Emerging Investment Themes

Updated Views

2012-01-28T05:19:00.003Z

For a variety of reasons, I shall only be updating this blog occasionally. Please email me at laeeth at kaleidicassociates.com if you would like to get in touch. Some brief thoughts follow.

From a rather complacent spring 2011, we saw the developments I had been expecting - the market awoke rather suddenly to the deteriorating situation in peripheral Europe and the broader implications for global growth associated with both the direct economic impact, and more importantly, with the deterioration in risk appetite. So peripheral spreads in Europe widened, fixed income markets globally rallied, with 2-5y German performing exceptionally well, the US dollar experienced a broad rally (except vs the yen), we saw a correction in commodity prices, and a sharp underperformance of emerging markets.

I thought at the time that my central case would be that it would be a nasty slowdown (something more than a midcycle pause, but less than a re-entry into recession), but that one could not rule out a repeat of July 2008 with the ECB hiking into a rather evident slowdown. Well it seems clear to me now that my primary scenario was correct, but that many commentators lacking in restraint and grasp of the present and historical context have, spooked by price action, jumped to the conclusion that we have a depression ahead, with supposedly quite sensible and well-respected commentators assigning very high probabilities to the possibility of an EMU breakup.

I think it is unfortunate that regulators have decided to enforce tighter capital requirements for European banks that will take effect by June. A perfect instance of shutting the stable door after the horse has bolted. Clearly, given the rather weak possibilities for shoring up bank balance sheets via retained earnings, this has led to some forced asset sales. European banks are active in c. 30% of cross-border financing, and this has likely weighed most of all on emerging markets (Eastern Europe, but possibly some others - LatAm included). One might infer the wrong thing from watching price action of assets under pressure for this reason if one does not take into account the forced selling which will come to an end in just a few months. Typically in this scenario, the low tends to be made some time before the deadline.

In the bigger picture, I think we are at a buying opportunity for many equity markets comparable to the pricing of a few weeks after the March 2009 low. Price is higher in many markets, but so are earnings and sales. There are certain specific reasons why I do not believe we are in for a Great Depression 2.0, and that I think the bear market for US and other equity valuations that began in 1999/2000 is now over.

So I expect US equities to outperform gold from here, and I am constructive in particular on Indian equities, German equities, US financials, US homebuilders. I liked buying the SMI and FTSE in September last year, and see no reason to change my mind. I am positive on agricultural commodities - corn and wheat, and think platinum, silver and copper can outperform gold. I believe that there is a significant risk that crude is in the process of making a very major high that may hold for a few years. Even if the structural story about peak oil and BRIC demand is correct, we can certainly see a major retracement of the entire rally since 1998 given the tremendous increase in energy supply we have seen from shale oil and shale gas. Price does lead to a supply response, but sometimes the lags can be significant, and commentators, becoming impatient, think that there will never be a response. So if I am right, this would be very negative for NOK, CAD, and RUB. It is interesting in this context to note how beloved the former two currencies are amongst conventional macro investors. I am bigger picture bullish the US dollar (on a multi-year horizon), but think in the near-term it has further to correct against NZD, MXN and INR. It is not because I hate the EUR that I like the dollar - I think the EUR itself has made a major low on a trade-weighted basis. JPY looks interesting to line up for shorts. I am bearish fixed income - 10 year gilts, 10 year bunds and 30 year UST.

Dollar Bullish Thesis

2011-06-08T01:19:00.001+01:00

I am very grateful to Marc Faber for the mention in the June edition of his Gloom, Boom and Doom report.

If anyone would like to receive a write-up of my bullish case for the dollar (and the associated bearish prospects for industrial commodities, emerging markets and hard assets ex US real estate), please do email me.

My address is laeeth2 at gmail dot com.

Laeeth Isharc

Bling is Dead?

2011-05-08T21:23:00.001+01:00

In August 2008, I suggested that the trend towards materialism and display of wealth manifesting as ‘bling’ was exhausted. (We see from the research of the Foundation of the Study of Cycles that there are 9 year and 30 year cycles in church membership reflecting an underlying social oscillation between materialism and idealism/spirituality. A study written up in the 1991 Jan/Feb edition of Cycles Magazine explores this in more detail.

This was picked up in the mass media a few months later in Jan 2009 as Karl Lagerfeld prophesied an era of the ‘new modest’ ahead.

Lagerfeld said: "This whole crisis is like a big spring house-cleaning - both moral and physical.

"There is no creative evolution if you don't have dramatic moments like this. Bling is over. Red carpetry covered with rhine-stones is out. I call it 'the new modesty'."

Bling is a type of ostentatious fashion. The word was coined by hip hop stars to mean flashy, in a good way, but has come to be used in wider culture as a general term for the overt demonstration of wealth.

His comments follow those he made earlier this month to BBC Radio 4's Today programme, when he said he believed the recession was more like "a cleaning out".

"It was too rotten anyway," he said.

He thought the recession could affect fashion and design "in a good way".

"I do not think we were on the best way," he said. "I think it's a difficult moment for a lot of people and a lot of things, but in the end it was really needed, because it was really gone too far."

He concluded: "I see it like a healthy thing, a horrible but healthy thing. It's a medical treatment of the world, I see it like this."

Fashion in architecture is rather slower moving than in clothing, and so it is not surprising to see the architect of the hideous Gherkin building only now catching up with developments.

"The age of bling is over," said Shuttleworth, who led the team at Norman Foster's firm that designed the 7-year-old tower in the City of London financial district. He said it would never get off the ground today. "Money now drives everything, so if you can build something for half the price, you will," he said.

By the time a trend reaches mainstream media, it is rarely early in its development. It will be interesting to see how this develops.

Hiatus from posting

2010-01-28T01:23:00.001Z

Bloomberg have asked me not to post Bloomberg charts here. It is a mystery to me as to why my posting images from their system should be of concern when there are hundreds of thousands of Bloomberg charts posted on other financial blogs – mostly without explicit permission.

In the medium term I shall likely move to a competitor – CQG are very much less restrictive, and in my experience very oriented towards the needs of their user base. In the short term, please contact me directly if you would like to receive my thoughts on markets. For now at least, I do not think Bloomberg objects to their own users sharing Bloomberg charts amongst themselves.

New Bloomberg Book on the Demark Indicators

2009-07-17T14:30:00.001+01:00

Jason Perl on Demark indicators

Time for a pause

2009-04-16T13:26:00.000+01:00

There have been ample trading opportunities since my last post of early January, but nothing truly worth blogging about. We have indeed seen the pickup in growth rate of leading indicators of economic activity that I thought we might. Economic data have also surprised persistently to the upside since the gloomy days of November 2008.

Commodity-related stocks, short bonds and long break-evens have all performed well since early Jan.

FCX - copper

RSX - Russia ETF

5y US breakevens

TBT short bond fund

I have also been involved on the short side of EUR/GBP fx, thinking that we might have seen a significant top in the Euro against other European crosses. Eurozone countries that relied on credit-driven domestic demand growth during the previous era will find it difficult to maintain adequate levels of demand without a very pronounced depreciation in their real exchange rate. Given the poor flexibility of these economies, this is not likely to come about via the deflationist route and so it seems to me more likely that they lower their nominal exchange rate (ie the Euro) with inflation in Germany allowed to pick up over time. Germans are unlikely to be thrilled by higher inflation, but this is not a concern for the moment given the cyclical situation and is likely to be politically more acceptable and feasible than a fiscal bailout of PIGS + E Europe.

A policy of wage restraint has allowed German relative unit labour costs to be competitive even with EUR/USD very strong. Despite the national pessimism over the economy (it is interesting to note that house prices are not much higher than the previous 18 year cycle high in 1992), the undercurrents are shifting and one might expect significantly brighter relative performance over the next 10-20 years once global growth starts to pick up. Possibly German exporters might start to look interesting. I will also explore plays on domestic demand.

EUR/GBP FX

Trade-weighted Euro ex USD

BMW

The consensus now starts to realize that it is likely we will avoid a repeat of the Great Depression of the 1930s, at least for now. There have been many stories on Bloomberg the past few days making this observation and pointing to the sharp rises in commodity prices and global equities since the lows. Interestingly this coincides with various Demarkian signs of price exhaustion as we approach the April 19th-23rd cyclically important date.

ECRI Weekly Leading Indicator Growth Rate

Citi Index of Econ Surprises (Major Economies)

So I feel it is now time to lighten up on risk, express tactical bearish trades and start thinking about which securities should be bought in the event there is a wobble in risk aversion.

In the longer term Japanese small caps start to look interesting - particularly growth. They have performed horribly over the past three years, but represent outright value here and on a longer term basis the chart shows positive divergence vs the NKY. Elliott Wave International published a piece recently suggesting the JSDA might be entering wave 3 up on a longer term basis. I have been playing via JOF, JSC and JPS LN - none of these are very liquid. Possibly easier to wait to establish a full position till the uptrend is established but maybe okay to have a small position now.

Buy commodity-related equities, buy breakevens and sell global fixed income. Why? Maybe It's just time.

2009-01-03T22:59:00.001Z

[First draft of my post; Bloomberg charting is not functioning so rest will follow].

Bonds and economic activity

Since I turned bullish on European fixed income on the 3rd of July ahead of the ECB meeting, fixed income markets globally have seen a wondrous rally with market commentators expecting quantitative easing to be implemented across regions. I initially expected upside for ERZ9 from 94.63 towards the 95.77/96.00 level, but that proved much too conservative and the contract settled on Friday at 97.795.

I think it is now time to exit longs and look for opportunities to establish shorts (either near current levels via options, or using countertrend technical indicators to short outright with a tight step making several attempts, if necessary). Time horizon for the shorts will be initially tactical, but as the trade proceeds evidence may emerge to suggest that it is a turn of a more significant order.

Why be bearish? After all, the change in Nonfarm Payrolls for November was a shocking -533K (vs survey -335) and prior month was revised down from -240k to -320K. This is pretty consistent with poor factory orders and sentiment surveys in Europe and Asia and at this juncture it is very hard to imagine the economic situation not continuing to deteriorate. More forward-looking survey data paints a similarly horrific picture.

Perhaps there is scope for a recovery in sentiment similar to what occurred in March 2008. I do think it is likely that we remain in a twelve year bear market associated with a period of economic depression in the developed world (with perhaps the post 1837 and post 1873 periods providing alternative templates to the overused example of the Great Depression of the 1930s). That clearly does not mean one extended period of negative or even sub-trend economic growth - there will be periods of ebb and flow within this secular bear.

On 1st December, the NBER officially recognised the current recession and found it to have commenced in Dec 2007. I do not have access to the study I wanted to post a summary of, but recognition of the recession has often (thought not in all cases) within weeks to months of the end, and as Hussman funds research point out, returns for asset markets following recognition tend to be much better than for the period between the start and recognition.

I think it is entirely possible global yields end up sub 1% as they did during the worst period of Japan's depression. However, at this juncture I believe that a great deal is discounted and that there is a good chance we see a very substantial selloff associated with an improvement in animal spirits from their present state of unrelenting gloom and despondency.

Ben Stein, who seems to have few redeeming features as an economic commentator, having been adamant for some months at the beginning of the recession that everything would be fine recently wrote an article for the New York Times arguing that without _further_ unprecedented massive government intervention, the economy might _never_ recover. So even the permabulls have come round to the depression scenario, it seems.

It's not at all my central case, but I suppose that one year from now looking back at the present time it is possible that the panic over a possible depression may be seen as an ill-founded hysterical response to shocking market declines that was not in the end based upon a well-tempered assessment of likely scenarios for economic activity. The response of the authorities has been without precedent - the US has a new president, and perhaps confidence in the new administration may stave off the worst consequences of the epidemic contagion of fear - for now, at least.

Broad credit growth, properly measured, will likely never return to the previous heights for a couple of generations (provided we avoid roaring inflation). But it is certain that for the time being we shall avoid the 29-33 collapse that was associated with every sovereign issuer in Europe except Britain, and much of Latin America and Asia defaulting as well as large numbers of banks in the US (in the days before deposit insurance).

I have written before about the importance of the state of animal spirits as at times the only fundamental that matters, and thought the Sidney Homer quote below was pertinent (via Bill Meridian and, indirectly, Paul Montgomery).

“With no change at all in the money supply or in tax rates, the American people at almost any
time are capable of putting on a roaring inflation or alternatively a roaring deflation.”

One way to measure risk appetite and velocity (the demand for money) is to look at desired balance sheet size in relation to cash holdings. The Fed is now expanding base money at an annual rate of 105% - a rate not normally seen outside of hyperinflationary economies. To date this has been more than offset by deleveraging by the financial and non-financial private sectors. At some point, should risk appetite pick up, the excess money created will likely find its way into asset, commodity and consumer prices.

US Base money growth (ADIMBSY)

Various cycle analysts have established a somewhat esoteric connection between the sunspot cycle and risk appetite (with risk appetite being coincident with the rate of change of solar activity and the causal mechanism being via electromagnetic influence on the human organism). The sunspot cycle is almost three years late and some discussion relates this to the possibility that the next cycle may be very weak, even forming part of a new extended period of low solar activity such as that of the Dalton minimum. However some work suggests a bottom in the first quarter of next year, and that might be coincident with a pick in risk appetite of intermediate magnitude and duration.

My central scenario is that, although we will likely see a tradable bounce now, the cyclical bear market within the bear saeculum might last around 1000 days or so, suggesting a low in summer 2010. This might also coincide with a more durable low for industrial commodities and a broad commodity index. However as a trader I do not have the luxury of investing based upon a very long term roadmap, and I will try to respond to events as they unfold. A roadmap can enable primed recognition of emerging themes, but it can be dangerous to stick to it stubbornly. (As we saw with the roaring inflation theme that climaxed in summer 2008).

As I wrote a few weeks ago, The Economist magazine recently announced 'all you need is cash' on its front cover having prematurely heralded the end of the cash era at the top of the bull market in credit. A study by Paul Macrae Montgomery on mainstream magazine cover stories suggests that although the trend in force at the time the cover is published continues for some weeks it is often very substantially reversed after a few months.

Nov 2008 Feb 2007

Here is a chart of the Weekly ECRI US Leading Indicators Index for Growth. I posted it in March 2008, around the time of the PEI cycledate, and of course the subsequent bounce in the index - although arguably based on very thin foundations indeed - was associated with a substantial rally in risk assets and brutal correction in fixed income.

We have completed 5 waves down and hit confluence of lower wave 3 and wave 5 targets. We had a 13 combo on the 11th Oct whose risk level has been taken out, but we now have a 13 seq as of the close of week ending 5th Dec followed by a price flip.

It's certainly possible for wave 5 down to extend but, should this turn here prove sustainable, it could be a turn of some magnitude given the complete wave structure. I am not predicting it, but certainly there is nothing wrong with this picture if we were looking to assess the likelihood that the first recession will soon be over (which would not rule out a deterioration a few months later).

Here is the picture during the last recession

The first 13 following a 5 wave move down that hit targets appeared 30 Mar 2001 - this continued to a setup 22 Jun 2001 but then made a new low and did not put in a base till some time later. This was associated with a 24.6% rally in the Dow from 9106.54 on 22nd March to 11350.05 on 22nd May 2001. Of course the equity market is a component of the leading indicators, so this is somewhat self-referential. (Ideally one should look at the various sub components individually, but I don't subscribe to the ECRI data).

NAPM PMI monthly - 12 combo/4 setup

ISM non-manuf PMI - 6 setup at wave 3 target

Coincident:Lagging ratio monthly - wave 5 down, 9 setup

US Existing Home Sales Inventory Qtly - 13 at the high

US Existing Home Sales SAAR Mthly - 11 combo

Case Shiller Composite 20 City Home Price YoY Mthly

30y FNMA current coupon

Monday 8th December 2008 is part of the PEI 8.6 month cycle series (the last turn being late March this year). It is interesting then that a range of markets at various horizons are at important junctures from a wave structure and price exhaustion perspective. One might expect a significant regime shift in which many of the recent moves are unwound.

Firstly an annual continuation chart of the US bond future -

We had a 13 combo sell dec 2005 with an overlapping setup. The setup completed and perfected last year and this year's bar is a seq 13 (with termination count=open).. Price exceeds the TD Channel by tens of points, and we might expect consider plays for price to close back within the channel this year. So we are potentially set up for a turn of very important magnitude indeed, although in theory we should be prepared to wait twelve bars for a possible response to the signal. That might suggest a response window between now and 2021 - not so helpful - but of course, as Gann said, the longer term cycles are triggered by shorter term ones , and one can wait for these to turn. For example the annual Dow sell from 2004 can be said to have been triggered by the May 2007 first valid monthly combo since the 2002 low (the signal in Feb 2006 was recycled).

The annual yield chart for the ten year is less clear -

Significantly below the channel, and disqual TD line break. Qualified break of TDST support at 6.8020% would suggest completion to a 13 countdown, which would require years more of a rally. But not every qualified TDST break completes that far. There is also an unmet TD Line target at 1.4320 (again, not every target is met). [This is an old chart from Dec 2008 - Bloomberg is malfunctioning and won't produce an updated one]

Quarterly chart

9-13-9. Has pretty much met old TD Line targets (although there are some unhelpful negative yield targets outstanding).

Monthly

5 waves down complete and has met old TD Lines target and close enough to higher wave 5 target (2.51 vs 2.03). Unmet TD Line target of 1.2416

Weekly

5 waves down complete and has met lower target for wave 3 and higher target for wave 5. 9-13-9 with perfected recent setup. yields now testing disqual prop trigger up.

Daily

5 waves down complete and has met confluence of higher target for wave 5, prop down and TD Line target. Dual 13 combos completed near low with prop trigger up. Subsequent qual break of refclose up on 31dec 08.

extreme bullish bond sentiment

Breakevens

US 10y breakevens (weekly)

5 waves down, at confluence of wave 5 target and wave 3 4.25 extension. Weekly 13 combo/8 setup.

US 10y breakevens (daily)

scope for sideways to lower to trigger pending combo and seq?

US 20y breakevens (daily)

Long end looks more compelling (fundamentally too).

TIP/TLT ratio of ETFs - weekly

TIP/TLT daily

TIP/TLT duration weighted?

Commodities and related equities

Our Subprime Leadership

2008-12-27T21:56:00.001Z

Technological advances have dramatically transformed the provision of financial services in our economy. Notably, increasingly sophisticated information technologies enable lenders to collect and process data necessary to evaluate and price risk much more efficiently than in the past. For example, the expanded use of credit-scoring models, by reducing the costs of making loans and by increasing the range of assets that can be securitized, has facilitated greater extension of credit to a larger group of borrowers. Indeed, we have seen an increasingly wide array of products being offered to consumers across a range of incomes, leading to what has been called the democratization of credit.

-- Ben Bernanke testimony before Congress May 23, 2006

Although the severity of the financial stresses became apparent only in August [2007], several longer-term developments served as prologue for the recent turmoil ... The first of these was the U.S. housing boom, which began in the mid-1990s ... A second critical development was an even broader credit boom, in which lenders and investors aggressively sought out new opportunities to take credit risk even as market risk premiums contracted ... he explosive growth of subprime mortgage lending in recent years was yet another facet of the broader credit boom. Expanding access to homeownership is an important social goal ... But, clearly, much of the subprime lending that took place during the latter stages of the credit boom in 2005 and 2006 was done very poorly.

-- Ben Bernanke, International Monetary Conference June 3, 2008

(via Richebacher letter)

Still Delusional

2008-12-27T21:31:00.001Z

From House & Home section in this weekend's FT

Why anyone should listen to real estate industry analysts is a fairly important question. None of the agencies or organisations that regularly comment on the housing market predicted the 2008 crash so why should we think we know any more now?

But we are in a very different situation than we were a year ago. In 2007 we were at the top of the boom and the question was when it would turn to crash. Now we are in the crash and whether prices fall 30 percent or 50 per cent, at some point in 2009 the market is likely to hit bottom or be close to it. This is the time to prepare to buy before the herd moves in.

No mention of valuation, credit conditions or the 18 year real estate cycle.

The Financial Times was once a good newspaper...

Do Fight the Fed

2008-12-22T14:08:00.001Z

Some charts/commentary from s.d. rock - demarkian commentary coming up soon.

From: sjrock (Steven Rock)
Date Posted: December 15, 2008 at 10:20:13
Subject: XAU, Fibonacci and Thyme

Coming up......
1. '06 top + 2.618 yrs = 12/22
2. '04 low + 4.618 yrs = 12/22
3. ATH + 199 t = 12/26 or 12/29
4. ATH + 288 c = 12/27
5. ATH + .786 yr = 12/27
6. '05 low +3.618 yrs = 12/28
7. '02 low + 1618 t = 12/29-12/30
8. '00 low + 1618*root(1.618) t = 12/31
9. 10/24 low + 2*34c = 12/31
10. 10/24 low + 47 (Lucas)t =around 12/30

Could Civil War be ahead of us?

2008-12-10T00:23:00.001Z

Disturbing note by Walter Molano of BCP Securities - friend of Marc Faber.

Overview: Feuding Swans
The onset of the global credit crisis and the deepening of the U.S. recession make people wonder if a conflict is on the horizon. History tells us that the demise of a hegemonic power is accompanied by military confrontation, as the rising aspirants elbow for position in the new global order. With Russia and China, two historical rivals of the U.S., moving into stronger positions, many people wonder if the next global engagement will be with be them? However, a quick look at the order of battle will tell you that such a possibility is ludicrous. The U.S. has more ships, aircraft and weapons than the rest of the world combined. A conflict with either one would be over in a very a short time, with the U.S. as the victor. Some people reply, that the deepening of the economic crisis could erode U.S. military resources and eventually put it on a level playing field. That may, and will probably, be the case, but such a rebalancing process could take a long time to implement without a major catalyst. A mechanism that could hasten such a transformation is a radicalization of domestic environments.

Hegemonic powers are always considered to be homogenous structures. However, they are not. They are usually an amalgamation of feuding factions. Hegemonic powers often implode, especially after they defeat competing rivals. Ancient Greece was a case in point. The defeat of the Persians in 479 BC left Greece as the single most powerful nation on the earth. However, with no external enemies to fight, the city-states turned on each other, bringing the empire to its knees during the Peloponnesian War. Rome was another example. The empire was under constant attack from the barbarian tribes that inhabited the northern reaches of Western Europe, but it was the internecine wars that dismembered the empire and made it vulnerable.

Civil wars can appear in the most unlikely of places. Spain was an important case in point. The unification of Spain under the Catholic Kings was such a powerful catalyst that it catapulted the Iberian nation into the vanguard of the global economy. For the next two centuries, Spain controlled the globe. Through its navies and the vast wealth generated by its colonies, Spain was the deciding force on the global political stage. Napoleon's invasion at the start of the 19th century brought the country closer together, with Spanish guerillas fighting savagely to rid themselves of the French invaders.

However, the humiliating loss of empire and the evaporation of its wealth were too much for Spanish society to swallow. The cultural divisions that always enhanced the patchwork of Spanish identity now became the fissures of social division. The various regions and dialects became reasons for conflict. The social cleavages of urban versus rural, left versus right, and religious versus secular sowed the seeds for one of the cruelest civil conflicts of the 20th century.

The polarization of society is already taking place. The economic downturn is widening the income gap, and the middle class is shrinking. The recent events in India confirm that the violence is on the rise. No country is immune. The fear and hatred that ran down both sides of the aisles during the U.S. presidential elections and the accusations that were thrown showed that the social fabric was ripping. The question is how society will cope once it realizes that credit is gone for a long time. People around the world will have to severely curtail their economic activity. Moreover, they will have to overcompensate in order to build up savings for future acquisitions. This is devastating for a society established on the concepts of reckless consumption. All of this will add to the level of social frustration and humiliation that could eventually be manifested in domestic unrest. Such scenarios are painful to contemplate, and they are improbable.

Nevertheless, in an age where we encounter black swans on almost a daily basis, we need to consider all possibilities.

What impact would a Chinese deval have on markets?

2008-12-04T03:46:00.001Z

CNY Spot Qtly

CNY Daily

EURCNY Daily

AUDCNY Daily

What should one make of the significant appreciation of CNY vs its trading partners? Not clear China needs a terms of trade appreciation right now. To some extent, I wonder if inability of administered CNY to depreciate steadily alongside other non-USD currencies has led to pressure building on non-CNY foreign currencies.

Perhaps recognition by policymakers of what is already priced into the NDF (non deliverable forwards) could lead to a jump appreciation in foreign currencies. Intuitively I would think also a selloff in bonds.

I need to articulate more clearly the logic in a future post.

USD/CNY Revisited

2008-12-02T04:30:00.001Z

I wrote on 30th June about prospects for upside to 1y CNY NDF as we approached the Olympics. We did pull back to a touch below 6.42 as I suggested was required, and since then we have seen a rally to the current high of 7.325.

Although we have reached confluence of initial target for wave 3 and td prop exhaustion at a time of short-term overbought condition and a pullback would not be surprising, I do expect further substantial upside over time. Daily wave 5 targets to 7.75 and 8.44 and TD Line targets 8.01 and 8.1057.

Daily USDCNY 1y NDF

Weekly USDCNY 1y NDF

Weekly chart bullish - having completed 5 waves down and hit multiple dwave targets and then made qual break above TDST, one should expect completion to a countdown at least (and at least a decent fibo retracement of the move). Daily targets above look not implausible.

Still too early to buy Gold?

2008-12-01T23:40:00.001Z

Qtly

13 seq at the closing high. REI arrow down on most recent bar.

Monthly

Setup bars 8 and 9 need to make a low below low of bars 6 and 7 (682.41) to perfect setup. Holding above TDST at 418.25 keeps trend bullish (ie plenty of room to correct).

Weekly

Open on 24 Oct confirmed qualified break of TDST support, suggesting countdown should complete to a 13. Recent bounce after hittiing confluence of dwave and TD Rel Retrace from the high is retesting confluence of breakdown level, unqualified TD Prop trigger and TD Trend up (and holding below 885.55 trender level). Suggests further downside is possible/likely, and one should look for selling opportunities on shorter-term horizon.

Daily

Recent bounce unable to break Rel Up in qualified manner. Market exceeded prop exhaustion but never met prop full range or dwave targets (Dwave 553.77, 330 and potentially lower [!]) and TD lines points to 434.41. Wave 1/A RSI less overbought than wave 2 or wave 4.

Market unable to hold cloud break on this try; let's see if base line holds as support. No seq 13 at the low despite qualified break of TDST support. Not looking very positive for gold here, although that doesn't rule out further near-term bounce.

Sentiment remains bullish

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7b334BB175-4F9A-4D66-A542-5E82E9108379%7d&siteid=nbkh

Sentiment

2008-11-30T22:02:00.001Z

Feb 2007

Nov 2008

Merkel on the Anglo Saxon Path to Ruination

2008-11-30T01:40:00.001Z

To the German radio presenter, the real news about the measures announced by Washington on Tuesday to jolt banks into lending again was not so much the astronomical costs, but a little-noticed comment in Hank Paulson’s statement.

“Millions of Americans,” croaked the US Treasury secretary, were being denied credit or facing rising credit card rates, “making it more expensive for families to finance everyday purchases”. The notion that families should finance everyday purchases on credit, the anchor commented, “suggests Washington has still to understand what brought us there in the first place”.

http://www.ft.com/cms/s/0/0c618e00-bd62-11dd-bba1-0000779fd18c.html

Softs, Gold Stocks, Fertilizer

2008-11-27T00:50:00.001Z

Brief notes - for now. more complete writeup to follow.

Cocoa

Cocoa Qtly (GSCI Spot)

Bullish chart. TDST breakout early in setup (completion to 13 countdown?) Reaction following perfected setup and close outside TD Channel. This month likely to close outside channel. Pullback so far holding TDST support and TDST breakout level.

Cocoa Monthly (GSCI Spot)

Bullish chart. 2002 qualified breakout of TDST resistance - pullback holding TDST support. 2007 qualified breakout of higher TDST resistance - pullback holding higher TDST support. Should progress to 13 countdown. Wave 3 confirmed by price breaking wave 1 high with RSI>60 (and RSI holding 40 zone in pullback) - price projects to c. 3x current level.

Cocoa Weekly (GSCI Spot)

Bullish chart so far. 5 waves up, combo at high and met price projection of 126.926. setup above TDST support, which held. Could be in B wave up or wave 5 could turn out to extend. REI green arrow up at the low previous bar with price near TDST support was good entry point. Break of Bloomberg Trender would confirm scope for a bounce, but for now confluence of disqual prop trigger and trender at 92.57 could act as resistance.

Cocoa Daily (GSCI Spot)

5 waves down after hitting dwave projection. Disqual break of TDST support at 100 progressed to 13 seq buy. Price holding above trender and refclose. Based off daily chart alone it would seem prudent to wait for a break of the cloud. However given bullish charts at higher horizon, buy dips mode (and add following a break of cloud) would make sense.

GDM Gold stocks

Fertilizer Stocks

MOS Daily

5 waves down; hit initial target. Qualified break of refclose

POT Daily

5 waves down; hit 4.25 target. Qualified break of refclose

Crisis of the Third Century

2008-11-24T13:47:00.001Z

http://en.wikipedia.org/wiki/Crisis_of_the_Third_Century

Economic impact

Emperor Diocletian. With his rise to power (284), the Crisis of the Third Century ended and gave rise to theTetrarchy.

Internally the empire faced runaway hyperinflation caused by years of coinage devaluation. This had started earlier under the Severan emperors who enlarged the army by one quarter^{[citation needed]} and doubled the base pay. As each of the short-lived emperors took power they needed ways to raise money quickly to pay the military's "accession bonus" and the easiest way to do so was by simply cutting the silver in coins and adding less valuable metals. This had the predictable effect of causing runaway inflation and by the time Diocletian came to power the old coinage of the Roman Empire had nearly collapsed. Some taxes were collected in kind and values were often notional in bullion or bronze coinage. Real values continued to be figured in gold coinage, but the almost solid silver coin, the denarius, used for 300 years was gone (1 pound of gold = 40 gold aurei = 1000 denarii = 4000 sestertii).^{[citation needed]} The currency had almost no value and trade was by barter.^{[citation needed]} Every aspect of the Roman way of life was affected.

One of the most profound and lasting effects of the Crisis of the Third Century was the disruption of Rome's extensive internal trade network. Ever since the Pax Romana, Imperial Rome's economy depended in large part on trade between the Mediterranean ports and over Rome's extensive road system. Merchants could travel from one end of the Empire to the other in relative safety in a few weeks, moving agricultural goods produced in the provinces, and manufactured goods produced by the great cities of the East. Large estates produced cash crops for export, and used the resulting revenues to import food and manufactured goods. This resulted in a great deal of interdependence between the Empire's inhabitants. The historian Henry Moss describes the situation as it stood before the Crisis:

Along these roads passed an ever-increasing traffic, not only of troops and officials, but of traders, merchandize and even tourists. An interchange of goods between the various provinces rapidly developed, which soon reached a scale unprecedented in previous history and not repeated until a few centuries ago. Metals mined in the uplands of Western Europe, hides, fleeces, and livestock from the pastoral districts of Britain, Spain, and the shores of the Black Sea, wine and oil from Provence and Aquitaine, timber, pitch and wax from South Russia and northern Anatolia, dried fruits from Syria, marble from the Aegean coasts, and – most important of all – grain from the wheat-growing districts of North Africa, Egypt, and the Danube valley for the needs of the great cities; all these commodities, under the influence of a highly organized system of transport and marketing, moved freely from one corner of the Empire to the other.^[1]

With the Crisis of the Third Century, however, this vast trade network broke down. The widespread civil unrest made it no longer safe for merchants to travel as they once had, and the financial crisis that struck made exchange very difficult. This produced profound changes that, in many ways, would foreshadow the character of the comingMiddle Ages. Large landowners, no longer able to successfully export their crops over long distances, began producing food for subsistence and local barter. Rather than import manufactured goods, they began to manufacture many goods locally, often on their own estates, thus beginning the self-sufficient "house economy" that would become commonplace in later centuries, reaching its final form in Manorialism. The common free people of the cities, meanwhile, began to move out to the countryside in search of food and protection. Made desperate by economic necessity, many of these former city dwellers, as well as many small farmers, were forced to give up basic rights in order to receive protection from large land holders. The former became a half-free class of citizens known as coloni. They were tied to the land and, in later Imperial law, their positions were made hereditary. This provided an early model for serfdom, which would form the basis of medieval feudal society.

Even the cities themselves began to change in character. The large, open cities of antiquity slowly gave way to the smaller, walled cities that were common in the Middle Ages. These changes were not restricted to the third century, but took place slowly over long periods of time, and were punctuated with many temporary reversals. However, in spite of extensive reforms by later Emperors, the Roman trade network was never able to fully recover. The decrease in commerce between the provinces put them on a path towards increased insularity. Large landowners, who had become more self-sufficient, became less mindful of Rome's central authority and were downright hostile towards its tax collectors. The measure of wealth at this time began to have less to do with wielding urban civil authority and more to do with controlling large agricultural estates. The common people lost economic and political power to the nobility, and the middle classes waned. The Crisis of the Third Century thus marked the beginning of the long evolutionary process that would transform the ancient world into the medieval world

Market Timing vs Fundamental Analysts

2008-11-19T09:27:00.001Z

Barry Ritholtz has a piece up here on the performance of the fundamental equity analysts looking at the steel sector. In particular it is worth noting that when the drivers of earnings switch from company-specific factors to more economy-wide macro factors and there is a big change in regime, the equity analysts always seem to be left behind.

I wrote here from a fundamental macro and market timing perspective about the cyclicals and materials in early August. Point and figure subsequently confirmed the very obvious breakdown.

UBS Carry Risk Index

2008-11-16T18:01:00.001Z

This is (as I understand it) based on a subset of the full UBS Risk index, and excludes EMBI spreads (emerging market credit risk). I wrote about this in mid-August elsewhere, but interesting to review recent developments

Weekly

As of early August we had 5 waves down and we hit confluence of dwave target prop down and TDST support mid-August. PEI date was 31st July, and mid August was the one year anniversary of the initial risk asset collapse following the initial credit-market panic of 2007. In the weeks following that bug signal we have seen the bankruptcy of Lehman brothers, the collapse of AIG and the conversion of all the remaining investment banks into bank holding companies as well as a massive expansion globally of government involvement in the financial markets.

Current juncture is unclear. Setup was completed at the end of October (very significant cycle date - PEI 8.6 years from the 2000 high as well as significant from the perspective of various esoteric cycles). However the setup completed above TDST resistance and was not perfected. Lack of perfection doesn't seem to be quite as critical on previous occasions for this index, but it does suggest this is not yet unambiguously a good buy risk opportunity.

Daily

No obvious signals on daily. Perfected setup on 10th October, which turned out to be a good opportunity to buy risky assets for a short-term trade. Risk index remains above TDST support for now and has yet to complete a seq or combo 13. Since it is close to confluence of TDST and 38.2% pullback + has a wave 2 completion (not shown) overall reading is consistent with bearish stance on risk assets if other signals confirm.

VXO Daily

VXO Weekly

Old VIX (original construction, as used in the 80s) is consistent with this picture. On the weekly, although was have completed 5 waves up and have hit wave target, we also have qualified breakout of TDST resistance, suggesting seq/combo should run to a 13 countdown. So far only setup phase is complete, and the setup is not yet perfected implying we need to make a new high.

Daily suggests scope to extend higher in a fifth wave, possibly to 150+.

Berkshire Hathaway

2008-11-16T17:23:00.001Z

Annual 13 combo.

Close below 200 week moving average for the first time since 2003. First break of $100k level since 2006.

Monthly MACD more overbought than previous major top in 98 with negative histograms.

Daily MA bearishly aligned.

Qtly perfected setup at the high followed by price flip (presuming we close in this region) and two successive qualified TD Lines break targeting 46k region.

Monthly 5 waves up and has hit wave 5 projection. 13 combo at the high. Break of Trender and TDST line. Setup perfected but below TDST support - break was not qualified so a retest of breakdown level is possible, but suggests trend is down.

Weekly 5 waves up and hit wave 5 projection. 13 combo at the high. Qualified break of TDST support suggests count will progress to a 13 countdown (and currently only a 6 setup). Break of trender support and low of wave 1 down. Next TDST support at 95k, but context suggests this will be broken. Overall picture quite consistent with 45-50k eventual downside.

Daily Trender and refclose down. Prop full range 74.8k; dwave target 80k then 38k. Setup suggests lower short term before chance for a bounce. Sell rallies.

Weekly perf vs SPX - dwave structure looks complete having hit confluence of dwave target and prop full range.

Buffett has benefited from post 1982 bull market by using insurance 'float' to finance asset purchases. Similar economics to being levered long, except that cost and stability of financing at potentially much better terms than could be achieved via bank credit or issuing bonds. Here is what Buffett wrote in his 2004 letter.

The Power of Float
The source of our insurance funds is "float," which is money that doesn't belong to us but that we temporarily hold. Most of our float arises because (1) premiums are paid upfront though the service we provide - insurance protection - is delivered over a period that usually covers a year and; (2) loss events that occur today do not always result in our immediately paying claims, because it sometimes takes many years for losses to be reported (asbestos losses would be an example), negotiated and settled. The $20 million of float that came with our 1967 purchase (National Indemnity- NICO) has now increased - both by way of internal growth and acquisitions - to $46.1 billion.

Float is wonderful - if it doesn't come at a high price. Its cost is determined by underwriting results, meaning how the expenses and losses we will ultimately pay compare with the premiums we have received. When an underwriting profit is achieved - as has been the case at Berkshire in about half of the 38 years we have been in the insurance business - float is better than free. In such years, we are actually paid for holding other people's money.

If we are indeed correcting the entire post 82 bull market, such a structural synthetic levered long position may perform particularly badly. Bear markets tend to be unkind to the former icons of the preceding bull and it is hard to think of a better loved and respected representative of the equity culture. Once admired value investors such as Bill Miller of Legg Mason have already given up huge portions of their outperformance - maybe in the end even Buffett will not be immune. It's possible Buffett will have cause to regret his investments in GE and GS. Not clear that he has very strong expertise in grasping the nature of the balance sheet and business models he has bought into.

Richard Russell, the 84 year old Dow Theorist, wrote the following about Buffett, and I am inclined to agree.

November 13, 2008 -- I was talking to my partner on the phone yesterday. He mentioned Warren Buffett who's been saying, "When people are scared, be greedy." Buffett's been advising buying stocks in this area -- he says he himself has been buying.
I replied, " Buffett's a youngster, he's only 78, he never lived during the Great Depression as I have. With due respect to Buffett, I don't think he knows what real fear looks like. I'm not going to go through a description of my experiences during the '30s again (I've done that before), but you have to be my age (over 80) to know what it was like during the Great Depression. It was worse than anything we've seen so far in the current recession. Example -- My Grandma owned a house by the sea in Far Rockaway, New York. My mom was born in that house. Grandma died during the Depression, and my parents decided to sell the Far Rockaway house for anything to raise money. The best bid they got for that house was $2500. And that's what they sold it for. That's how scarce money and buyers were during the Great Depression.
So when Warren Buffett says that this is "scary time" and it's time to be greedy, I think to myself, "Warren, you've never seen really scary times. You were too young. This bear market, I believe, is in the process of correcting all the leveraging and debt-accumulation since World War II. Honestly, I have no preconceived notion as to how rough things may become. But I have memories.
We have to remember that Buffet started Berkshire Hathaway's operations in 1967. The Dow was in the 800s when Buffett started his fortune-building. Since the time when Buffett started operating Berkshire, the Dow has never declined substantially below the level from which Buffett started his operation. In other words, Buffett has had, in effect, a long bull market during all the years of Berkshire's existence. Buffett has never been "under water" as many hedge funds are today. And I wonder, could that change? Warren has never had to deal with a true, devastating primary bear market.

Russell's point is made clear by looking at a monthly log chart of the Dow - even buying at the top in 68 the worst drawdown in nominal terms was only 40% by 1974. It's possible/likely we will experience a correction of much greater magnitude given the (as yet unrecognised) appalling nature of basic conditions.

As I wrote in early July, quoting George Karaholios, ""In general, during tumultuous times, people buy what they 'know' to be safe". Since then supposed safe havens such as Apple, Rimm, cyclical and commodity stocks and 'high end' real estate have been utterly destroyed. I would be very surprised if something similar does not happen to BRK over the coming months.

Druckenmiller

2008-11-13T11:18:00.001Z

from New Market Wizards. he describes a very different approach to that of most managers today.

George Soros has a philosophy that I have also adopted: The way to build long-term returns is through preservation of capital and home runs.
You can be far more aggressive when you're making good profits. Many managers, once they're up 30 or 40 percent, will book their year [i.e., trade very cautiously for the remainder of the year so as not to jeopardize the very good return that has already been realized]. The way to attain truly superior long-term returns is to grind it out until you're up 30 or 40 percent, and then if you have the convictions, go for a 100 percent year.
If you can put together a few near-100 percent years and avoid down years, then you can achieve really outstanding long-term returns.

What Went Wrong?

2008-11-12T11:13:00.001Z

From a research note by Dr Walter Molano, Head of Economic and Financial Research at BCP Securities LLC

“What went wrong?” This is one of the central topics of discussion. Most
people agree that there were many reasons for the collapse of the U.S.
financial system. Most say that there was lack of regulation and loose
monetary policy. There is a consensus that the state should play a larger
role in overseeing the markets. However, if this is so obvious, why wasn’t it
six months ago? If monetary policy was so lax, why were there no complaints? With the multiples of well trained economists and theoreticians, how was it that such glaring mistakes were never noticed.
To say that there was very little regulation is to surrender reality. What about the SEC and the FSA, and the tomes of regulations they deployed to regulate financial institutions. What about the leagues of compliance people and lawyers that were hired, or how about the draconian rules and Chinese walls that controlled every aspect of daily business life? The problem was not a lack of regulation.
The problem was too much regulation.

Martin Armstrong's New Essay

2008-11-05T11:46:00.001Z

This the guy who nailed years in advance the all-time top in Nikkei, equity high in July 98 and the tight in credit spreads Feb 2007.

"It's Just Time", courtesy of my friend at Contrahour

I have not yet had a chance to read, but will post thoughts over the coming weeks.

What do hedge funds do?

2008-10-30T16:31:00.001Z

Is it really about alpha generation?

Candy and Candy Kaput?

2008-10-30T12:31:00.001Z

I wrote previously about the vulnerability of high end developers, and about the ephemeral nature of certain kinds of prestige.

CPC sought to modify or extend its loan, which matured early this month. But its efforts faltered, and Credit Suisse Group, acting as agent for a group of creditors, on Wednesday filed a notice of default in the office of the Los Angeles County registrar."

http://ftalphaville.ft.com/blog/2008/10/30/17625/serving-candy/

The Candy brothers’ Candy & Candy will remain development manager and interior designer for 9900 Wilshire. But it will cease to be development manager at Noho Square.

This site in Fitzrovia, which was bought for £175m in 2006, was bought with £21m of equity from Kaupthing and £14m of equity from CPC. The site, however, is now worth far less than its purchase price and the last informal valuation put the site value at around £120m. There is also a £200m senior debt loan on the site. The CPC group has no liability on the senior loan.

http://www.propertyweek.com/story.asp?sectioncode=297&storycode=3126331&c=1

British brothers Christian and Nick Candy have spearheaded a number of high-end property projects, and the Candy-led venture in Beverly Hills typified their optimism during the recent property boom.

CPC bought the eight-acre site, wedged between Wilshire and Santa Monica boulevards, for $500 million in April 2007. Just four years earlier, the parcel had traded hands for less than $50 million.

http://online.wsj.com/article/SB122532158922982061.html?mod=googlenews_wsj

Update on previous thoughts - ags, cyclicals, materials, steel, fx

2008-10-30T05:40:00.001Z

Thought it better to put out a brief update now , even if it is a bit unpolished.

I thought in late April that there might be a medium term top in agricultural commodities given hysterical sentiment, and various technical signs of price exhaustion at wave projections. Since then the DBAGIX index (underlying DBA ETF) has collapsed by 38%. Some signs of price exhaustion after hitting projected targets and we have a qualified close above refclose (no critical qualifier condition yet met).

Hadik thinks Oct could mark a near-term low in the grains. It's unclear whether the foundation for a new bull market can be laid so soon after termination of the old one, but it is worth exploring opportunities to establish tactical longs over the next weeks.

Monthly

Weekly

Daily

I posted in early August about that in part because of the growing realisation that the 'us subprime crisis' was in reality much broader in scope there would be "extreme danger for longs in cyclical stocks, materials, steels and agriculture". This unwinding of the global growth/decoupling theme has played out in a brutal, relentless fashion taking down some famous names in money management and hedge fund land.

In June I observed that 'impossible is nothing' in the current environment and suggested that options were mispriced versus quite plausible scenarios. I suggested calls on financials and puts on materials/steel/cyclical stocks. Thinking about financial upside proved to be the wrong call (although in fact financials overall have performed in line with the SPX since June, and once we broke down technically there was no reason to stay long). Owning volatility and downside in cyclicals has worked wonderfully.

It has truly been a train wreck - people stubbornly sticking to their thesis despite a clear climax amidst hysteria after a parabolic advance in these themes. The FT magazine earlier this year launching a wealth supplement targeted at the super-rich featuring a grinning Mittal and son on the front cover was only one of many signs people were focusing only on further upside without considering the impact of a slowing US current account and subsequent impact on global credit growth. Strategists David Fuller and Don Coxe have sadly remained bullish on their fundamental themes all the way down in spite of the incredible wealth destruction, with the latter sadly resorting to blaming market manipulation for what ultimately is now clearly more of a move to revert to pricing the true fundamentals.

SMN double short materials fund + 290% from when I posted to the recent peak. Now showing signs of fatigue, but probably too early to bet the other way. It would be nice to see the current daily 10 seq complete to a 13.

SMN Daily

SMN Weekly

US Steel down -80% from my posting date to recent low. (Mittal and Cleveland Cliffs have had similar moves). Marc Faber and Jim Rogers nailed this swing in the steel stocks. Tough to ride out the position in significant size outright given the intraday volatility, but options were not expensive given the magnitude of the move we had just seen (let alone what was to subsequently play out). Probably too early to buy, but certainly worth covering most shorts

X Daily

X Weekly

MOO agribusiness ETF down 60% from my posting to recent low. Again probably too early to go long.

MOO Daily

MOO Weekly

More detailed FX comment coming soon. I wrote in mid-August about my concerns for E European currencies. The region is now blowing up and is being discussed as potentially worse than Asia in 1997. So many borrowers took out foreign currency loans in EUR and CHF. Moves have been significant so far (for example 20% in GBPPLN, with much greater move vs USD) but charts below and my reading of the fundamentals suggest much further upside possible over the medium term.

GBPPLN

GBPHUF

GBPBGN

GBPLVL

Long US Growth vs Emerging Markets (equityland) has worked v well since i first mentioned 23rd June. Ratio has moved 50%+ since then. Prudent to take some more chips off the table as we are reaching initial projections. But medium-term I feel this trade has much further to go.

One can reasonably make an argument that much of the emerging market outperformance post 2003 was driven by a delusion - it's not clear that governance improved all that much. The synchronous nature of the outperformance certainly tends to favour the idea that much of it was driven by fast credit growth (which tended to validate the appreciation in asset prices by pumping up prices of exports of resource producers and generated an investment boom and demand for the end-products of manufacturing exporters, not to mention local real estate bubbles globally).

At this juncture, I do not know how much I say it was 100% a delusion. But there is an old rule of thumb that every mania is completely retraced. Should this apply here, one could imagine that the whole period of emerging market outperformance since 2003 should be retraced suggesting a doubling of the spy/eem ratio from here. Worth bearing in mind as one possible scenario, even if not very high probability.

. SPY vs EEM Daily

SPY vs EEM Weekly

What are the market opportunities going forward? Have mentioned tactically bullish view on DBA/agricultural commodities. I am inclined to wait for the period after the US election. I expect to be trading the dollar from the short side and equities from the long side.

More soon.

Baltic Dry

2008-10-30T04:16:00.001Z

It's funny how intellectual fashions change. A few years ago, when the focus was on payrolls, one received odd looks from fellow bond traders if one talked about the price of copper. These days the collapse in the Baltic Dry index of shipping costs is a top story on Bloomberg.

Qtly

Monthly

Weekly

Daily

Perfect confluence of sell signals at the highs. Now hit long-term targets. Chance to base here / await price flip and close above ref close for confirmation.

Gold/Copper

2008-10-28T19:25:00.001Z

Daily

Weekly

On the Present Distress of Prominent Fund Managers

2008-10-28T18:04:00.001Z

From Gustave Le Bon's "The Crowd"

It is seen from what precedes that a number of factors may be concerned in the
genesis of prestige; among them success was always one of the most important.
Every successful man, every idea that forces itself into recognition, ceases,
ipso facto, to be called in question. The proof that success is one of the
principal stepping-stones to prestige is that the disappearance of the one is
almost always followed by the disappearance of the other. The hero whom the
crowd acclaimed yesterday is insulted to-day should he have been overtaken by
failure. The reaction, indeed, will be the stronger in proportion as the
prestige has been great. The crowd in this case considers the fallen hero as an
equal, and takes its revenge for having bowed to a superiority whose existence
it no longer admits. While Robespierre was causing the execution of his
colleagues and of a great number of his contemporaries, he possessed an immense
prestige. When the transposition of a few votes deprived him of power, he
immediately lost his prestige, and the crowd followed him to the guillotine
with the self-same imprecations with which shortly before it had pursued his
victims. Believers always break the statues of their former gods with every
symptom of fury.

Prestige lost by want of success disappears in a brief space of time. It can
also be worn away, but more slowly by being subjected to discussion. This
latter power, however, is exceedingly sure. From the moment prestige is called
in question it ceases to be prestige. The gods and men who have kept their
prestige for long have never tolerated discussion. For the crowd to admire, it
must be kept at a distance.

Our Great Leaders

2008-10-01T06:33:00.001+01:00

Some quotes, courtesy of Fred Sheehan (via Marc Faber).

“We have not seen major spillovers from housing onto other sectors
of the economy.”
Ben Bernanke, June 21, 2007 – Federal Reserve Chairman

“I take comfort from the underlying economic strength…. Listen,
I’ve been watching markets for a long time. It’s my job to be vigilant,
so I’m watching these markets carefully.”
Henry Paulson, July 31, 2007 - Secretary of the Treasury

“Treasury Secretary Henry Paulson said on Wednesday the repricing
of credit risk was hitting financial markets, but subprime mortgage
fallout remained largely contained due to the strongest global
economy in decades.”
Henry Paulson, August 1, 2007 - Secretary of the Treasury

“To begin with, the bursting of asset price bubbles often does not
lead to financial instability…. There are even stronger reasons to
believe that a bursting of a bubble in house prices is unlikely to
produce financial instability…. Declines in home prices are far less
likely to cause losses to financial institutions.…”
Frederic Mishkin, January 2007 - Federal Reserve Governor

Jack Welch - Interviewed January 19, 2007
Q: What do you think of analysts who predict we'll be in recession in
six months?
A: They should find another line of work.
Q: Do you think sentiment is too bullish?
A: I'm not here as a market timer. I'm here to tell you this
economy's in one helluva good shape.

September 25, 2008
NEW YORK (Reuters) - Former General Electric Chairman and Chief
Executive Officer Jack Welch said the U.S. economy faces a deep
downturn in coming quarters, and he supports a proposed $700 billion
government rescue package for the financial sector.
"I now believe we are in for one hell of a deep downturn," Welch told
the World Business Forum in New York on Wednesday, adding that
the first quarter of 2009 will likely be "brutal."

Brief Note on FX

2008-09-23T06:25:00.001+01:00

I said here that I was long foreign currencies, in particular the pound, and that I expected a correction in the dollar rally. That has played out (I have also been long silver metal and mining stocks, gold, GDM, PBR and EEM vs SPY), and I am exiting positions.

Technically and fundamentally the picture is a bit murky at this juncture. Nothing about the Paulson plan is bullish the dollar, and certainly staving off collapse in the dollar money market is less dollar bullish than would otherwise have been the case (since market participants would have been staved of dollar liquidity).

The correction in EUR/USD and silver both seem incomplete - we are pressing against resistance, overbought in what remains for now a downtrend. Hadik has the Euro peaking/USD basing by October 10th - picture is not completely clear (and these cycles can invert). So for now just small short in EUR/USD.

Charts to follow.

Stocks 1929, Gold 2008?

2008-09-17T08:04:00.001+01:00

DJI 1929 Qtly

Gold 2008 Qtly

Perhaps the gold bugs are right, and the inflationary regime we experienced post 2002 remains intact. But what if they are missing something. and this really is the Big One? Certainly seems scope for downside to 650ish.

Inflation Climax Corrected

2008-09-17T07:32:00.001+01:00

I wrote in my post of the 11th June this year that I thought the inflation theme was "very played out, and we may see this take a rest for as long as a year or two. Truly remarkable how it's so often only towards the end of a theme that it is recognized more broadly. John Williams at Shadow Financial Statistics and Tom Hobson at ML have been writing about this for some years (certainly since 2005/06)".

The call was based in part on the technicals, but most of all on the glaring divergence between basic conditions and the mindless chatter of the herd and the media. It's poetic that only towards the final stages of a long period of excessive credit growth should the masses start worrying about the lagged effects of overly easy monetary policy - at the very time when the system driving credit growth machine was imploding because of its own internal contradictions.

Since then we have seen a remarkable collapse in implied belief in the inflation theme - from precious metals, to crude and food prices and to implied breakeven inflation rates globally. Mr Demark once again came to our aid in finessing the entry.

French 5y breakevens weekly

French 5y breakevens daily

I may update this post later with charts of other breakevens globally, but the basic picture is similar everywhere and for now this will suffice to capture the general idea.

Too early to say definitively that breakevens have based - technically more downside is certainly possible. But risk reward favours covering the bulk of short breakeven positions here. Beautiful how well Dwave has operated when applied in this context. Timing wise the top occurred a little after the ideal May/June window for a crude top and a little before the 31 July demi-PEI turn date.

Sad news about Lehman. When I was at a previous role working at a large US hedge fund in 2005, a gentleman from the BIS visited. He wanted to know if I thought the yen carry trade was a big risk to the system. I told him I thought the bigger risk was the assets that people were buying. What were investors and the regulators thinking? Generals always fighting the last war...

More to come on commodities and equity sectors shortly.

Dollar Weekly

2008-09-11T03:44:00.001+01:00

DXY

USD/CHF

JPY

EUR/USD

GBP/USD

SEK

NOK

RUB

HUF

PLN

ZAR

KRW

SGD

VND

CNY 1Y NDF

TWD

Cable

2008-09-10T01:56:00.001+01:00

IMM Cable Positioning

Most extreme short base since 2002 (and, given the explosion in liquidity since then, likely in history). IMM is only a small part of the market, but interesting to note (and I do usually find it more or less representative). I won't reproduce all charts here, but positions in other currencies are more normal with the exception of euro (shorts comparable to GBP though subjectively a bit less extended) and AUD (flat, which is relatively bearish in the history of the series).

Larry Williams sentiment numbers (I have more experience with DSI, but for now LW are all I have available) -

EUR 11% bullish
GBP 1% bullish
JPY 71% bullish

So, at the very least, now is not the time to be adding to shorts. Still another week before weekly setup completion. Last Rel retrace level of 1.80 had a qualified break/ not yet reached lower Dwave target. So scale into longs here - the stars don't quite all align.

GBP/USD Weekly

GBP/USD Daily

Price Exhaustion and Capitulation - the Darling Bottom

2008-09-08T07:00:00.001+01:00

I shall write more about the work of Tom Demark - the master of market timing - over the weeks and months to come. But for now I will just note an extremely astute observation of his - markets bottom when there is nobody left to sell, not because of smart/informed buyers coming in to buy at the low. It has taken me more than a few occasions over the years of being the dumb money stopping out of a long position at the low to realize just how profoundly true this is.

(Trading is an odd profession because compared to other careers - and even other roles within finance - one is judged more by performance itself ie the bottom line rather than by perceptions about performance. It's okay to be wrong, which is lucky because I have at least my share of bad calls. I have always found it more interesting and enlightening to discuss the trades that went wrong than those that go according to plan. But it is hard to imagine somebody in a metier such as consulting, where performance is less directly measurable and perception is everything, wanting to do the equivalent in their field).

On Friday morning I received a Bloomberg message from an esteemed and very senior contact at a major bank. "Looks like the time has come to just sell ... we are about to sell the next stage in deleveraging as our last avenues of global growth falter. [S]ell equities just do it and close your eyes and sell 1300 is a distant dream". I mention this not to pick on my friend, but to illustrate what capitulation feels like emotionally as an investor. It happens to the best of us at all horizons both in our investing lives and outside.

David Fuller has a saying "if you are going to panic, panic early". The reality is that (as Jim Rogers and Marc Faber have pointed out), the idea of decoupling in economic growth was bogus from the start, reminiscent of the idea in 2000 that the European and non-tech US economy would somehow decouple from the emerging slowdown then manifesting most prominently as the bursting of the dotcom bubble. Weakness in growth outside the US started coming through just when it was supposed to - and once again decoupling turned out to be a case of the periphery lagging the core.

Here is a chart from Barclays Capital of leading indicators of global growth - even the observable fundamentals have been deteriorating for quite some time. At this stage, growth plays and risk assets are very oversold and technical conditions suggest one should be thinking about trading longs, not establishing new strategic shorts. More to come later today/later this week.

Here's another instance of capitulation in a political context.

Alistair Darling, Chancellor of the Exchequer, gave an interview to the Guardian on 30th August admitting that Britain is facing "arguably the worst" economic downturn in 60 years which will be "more profound and long-lasting" than people had expected. Below is a daily chart of the GBP/USD exchange rate - observe the completion of 5 waves down and reaching initial downside target, with initial sign of price exhaustion the first trading day following the interview. The chart of GBP SONIA 2y swap similarly shows price exhaustion after reaching confluence of TD Prop down and TD Rel Retrace Magnet price.

Cable Daily

BPSWS2 Daily

BPSWS2 Weekly

Jesse Livermore

2008-09-02T01:40:00.001+01:00

Wikipedia entry on Jesse Livermore, author of the best book of all time on the phenomenology of trading.

Reminiscences of a Stock Operator

On the difficulties of adapting to a changing market
I didn't keep on trading the way I did through stubbornness. I simply wasn't able to state my own problem to myself, and, of course, it was utterly hopeless to try to solve it. I harp on this topic so much to show what I had to go through before I got to where I could really make money. My old shotgun and BB shot could not do the work of a high-power repeating rifle against big game.

On taking profits too quickly

Studying my winning plays in Fullerton's office I discovered that although I often was 100 per cent right on the market that is, in my diagnosis of conditions and general trend -- I was not making as much money as my market "rightness" entitled me to. Why wasn't I?

There was as much to learn from partial victory as from defeat. For instance, I had been bullish from the very start of a bull market, and I had backed my opinion by buying stocks. An advance followed, as I had clearly foreseen. So far, all very well. But what else did I do? Why, I listened to the elder statesmen and curbed my youthful impetuousness. I made up my mind to be wise and play carefully, conservatively. Everybody knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried to do; for I often took profits and waited for a reaction that never came. And I saw my stock go kiting up ten points more and I sitting there with my four-point profit safe in my conservative pocket. They say you never grow poor taking profits. No, you don't. But neither do you grow rich taking a four-point profit in a bull market.

Where I should have made twenty thousand dollars I made two thousand. That was what my conservatism did for me. About the time I discovered what a small percentage of what I should have made I was getting I discovered something else, and that is that suckers differ among themselves according to the degree of experience. The tyro knows nothing, and everybody, including himself, knows it. But the next, or second, grade thinks he knows a great deal and makes others feel that way too. He is the experienced sucker, who has studied not the market itself but a few remarks about the market made by a still higher grade of suckers. The second-grade sucker knows how to keep from losing his money in some of the ways that get the raw beginner. It is this semisucker rather than the 100 per cent article who is the real all-the-year-round support of the commission houses. He lasts about three and a half years on an average, as compared with a single season of from three to thirty weeks, which is the usual Wall Street life of a first offender. It is naturally the semisucker who is always quoting the famous trading aphorisms and the various rules of the game. He knows all the don'ts that ever fell from the oracular lips of the old stagers excepting the principal one, which is: Don't be a sucker!

On trend following

Most let us call'em customers -- are alike. You find very few who can truthfully say that Wall Street doesn't owe them money. In Fullerton's there were the usual crowd. All grades! Well, there was one old chap who was not like the others. To begin with, he was a much older man. Another thing was that he never volunteered advice and never bragged of his winnings. He was a great hand for listening very attentively to the others.

He did not seem very keen to get tips -- that is, he never asked the talkers what they'd heard or what they knew. But when somebody gave him one he always thanked the tipster very politely. Sometimes he thanked the tipster again -- when the tip turned out O.K. But if it went wrong he never whined, so that nobody could tell whether he followed it or let it slide by. It was a legend of the office that the old jigger was rich and could swing quite a line. But he wasn't donating much to the firm in the way of commissions; at least not that anyone could see. His name was Partridge, but they nicknamed him Turkey behind his back, because he was so thick-chested and had a habit of strutting about the various rooms, with the point of his chin
resting on his breast.

The customers, who were all eager to be shoved and forced into doing things so as to lay the blame for failure on others, used to go to old Partridge and tell him what some friend of a friend of an insider had advised them to do in a certain stock. They would tell him what they had not done with the tip so he would tell them what they ought to do. But whether the tip they had was to buy or to sell, the old chap's answer was always the same.

The customer would finish the tale of his perplexity and then ask: "What do you think I ought to do?" Old Turkey would cock his head to one side, contemplate his fellow customer with a fatherly smile, and finally he would say very impressively, "You know, it's a bull market!"

Time and again I heard him say, "Well, this is a bull market, you know!" as though he were giving to you a priceless talisman wrapped up in a million-dollar accident-insurance policy. And of course I did not get his meaning.

One day a fellow named Elmer Harwood rushed into the office, wrote out an order and gave it to the clerk. Then he rushed over to where Mr. Partridge was listening politely to John Fanning's story of the time he overheard Keene give an order to one of his brokers and all that John made was a measly three points on a hundred shares and of course the stock had to go up twenty-four points in three days right after John sold out. It was at least the fourth time that John had told him that tale of woe, but old Turkey was smiling as sympathetically as if it was the first time he heard it.

Well, Elmer made for the old man and, without a word of apology to John Fanning, told Turkey, "Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled
to a reaction and that I'll be able to buy it back cheaper. So you'd better do likewise. That is, if you've still got yours."

Elmer looked suspiciously at the man to whom he had given the original tip to buy. The amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and soul, even
before he knows how the tip is going to turn out.

"Yes, Mr. Harwood, I still have it. Of course!" said Turkey gratefully. It was nice of Elmer to think of the old chap.

"Well, now is the time to take your profit and get in again on the next dip," said Elmer, as if he had just made out the deposit slip for the old man. Failing to perceive enthusiastic
gratitude in the beneficiary's face Elmer went on: "I have just sold every share I owned!"
From his voice and manner you would have conservatively estimated it at ten thousand shares.
But Mr. Partridge shook his head regretfully and whined, "No! No! I can't do that!"

'What?" yelled Elmer.

"I simply can't!" said Mr. Partridge. He was in great trouble.

"Didn't I give you the tip to buy it?"

"You did, Mr. Harwood, and I am very grateful to you. Indeed, I am, sir. But --"

"Hold on! Let me talk! And didn't that stock go up seven points in ten days? Didn't it?"

"It did, and I am much obliged to you, my dear boy. But I couldn't think of selling that stock."

"You couldn't?" asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers.

"No, I couldn't."

"Why not?" And Elmer drew nearer.

"Why, this is a bull market!" The old fellow said it as though he had given a long and detailed explanation.

"That's all right," said Elmer, looking angry because of his disappointment. "I know this is a bull market as well as you do. But you'd better slip them that stock of yours and buy it
back on the reaction. You might as well reduce the cost to yourself."

"My dear boy," said old Partridge, in great distress "my dear boy, if I sold that stock now I'd lose my position; and then where would I be?"

Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: "Can you beat it?" he asked me in a stage whisper. "I ask you!" I didn't say anything. So he went on: "I give him a tip on Climax Motors. He buys five hundred shares. He's got seven points' profit and I advise him to get out and buy 'em back on the reaction that's overdue even now. And what does he say when I tell him? He says that if he sells he'll lose his job. What do you know about that?"

"I beg your pardon, Mr. Harwood; I didn't say I'd lose my job," cut in old Turkey. "I said I'd lose my position. And when you are as old as I am and you've been through as many booms and
panics as I have, you'll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase
your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don't feel like throwing away a
second tuition fee. But I am as much obliged to you as if I had the money in the bank. It's a bull market, you know." And he strutted away, leaving Elmer dazed.

What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I ought to when I was so right on the general market.

The more I studied the more I realized how wise that old chap was. He had evidently suffered from the same defect in his young days and knew his own human weaknesses. He would not lay himself open to a temptation that experience had taught him was hard to
resist and had always proved expensive to him, as it was to me.

I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, "Well, you know this is a bull
market!" he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market
and its trend.

And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that
made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and
early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level, which should show the
greatest profit. And their experience invariably matched mine -- that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to
trade than hundreds did in the days of his ignorance.

The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.
Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that
the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for
keeps! Wait until you see -- or if you prefer, until you think you see the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision
to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last
eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across
the continent.

Another thing I noticed in studying my plays in Fullerton's office after I began to trade less unintelligently was that my initial operations seldom showed me a loss. That naturally made
me decide to start big. It gave me confidence in my own judgment before I allowed it to be vitiated by the advice of others or even by my own impatience at times. Without faith in his own judgment no man can go very far in this game. That is about all I have learned to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience.
can see a setback without being shaken, knowing that it is only temporary. I have been short one hundred thousand shares and I have seen a big rally coming. I have figured and figured
correctly -- that such a rally as I felt was inevitable, and even wholesome, would make a difference of one million dollars in my paper profits. And I nevertheless have stood pat and seen
half my paper profit wiped out, without once considering the advisability of covering my shorts to put them out again on the rally. I knew that if I did I might lose my position and with it
the certainty of a big killing. It is the big swing that makes the big money for you.

On somatic knowledge

(Worth reading Flavia Cymbalista - How George Soros Knows what he Knows)

You may remember the story I told you about that time when I was short thirty-five hundred Sugar in the Cosmopolitan and I had a hunch something was wrong and I'd better close the trade?
Well, I have often had that curious feeling. As a rule, I yield to it. But at times I have pooh-poohed the idea and have told myself that it was simply asinine to follow any of these sudden
blind impulses to reverse my position. I have ascribed my hunch to a state of nerves resulting from too many cigars or insufficient sleep or a torpid liver or something of that kind.
When I have argued myself into disregarding my impulse and have stood pat I have always had cause to regret it. A dozen instances occur to me when I did not sell as per hunch, and the
next day I'd go downtown and the market would be strong, or perhaps even advance, and I'd tell myself how silly it would have been to obey the blind impulse to sell. But on the
following day there would be a pretty bad drop. Something had broken loose somewhere and I'd have made money by not being so wise and logical. The reason plainly was not physiological but
psychological. I want to tell you only about one of them because of what
it did for me. It happened when I was having that little vacation in Atlantic City in the spring of i9o6. I had a friend with me who also was a customer of Harding Brothers. I had no
interest in the market one way or another and was enjoying my rest. I can always give up trading to play, unless of course it is an exceptionally active market in which my commitments are rather heavy. It was a bull market, as I remember it. The outlook was favorable for general business and the stock market had slowed down but the tone was firm and all indications
pointed to higher prices.
One morning after we had breakfasted and had finished reading all the New York morning papers, and had got tired of watching the sea gulls picking up clams and flying up with them
twenty feet in the air and dropping them on the hard wet sand to open them for their breakfast, my friend and I started up the Boardwalk. That was the most exciting thing we did in the daytime.
It was not noon yet, and we walked up slowly to kill time and breathe the salt air. Harding Brothers had a branch office on the Boardwalk and we used to drop in every morning and see
how they'd opened. It was more force of habit than anything else, for I wasn't doing anything.
The market, we found, was strong and active. My friend, who was quite bullish, was carrying a moderate line purchased several points lower. He began to tell me what an obviously wise
thing it was to hold stocks for much higher prices. I wasn't paying enough attention to him to take the trouble to agree with him. I was looking-over the quotation board, noting the changes
they were mostly advances until I came to Union Pacific. I got a feeling that I ought to sell it. I can't tell you more. I just felt like selling it. I asked myself why I should feel like
that, and I couldn't find any reason whatever for going short of UP.
I stared at the last price on the board until I couldn't see any figures or any board or anything else, for that matter. All I knew was that I wanted to sell Union Pacific and I
couldn't find out why I wanted to.
I must have looked queer, for my friend, who was standing alongside of me, suddenly nudged me and asked, "Hey, what's the matter?"
"I don't know," I answered.
"Going to sleep?" he said.
"No," I said. "I am not going to sleep. What I am going to do is to sell that stock." I had always made money following my hunches. I walked over to a table where there were some blank order
pads. My friend followed me. I wrote out an order to sell a thousand Union Pacific at the market and handed it to the manager. He was smiling when I wrote it and when he took it. But
when he read the order he stopped smiling and looked at me.
"Is this right?" he asked me. But I just looked at him and he rushed it over to the operator.
"What are you doing?" asked my friend.
"I'm selling it!" I told him.
"Selling what?" he yelled at me. I f he was a bull how could I be a bear? Something was wrong.
"A thousand UP," I said.
"Why?" he asked me in great excitement.
I shook my head, meaning I had no reason. But he must have thought I'd got a tip, because he took me by the arm and led me outside into the hall, where we could be out of sight and
hearing of the other customers and rubbering chairwarmers.
"What did you hear?" he asked me.
He was quite excited. UP. was one of his pets and he was bullish on it because of its earnings and its prospects. But he was willing to take a bear tip on it at second hand.
"Nothing" I said.
"You didn't?" He was skeptical and showed it plainly.
"I didn't hear a thing."
"Then why in blazes are you selling?"
"I don't know," I told him. I spoke gospel truth.
"Oh, come across, Larry," he said.
He knew it was my habit to know why I traded. I had sold a thousand shares of Union Pacific. I must have a very good reason to sell that much stock in the face of the strong market.
"I don't know," I repeated. "I just feel that something is going to happen."
"What's going to happen?"
"I don't know. I can't give you any reason. All I know is that I want to sell that stock. And I'm going to let 'em have another thousand."
I walked back into the office and gave an order to sell a second thousand. If I was right in selling the first thousand I ought to have out a little more.
"What could possibly happen?" persisted my friend, who couldn't make up his mind to follow my lead. If I'd told him that I had heard UP. was going down he'd have sold it without
asking me from whom I'd heard it or why. "What could possibly happen?" he asked again.
"A million things could happen. But I can't promise you that any of them will. I can't give you any reasons and I can't tell fortunes," I told him.
"Then you're crazy," he said. "Stark crazy, selling that stock without rime or reason. You don't know why you want to sell it?"
"I don't know why I want to sell it. I only know I do want to," I said. "I want to, like everything." The urge was so strong that I sold another thousand.
That was too much for my friend. He grabbed me by the arm and said, "Here! Let's get out of this place before you sell the entire capital stock."
I had sold as much as I needed to satisfy my feeling, so I followed him without waiting for a report on the last two thousand shares. It was a pretty good jag of stock for me to sell even with the best of reasons. It seemed more than enough to be short of without any reason whatever, particularly when the entire market was so strong and there was nothing in sight to make anybody think of the bear side. But I remembered that on previous occasions when I had the same urge to sell and didn't do it I always had reasons to regret it.
I have told some of these stories to friends, and some of them tell me it isn't a hunch but the subconscious mind, which is the creative mind, at work. That is the mind which makes
artists do things without their knowing how they came to do them. Perhaps with me it was the cumulative effect of a lot of little things individually insignificant but collectively powerful.
Possibly my friend's unintelligent bullishness aroused a spirit of contradiction and I picked on UP. because it had been touted so much. I can't tell you what the cause or motive for
hunches may be. All I know is that I went out of the Atlantic City branch office of Harding Brothers short three thousand Union Pacific in a rising market, and I wasn't worried a bit.
I wanted to know what price they'd got for my last two thousand shares. So after luncheon we walked up to the office. I had the pleasure of seeing that the general market was strong
and Union Pacific higher.
"I see your finish," said my friend. You could see he was glad he hadn't sold any.
The next day the general market went up some more and I heard nothing but cheerful remarks from my friend. But I felt sure I had done right to sell UP, and I never get impatient when
I feel I am right. What's the sense? That afternoon Union Pacific stopped climbing, and toward the end of the day it began to go off. Pretty soon it got down to a point below the level of
the average of my three thousand shares. I felt more positive than ever that I was on the right side, and since I felt that way I naturally had to sell some more. So, toward the close, I
sold an additional two thousand shares.
There I was, short five thousand shares of UP. On a hunch.
That was as much as I could sell in Harding's office with the margin I had up. It was too much stock for me to be short of, on a vacation; so I gave up the vacation and returned to New York
that very night. There was no telling what might happen and I thought I'd better be Johnny-on-the-spot. There I could move quickly if I had to.
The next day we got the news of the San Francisco earthquake. It was an awful disaster. But the market opened down only a couple of points. The bull forces were at work, and the public never is independently responsive to news. You see that all the time. If there is a solid bull foundation, for instance, whether or not what the papers call bull manipulation is going
on at the same time, certain news items fail to have the effect they would have if the Street was bearish. It is all in the state of sentiment at the time. In this case the Street did
not appraise the extent of the catastrophe because it didn't wish to. Before the day was over prices came back. I was short five thousand shares. The blow had fallen, but my stock hadn't.
My hunch was of the first water, but my bank account wasn't growing; not even on paper. The friend who had been in Atlantic City with me when I put out my short line in UP. Was glad and
sad about it.
He told me: "That was some hunch, kid. But, say, when the talent and the money are all on the bull side what's the use of bucking against them? They are bound to win out."
"Give them time," I said. I meant prices. I wouldn't cover because I knew the damage was enormous and the Union Pacific would be one of the worst sufferers. But it was exasperating to
see the blindness of the Street.
"Give 'em time and your skin will be where all the other bear hides are stretched out in the sun, drying," he assured me.
"What would you do?" I asked him. "Buy UP. On the strength of the millions of dollars of damage suffered by the Southern Pacific and other lines? Where are the earnings for dividends
going to come from after they pay for all they've lost? The best you can say is that the trouble may not be as bad as it is painted. But is that a reason for buying the stocks of the roads
chiefly affected? Answer me that."
But all my friend said was: "Yes, that listens fine. But I tell you, the market doesn't agree with you. The tape doesn't lie, does it?"
"It doesn't always tell the truth on the instant," I said.
"Listen. A man was talking to Jim Fisk a little before Black Friday, giving ten good reasons why gold ought to go down for keeps. He got so encouraged by his own words that he ended
by telling Fisk that he was going to sell a few million. And Jim Fisk just looked at him and said, "Go ahead! Do! Sell it short and invite me to your funeral."'
"Yes," I said; "and if that chap had sold it short, look at the killing he would have made l Sell some UP. yourself."
"Not I! I'm the kind that thrives best on not rowing against wind and tide."
On the following day, when fuller reports came in, the market began to slide off, but even then not as violently as it should. Knowing that nothing under the sun could stave off a
substantial break I doubled up and sold five thousand shares. Oh, by that time it was plain to most people, and my brokers were willing enough. It wasn't reckless of them or of me, not
the way I sized up the market. On the day following, the market began to go for fair. There was the dickens to pay. Of course I pushed my luck for all it was worth. I doubled up again and sold ten thousand shares more. It was the only play possible. I wasn't thinking of anything except that I was right 100 per cent right and that this was a heaven-sent opportunity. It
was up to me to take advantage of it. I sold more. Did I think that with such a big line of shorts out, it wouldn't take much of a rally to wipe out my paper profits and possibly my
principal? I don't know whether I thought of that or not, but if I did it didn't carry much weight with me. I wasn't plunging recklessly. I was really playing conservatively. There was
nothing that anybody could do to undo the earthquake, was there?
They couldn't restore the crumpled buildings overnight, free, gratis, for nothing, could they? All the money in the world couldn't help much in the next few hours, could it?
I was not betting blindly. I wasn't a crazy bear. I wasn't drunk with success or thinking that because Frisco was pretty well wiped off the map the entire country was headed for the
scrap heap. No, indeed! I didn't look for a panic. Well, the next day I cleaned up. I made two hundred and fifty thousand dollars. It was my biggest winnings up to that time. It was all
made in a few days. The Street paid no attention to the earthquake the first day or two. They'll tell you that it was because the first dispatches were not so alarm ring, but I think
it was because it took so long to change the point of view of the public toward the securities markets. Even the professional traders for the most part were slow and shortsighted.
I have no explanation to give you, either scientific or childish. I am telling you what I did, and why, and what came of it. I was much less concerned with the mystery of the hunch than
with the fact that I got a quarter of a million out of it. It meant that I could now swing a much bigger line than ever, if or when the time came for it.

On external colour and research
Of course I had been reading the daily dope regularly for a long time. All traders do. But much of it was gossip, some of it deliberately false, and the rest merely the personal opinion of
the writers. The reputable weekly reviews when they touched upon underlying conditions were not entirely satisfactory to me. The point of view of the financial editors was not mine as a rule.
It was not a vital matter for them to marshal their facts and draw their conclusions from them, but it was for me. Also there was a vast difference in our appraisal of the element of time.
The analysis of the week that had passed was less important to me than the forecast of the weeks that were to come.

On patience
I tell you it was remarkable. What happened was this I looked ahead and saw a big pile of dollars. Out of it stuck a sign. It had "Help yourself," on it, in huge letters. Beside it
stood a cart with "Lawrence Livermore Trucking Corporation" painted on its side. I had a brand-new shovel in my hand. There was not another soul in sight, so I had no competition in the
gold-shoveling, which is one beauty of seeing the dollar-heap ahead of others. The people who might have seen it if they had stopped to look were just then looking at baseball games
instead, or motoring or buying houses to be paid for with the very dollars that I saw. That was the first time that I had seen big money ahead, and I naturally started toward it on the run.
Before I could reach the dollar-pile my wind went back on me and I fell to the ground. The pile of dollars was still there, but I had lost the shovel, and the wagon was gone. So much for
sprinting too soon ! I was too eager to prove to myself that I had seen real dollars and not a mirage. I saw, and knew that I saw. Thinking about the reward for my excellent sight kept me
from considering the distance to the dollar-heap. I should have walked and not sprinted.

On getting suckered back in too early
It was very curious how, after suffering tremendous losses from a break of
fifteen or twenty points, people who were still hanging on, welcomed a three-point rally and were certain the bottom had been reached and complete recovery begun.

One day my friend came to me and asked me, "Have you covered?"
"Why should I?" I said
"For the best reason in the world."
"What reason is that?"
"To make money. They've touched bottom and what goes down
must come up. Isn't that so?"
"Yes," I answered. "First they sink to the bottom. Then they come up; but not right away. They've got to be good and dead a couple of days. It isn't time for these corpses to rise
to the surface. They are not quite dead yet."
An old-timer heard me. He was one of those chaps that are always reminded of something. He said that William R. Travers, who was bearish, once met a friend who was bullish. They
exchanged market views and the friend said, "Mr. Travers, how can you be bearish with the market so stiff?" and Travers retorted, "Yes! Th-the s-s-stiffness of d-death!"

It was Travers who went to the office of a company and asked to be allowed to see the booxs. The clerk asked him, "Have you an interest in this company?" and Travers answered, "I sh-should s-say I had! I'm sh-short t-t-twenty thousand sh-shares of the stock !"
....
The market would not be right for me to trade in for a while. The first ten thousand
dollars I made in the bucket shops I lost because I traded in and out of season, every day, whether or not conditions were right. I wasn't making that mistake twice. Also, don't forget
that I had gone broke a little while before because I had seen this break too soon and started selling before it was time. Now when I had a big profit I wanted to cash in so that I could feel
I had been right. The rallies had broken me before. I wasn't going to let the next rally wipe me out. Instead of sitting tight I went to Florida. I love fishing and I needed a rest. I
could get both down there. And besides, there are direct wires between Wall Street and Palm Beach.

Learning from Mistakes

The recognition of our own mistakes should not benefit us any more than the study of our successes. But there is a natural tendency in all men to avoid punishment. When you associate
certain mistakes with a licking, you do not hanker for a second dose, and, of course, all stock-market mistakes wound you in two tender spots -- your pocketbook and your vanity. But I will tell you something curious: A stock speculator sometimes makes mistakes and knows that he is making them. And after he makes them he will ask himself why he made them; and after thinking
over it cold-bloodedly a long time after the pain of punishment is over he may learn how he came to make them, and when, and at what particular point of his trade; but not why. And then he simply calls himself names and lets it go at that.
Of course, if a man is both wise and lucky, he will not make the same mistake twice. But he will make any one of the ten thousand brothers or cousins of the original. The Mistake family
is so large that there is always one of them around when youwant to see what you can do in the fool-play line.
To tell you about the first of my million-dollar mistakes I shall have to go back to this time when I first became a millionaire, right after the big break of October, 1907. As far
as my trading went, having a million merely meant more reserves. Money does not give a trader more comfort, because, rich or poor, he can make mistakes and it is never comfortable to be
wrong. And when a millionaire is right his money is merely one of his several servants. Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it
overnight. But being wrong -- not taking the loss that is what does the damage to the pocketbook and to the soul.

Unconscious Competence

A man can't spend years at one thing and not acquire a habitual attitude towards it quite unlike that of the average beginner. The difference distinguishes the professional from the amateur. It is the way a man looks at things that makes or loses money for him in the speculative markets. The public has the dilettante's point of view toward his own effort. The ego obtrudes itself unduly and the thinking therefore is not deep or exhaustive. The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to. A trader gets to play the game as the professional billiard player does -- that is, he looks far ahead instead of considering the particular shot before him. It gets to be an instinct to play for position.
...
The training of a stock trader is like a medical education. The physician has to spend long years learning anatomy, physiology, materia medica and collateral subjects by the dozen.
He learns the theory and then proceeds to devote his life to the practice. He observes and classifies all sorts of pathological phenomena. He learns to diagnose. If his diagnosis is correct,
and that depends upon the accuracy of his observation -- he ought to do pretty well in his prognosis, always keeping in mind, of course, that human fallibility and the utterly
unforeseen will keep him from scoring 100 per cent of bull's eyes.

And then, as he gains in experience, he. learns not only to do the right thing but to do it instantly, so that many people will think he does it instinctively. It really isn't automatism.
It is that he has diagnosed the case according to his observations of such cases during a period of many years; and, naturally, after he has diagnosed it, he can only treat it in
the way that experience has taught him is the proper treatment. You can transmit knowledge -- that is, your particular collection of card indexed facts, but not your experience. A man
may know what to do and lose money -- if he doesn't do it quickly enough.

Observation, experience, memory and mathematics -- these are what the successful trader must depend on. He must not only observe accurately but remember at all times what he has
observed. He cannot bet on the unreasonable or on the unexpected, however strong his personal convictions may be about man's unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities -- that is, try to anticipate them. Years of practice at the game, of constant study, of always remembering,
enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass. A man can have great mathematical ability and an unusual
power of accurate observation and yet fail in speculation unless he also possesses the experience and the memory. And then, like the physician who keeps up with the advances of science, the wise trader never ceases to study general conditions, to keep
track of developments everywhere that are likely to affect or influence the course of the various markets. After years at the game it becomes a habit to keep posted. He acts almost
automatically. He acquires the invaluable professional attitude and that enables him to beat the game at times! This difference between the professional and the amateur or occasional trader
cannot be overemphasised. I find, for instance, that memory and mathematics help me very much. Wall Street makes its money on a mathematical basis. I mean, it makes its money by dealing with facts and figures.

When I said that a trader has to keep posted to the minute and that he must take a purely professional attitude toward all markets and all developments, I merely meant to emphasise again that hunches and the mysterious ticker-sense haven't so very much to do with success. Of course, it often happens that an experienced trader acts so quickly that he hasn't time to give all his reasons in advance, but nevertheless they are good and sufficient reasons, because they are based on facts collected by him in his years of working and thinking and seeing things from the angle of the professional, to whom everything that comes to
his mill is grist...

Consensus Trades

The news of Percy Thomas' latest misadventure turned my mind from the fishing to the cotton market. I got files of the trade papers and read them to get a line on conditions. When I
got back to New York I gave myself up to studying the market. Everybody was bearish and everybody was selling July cotton. You know how people are. I suppose it is the contagion of example that makes a man do something because everybody around him is doing the same thing. Perhaps it is some phase or variety of the herd instinct. In any case it was, in the opinion of hundreds of traders, the wise and proper thing to sell July cotton and so safe too! You couldn't call that general selling reckless; the word is too conservative. The traders simply saw one side to the market and a great big profit. They certainly expected a collapse in prices.

I saw all this, of course, and it struck me that the chaps who were short didn't have a terrible lot of time to cover in. The more I studied the situation the clearer I saw this, until I
finally decided to buy July cotton. I went to work and quickly bought one hundred thousand bales. I experienced no trouble in getting it because it came from so many sellers. It seemed to me that I could have offered a reward of one million dollars for the capture, dead or alive, of a single trader who was not selling July cotton and nobody would have claimed it.

Magnetic Personalities

I find I can err with great ease.
I ought to have been on my guard at this particular time because not long before that I had had an experience that proved how easily a man may be talked into doing something against his
judgment and even against his wishes. It happened in Harding's office. I had a sort of private office -- a room that they let me occupy by myself and nobody was supposed to get to me during market hours without my consent. I didn't wish to be bothered and, as I was trading on a very large scale and my account was fairly profitable, I was pretty well guarded.
One day just after the market closed I heard somebody say,
"Good afternon, Mr. Livermore."
I turned and saw an utter stranger -- a chap of about thirty or thirty-five. I could not understand how he'd got in, but there he was. I concluded his business with me had passed
him. But I didn't say anything. I just looked at him and pretty soon he said, "I caine to see you about that Walter Scott," and he was off.
He was a book agent. Now, he was not particularly pleasing of manner or skillful of speech. Neither was he especially attractive to look at. But he certainly had personality. He talked and I thought I listened. But I do not know what he said. I don't think I ever knew, not even at the time. When he finished his monologue he handed me first his fountain pen and
then a blank form, which I signed. It was a contract to take a set of Scott's works for five hundred dollars.
The moment I signed I came to. But he had the contract safe in his pocket. I did not want the books. I had no place for them. They weren't of any use whatever to me. I had nobody to
give them to. Yet I had agreed to buy them for five hundred dollars.
I am so accustomed to losing money that I never think first of that phase of my mistakes. It is always the play itself, the reason why. In the first place I wish to know my own limitations
and habits of thought. Another reason is that I do not wish to make the same mistake a second ime. A man can excuse his mistakes only by capitalising them to his subsequent profit. Well, having made a five-hundred dollar mistake but not yet having localised the trouble, I just looked at the fellow to size him up as a first step. I'll be hanged if he didn't actually smile at me -- an understanding little smile! He seemed to read my thoughts. I somehow knew that I did not have to explain anything to him; he knew it without my telling him. So I skipped the explanations and the preliminaries and asked him,
"How much commission will you get on that five hundred dollar order?"
He promptly shook his head and said, "I can't do it!
Sorry!"
"How much do you get?" I persisted.
"A third. But I can't do it!" he said.
"A third of five hundred dollars is one hundred and sixty six dollars and sixty-six cents. I'll give you two hundred dollars cash if you give me back that signed contract." And to
prove it I took the money out of my pocket.
"I told you I couldn't do it," he said.
"Do all your customers make the same offer to you?" I asked.
"No," he answered.
"Then why were you so sure that I was going to make it?"

It is what your type of sport would do. You are a first class loser and that makes you a first-class businessman. I am much obliged to you, but I can't do it."
"Now tell me why you do not wish to make more than your commission?"
"It isn't that, exactly," he said. "I am not working just for the commission."
"What are you working for then?"
"For the commission and the record," he answered.
"What record?"
"Mine."
"What are you driving at?"
"Do you work for money alone?" he asked me.
"Yes," I said.
"No." And he shook his head. "No, you don't. You wouldn't get enough fun out of it. You certainly do not work merely to add a few more dollars to your bank account and you are not in
Wall Street because you like easy money. You get your fun some other way. Well, same here."
I did not argue but asked him, "And how do you get your fun?"
"Well," he confessed, "we've all got a weak spot."
"And what's yours?"
"Vanity," he said.
"Well," I told him, "you succeeded in getting me to sign on. Now I want to sign off, and I am paying you two hundred dollars for ten minutes' work. Isn't that enough for your pride?"
"No," he answered. "You see, all the rest of the bunch have been working Wall Street for months and failed to make expenses. They said it was the fault of the goods and the territory. So the office sent for me to prove that the fault was with their salesmanship and not with the books or the place. They were working on a 25 per cent commission. I was in Cleveland, where I
sold eighty-two sets in two weeks. I am here to sell a certain number of sets not only to people who did not buy from the other agents but to people they couldn't even get to see. That's why they give me 33 per cent."
"I can't quite figure out how you sold me that set."
"Why," he said consolingly, "I sold J. P. Morgan a set."
"No, you didn't," I said.
He wasn't angry. He simply said, "Honest, I did!"
"A set of Walter Scott to J. P. Morgan, who not only has some fine editions but probably the original manuscripts of some of the novels as well?"

"Well, here's his John Hancock." And he promptly flashed on me a contract signed by J. P. Morgan himself. It might not have been Mr. Morgan's signature, but it did not occur to me to doubt it at the time. Didn't he have mine in his pocket? All I felt was curiosity. So I asked him, "How did you get past the librarian?"
"I didn't see any librarian. I saw the Old Man himself. In his office."
"That's too much!" I said. Everybody knew that it was much harder to get into Mr. Morgan's private office empty handed than into the White House with a parcel that ticked like an alarm
clock.
But he declared, "I did."
"But how did you get into his office?"
"How did I get into yours?" he retorted.
"I don't know. You tell me," I said.
"Well, the way I got into Morgan's office and the way I got into yours are the same. I just talked to the fellow at the door whose business it was not to let me in. And the way I got Morgan to sign was the same way I got you to sign. You weren't signing a contract for a set of books. You just took the fountain pen I gave you and did what I asked you to do with it. No difference. Same as you."
"And is that really Morgan's signature?" I asked him, about three minutes late with my skepticism.
"Sure! He learned how to write his name when he was a boy."
"And that's all there's to it?"
"That's all," he answered. "I know exactly what I am doing. That's all the secret there is. I am much obliged to you. Good day, Mr. Livermore." And he started to go out.
"Hold on," I said. "I'm bound to have you make an even two hundred dollars out of me." And I handed him thirty-five dollars.
He shook his head. Then: "No," he said. "I can't do that. But I can do this!" And he took the contract from his pocket, tore it in two and gave me the pieces. I counted two hundred dollars and held the money before him, but he again shook his head.
"Isn't that what you meant?" I said.
"No."
"Then, why did you tear up the contract?"
"Because you did not whine, but took it as I would have taken it myself had I been in your place."
"But I offered you the two hundred dollars of my own accord," I said

I know; but money isn't everything."
Something in his voice made me say, "You're right; it isn't. And now what do you really want me to do for you?"
"You're quick, aren't you?" he said. "Do you really want to do something for me?"
"Yes," I told him, "I do. But whether I will or not depends what it is you have in mind."
"Take me with you into Mr. Ed Harding's office and tell him to let me talk to him three minutes by the clock. Then leave me alone with him."
I shook my head and said, "He is a good friend of mine."
"He's fifty years old and a stock broker," said the book agent.
That was perfectly true, so I took him into Ed's office. I did not hear anything more from or about that book agent. But one evening some weeks later when I was going uptown I ran
across him in a Sixth Avenue L train. He raised his hat very politely and I nodded back. He came over and asked me, "How do you do, Mr. Livermore? And how is Mr. Harding?"
"He's well. Why do you ask?" I felt he was holding back a story.
"I sold him two thousand dollars' worth of books that day you took me in to see him."
"He never said a word to me about it," I said.
"No; that kind doesn't talk about it."
"What kind doesn't talk?"
"The kind that never makes mistakes on account of its being bad business to make them. That kind always knows what he wants and nobody can tell him different. That is the kind that's
educating my children and keeps my wife in good humor. You did me a good turn, Mr. Livermore. I expected it when I gave up the two hundred dollars you were so anxious to present to me."
"And if Mr. Harding hadn't given you an order?"
"Oh, but I knew he would. I had found out what kind of man he was. He was a cinch."
"Yes. But if he hadn't bought any books?" I persisted.
"I'd have come back to you and sold you something. Good day, Mr. Livermore. I am going to see the mayor." And he got up as we pulled up at Park Place.
"I hope you sell him ten sets," I said. His Honor was a Tammany man.
"I'M' a Republican, too," he said, and went out, not hastily, but leisurely, confident that the train would wait. And it did.

I have told you this story in such detail because it concerned a remarkable man who made me buy what I did not wish to buy. He was the first man who did that to me. There never should have been a second, but there was. You can never bank on there being but one remarkable salesman in the world or on complete immunization from the influence of personality

Forcing the Market to your Will

But that one blow wasn't enough. Luck was against me. I ran up first against illness and then against the urgent need of two hundred thousand dollars in cash. A few months before that sum
would have been nothing at all; but now it meant almost the entire remnant of my fleet-winged fortune. I had to supply the money and the question was: Where could I get it? I didn't want
to take it out of the balance I kept at my brokers' because if I did I wouldn't have much of a margin left for my own trading; and I needed trading facilities more than ever if I was to win
back my millions quickly. There was only one alternative that I could see, and that was to take it out of the stock market!
Just think of it! If you know much about the average customer of the average commission house you will agree with me that the hope of making the stock market pay your bill is one of
the most prolific sources of loss in Wall Street. You will chip out all you have if you adhere to your determination. Why, in Harding's office one winter a little bunch of high
flyers spent thirty or forty thousand dollars for an overcoat - and not one of them lived to wear it. It so happened that a prominent floor trader who since has become world-famous as one
of the dollar-a-year men-came down to the Exchange wearing a fur overcoat lined with sea otter. In those days, before furs went up sky high, that coat was valued at only ten thousand dollars.
Well, one of the chaps in Harding's office, Bob Keown, decided to get a coat lined with Russian sable. He priced one uptown. The cost was about the same, ten thousand dollars.
"That's the devil of a lot of money," objected one of the fellows."

"Oh, fair! Fair!" admitted Bob Keown amiably. "About a week's wages -- unless you guys promise to present it to me as a slight but sincere token of the esteem in which you hold the
nicest man in the office. Do I hear the presentation speech? No? Very well. I shall let the stock market buy it for me!"

"Why do you want a sable coat?" asked Ed Harding.
"It would look particularly well on a man of my inches," replied Bob, drawing himself up.
"And how did you say you were going to pay for it?" asked Jim Murphy, who was the star tip-chaser of the office.
"By a judicious investment of a temporary character, James.
That's how," answered Bob, who knew that Murphy merely wanted a tip.
Sure enough, Jimmy asked, "What stock are you going to buy?"
"Wrong as usual, friend. This is no time to buy anything. I propose to sell five thousand Steel. It ought to go down ten points at the least. I'll just take two and a half points net. That is conservative, isn't it?"
"What do you hear about it?" asked Murphy eagerly. He was a tall thin man with black hair and a hungry look, due to his never going out to lunch for fear of missing something on the
tape.
"I hear that coat's the most becoming I ever planned to get." He turned to Harding and said, "Ed, sell five thousand U.S. Steel common at the market. Today, darling!"
He was a plunger, Bob was, and liked to indulge in humorous talk. It was his way of letting the world know that he had an iron nerve. He sold five thousand Steel, and the stock promptly
went up. Not being half as big an ass as he seemed when he talked, Bob stopped his loss at one and a half points and confided to the office that the New York climate was too benign
for fur coats. They were unhealthy and ostentatious. The rest of the fellows jeered. But it was not long before one of them bought some Union Pacific to pay for the coat. He lost eighteen
hundred dollars and said sables were all right for the outside of a woman's wrap, but not for the inside of a garment intended to be worn by a modest and intelligent man.
After that, one after another of the fellows tried to coax the market to pay for that coat. One day I said I would buy it to keep the office from going broke. But they all said that it
wasn't a sporting thing to do; that i f I wanted the coat for myself I ought to let the market give it to me. But Ed Harding strongly approved of my intention and that same afternoon I went to the furrier's to buy it. I found out that a man from Chicago had bought it the week before.
That was only one case. There isn't a man in Wall Street who has not lost money trying to make the market pay for an automobile or a bracelet or a motor boat or a painting. I could
build a huge hospital with the birthday presents that the tight-fisted stock market has refused to pay for. In fact, of all hoodoos in Wall Street I think the resolve to induce the
stock market to act as a fairy godmother is the busiest and most persistent.
Like all well-authenticated hoodoos this has its reason for being. What does a man do when he sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles.
He therefore runs much greater risks than he would if he were speculating intelligently, in accordance with opinions or beliefs logically arrived at after a dispassionate study of
underlying conditions. To begin with, he is after an immediate profit. He cannot afford to wait. The market must be nice to him at once if at all. He flatters himself that he is not asking
more than to place an even-money bet. Because he is prepared to run quick -- say, stop his loss at two points when all he hopes to make is two points -- he hugs the fallacy that he is merely taking a fifty-fifty chance. Why, I've known men to lose thousands of dollars on such trades, particularly on purchases made at the height of a bull market just before a moderate
reaction. It certainly is no way to trade.

Japan Small Caps for DM and NK

2008-08-27T22:41:00.001+01:00

JPS LN

Annual

Qtly

Monthly

Weekly

Weekly 2

Daily

Daily 2

Strategically looking very interesting.

Perhaps establish first tranche of the position near here and add on confirmation - cloud break, TD ref close, weekly price flip etc.

Marc Faber likes J small caps on valuation, and anecdotally there are many very cheap companies around.

Regional Banks and the Dollar

2008-08-21T00:13:00.001+01:00

The news couldn't be worse. My friends that were suggesting last autumn that there might be a buying opportunity in the banking sector ('since the franchise earnings power was still intact') are now telling me that obviously the entire banking system is insolvent. Certainly it is what I have feared for a while and perhaps that is right, but given the illiquidity of the system, valuation might remain a matter of opinion for some time yet (until the defaults start coming through). As I mentioned before, one is supposed to be thinking about buying, not selling when the blood truly is running in the streets.

Regional banks index (BKX underlying, KBE ETF) has seen 5 wave down correction that has overshot lower wave 5 projection of 71.01. 13 Seq buy close to the low (in time, if not - given the overshoot - price). Market certainly has the look of having experienced extreme capitulation into mid July low (close to the 31st July demi PEI turn). Close to completing buy setup just ahead of disqualified prop trigger, with possible Dwave 3 up about to begin.

BKX daily

BKX weekly

Weekly perfected buy setup. Holding 50% level of TD Abs Retracement off 2007 high.
Maybe one should consider trades from the long-side in this sector between now and the election.

Here's one possible candidate, with good relative strength. Wells Fargo completed 5 waves down (reached confluence of TD Line and prop projections, though not wave 5 target). Has made a qualified break of two consecutive TDST levels and come back to test the breakout level (also disqual prop trigger). Dwave suggests a 1-2 or A-B with wave 3/C up to come. I'm long against shorts in other indices.

WFC daily

WFC daily cloud

WFC Weekly

On the dollar, I talked previously about DXY upside to 78, and then more recently about scope to 1.25 USDCHF (implicitly perhaps 82ish on DXY). The fundamentals are very EUR/USD bearish (not to mention the incredible climax in sentiment), and it is possible/likely I was too conservative. (Instructive - as discussed earlier - that quarterly though weekly charts are strategically bullish USDDEM). to review Here is an Elliott count from Dimo Dimov, suggesting very substantial scope for further sell-off in EUR/USD (both legs work I think ie bearish EUR TWI and bullish USD TWI).

He is expecting a near-term EUR/USD recovery and that the next impulsive leg down does not begin until after the US elections. I have no argument with that roadmap.

Clearly it's not very likely that EUR/USD reaches parity within a couple of years (as he is expecting). But I believe it's much more likely than the market is currently expecting, and positioning via options on a bounce offers attractive risk:reward.

(To avoid any confusion, I am near-term mildly constructive on foreign currencies, precious metals and commodities but do not plan to overstay my welcome on the long side).

Gold/Natty III

2008-08-20T23:38:00.001+01:00

In July I posted on a possible basing in the gold/natty ratio saying that we had hit area of potential support (although far from ultimate downside 50 target). Here was the picture in July

Here is the picture today

I haven't been involved in the ratio, but interesting to track.

Natty itself has collapsed, breaking three TDST support levels without looking back.

Daily

Weekly

Good risk reward shot from the long side. Seasonals, cycles, demark work all line up (more or less - possible basing process doesn't complete for another few weeks).

Here's natty/crude - chance to find support at confluence of prop exhaustion and higher dwave target (daily) and higher dwave target (weekly).

Daily

Weekly

Geomagnetic Field Beats Economists for GDP Forecasting

2008-08-20T04:28:00.001+01:00

"[T]he consensus economic forecast of gross national product growth between 1972 and 1990s howed a mean forecast error of 28% and a correct prediction for the direction of real GNP growth of 69%. The geomagnetic change model for the same period showed a mean forecast error of 50% and a correct projection for the direction of real GNP growth of 90%".

Bill Meridian on Lindsay's Cultural Cycles

2008-08-20T04:14:00.001+01:00

'The Soviet Union will recover from any possible trouble not later than 1974 or 1975. A decade of good fortune will follow... [W]e must watch for signs of a downturn by 1986 or 1987. This will be 69 years after the revolution of 1917. The transition from progress to retrogression will be gradual, no sudden calamity will strike... the 1990s are the most probable time for a genuine Russian disaster'

George Lindsay, 1969

Wheeler's Cycles and Music History

2008-08-20T03:30:00.001+01:00

Farewell, Bling?

2008-08-20T03:17:00.001+01:00

Seems clear that the 9 year cycle in idealism last topped in 2000, and a fair bet that the 30 year cycle last topped in the late 70s. Article below is from the magazine of the Foundation for the Study of Cycles - 1991 Jan/Feb edition of Cycles Magazine.

Citibank vs GS

2008-08-17T00:30:00.001+01:00

AC - Time to think about reversing idea from early 2006. (Can finesse optimal entry)

Here is a recent piece by Reggie Middleton on GS

C/GS Qtly

C/GS Monthly

C/GS Weekly

C/GS Daily

C/GS Daily Cloud

C/GS Daily MACD

Precious Metals Stocks

2008-08-17T00:07:00.001+01:00

SIL Annual

SIL Qtly

SIL Monthly

SIL Weekly

SIL Daily

Lumber

2008-08-16T19:54:00.001+01:00

Construction bust notwithstanding, Lumber looks to be in the latter stages of - if not to have completed - a basing process. (Credit PW for first alerting me to this)

Monthly

Weekly

Daily

Cloud Daily

MACD Daily

WY Daily (weyerhauser)

WY Weekly

WY Monthly

Dow/Gold Ratio

2008-08-16T18:49:00.001+01:00

Annual

Qtly

Monthly

Weekly

Daily

Weekly

Dow Monthly

Long term commodity charts

2008-08-16T18:35:00.001+01:00

Rogers Commodity Index

Continuous Commodity Index

CRB

GSCI Spot Index

GSCI Agriculture Spot Index

GSCI Livestock Spot Index

Crude (annual)

Heating Oil

GSCI Unleaded Spot

Natty

GSCI Natty Spot

Gold (annual)

Silver (annual)

Platinum

Palladium

GSCI Industrial Metals Spot

Copper (annual)

Nickel

Lead

Zinc

Aluminium

Tin

Wool

Soybeans (GSCI spot)

Soybean Oil

Soybean Meal

Wheat

Corn

Oats

Canola

Rough Rice

Barley

Lean Hogs

Pork Bellies

Live Cattle

Feeder Cattle

Lumber

Azuki Beans

Coffee

Cocoa

Sugar

GSCI Cotton Spot

Rubber

Equity Rotation

2008-08-15T19:16:00.001+01:00

SPY/IWM

QQQQ/EWJ

SPY/FXI

Euro Sentiment Vs Reality

2008-08-15T06:06:00.001+01:00

Vertical line - Rappers join models in insisting on euros as greenbacks fall further out of fashion

"It's ignorance and arrogance," commented Clyde Prestowitz, of the Economic Strategy Institute. "The candidates, the voters, the country's elite – they all take it for granted that the US currency is always going to be the world's currency. It hasn't hit them yet."

Perhaps the above is true. But the above might be perhaps more acutely describe the attitude of the European elites towards their terms of trade and the looming disaster that is post-credit bubble EMU.

Bernard Connolly of AIG has been discussing the problems of the housing bubble EMU members for some time now. As a result of the credit-driven boom in domestic demand, wages for Portugal, Italy, Ireland, Spain and Greece have grown much faster than justified by productivity. Now that the consumption and construction boom is over they will need to substitute net exports and net government spending for the deficit in consumption + investment. But there are obviously political constraints preventing a massive fiscal boost, and restoring export competitiveness would require domestic deflation in prices and wages and/or higher inflation in the rest of the eurozone and/or a massive euro depreciation.

The latest piece isn't available on the web, but here is a choice extract -

*We conclude that to allow current-account adjustment in the cad bloc as a whole without a downward deviation of output, employment and prices in that bloc, the euro would need to depreciate to USD 1.07 (using the dollar, for illustrative purposes, as proxy for the euro's effective rate).
* But a cad bloc has no more political reality than "euroland": repeating the calculation for the worst-placed cads (Greece and Spain), the required euro depreciation would take it to around USD 0.6.
* Using the Obstfeld-Rogoff approach suggests that euro depreciation to USD 1.07 would raise the German price level, over time, by 21%; depreciation to USD 0.6 would raise that price level, over time, by 74%.
* Using large-scale macroeconometric metric models (as in studies by ECB staff and their academic collaborators) for our purpose raises severe logical problems; these problems are inherent in EMU; but, for what it is worth, the approach of such studies suggests results for the German price level very similar to those above, implying, for instance, an average German inflation rate of 14% a year for at least five years if the euro depreciated enough to solve Greece's adjustment problems.
* The economic and political dynamics of such high German inflation would be very difficult to predict, but would probably arouse public fears, however unjustified, of possible hyper-inflation.
* Even a half-way house burden-sharing would probably be insufficient to prevent disaster in the worst-affected cads and politically-unacceptable inflation in Germany:
* Barring a fiscal bailout (and Bernard Connolly has pointed out in previous notes that the required fiscal transfers from Germany would have to be of a size qualitatively similar to the reparations imposed on Germany, with disastrous economic, financial and political results, in the Versailles Treaty), the medium-term feasibility of the euro area in its current configuration must be open to very considerable doubt.

At this juncture, sentiment is probably much too negative about the prospects for the US and too sanguine about those for the eurozone.

Note that Bloomberg's interview with Gisele's agent took place in September - before the euro broke out - yet the story was only picked up in November as (what now looks like) the final parabolic leg down in the dollar approached. From a contrarian perspective, the news was that this minor contractual detail was considered at all story-worthy.

In the near-term the dollar is overbought and there have been associated collapses in commodities - notably silver (shown below) just as we are approaching a potentially very significant cycle reversal date for stocks, bonds, fx and precious metals. (It's interesting that this weekend is a lunar eclipse - by definition also a full moon). Demark sequential/combo work lines up with the idea of near-term reversal. Medium term there appears to be scope for very substantial further downside to EUR/USD. TD Lines projects to 1.3929 and lower would be conceivable.

Interesting to note that just as the March PEI date marked the high in EUR/USD, the recent mid-cycle PEI date of July 31st marked an acceleration phase downwards.

With hindsight I was too hasty in covering DXY longs, but I do expect a reasonable dip to be able to re-establish at better levels. (Covered the short USDJPY trade from previous post after a very sharp selloff at 108 and change - confluence of old TDST and TD Line target).

I established longs in long end European bonds vs US Treasuries. It is still a noisy trade intraday, but easier to stick with than a position in the short end of the curve. The way the spread keeps testing the 200 day MA reminds me of USDCAD shortly before the breakout.

Quick note on dollar

2008-08-13T01:21:00.001+01:00

JYU8 daily

USDJPY fx daily

Although my strategic view remains that there is scope for very substantial yen weakness, I established a tactical yen long against the dollar earlier today. Pretty good risk reward, and there is some chance I am wrong about the bigger picture.

Update across markets

2008-08-13T00:47:00.001+01:00

Synchronicity Journal

I wrote about the interesting relationship between leadership succession at Citibank and the stock price previously, and wondered how emerging markets might perform following the passing away of John Templeton.

(S&P vs EEM emerging mkts etf)

Here are couple more instances of well-timed retirements/changes in the guard -

Wells Fargo Succession

UK Leadership succession (2007)

UK leadership succession (1990)

Thatcher steps down as MP (1992)

Eastern Europe

Not an area of focus for me, though I have been involved from time to time. One striking phenomenon has been the improvement in their real exchange rates in past years accompanied by a buoyant consumer, booming property markets strong consumption debt growth and substantial current account deficits. (This applies perhaps less to Poland than other C+ E European economies).

At the recent highs in prices, apartments in Riga were said to trade at a substantial premium over Vienna, a city with much higher levels of income and wealth not to mention a history of stability. There have been recent anecdotes of E European workers returning home from the UK given the worsening employment prospects here and, at least until recently, improving situation at home.

It's interesting then that charts show complete 5 wave structures in GBPPLN and GBPHUF exchange rates, suggesting scope for a substantial reversal of the trend of the past couple of years. Time to dig a bit deeper into the fundamental story. One thing that is clear is that this is unlikely to end well, and the deterioration in competitiveness from running the economy too hot over past years will have to be made up by a combination of lower domestic inflation and a weaker nominal exchange rate.

GBPPLN weekly

GBPHUF weekly

GBPBGN daily (Bulgaria)

GBPLVL daily (Latvia)

Long US growth vs short Canada, Emerging Markets, EAFE

Long SPY and QQQQ against EWC, EEM and EFA have worked well since I first mentioned on 23rd June. Took some chips off the table yesterday - think that for the obvious fundamental reasons this is a trade that can gain some traction over the next year. Not only is the periphery hurt more than the core by decelerating dollar liquidity, but US real money has a very substantial overweight in overseas equities (ref Stephen Jen, MS) which might in part need to be covered as the momentum shifts against that trade. (Not to mention the severe policy challenges faced by immature domestic institutions in many of these countries).

SPY vs EEM

In the near term we are showing signs of exhaustion and at initial projected targets. Commodities are very oversold and we could see a substantial bounce, which might take up equities in resource producers and way on US domestic stocks.

SPY vs EEM daily

One should not forget the potentially much more constructive weekly (as weel as monthly - not shown) context though

SPY vs EEM weekly

Precious Metals

Quite a pullback in the precious metals sector of late. Should this have been a surprise? Not at all - it would have been shocking not to see this kind of correction.

Sentiment was stretched - as I wrote here. "I think the inflation theme is very played out, and we may see this take a rest for as long as a year or two." (Links point to anecdotal evidence of extreme in inflation psychology).

But there were also clear technical warnings. Here is an annual chart of silver.

Following unqualified break of a TDST line market will often, at some future point (not usually very many bars) come back to test the breakout level before (usually) resuming the move. So we knew since the beginning of this year that this kind of move was pretty likely for silver. Now that we have seen a pullback to the TDST level whilst more downside is certainly possible the odds favour a very substantial continuation of the move higher. Long term projections for silver are extremely bullish).

Picture for other precious metals is quite different

Gold

Platinum (response to 9 1 bar later)

Palladium

Fixed Income

Bobl daily (price)

Following qualified break of TDST resistance, focus remains higher, with 109.42 target (and potentially higher). A perfect instance of not trying to anticipate a trend continuation overly prematurely once a 5 wave move in one direction has been made.

Bobl yields monthly

Bobl yields qtly

Note the monthly combo yield sell in June coincident with qtly chart perfecting sell setup just as yields reached the 4.661 TDline target.

US/EU 5y spread (monthly)

US/EU 5y spread (weekly)

US/EU 5y spread (daily)

Short-term overbought and setup against tdst line. Tomorrow 10y supply in Europe, but probably this is a trade to add on dips. (Buy Europe sell US). Fundamentals pretty straightforward, and I won't go into at this stage. But clearly global growth slowdown is an emerging meme, and also it is not just the US that has problems with its banks owning lousy credit product.

Markets are at an interesting juncture - have more to say but will have to save it for next post.

Dollar short-term

2008-08-10T23:53:00.001+01:00

Longer term it seems to me that there is very significant scope for further DXY appreciation.I wonder if we could see 1.25 on USDCHF and 125 on USDJPY.

That said, daily charts across USD pairs are at confluence of targets with signs of price exhaustion and hourly also showing 5 waves up at projected targets. So I took in USD longs this morning and hope for a correction to re-establish USD longs.

USDJPY daily

USDJPY hourly

USDCHF daily

USDCHF hourly

EUR daily

EUR hourly

AUD daily

AUD hourly

CAD daily

CAD hourly

US/Europe, UK/Europe

2008-08-10T23:42:00.001+01:00

Fives/Bobl ratio

EUR vs US 5y swap/daily

daily

weekly

monthly

qtly

UK/EU 5y swap daily

weekly

ENG LN for Rob

2008-08-08T17:00:00.001+01:00

Daily

Weekly

Monthly

Nobody expects the 'Big One'

2008-08-08T04:38:00.001+01:00

http://www.whiskeyandgunpowder.com/Archives/2007/20070126.html

Superb piece by Fred Sheehan - choice extracts below, but worth reading the whole thing from the link above.

The historian Niall Ferguson (The Cash Nexus, War of the World) has written a paper on the risk imbedded in sovereign bond spreads between 1848 and 1914: "Political Risk and the International Bond Market between the 1848 Revolution and the Outbreak of the First World War". Published in the Economic History Review earlier this year (available on www.blackwell-synergy.com), his exhaustive study of weekly great-power bond prices (United Kingdom, France, Germany, Austria-Hungary, and Russia) comes to a surprising conclusion - the closer Europe edged towards war, the less the financial markets cared. Ferguson sees two distinct periods: from 1848 through 1880, the markets were anxious. Sovereign bonds were sold at the slightest scent of war. After 1880, the response to international tensions grew less and less pronounced.

...

Ferguson found that "midnineteenth century investors tended to infer future changes in fiscal and monetary policy from political events, which were regularly reported in private correspondence, the newspapers, and later through telegraph agencies. Among the most influential bases for their inferences were four assumptions: (1) that a political move to the left would tend to loosen fiscal and monetary policy; (2) that a new and radical government would be more likely to pursue an aggressive foreign policy; (3) that any war would disrupt trade and hence lower tax revenues for all governments; and (4) that direct involvement in war would increase a state's expenditure as well as reducing its tax revenues, leading to substantial new borrowings."

Most important, as a parallel to our times, "All these assumptions owed much to the experience of the period between 1793 and 1815." Investors weigh the recent past most heavily in their estimations. The French Revolution and Napoleonic Wars produced, or spawned (in future wars and revolutions), the product of these fears. In this rough estimation, investors between 1848 and 1880 sold sovereign bonds in proportion to how badly bondholders had fared. Ferguson concludes: "Indeed, the experience of the 1790s - when revolution, war, default, and inflation had sent the yields on French securities soaring from 6% to 60% - echoed, like the Marseillaise, for nearly a century. Each time Paris sneezed, to paraphrase Prince Metternich, the European markets caught cold, most obviously in 1830, 1848, and 1871."

Ferguson goes on to describe the "biggest crisis in the European bond market in the nineteenth century". This "occurred during the two months after the outbreak of the 1848 revolution in Paris. Austrian and French bonds were both severely hit, with yields on the London market rising by as much as 662 basis points in the former case, and 505 in the latter."

...

Ferguson found that "midnineteenth century investors tended to infer future changes in fiscal and monetary policy from political events, which were regularly reported in private correspondence, the newspapers, and later through telegraph agencies. Among the most influential bases for their inferences were four assumptions: (1) that a political move to the left would tend to loosen fiscal and monetary policy; (2) that a new and radical government would be more likely to pursue an aggressive foreign policy; (3) that any war would disrupt trade and hence lower tax revenues for all governments; and (4) that direct involvement in war would increase a state's expenditure as well as reducing its tax revenues, leading to substantial new borrowings."

Most important, as a parallel to our times, "All these assumptions owed much to the experience of the period between 1793 and 1815." Investors weigh the recent past most heavily in their estimations. The French Revolution and Napoleonic Wars produced, or spawned (in future wars and revolutions), the product of these fears. In this rough estimation, investors between 1848 and 1880 sold sovereign bonds in proportion to how badly bondholders had fared. Ferguson concludes: "Indeed, the experience of the 1790s - when revolution, war, default, and inflation had sent the yields on French securities soaring from 6% to 60% - echoed, like the Marseillaise, for nearly a century. Each time Paris sneezed, to paraphrase Prince Metternich, the European markets caught cold, most obviously in 1830, 1848, and 1871."

Ferguson goes on to describe the "biggest crisis in the European bond market in the nineteenth century". This "occurred during the two months after the outbreak of the 1848 revolution in Paris. Austrian and French bonds were both severely hit, with yields on the London market rising by as much as 662 basis points in the former case, and 505 in the latter."

(For purposes of orientation, a note on 19th-century bond yields: The British consol is the standard by which to judge other sovereign issues. The 3% consol was introduced in 1751 at a par value of £100. It remained the benchmark bond until 1914. Three-percent consols were perpetual issues with covenants that authorised the government to redeem if the price reached par. During the Napoleonic Wars, it traded as low as £50-1/2 to yield 5.98%. Waterloo was distant enough by 1880 that the consol finally traded at £100 and fell below the 3% mark. The perpetuals traded at 2.25% (above £113) by the mid-1890s. The British government didn't redeem the issues, but the possibility prevented yields from dropping further. Eyeing Ferguson's data (painstakingly retrieved from every issue of the Economist between 1848 and 1914), the non-British bonds were generally issued with a 5% coupon until 1880; from 1881 some French rentes (which were also perpetual) and Russian issues paid 3% and 4% (respectively). More importantly, except during crises, yields rarely rose above 5% during the entire 1848-1914 period. The exception was Austria; the imperial credit traded at around 6% or 7% during good times and soared into double-digits during crises. By the 1890s, the four other sovereign issuers traded at yields of 3% or below. The trend for the following 20 years was of higher yields, rising by 0.5% to 1.0%.)

Particularly notable, given the later somnolence, was that after King Louis Philippe gave a "disappointing speech to the Chamber of Deputies" in January 1848, the French market suffered a "depression" ["panic selling", to hazard a guess]. Following the February 1848 revolution in France, the price of British consols fell 7.6%. This was an overreaction in Britain, as was General Motors trading at a price-to-earnings ratio of 5:1 with a dividend yield of 11% in 1949 - American investors who survived the Great Depression could only look back, and British investors schooled in the Napoleonic Wars could only anticipate the long-feared, cross-Channel invasion.

European bond investors suffered similar panic attacks at the outbreak of the Crimean War in 1854, at the impending Franco-Prussian War of 1870-1871, and during the Eastern Crisis of 1876-1878. Russian bond yields rose 5% in March 1878 in fear of a full-scale war between Russia and Britain. This fear, The Economist wrote, was of a "new campaign [that] would lead to a financial disaster. Although the risk of this is very small, this has, nevertheless, depressed Russian stocks." In modern parlance, the risk-pricing models took unlikely events seriously. But, as is true today, the pricing models weigh recent events most heavily. The world knew these splendid little wars could have turned Napoleonic, but none did. The revolutions of 1830, 1848, and 1871 could have spread like wildfire across Europe, but none did.

Then markets turned a deaf ear to bedlam. In Ferguson's summation:

Repeatedly between 1845 and 1880, then, not only war, but even the mere possibility of war pushed up the risk premia and therefore the yields on great power bonds. The puzzle is that after around 1880 the threat of war seems to have counted for much less. Indeed, the magnitude of financial responses to political crises apparently declined even as 1914 approached - the reverse of what traditional historical accounts would lead us to expect. That, at any rate, is one possible inference to be drawn from financial market data. In the decades before 1914, there was a marked convergence in the longterm interest rates of most major economies.

Ferguson discusses practical reasons why sovereign bond yields fell and converged after 1880: the widespread adoption of the gold standard, the deepening of markets and liquidity, and the rise of local savings banks lassoed to the (general) requirement that deposits be backed by government bonds. Each explanation has its virtues, but flaws persist. The gold standard, the author explains, was seen as a commitment to fiscal rectitude, but gold "was a contingent rule, or a rule with escape clauses" which could be suspended "in the event of a well-understood, exogenously produced event, such as war".

Ferguson offers an analysis of post- 1880 bond spreads:

Spreads between British consols and approximately equivalent French, German, Russian, and Italian long-bond yields all tended to fall. For example, Italian yields, which were close to double British yields in 1894, had fallen to just 54 basis points above them by 1907. Part of this convergence was because of the rise of consol yields from their all-time nadir of 2.25 in July 1896 to 3.6 per cent in July 1914. However, the main cause was the decline in yields on the bonds of the other great powers. Even more strikingly, the magnitude of short-run fluctuations in yields also diminished. Volatility in the bond markets has also disappeared today.

We saw compression of sovereign yields in Europe when countries cooked their books in anticipation of the Euro. The wide government deficits of 1993 converged on solvency and even persist, at least in official figures. Sovereign credits of Greece trade at approximately the same yield as German debt. Even such a successful domestic investor as Sophocles would forego the local and buy the foreign bond. This willingness to invest in an illusion may find an analogue in the "contingent rule" of gold "with escape clauses": an inconvenient truth is better dismissed in a bull market.

Let's turn to a mythical, prototypical Serious Investor. A rookie in the late 1960s, he fears rising budget deficits, out-of-control consumption, waning physical production, an economy that survives from financial transactions and the mysterious yet oppressive influence of derivatives on the financial markets. This investor watches credit mushroom; bubbles pop and move on. He sees no-interest, no-downpayment, optional-monthly-payment mortgages hibernate in hedge-fund side pockets, which recycle the central-bank, commercial-bank, prime-broker, credit-inflation pool. Reading Professor Ferguson's study, he won't find the post-1880 atmosphere puzzling.

It is 2006. Our Serious Investor (Columbia, B.A. 1965; Yale LL.B., 1968) has grown calloused to once-in-the-history-of-the-universe events. Martin scared him to death. Our Investor understood the dollar was the weak link in the international payments system. Surely, the American Century was at an end. Our Investor survived the dollar crisis, the stock market collapse and deep recession of 1973-1974, the Business Week "Death of Equities" front cover, the US$250 billion federal budget deficits of the 1980s, the frequent financial and derivative crises of the past 20 years (far more prevalent than between 1950 and 1970), the current US$500 billion federal budget deficits, and the (prospective) US$1 trillion trade deficit. Our Serious Investor has prospered. He gradually learned to shrug off the deteriorating macro world. He grew accustomed to the "Greenspan put" (that is, central banks will bail out any-and-all financial meltdowns), the risky adventures of hedge funds, the abandonment of debt covenants by bond issuers, the private-equity moon shot; he has, by now, grown so accustomed to the warnings that he keeps his head down, plugs away, and diligently watches for signs that THIS IS IT.

If convinced THIS IS IT, what would he do? He's not sure. He loses a night's sleep. He goes to the office the next morning and pulls out a faded, 1978 clipping from U.S. News and World Report:

The mountain of debt has grown so high in this country that many economists fear the United States is unusually vulnerable if a recession occurs.... [S]ome fret that a load of personal debt will make a recession more severe than it otherwise would be. In only 3-1/2 years since the end of the last slump, Americans have added a trillion dollars to their financial obligations. Today, government, corporations and individuals owe more than 3.5 trillion dollars, equal to nearly $16,000 for every man, woman and child in the country.... The question now being raised is whether a day of reckoning is at hand.

Our Serious Investor relaxes. Yes, all of this is still true and now we add a trillion dollars of debt every three months. We have accumulated US$90,000 in debt for every man, woman, and child in the country. A day of reckoning will come. But there's no point worrying about it. The entire credit structure and gutted economy is a shambles, but we inflated our way out of a 1978 reckoning; we may muddle through again. The emperor wears no clothes, but the architects of economic consensus and market wisdom constructed a bunker that excludes the dissidents. Official opinion is like Lenin's tomb. The iconic face demands intensive care as the skin decays. The deception of eternal embalming grows less convincing as the emperor's face erodes. The best minds are diverted from biotechnology labs and mathematical discoveries to design a cosmetic cloak for a dead corpse.

US financial chicanery is similar, with a twist. It bloats and must continue to do so. US engineers and mathematicians (in such demand they are now imported from China and India) must not only disguise blemishes, but perform artistic feats to match the finest trompe-l'æil artists. The asymmetrical cheekbones and mutations of the cranium demand optical illusions. Our Serious Investor knows the suspension of judgment on the part of the viewing public could dissipate in a flash, but trading rooms still watch CNBC, quote Gentle Ben, and are preoccupied with football betting pools. We will be free of thought at least through the Super Bowl.

...

Our Serious Investor holds one trump card not available to his ancestors. The derivative world offers such an extraordinary range of insurance products - puts on indexes, on stocks, even puts on puts; credit derivative protection against defaults; mutual funds that leverage short positions on bond and stock indexes - and they are extraordinarily cheap. They are cheap because volatility has disappeared from markets, and protecting the downside risk in a portfolio is generally considered a waste of money. It is also a risk to one's career, since clients want every cent of their money chasing higher returns.

Ferguson's narrative of the countdown to war is a splendid chronology of how quickly the world can change:

It was not until 22 July [1914] - more than three weeks after the Sarajevo assassinations - that the possibility of a European political crisis was first mentioned as a potential source of financial instability in the financial pages of The Times. A plausible inference is that continental markets were anticipating the belligerent tone of the Austrian ultimatum to Serbia, published on 23 July, which demanded official cooperation with an Austrian inquiry into the Sarajevo assassinations. This was the signal to investors that war was a real danger.

The 2-1/2% British consols rose from a 3.30% yield on July 7 to 3.31% on July 22 - a single basis point of fear. If investors now foresaw real danger, they must have believed their portfolios received a personal exemption. Tensions rose on the exchanges and grew acute on July 27 when the Vienna and Budapest exchanges closed. The Sarajevo incident could still be interpreted as a local affair, but trading slowed on the other European exchanges. Now consols rose to 3.45%. The St. Petersburg exchange closed on the 29th and The Economist considered the "Berlin and Paris bourses closed in all but name".

It was by no means clear who would fight, or even if there would be a war. Nevertheless, British exchanges suffered a two-fold crisis. In Ferguson's words:

First, foreigners who had drawn bills on London found it much harder to make remittances; those British banks that had accepted foreign bills suddenly faced a general default as bills fell due. At the same time, there were large withdrawals of continental funds on deposit with London banks and sales of foreign-held securities. London became, as The Economist put it, "a dumping ground for liquidation for the whole Continent of Europe".

A wholly unanticipated domino effect now engulfed London. The bond market didn't seem to acknowledge this vaporisation of liquidity:

Even these developments had a remarkably limited impact on great-power bond yields. Between 22 July and 30 July (the last day when quotations were published), yields on consols rose by 26 basis points; yields on French rentes by 22 basis points; and yields on German bonds by 17 basis points. The rises were twice as large for Austrian and Russian bonds, yields on which rose by nearly half a percentage point.... The Economist was especially struck by the widening of the bid-ask spread for consols (the gap between buyers' offers and sellers' asking prices) to a full percentage point, compared with a historic average of one-eighth of 1%....

The London market started to close on July 29. London clearing banks concentrated on funding their stock-exchange clients, eight of which failed by the end of the day. On July 30, the Bank of England raised its discount rate from 3% to 5%. On July 31, the Stock Exchange was closed and the Bank of England raised its discount rate from 5% to 8%. The week before, The Economist was preoccupied with the "continual suspense over Ulster". (Northern Ireland dominated newsprint during the summer of 1914. It made better copy than another Balkan Crisis.) What a difference a week makes - from the August 1, 1914 Economist:

The financial world has been staggering under a series of blows such as the delicate system of international credit has never before witnessed, or even imagined.... Nothing so widespread and so world-wide has ever been known before. Nothing ... could have testified more clearly to the impossibility of running modern civilisation and war together than this closing of the London Stock Exchange owing to a collapse of prices, produced not by the actual outbreak of a small war, but by fear of a war between some of the Great Powers of Europe. [My italics.]

Did The Economist or the Bank of England consider the international credit system "fragile", under any conceivable circumstances, a year before? Five days before? Ferguson writes:

The key phrase here is "fear of a war". Although Austria had declared war on Serbia on 28 July, it was still far from certain that the other great powers would join in; it was not until 31 July that Russia, after three days of indecision, began general mobilization, prompting the German government to issue its ultimatums to St Petersburg and Paris. The Germans did not declare war on Russia until 1 August; their declaration of war on France came two days later. Britain entered the fray only on 4 August (an event readers of The Economist had certainly not been led to expect). What happened between 22 July and 30 July was therefore no more than a sharp rise in the perceived probability of a great power war on the continent; it was still not considered a certainty when the markets had to close.

Oh, but that was the Stone Age. They didn't have the Internet! It is worth considering though, despite the technological innovations and wonders of the Information Age, that this week's celebrities of Wall Street are more inert than the better minds in the City a century ago. Ferguson found "even to the financially sophisticated, as far as can be judged by the financial press, the First World War came as a surprise. Like an earthquake on a densely populated fault line, its victims had long known that it was a possibility, and how dire its consequences would be; but its timing remained impossible to predict, and therefore beyond the realm of normal risk assessment." So it goes with any probability model, designed in the head of a Rothschild or by the math nerds at JP Morgan.

...

Ferguson scrapes up the debris:

For all save the holders of British consols, who could reasonably hope that their government would restore the value of their investments when the war was over, these outcomes [for Continental sovereign bond holders] were even worse than the most pessimistic pre-war commentators had foreseen. The fact that investors do not seem to have considered such a scenario until the last week of July 1914 surely tells us something important about the origins of the First World War. It seems as if, in the words of The Economist, the City only saw "the meaning of war" on July 31 - "in a flash".

ISK update for Mike

2008-08-08T02:59:00.001+01:00

ISK/CHF

Daily

Weekly

ISKJPY

Daily

Weekly

Told you they were easy... (ECB/dollar)

2008-08-08T02:33:00.001+01:00

This is a follow-up post to

http://emergingthemes.blogspot.com/2008/06/don-take-eazy-b-at-their-word.html
http://emergingthemes.blogspot.com/2008/07/eazy-b-take-ii.html
http://emergingthemes.blogspot.com/2008/06/some-charts-and-reflections.html

We've seen a pretty good rally in 5y Europe since my first post above. Here is the current state of play in 5Y German yields

(And turns out 9th July was not such a bad time to take partial profits, as suggested - oppty to re-enter on confluence of rel retrace 61.8% level and disqual tdst support).

I am mystified by the balance of attention paid to parsing the rhetoric of central banks as compared with trying to figure out the likely 'fundamentals' policy makers will be reacting to in a few months time.

Here's a brief illustration of how the smoke signals from the ECB evolved during the last cycle. Chart below of 5y yields in Germany - points from statements below are marked with circles. It's clear that at turning points in market rates the public statements of central banks show that they have less insight into what they will be doing a few months hence than what technical measures of the market imply.

It's a tedious exercise, but perusal of old Fed minutes (that are released years later) suggest that it is not just a question of central bankers putting a good face on things - at inflection points they genuinely have poor insight into nascent trends.

apr 14, 2000 - duisenberg backs boj rate hike - 'sign of recovery'
oct 5, 2000 - 25bp hike, 'strong [eurozone] real GDP growth... strong world economy... no threat to growth from this rate hike.. the euro area has reached cruising altitude
nov 2, 2000 - unched, 'outlook for growth for world economy remains favourable... first sign of an orderly slowdown towards more sustainable levels.. good reason to remain confident that strong growth will be sustained in the euro area'
nov 2001 - 50 bp cut, 'inflationary pressures have further diminished... monetary developments do not signal risks to price stability ... Our assessment of the economic developments, especially after the events of 11 September, has led us to believe that confidence has been hit harder than we thought only a few weeks ago. And it also means that it will take longer than previously assessed for the economy to recover.'

The weekly seq on EUR/USD I discussed back in June completed to a 13 count with a TD REI red arrow down and euro fx currently in meltdown mode. Propulsion suggests we could see at least a move to 1.5025 though no reason it should be in a straight line.

Daily completed 5 waves up and hit price targets so no reason to be too cute and try to fade the larger correction down any time soon. REI red arrow down at the high following B wave and perfected setup. Qual break TDST support on daily. One would expect combo countdown to complete. Could we reach next TDST support around 1.45? Entirely possible.

Did we have any warning to expect a change in market environment? Yes - Armstrong PEI cycle last major turn was 23 Mar 2008. Risk takers found the following period quite painful. The market moved rather abruptly from 'end of the world' trades to finding some relief. Everything that went parabolic into the PEI reversed more or less abruptly after that. The curve flattened as expectations about short rates were revised smartly upwards - exotics desks were forced to buy vol and hedge steepeners; precious metals sold off, the dollar bounced against the yen, equities bounced and risky asset vol came off.

It's an 8.6 month cycle, so next turn isn't till 2009. But he did mention that the half cycle period could also mark significant shifts, so sometimes more subtle. That date was July 31st/August 1st. Since then the curve has steepened as short ends accelerate higher, eur/usd and precious metals have collapsed and the equity picture remains a bit murky. Amusingly, exotics desks have been caught again, but the other way round - the curve vol they are short is not selling off very much whereas rates vol is collapsing (2y2y from 220 at the high to 152 today).

There seems to be an increasing acceptance that the supposed 'us subprime' crisis has a broader scope than initially perceived, and just as in 2000-03 europe and the rest of the world will not be immune.

Possibly this suggests extreme danger for longs in cyclical stocks, materials, steels and agriculture.

SMN - ultra short materials ETF

X - US Steel

DXAG - underlying for MOO - DB Agribusiness ETF

Dollar index (DXY) broke some important levels today. Various trades look interesting - particularly USD/CHF, EUR/USD, USD/CAD, AUD/USD.

Market was kind enough to provide a clear price target to take profits on usd shorts. Confluence of price (monthly prop exhaustion) and time (PEI), not to mention extreme sentiment.

DXY monthly

CAD monthly

5 waves down. perfected setup against confluence of prop exhaustion, old full range prop exhaustion, wave 3 target, tdline target followed by trigger of prop up suggests limited downside near-term from here. (Ultimately though perhaps move is not complete, with final downside targets of .7679 and .5961 beckoning over coming years).

CAD weekly

beautiful chart - clear capitulation into nov low at which point ultimate wave 5 targets reached coincident with sequential buy and perfected setup. few weeks ago another 13 sequential - close to tdst resistance and early in the setup. medium term scope to 1.10, 1.15?

CAD daily

possibly still in 3rd wave up. has continued past td exhaustion - next stop full range at 1.1032? close to a combo so could be a dip (maybe significant) near-term. qualified break of tdst resistance followed by old tdst levels going back to earlier in year.

CAD weekly cloud

promising. not much more to add.

AUD weekly cloud

AUD daily cloud

close to a profit-taking level perhaps once combo is completed. but one wants to be sure to re-short the bounce.

Not much time or inclination to discuss in any details the fundamentals here. Agree with MS Stephen Jen's piece on why the dollar can rally. Clearly US domestic credit growth is slowing - US consumer has less inclination or ability to borrow and this is showing up in the numbers. Counterpart of US consumer dissaving is current account deficit. Ex-oil this is already at levels comparable with last recession, and as energy prices come down and lagged effects of prior price hikes are felt in demand destruction the overall number should start to improve. Counterpart of deficit is reserve growth at foreign central banks, and counterpart of that is domestic liquidity creation suggesting that growth in the rest of the world should start to slow.

I talked about prospects for a reversal in the performance of US equities vs international equities, particularly emerging markets, previously. Here is an update for SPY vs EEM daily

Overbought to be sure, but here is the weekly

Notable that there is a 13 on monthly as well as quarterly suggesting this emerging theme might turn out to have a surprising extent to go over the next couple of years.

Crude

2008-08-06T00:41:00.001+01:00

Foundation for Study of Cycles paper on 4+ year oil cycle

Crude Light Annual

Qtly

Monthly

Weekly

Daily

Here are my previous thoughts on crude. We topped with a perfected setup at a high of 120 on USO vs a projected target of 119. Not too bad.

http://emergingthemes.blogspot.com/2008/07/crude-ii.html
http://emergingthemes.blogspot.com/2008/05/crude.html

Downside to around 90 (ref CLZ8)? Confluence of TDST resistance breakout level, 61.8% abs retracement level and 61.8% rel retrace level.

Brief Update

2008-08-05T01:23:00.001+01:00

Does consumption of coffee and sugar reflect economic and financial booms?

SBUX (weekly)

SBUX (daily)

Barclay Leib of Sandspring nailed it. July 31st/August 1st was demi-PEI date. (Based on 8.6/2 months from mar 22nd PEI date).

Deflation scare/growth shock. Short AUD/copper/gold/platinum/cocoa/sugar/steel stocks/potash. Still Long Bobls and SMN (double short materials). No time to post many charts right now but will do so over next few days.

Economist cover 'Inflation is back' and non-finance friends asking if they should be buying gold made it clear magnitude of correction would be substantial.

Does this mean US today = 1990 Japan ? Will Peter Thiel's thesis of deflation in the US be proven correct? (vs Rogers/Faber/Laeeth view of eventual roaring inflation). Possibly. For now though, as MS Gerard Minack points out, there is no need to choose. Current valuations (and earnings expectations) inconsistent with prospective growth from leading indicators.

So today from a fundamental perspective we can bet on slowing growth accompanied by deflation in pricing of certain related sectors without yet taking a view on ultimate denouement of excessive debt:GDP ratio.

Credulous Bayesians

2008-07-30T00:59:00.001+01:00

Nice paper by Glaeser attacking the glib and simplistic Surowiecki 'Wisdom of Crowds' idea.

"[W]e suggest that social learning is often best characterized by what we call Credulous Bayesianism. Unlike perfect Bayesians, Credulous Bayesians treat offered opinions as unbiased and independent and fail to adjust for the information sources and incentives of the opinions that they hear. There are four problems here. First, Credulous Bayesians will not adequately correct for the common sources of their neighbors’ opinions, even though common sources ensure that those opinions add little new information. Second, Credulous Bayesians will not adequately correct for the fact that their correspondents may not be a random sample of the population as a whole, even though a non-random sample may have significant biases.
Third, Credulous Bayesians will not adequately correct for any tendency that individuals
might have to skew their statements towards an expected social norm, even though peer
pressure might be affecting public statements of view. Fourth, Credulous Bayesians will
not fully compensate for the incentives that will cause some speakers to mislead, even
though some speakers will offer biased statements in order to persuade people to engage
in action that promotes the speakers’ interests...

In Section V of the paper, we assume that errors in private signals are correlated
across individuals. Credulous Bayesians overestimate the extent to which these signals
are independent. The first proposition of the paper shows that when individuals are
Credulous Bayesians, their post-deliberation beliefs become more erroneous and they
acquire more misplaced confidence in those erroneous beliefs. This proposition helps
explain why socially formed beliefs, like those about religion, politics, and constitutional
law (and sometimes science as well), can be quite strongly held, despite a lack of
evidence and an abundance of other groups holding opposing beliefs.
Our second proposition shows that when individuals are Credulous Bayesians,
accuracy may decline as group size increases. As group size increases, mistakes can
become more numerous and more serious. After all, the essence of Credulous
Bayesianism is that people misuse the information of their neighbors, so more neighbors
means more errors. This finding suggests that in some settings individuals may be wiser
as well as less extreme than crowds (compare Surowiecki, 2005; Page, 2006)...

A large body of research has discussed the human tendency to give statements that
conform to an expected community norm. For group deliberation, the problem is that
people may discount this tendency and think, wrongly, that public statements actually
convey information. In Section VI, we model conformism by assuming that individuals’
statements reflect a combination of private information and an expectation of what
individuals think that the group wants to hear. Credulous Bayesians fail fully to adjust
for the fact that statements are skewed to the norm. The combination of conformism and
Credulous Bayesianism creates error, tight homogeneity within groups, and greater
heterogeneity across groups. If people utter politically correct statements, with the aim of avoiding the wrath of others, then Credulous Bayesianism could help explain both the
blue state/red state phenomenon of ideological homogeneity within areas and
heterogeneity across areas (Glaeser and Ward, 2006)..."

"In Section VII, we assume that some individuals, like legal advocates or politicians,
have incentives to report misleading information in their quest to change people’s
decisions. “Polarization entrepreneurs,” in law and politics, might attempt to do exactly
that. This claim is in a similar spirit to Mullainathan, Schwartzstein and Shleifer (2007),
who examine the interaction between persuasion and categorical thinking. In this case,
Credulous Bayesians fail fully to correct for the motives of those around them. The
combination of incentive-created misstatements and Credulous Bayesianism always leads
to less accurate assessment and can lead to bias as well. The degree of bias depends on
the imbalance of resources or incentives across persuaders, not the persuasion per se.
"

http://www.economics.harvard.edu/faculty/glaeser/files/socproof19.pdf

Near-term caution

2008-07-24T20:34:00.001+01:00

Very brief note as I only have a few minutes to post.

REI green buy arrow on VIX today.

Although various Dow components looked somewhat constructive, other indices don't look so great. So possible a) Dow picture is false or b) Dow components mentioned double-bottom and other indices make lower lows.

Here is some Fibo timing work (courtesy of Geoff Robson Scott at DB and Steve Rock) that suggests one might want to take the REI arrow (and general demark context) seriously.

Some links on famine

2008-07-20T17:20:00.001+01:00

When God saw that the world was so over proud,
He sent a dearth on earth, and made it full hard.
A bushel of wheat was at four shillings or more,
Of which men might have had a quarter before....
And then they turned pale who had laughed so loud,
And they became all docile who before were so proud.
A man's heart might bleed for to hear the cry
Of poor men who called out, "Alas! For hunger I die ...!"

—Poem on the Evil Times of Edward II, c. 1321.

Food prices (taking corn as a benchmark) are currently roughly 1/8 of the 1970s high in real terms. Link to energy prices; massive population growth since then; long-term cycles in climate and solar output.

Famine may seem unlikely today (although it seems some emerging market countries had a close brush earlier in the year), but it is an event of such significance that as an investor one cannot ignore the possibility.

That doesn't mean I am near-term bullish agricultural prices.

Peak Food: Famine in the West by 2025

The point is that farming has, over the past 70 years become a method of converting cheap, finite fossil fuels and other resources in to food. As the world population continues to rise and more people in the east are able to afford a “better” diet with more meat, the earth will not be able to provide enough of these inputs.

These finite inputs have TEMPORARILY raised the carrying capacity of the earth to a level far above the level possible when they are no longer so easily available. In addition the availability of irrigation water and cropland per person on earth is going down.

Until about 70 years ago in the west and much more recently elsewhere, the energy inputs into farming were from the sun through the food for horses and workers. Fertility was maintained through crop rotation, the use of legume crops such as peas, beans and clover to provide nitrogen and the return of other nutrients to the soil through animal and human manure.

The price of fertiliser will most likely go down in the next year or two as the price encourages more production, but the present supply problems give us an insight of the more severe problems to come.

Wikipedia: Malthusian Catastrophe
Wikipedia: List of Famines
Wikipedia: Crop Yields
Malthus - Principles of Political Economy
Great Famine of 1315-1317
Famine of 1770 in Bengal
Ireland's Great Famine: 1845-1849
Bees, CCD, GM crops, Pesticides and Sunspots
Sidis: Famine, Revolutions and Sunspots
200 year sunspot/weather cycle
Famine, revolt and the (Chinese) dynastic cycle
1816 Year without a summer
Dalton minimum
Donald Coxe on yields and sunspots
Time Magazine 1974 article on Famine

Real CHF corn prices

Corn/Crude Ratio

From the Daily Reckoning - worth reading the whole piece.

A world of 6.4 billion people, on the way to 9 billion or more, needs more protein than the planet's croplands can generate from biologically provided nitrogen. Our species has become as physically dependent on industrially produced nitrogen fertilizer as it is on soil, sunshine, and water," writes Stan Cox, a scientist at the Land Institute in Salina, Kansas.

"Vaclav Smil, distinguished professor at the University of Manitoba and author of the 2004 book Enriching the Earth: Fritz Harber, Carl Bosch and the Transformation of World Food Production, has demonstrated the global food system's startling degree of dependence in nitrogen fertilization. Using simple math, the kind you can do in your head if there's no calculator handy-Smil showed that 40 percent of the protein in human bodies, planet-wide, would not exist without the application of synthetic nitrogen to crops during most of the 20th century."

"That means that without the use of industrially produced nitrogen fertilizer, about 2.5 billion people out of today's world population of 6.2 billion simply could never have existed."

Review of the Dow - intermediate bottom?

2008-07-19T02:37:00.001+01:00

Let's see how markets have performed since my post of five weeks ago.

Some signs we may have reached a bottom of potentially intermediate term significance - a week later than I expected in early June, and perhaps some chance of a retest for some indices (more on this later).

Signs of an intermediate term top in the Gold:SPX ratio

Leadership in next rally will change towards megacaps. Here is Dow/QQQQ relative strength

(chart to follow)

Newsletter sentiment was worse than at the bottom of 2000-2002 bear market.

Dow Components without Duration Oversold
(Only listed if both Demarker One and Pressure are clear)

Ticker	Refclose	Buy setup above TDST support	TDST up break	5 waves	Hit lower Dwave target
AXP	Y	N	N	Y	Y
BA	Y	N	N	Y	N
BAC	Y	N	N	Y	N
C	Y	N	N	Y	Y
CVX	N	N	N	?Bug?
DD	Y	N	N	Y	N
GE	Y	N	N	Y	N
GM	Y	N	N	Y	N
HD	Y	N	N	Y	N
HPQ	Y	N	N	N	N
IBM	Y (OR)	N	Y (NQ)	Y(hist)	N
INTC	Y	Y	N	N	N
JNJ	N	N	N	N	N
JPM	Y	N	Y	Y	N
MCD	Y (OR)	Y	Y	N	N
MMM	Y (OR)	N	N	Y	N
MRK	Y	N	N	Y	N
MSFT	Y(OR)	N	N	Y	N
PFE	Y(OR)	N	N	Y	Y(close)
PG	N	N	N	N	N
UTX	N	N	N	Y	Y(close)
VZ	Y	N	N	Y	Y (close)
WMT	Y	(Y)	(Y)	N	N
XOM	N	N	N	Y	N

TSO Calls

2008-07-17T06:31:00.001+01:00

Jan 09

TSO stock daily

TSO stock weekly

food prices II

2008-07-17T04:17:00.001+01:00

We had the correction I expected (to the low, about 32% from the spike high and 12% from when I posted).

Here is the current picture (SPGSAGTR = GSCI agricultural sub-index total return)

Prop full range at 822 acted as good support. Qualified break of TDST confirmed bullish strength; we have now completed a setup ahead of TDST support and 61.8% Rel Retrace level. Dlines does project lower, but those targets are not necessarily always reached.

Bloomberg Dwave is confused (the bug in action). Let's look at Ichimoku chart. Suggests could find support here - cloud gets fatter over next weeks, and looks like lagging span could also find support in the cloud.

From memory I believe seasonality is supportive, at least for corn prices (although I need to investigate further here).

Sugar (continuation chart, weekly)

As expected Sugar triggered weekly prop down at 14 and hit exhaustion level at 10.805, which acted as good support. Nice level to add to shorts in B wave at 14.655 against disqual prop trigger.

Weekly structure currently uncertain - let's revisit once Dwave bug is fixed.

USD/JPY

2008-07-17T02:13:00.001+01:00

Bloomberg implementation of Dwave is broken. So the appearance of a structure that appears to suggest substantial further upside to USD/JPY does not reflect reality.

Here is Bloomberg's chart

Here is how the wave structure should look

Setup above TDST line and, although TDST line was violated briefly, break was not qualified. Market found support at unqualified prop trigger level and we have a TD REI green arrow up fairly late in the buy setup. Mkt is short-term oversold, and at initial Dwave target so favours covering USDJPY shorts (possibly small-long). (Exit longs/enter tactical short was signalled clearly by 13 at TDST resistance - disqualified break - as well as various other confirming indicators).

CHFJPY completed 5 waves up. Didn't quite reach target - high was 105.12 vs 106.04. Still quite near the highs and could see further correction.

ISKJPY remains, for now at least, in a trading range established since March. The yen has certainly acquired a bid in this last leg of the flight from risk, but for now continues to trade stronger then one might expect given previous episodes of risk aversion.

I'm a little cautious because I don't think the bear market is close to over (on a medium term horizon) and there is the potential for further revulsion towards USD assets. Asian (including Japanese) investors are large holders of GSE paper. Probably Paulson et al will honour the 'implied guarantee', but what happens if there is a serious fear that they will not ?

A more ordinary trigger for further usdjpy weakness (and yen strength vs other currencies) would be a short-end rally. For now, the Fed feels constrained by the impact that a USD selloff and another leg up in commodities would have on consumers' terms of trade. But a continuation of recent commodity weakness (implying weaker prospects for global growth) and further deterioration in the financial sector might lead to a very different picture.

Nonetheless, I expect that until the rhythm changes long yen will perform badly in times of risk aversion compared to other short risk asset trades and that short yen will perform acceptably when the coast is clear (and perhaps, even when it is not).

Here is Barclays' take this week -

Smart Guys vs The Machines

2008-07-17T01:21:00.001+01:00

It's a very noisy trading environment, with so many cross-currents and false moves. I think it's ideal for either strategic positioning (options are not expensive as implied vol remains cheap vs potential swing and the economising of emotional capital) or short-term system-based trading.

Here's an ES chart illustrating potential for capturing moves using short-term systems. Looking at just one time horizon using a few indicators that have been publicly disclosed will not yield a consistently profitable system, but Tom Demark's work is a very good starting point, and the chart is suggestive.

If nothing else, paying attention to the short-term technicals can reduce the incidence of demoralising and money-losing sequences of whipsaws when entering fundamentally-based trades and can allow one to maximise profit before exit - it is all too easy to fall into that pattern if one tries to make sense of every few point SPU move from a fundamental perspective.

Of course there is a price to pay - understanding the indicators and how one can combine them takes at least a couple of years of dedicated effort. Many take a superficial stab at it and give up in frustration. But I think having some kind of systematic approach to market timing is as important as having a sound macro thesis.

The (18 year) Property Cycle

2008-07-13T20:43:00.001+01:00

"When I present my budget next week the first, the central and most important theme...will [be] for hard working families, to lock in economic stability...not just for a year or two, not just for an economic cycle. Our aim should be to lock in stability for a generation...we will take no risks with inflation."

- Gordon Brown at 2004 Labour Party spring conference

"Men have tried for millennia to forecast human events. In the long history of social forecasting, the chronic propensity for immense error has resulted from linear thinking, the extrapolation of current trends into the Future.

This nearly ubiquitous approach is a result of the assumption that laws governing billiard ball behavior apply to human behavior. Simply stated, most people, including economists, are social mechanists. They believe that markets and societies share the property of an object in motion, which will continue along a calculable path until some new outside influence – a force or an obstruction – alters its trajectory.

It remains a source of amazement to me how often I am asked what events will cause (or, in modified form, what “catalyst” will “precipitate”) a change in the direction of the market, politics or the economy, a query which has as its basis the unquestioned assumption that the record of human history is somehow at the mercy of random outside influences, such as earthquakes, volcanoes and floods but with regard to one presumed social influence over another presumed social effect.

Yet social forces cannot be “outside influences” because they reside within the human social experience, in which all elements are interrelated. The general assumption of outside causality nevertheless persists and has as its result the continuing bizarre state of affairs in which most people involved in areas of life where the future is important waste hours debating the various potential “causes” of the trends they hope to predict.

They usually conclude that forecasting with any reliability is impossible, yet they persist in the exercise anyway! Successfull anticipation of future events is possible. However, it is possible only with the knowledge that human behavior changes as a result not of external forces but of internal ones. "

Robert Prechter, Pioneering Studies in Socionomics 2003

"...Just how did Gordon Brown abolish the boom/bust cycle? By letting industry fall into recession...by forcing families into debt...and by inflating a house price bubble that will cause the Depression of 2010..." Fred Harrison, 2005

2005 article on the 18 yr real estate cycle by Fred Harrison
Fred Harrison's book - and a review
100 years of Land Values in Chicago by Fred Hoyt
Real Estate and Business Cycles by Fred Foldvary
Real Estate Cycle and Depression of 2008 by Foldvary

Foundation for the Study of Cycles

Some links on roaring inflation

2008-07-11T01:08:00.001+01:00

I will write further over the coming months on prospects for price instability over the next fifteen years. In the meantime I am posting here a few interesting relevant links.

(I think roaring is more accurate than hyper, for now at least. We would need to see massive political instability and government default for hyperinflation [sustained 30+% pa] to occur. Of course, authors published by the St Louis Fed are asking "Is the United States Bankrupt" - so it would be foolish to completely exclude such a horrifying scenario).

Wikipedia on Hyperinflation
2003 classic Faber GBD report on 'reflation'
2003 transcript of Jim Rogers vs Marc Faber
2003 Faber interview
Bresciani-Turroni study on Weimar inflation
Hans Sennholz on Weimar
Blumen on Hyperinflation - US is not Japan
Michael Panzer - Deflation then 'Hyperinflation'
Ron Paul on the origins of the mess

Prescient discussion from Rogers & Faber in 2003

JIM: What happens in the US for example, if the dollar is no longer accepted as payment globally? If we look at the US today, we are no longer self-sufficient in capital, we are no longer self sufficient in manufacturing and we are no longer self-sufficient in energy so we have to import much of the energy of this country. We are importing capital and we are importing just about everything else. What happens to the US , it seems to me that if we have to pay for these goods and the dollar depreciates against other currencies, than we are going to see as you see Jim, large amounts of inflation first.

ROGERS : Yes, Marc and I both have said that. You are going to see that. Worse than that, you are going to see the standard of living deteriorate here. It has already been deteriorating compared to where it was. There have been examples of this, look at what happened to the UK after they lost their position, Spain , Portugal , the Netherlands . It has happened to many countries throughout history, where they have been a dominate economic or political power, and they lose it, the whole thing falls apart. Bright people immigrate; the others send their money out of the country and survive that way. Usually when they get as bad as they will probably get, they put on exchange controls and they make it difficult if not illegal to take your money out of the country and peoples standard of living continues to decline. This is not radical. This is what has happened throughout history. I hate it, but this is always what has happened before.

Real Estate vs Precious Metals

Manfred Zimmel points out that in many countries future inflation may benefit other assets more than real estate. In 1900 the price of a square metre in Zurich was 10 ounces of silver. In 1990 it reached 1000 ounces, and since then the trend has reversed. Possibly one day we might see 10 ounces once again.

Boon gets it
Global Wealth Destruction as Gold Rises
Two objectives, one instrument - Tinbergen's rule broken
Inflationary Recession

Paul Tudor Jones on RV Blow Ups

2008-07-10T02:10:00.001+01:00

From Institutional Investor's Alpha, June 2008

Laeeth comment - and yet even today it is perceived by many 'relative value' fixed income guys as more than faintly disreputable to form an investment opinion that is strongly shaped by the technical evidence. (Start mentioning fibonacci levels and elliott wave fractals to your typical quant trader and they will be convinced of your unsoundness).

Not surprising that so many should have been caught the wrong way and stayed the wrong way in the March 'Great Depression II' reversal.

Gold/Natty II

2008-07-09T02:46:00.001+01:00

At the end of March I posted on the completed wave structure in the Gold/Natty ratio, suggesting scope for a very substantial correction (particularly given parabolic gold in rally with unimpressive natty move - CFTC specs very heavy long gold and short natty).

Qualified breakout by Natty of TDST resistance in Mar helped confirm the move and projected upside. Hairy Wave 4 pullback, but it found support not far below breakout level and never threatened old TDST support.

Gold followed in April by making a confirmed break of TDST support.

Here was the picture in March

Here's where we are now

5 wave structure complete to the downside but have yet to hit ultimate 50 target (just as natty has yet to hit ultimate upside target). I'd like to buy natty on a small pullback from here (Lines targets 11.8 to 12.2 region, above 11.8 TDST support but it wouldn't be surprising to see a pullback to 38.2 RR around 11.18). Crude pullback can help, obviously.

Gold I would like to buy on a pullback. We have a deferred 8 countdown. More detail in another post.