why despite all of bullish signs in the stock market and economy, the market remains characterized by low volume and small progressive steps rather than any big breakouts.

 

If all these ruminations appear to make me a stock market coward, well then so be it. But I do think that most of the money that's going to be made over the next few years -- and the next few decades -- are going to be on big macro bets. And the biggest bet of all is going to be shorting the bond market.

 

These thoughts also lead me to my other big bet, that on a reevaluation upwards of the Chinese yuan. In this regard, and let me put this in a very delicate manner, I can't believe how stupid and ball-less the Obama administration is. Throw in naïve while you're at it.

 

What is the source of this rant? The fact that our Lilliputian Treasury Secretary Timothy Geithner has cut a deal with the Chinese to allow them to engage in only the tiniest of revaluations. Memo to Tim: with the yuan undervalued by 30 to 40% or more, at 2% revaluation by the Chinese will have little or no impact on the ability of manufacturers in America to fairly compete with the mercantilist Dragon. You sir, are stupid, stupid, stupid, stupid, stupid, stupid, stupid, stupid, and stupid. And ball less, too.

 

The fact of the matter is the best jobs program for America is not building a mountain of debt through fiscal and monetary stimulus but rather engaging in constructive trade reform with China. At the top of the list of such reform, is a fairly valued currency. Until this is finally and fully understood in the White House and on Capitol Hill, long-term economic prosperity will elude this great nation.

11:32 am edt 


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DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.







DISCLAIMER: The newsletters and blogging on this page are written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.

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