Take One:
By Troy Flowers
WHAT WE DON’T LEARN FROM HISTORY… IS THAT WE DON’T LEARN FROM HISTORY
This profound quote is from none other than famed investor Warren Buffet. What we have here in the US is that we have not learned the dangers of trying to tamper with the bond market.
The question is what is the “bond market?” Affluent investors tend to own individual bonds. Most average investors have bonds in their portfolios via bond funds. But most really do not have an idea what bonds do. I will give you a very brief introduction to bonds - specifically government bonds.
When the government wants to fund a project but doesn't have the political courage to raise taxes on the citizens - it issues bonds (another word for debt). They basically borrow the money that it needs to pay back (eventually). There are a couple of important aspects of bonds: the bond price and bond yield. Very simply bond prices are how much you pay to purchase a bond. Bond Yields are the rate of return an investor gets from investing in a bond. They are inversely related, which means when the bond prices go up then yields go down and vice versus. Even though the stock market and the Dow often command more attention from the media, the bond market is actually many times bigger and is more vital to the ongoing operation of the public and private sector. Thus, when a country’s bond market falters then that the country can go bankrupt. The bond market debacle in Russia is an excellent example of this.
This crisis occurred in August of 1998. What were some of the the root causes? Declining Productivity and the cost of the first war in Chechyna (approximately $5.5 billion). More importantly, Russia had chronic fiscal deficit problems and artificially high fixed exchange rate. One of the key points is that they had an “artificially high fixed exchange rate.” This means that the Russians thought they had to prop up the currency or keep the value of their currency high to keep investors from taking their money elsewhere . The Russian finance minister actually hiked rates to 150%! The problem was that they had to pay interest payments at 150% to the debt holders who held Russian paper. It got so bad that the IMF and the World Bank was forced to step in and issue a $22.6 billion bailout. It was helped but the Russians did not want to abandon its support for the Ruble. The Russians then adopted a floating peg. Which meant if the Ruble fell below a certain range then the central bank would step in and buy the Ruble keeping it propped up. If the Ruble got too strong then the central bank would sell the Euro.
This resulted in an erosion crisis and investors dumped the Ruble and Russian securities. This drove the value of the Ruble down. The central bank then tried to spend its reserves to defend the Ruble but that just made matters worse and further eroded investor confidence.
Eventually, on the 13th August 1998 the Russian stock, bond and currency markets collapsed! From January to August 1998 their stock market lost 75%+ of its value.
So what does that have to do with us? A whole lot...
Our Federal Reserve is trying to do what the Russians did BUT in reverse. Instead of trying to prop up our currency, the Fed is trying to purposely devalue the US dollar ( i.e. QE 1, QE 2 and Operation Twist) by holding interest rates down. The problem is that very soon US bond investors will realize inflation is NOT 2% like the Fed wants us to believe. Right now bond yields are at a dangerous low rate of 1.7%. According to famed economist and author Peter Schiff, interest rates over the last 40 years have averaged 7%.
Investors will soon be unwilling to accept a 1.7% rate (or less) anymore and they will demand a higher rate of return for us to use their money. This means the US government will have 7% (for example) interest on +$14 Trillion dollar debt. In addition, investors who hold US paper will see the value of their bond holdings drop like a bad habit as interest rates soar. As a result, those investors will take (as Wall Street insiders like to call) a severe “haircut.” This is the problem in countries like Greece, Italy, Portugal and Spain.
In the last 13 years let us see what financial history has shown us…:
The Russians tried to manipulate the bond market in the late 90’s and it not only didn’t work they nearly went bankrupt.
The US tried to control the bond market/interest rates and artificially pushed interest rates to low levels from 2002 to 2008. We created a housing bubble that imploded in 2007-2008 and our economy nearly collapsed.
So now what’s the new solution to get our economy back on track? Drum roll please…
Drive interest rates EVEN lower?? Really?? (Scratching my head)
Didn’t Albert Einstein once say the definition of insanity is doing the same thing over and over again and expecting different results? But hey, what does Einstein know?
So what do we think will happen when this bond bubble collapses? Well, to borrow a great line from the movie 300: “This will not be over quickly. We will not enjoy this.”
Tuesday, May 29, 2012
Friday, May 18, 2012
Wary of taking a Stock Position Till SPX Reaches Weekly Support
I would be wary of buying new stocks until the market has run aground on support and gives good signs of rebounding.Yes, the S&P500 is indeed on its way to the bottom of Weekly and Monthly Support as I had predicted. Still I will not take any credit for understanding what the catalyst was except that it was near Resistance and was very likely to drop soon. I believe that spring is historically a low time for the SPX from what I have heard. The data reports have seemed to generally be mixed lately. I believe the SPX will continue to drop to Weekly or Monthly support levels and then hold and rise. If you have any questions, take a look at 'My Prediction' recorded in the last two posts. It will give you a much more detailed explanation!
Wednesday, April 11, 2012
Take One: Catalyst for the S&P's Drop - Want to ANSWER THAT One For Me?
I had figured the S&P 500 was going to drop, I just didn't expect it to happen before it reached Monthly Resistance. However, it was at Weekly Resistance, so it's no surprise it fell. Still, what was the catalyst that made it drop? Weekly Resistance only or some other fundamental news? To be sure, I don't have any real fundamental news to really mention except that perhaps all the dropping lately has been also due to company earnings. But what company's have done so poorly that it would warrent this? I mean, our unemployment rate has dropped to the lowest levels in four years - very good news. So, yes, I've been in the process of moving to a new home, so perhaps I missed something the last few days? If I did, please fill me in if you know the answer! To my knowledge, I can't think of that many big companies failing earning reports to warrent this drop. So my conclusion is that the drop was more of a technical reason and perhaps the earnings reports were NOT all that bad, but they weren't all that good either which could mean that the technical world won the upper hand. I thought I might add my prediction of late so that you can see what I'm expecting in the next six months:
3-16-12
"My predictions for the S&P500 are that we will see it arrive at the Monthly Resistance this month or next and that after that time stocks will take a downturn toward Monthly Support - which should last some five or six months. Of course, this is not accounting for any catalyst that should turn the tide to break Monthly Resistance and head up to the Highs of 2007. From more of a fundamental point of view, it seems that things are going better for the U.S economy as of late. We seem to be taking a turn out of the 'mud', so to speak. So I honestly cannot tell you what the catalyst to go lower will be upon reaching Monthly Resistance."
3-16-12
"My predictions for the S&P500 are that we will see it arrive at the Monthly Resistance this month or next and that after that time stocks will take a downturn toward Monthly Support - which should last some five or six months. Of course, this is not accounting for any catalyst that should turn the tide to break Monthly Resistance and head up to the Highs of 2007. From more of a fundamental point of view, it seems that things are going better for the U.S economy as of late. We seem to be taking a turn out of the 'mud', so to speak. So I honestly cannot tell you what the catalyst to go lower will be upon reaching Monthly Resistance."
Friday, March 16, 2012
Take One: My Prediction
Albie's Take:
My predictions for the S&P500 are that we will see it arrive at the Monthly Resistance this month or next and that after that time stocks will take a downturn toward Monthly Support - which should last some five or six months. Of course, this is not accounting for any catalyst that should turn the tide to break Monthly Resistance and head up to the Highs of 2007. From more of a fundamental point of view, it seems that things are going better for the U.S economy as of late. We seem to be taking a turn out of the 'mud', so to speak. So I honestly cannot tell you what the catalyst to go lower will be upon reaching Monthly Resistance.
My analasys of the Daily and Monthly Support and Resistance is as follows: The S&P500 was riding Daily Support last week but this week has gains going half way up towards Daily Resistance. It has gained new highs in Febuary and March of this year, excellerating up past the Highs of May 2011 and going up past that Resistance line. Technically speaking, the Daily Resistance line should be drawn much lower, as of last weeks major drop but it seems to have broken past those grounds and is back on track with its old Daily Support and Resistance lines. It now is heading toward Daily Resistance of 1418. If the S&P500 has no catalyst that takes it lower, it will in time head up to its monthly Resistance of 1434.4. I expect profit taking and a drop to Daily Support though, before that time. Even if it gets to Monthly Resistance however, it still has 2007 Highs to beat at 1575.1 Why does all this matter? Well, my opinion is that the S&P500 will find a catalyst at some point to gravitate back towards Monthly Support before it ever tries to break through 2007 Highs.
My predictions for the S&P500 are that we will see it arrive at the Monthly Resistance this month or next and that after that time stocks will take a downturn toward Monthly Support - which should last some five or six months. Of course, this is not accounting for any catalyst that should turn the tide to break Monthly Resistance and head up to the Highs of 2007. From more of a fundamental point of view, it seems that things are going better for the U.S economy as of late. We seem to be taking a turn out of the 'mud', so to speak. So I honestly cannot tell you what the catalyst to go lower will be upon reaching Monthly Resistance.
My analasys of the Daily and Monthly Support and Resistance is as follows: The S&P500 was riding Daily Support last week but this week has gains going half way up towards Daily Resistance. It has gained new highs in Febuary and March of this year, excellerating up past the Highs of May 2011 and going up past that Resistance line. Technically speaking, the Daily Resistance line should be drawn much lower, as of last weeks major drop but it seems to have broken past those grounds and is back on track with its old Daily Support and Resistance lines. It now is heading toward Daily Resistance of 1418. If the S&P500 has no catalyst that takes it lower, it will in time head up to its monthly Resistance of 1434.4. I expect profit taking and a drop to Daily Support though, before that time. Even if it gets to Monthly Resistance however, it still has 2007 Highs to beat at 1575.1 Why does all this matter? Well, my opinion is that the S&P500 will find a catalyst at some point to gravitate back towards Monthly Support before it ever tries to break through 2007 Highs.
Thursday, March 1, 2012
Take One: China, Europe and US Growth Increase.
Albie's Take:
The S&P500 hits Daily Support level. Why does this matter? Well, firstly it gives you an idea that a lot of odds are in favor of stocks rising as a apposed to falling any further! After a week at Resistance levels, and a week dabbling in the middle, the S&P00 has finally made a touch down with Support. Despite so much good news this week, the Dow hitting its highest levels since 2008 and the economy of China, Europe and the US showing positive signs of growth, the S&P500 still found its way to drop to Daily support levels. I see this as a good thing, as stocks will probably begin to rise. It's not that stocks haven't already been rising but the weekly fluctuations have gone to either extreems fairly quickly.
The S&P500 hits Daily Support level. Why does this matter? Well, firstly it gives you an idea that a lot of odds are in favor of stocks rising as a apposed to falling any further! After a week at Resistance levels, and a week dabbling in the middle, the S&P00 has finally made a touch down with Support. Despite so much good news this week, the Dow hitting its highest levels since 2008 and the economy of China, Europe and the US showing positive signs of growth, the S&P500 still found its way to drop to Daily support levels. I see this as a good thing, as stocks will probably begin to rise. It's not that stocks haven't already been rising but the weekly fluctuations have gone to either extreems fairly quickly.
Thursday, February 23, 2012
Take One - S&P500
Albie's Take:
The S&P500 is now on its way down to Support after having hung around at Resistance for about a week. Even with all the good news regarding Greece's bailout deal with the Euro, we find there still to not be enough news to create a catalyst to alter the S&P500 decent.
2-25-12: I find myself mistaken slightly. It seems that there was enough catalyst to keep the S&P500 in limbo between Resistance and Support for most of the week. My prediction: As soon as there is a lack of fundamental reasons to keep the market up, the S&P500 will drop to Daily Support.
The S&P500 is now on its way down to Support after having hung around at Resistance for about a week. Even with all the good news regarding Greece's bailout deal with the Euro, we find there still to not be enough news to create a catalyst to alter the S&P500 decent.
2-25-12: I find myself mistaken slightly. It seems that there was enough catalyst to keep the S&P500 in limbo between Resistance and Support for most of the week. My prediction: As soon as there is a lack of fundamental reasons to keep the market up, the S&P500 will drop to Daily Support.
Thursday, February 9, 2012
Take Three: S&P500 Riding Resistance Line, Super Cycle Theory, & DMND's Cooked Books
Albie's Take:
2-10-12: After having ridden the top of the Resistance line all week, the S&P500 found it's excuse to take profits today and drop downtoward support. Problems with Greece's debt deal is no doubt the 'excuse'. Here was my report from earlier this week:
2-8-12: "The S&P has been riding the Daily Resistance line now since last friday and may continue in same manner or break Daily Resistance if all goes well with the Greek debt deal. But pressure is there for traders to take profit and there is reason to start taking a short position. Personally, I would wait till the high's of the news wears off and there is not much fundamental play before I took a short position."
As to the Australian dollar (AUD), it has reason to hold strong against its other currency pairs - especially the EUR: "Australia Holds Key Interest Rate at 4.25%
"Australia’s central bank unexpectedly kept its benchmark interest rate unchanged as domestic growth withstands Europe’s debt crisis, sending the nation’s currency soaring to a six-month high."
www.IronFX.comMARKETS UPDATE
07 Feb 2012"
However, if news breaks in favor of the Greece debt deal, the EUR will have some new fighting power. Presently, speculation about the results are keeping the EUR strong.
Troy's Take: The Super Cycle Theory: This idea was made famous by famed investor Jim Rogers. This concept says that the investment world goes through 20 yr Bull and bear cycle markets in Stocks and Commodities. This concept goes back at least 100 years but I will start from 1940.
1940-1960’s- Stock/Equities were in a Market Bull. We were just recovering from the Great Deflationary Depression. In the early 1950’s the Dow returned to its pre-Depression price.
1960’s to 1980’s- Equities fell into a major bear market. The market was basically flat and the price of Gold surge and basically equaled the price of the Dow at about 850. There was also high inflation during the 1970’s. Stocks (except commodity stocks) were not a place to be.
1980 to 2000-Things changed again. Equities were now back in a bull market. From 1980 to 2000 the Dow went from 835 to over 10,000. The Gold price plummeted from $800 to approximately $260 per ounce. This is what most average investors remember and hope will return soon. This is what I call “Pathological Nostalgia” because it’s not going to return anytime soon.
2000-2020. Things changed again. We started our major recession after the stock market bubble burst in what year? That would be about 2000. Imagine that… This was when gold, silver and oil and other commodities started to trend upwards. This was kinda when gas prices started to get higher… The price of gold fell to about 250 per ounce to $1660 per ounce now…Silver went from about $5 per oz to $30 as of today. This is one of the main reason why I am very bearish on equities. History may not repeat itself but it does rhyme…
Bryan's Take:
"Since Albie and Troy's comments about the Macro environment, gold, and what China is up to lately don't interest me, and I am therefore completely ignorant on the subjects, I present to you something fun and speculative (not for the faint of heart)
Taking a bite of Diamond Foods: An analysis in behavioral psychology
One thing I learned from Warren Buffett is to take big bets when the odds are in your favor, much like someone who counts cards in Las Vegas. You won’t win every time, but when you do win you win big! I believe such an opportunity may have presented itself here in Debacle that Diamond Foods has gotten itself into. In a nutshell (no pun intended) it looks as if management tried to cook the books (again no pun intended) to a certain extent by not categorizing the money paid to Walnut Growers properly on their financial statements to tune of approximately $60 million. The CEO and CFO were both ousted from their posts yesterday because of it. The stock, having already been hammered this year due to financial misgivings, was given a veritable death blow today as it careened down another 40% today finally settling at $23.13 end of day. Keep in mind this was a $90 stock just a few months ago. This puts the P/E ratio at just over 10 times “earnings”. Now, there are many ways you can look at this. A bear might say that they just found two cockroaches in the kitchen and there are always more. In addition, since this debacle is related to their financials, who’s to say what their real financials are? Both valid points.
Here’s how I see it. Since their financials are obviously unreliable, at least for the last couple of years, I can’t really form a thesis based on them. Therefore, I am switching to the other side of my brain, and I ask myself “what would I do if I were Wall Street?” Since the majority of the money in stocks is institutional (mutual funds, ETF’s, Index Funds, etc), whatever they do is going to dictate the direction of the stock, both short term and long term. This stock is like a nightmare to a fund manager right now because it has been going down off and on for several months. When stocks take a nose dive, it means that the institutional guys are fleeing in mass. I think the stock may be at or near it’s bottom now. Why do I think this? Well, first the stock pretty much flat lined all day today after hitting a low of just over $21 dollars. That means that some value oriented investors were there as a buoy in case the stocked dropped down again, in which case they would pick up more shares. But also, just knowing how Wall Streeters think, they bank on certainty. They will kill a stock that misses earnings, much more one that misstates earnings. They are notorious for way overselling stocks surrounded by controversy, and then coming back in slowly as the smoke begins to clear. Think Johnson Meade, Carnival, Pepsi, Netflix….I could go on and on. So here are the 3 scenarios that COULD play out:
Worst Case Scenario: We find out that this thing is even bigger than we thought. There are more cockroaches in the kitchen, and the result is negative earnings. Wall Street news hits Main Street and people in all cities and towns in the world boycott the company, and stop buying Pringles, Walnuts, Almonds, Chips and everything else from Diamond because they are disgusted with their Shenanigans. Their stock drops to zero and we lose all our money as shareholders
Best Case Scenario: The already ousted CEO and CFO take the fall for the company’s misgivings. The financials are restated and it turns it was nowhere near as bad as everyone thought…earnings aren’t affected very much, and an analyst at Piper Jaffray gets excited and upgrades the stock….causing all the high paid lemmings at the other Investment Banks and Institutions to follow suit and the stock goes back to $50 dollars in a matter of a few months.
Most likely scenario: The worst part is over. They got the fall guys out of there already. Diamonds board pledges that their reputation is paramount to their success. The financials are restated and it’s bad but the company will survive and over the next few quarters things start to improve once this is behind them, and once bitten Wall Streeters learn to trust the good folks at Diamond again. They even start to play golf with the new CEO and CFO. People around the world continue to eat Pringles, Chips, and nuts of all varieties. They go about their lives completely oblivious to Diamond Foods former financial problems.
From the money in RISKY BUSINESS portfolio I am betting that the third scenario will play out. I won’t buy right at the open tomorrow. I will wait to see if the stock goes anymore before I purchase, but if it stays under $24 I am pulling the trigger tomorrow morning. I have the advantage of not having to report a profit to my shareholders next quarter, so if it takes a little longer for the company to recover so be it. That just means I won’t have to pay the short term capital gains rate. I am long DMND
2-10-12: After having ridden the top of the Resistance line all week, the S&P500 found it's excuse to take profits today and drop downtoward support. Problems with Greece's debt deal is no doubt the 'excuse'. Here was my report from earlier this week:
2-8-12: "The S&P has been riding the Daily Resistance line now since last friday and may continue in same manner or break Daily Resistance if all goes well with the Greek debt deal. But pressure is there for traders to take profit and there is reason to start taking a short position. Personally, I would wait till the high's of the news wears off and there is not much fundamental play before I took a short position."
As to the Australian dollar (AUD), it has reason to hold strong against its other currency pairs - especially the EUR: "Australia Holds Key Interest Rate at 4.25%
"Australia’s central bank unexpectedly kept its benchmark interest rate unchanged as domestic growth withstands Europe’s debt crisis, sending the nation’s currency soaring to a six-month high."
www.IronFX.comMARKETS UPDATE
07 Feb 2012"
However, if news breaks in favor of the Greece debt deal, the EUR will have some new fighting power. Presently, speculation about the results are keeping the EUR strong.
Troy's Take: The Super Cycle Theory: This idea was made famous by famed investor Jim Rogers. This concept says that the investment world goes through 20 yr Bull and bear cycle markets in Stocks and Commodities. This concept goes back at least 100 years but I will start from 1940.
1940-1960’s- Stock/Equities were in a Market Bull. We were just recovering from the Great Deflationary Depression. In the early 1950’s the Dow returned to its pre-Depression price.
1960’s to 1980’s- Equities fell into a major bear market. The market was basically flat and the price of Gold surge and basically equaled the price of the Dow at about 850. There was also high inflation during the 1970’s. Stocks (except commodity stocks) were not a place to be.
1980 to 2000-Things changed again. Equities were now back in a bull market. From 1980 to 2000 the Dow went from 835 to over 10,000. The Gold price plummeted from $800 to approximately $260 per ounce. This is what most average investors remember and hope will return soon. This is what I call “Pathological Nostalgia” because it’s not going to return anytime soon.
2000-2020. Things changed again. We started our major recession after the stock market bubble burst in what year? That would be about 2000. Imagine that… This was when gold, silver and oil and other commodities started to trend upwards. This was kinda when gas prices started to get higher… The price of gold fell to about 250 per ounce to $1660 per ounce now…Silver went from about $5 per oz to $30 as of today. This is one of the main reason why I am very bearish on equities. History may not repeat itself but it does rhyme…
Bryan's Take:
"Since Albie and Troy's comments about the Macro environment, gold, and what China is up to lately don't interest me, and I am therefore completely ignorant on the subjects, I present to you something fun and speculative (not for the faint of heart)
Taking a bite of Diamond Foods: An analysis in behavioral psychology
One thing I learned from Warren Buffett is to take big bets when the odds are in your favor, much like someone who counts cards in Las Vegas. You won’t win every time, but when you do win you win big! I believe such an opportunity may have presented itself here in Debacle that Diamond Foods has gotten itself into. In a nutshell (no pun intended) it looks as if management tried to cook the books (again no pun intended) to a certain extent by not categorizing the money paid to Walnut Growers properly on their financial statements to tune of approximately $60 million. The CEO and CFO were both ousted from their posts yesterday because of it. The stock, having already been hammered this year due to financial misgivings, was given a veritable death blow today as it careened down another 40% today finally settling at $23.13 end of day. Keep in mind this was a $90 stock just a few months ago. This puts the P/E ratio at just over 10 times “earnings”. Now, there are many ways you can look at this. A bear might say that they just found two cockroaches in the kitchen and there are always more. In addition, since this debacle is related to their financials, who’s to say what their real financials are? Both valid points.
Here’s how I see it. Since their financials are obviously unreliable, at least for the last couple of years, I can’t really form a thesis based on them. Therefore, I am switching to the other side of my brain, and I ask myself “what would I do if I were Wall Street?” Since the majority of the money in stocks is institutional (mutual funds, ETF’s, Index Funds, etc), whatever they do is going to dictate the direction of the stock, both short term and long term. This stock is like a nightmare to a fund manager right now because it has been going down off and on for several months. When stocks take a nose dive, it means that the institutional guys are fleeing in mass. I think the stock may be at or near it’s bottom now. Why do I think this? Well, first the stock pretty much flat lined all day today after hitting a low of just over $21 dollars. That means that some value oriented investors were there as a buoy in case the stocked dropped down again, in which case they would pick up more shares. But also, just knowing how Wall Streeters think, they bank on certainty. They will kill a stock that misses earnings, much more one that misstates earnings. They are notorious for way overselling stocks surrounded by controversy, and then coming back in slowly as the smoke begins to clear. Think Johnson Meade, Carnival, Pepsi, Netflix….I could go on and on. So here are the 3 scenarios that COULD play out:
Worst Case Scenario: We find out that this thing is even bigger than we thought. There are more cockroaches in the kitchen, and the result is negative earnings. Wall Street news hits Main Street and people in all cities and towns in the world boycott the company, and stop buying Pringles, Walnuts, Almonds, Chips and everything else from Diamond because they are disgusted with their Shenanigans. Their stock drops to zero and we lose all our money as shareholders
Best Case Scenario: The already ousted CEO and CFO take the fall for the company’s misgivings. The financials are restated and it turns it was nowhere near as bad as everyone thought…earnings aren’t affected very much, and an analyst at Piper Jaffray gets excited and upgrades the stock….causing all the high paid lemmings at the other Investment Banks and Institutions to follow suit and the stock goes back to $50 dollars in a matter of a few months.
Most likely scenario: The worst part is over. They got the fall guys out of there already. Diamonds board pledges that their reputation is paramount to their success. The financials are restated and it’s bad but the company will survive and over the next few quarters things start to improve once this is behind them, and once bitten Wall Streeters learn to trust the good folks at Diamond again. They even start to play golf with the new CEO and CFO. People around the world continue to eat Pringles, Chips, and nuts of all varieties. They go about their lives completely oblivious to Diamond Foods former financial problems.
From the money in RISKY BUSINESS portfolio I am betting that the third scenario will play out. I won’t buy right at the open tomorrow. I will wait to see if the stock goes anymore before I purchase, but if it stays under $24 I am pulling the trigger tomorrow morning. I have the advantage of not having to report a profit to my shareholders next quarter, so if it takes a little longer for the company to recover so be it. That just means I won’t have to pay the short term capital gains rate. I am long DMND
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