The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Kevin Ferry
Chief Market Strategist
Cronus Contrarian Corner
www.cronusfutures.com

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The first month of decline has led to a double in the 5 year yield and OVER a tripling in Eurodollar spreads into 2012 and 2013…1 MONTH….the bankruptcy we are calling for in 2011 is most likely the Fed

The smartest thing I was ever taught about the market was “The ONLY thing that matters is the positions.” We believe that tidal shifts revolve around markets under the stress of liquidation. The context within which the coming seismic shift in F.I. positions comes will define success or collapse. Right now, we are leaning toward the former.
The key take-away of the recent (and not fixed) Euro blasting was the first sign of flexibility and elasticity in the US rates space. The crisis showed what happens when capital markets break from rigidity. The trading community continues to wax and wane toward the tail risk, binary conclusions but elasticity means life in the middle. The Fed, the curve slope and the rest of the Globe will continue to buffer the turning tide. Valuation should push back against momentum bulls and bears. The MOVE Index (Merrill Treas vol index) will rival the VIX for popularity. As we said in October, rolling over is a critical part of the process.
The 10 year future has dropped about 5  points since early November. How far and how long the bounce is the micro discussion for the holiday season. The bigger conclusion for 2011 has already been decided. Higher and wider remains our call. Our focus will be on what can be taken out not necessarily what will move the most. For reference I would suggest a gander at the Note from March to June of 2009. Add a year and a half of monetary voodoo from the Fed and a dozen broken dreams from the public to the picture. Tops are protracted, choppy and frustrating in development. (Bottoms tend to be acute) That we are now engaged in that process is no longer part of the debate.

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Kevin Ferry is the Co-Founder of Cronus Futures Management. He created the company in 2005 with five other traders focusing on fixed income, foreign exchange and equity futures trading in the electronic world. Currently, Chief Market Strategist, Ferry has 24 years experience in futures trading. Kevin Ferry Graduated from John Carroll University in 1983, majoring Economics.

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Source:
Wikileaks Exposes All Firms and Could Spell the End of Email, Says Dartmouth Professor
Peter Gorenstein
Tech Ticker Dec 23, 2010
http://finance.yahoo.com/tech-ticker/wikileaks-exposes-all-firms-and-could-spell-the-end-of-email-says-dartmouth-professor-535750.html

This is very funny:

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Hat tip Dougie!

Read the rest of this entry »

While we await new home sales at 10, let’s consider a different abode than the typical McMansion, a smaller residence in the crowded and expensive city of Beijing:

What’s an architect to do when he can’t afford to pay rent in one of the most expensive cities in the world? Erect a solar-powered, grass-clad, egg-shaped hut on the streets of Beijing, of course.

Rent free, and no commuting costs.

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Too bad the city made him take it down

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Source:
Beijing’s incredible, inedible egg house
Matt Hickman
Mother Naure Network Dec 14 2010
http://www.mnn.com/your-home/green-building-remodeling/blogs/beijings-incredible-inedible-egg-house

I love this series of quotes:

1. “Spain is not Greece.”
Elena Salgado, Spanish Finance minister, Feb. 2010

2. “Portugal is not Greece.”
The Economist, 22nd April 2010.

3. “Ireland is not in ‘Greek Territory.’”
Irish Finance Minister Brian Lenihan.

4. “Greece is not Ireland.”
George Papaconstantinou, Greek Finance minister, 8th November, 2010.

5. “Spain is neither Ireland nor Portugal.”
Elena Salgado, Spanish Finance minister, 16 November 2010.

6. “Neither Spain nor Portugal is Ireland.”
Angel Gurria, Secretary-general OECD, 18th November, 2010.

Hat tip:  The Speculative Investor

Speculative momentum investors continue to whistle past the graveyard of a stalled-out economic recovery

The headline on the Chicago National Activity Index (CFNAI) a composite measure that closely tracks real U.S. GDP – thus it is a coincident economic indicator – came in at -0.46 (consensus was 0.00) and the prior monthly reading was at -0.25.

The index is now down four months in a row, something not seen since mid-2009 when the U.S. economy was hitting the recession’s depth. On a three-month basis, the more “smoothed” index remains at -0.4 for the past two months (-0.41 in November and -0.42 in October).

This has now been negative since May, portraying a pace of economic activity that is well below potential and therefore continues to be consistent with both (a) a continuing ultimately deflationary economic Supercycle Bear Market Period, or Winter, and (b) our working model for after-shock, double double-dip business cycle contractions over the next four years.

Further below is a Nov update of the Conference Board’s monthly coincident economic indicator index (CEI), especially on per capita basis (red line). It tells the same story with the economic recovery having stalled out in May and flat lining since then. Notice that the modest bounce since Sep is already starting to roll over – and below the May high.

The speculatively-extended stock market and its positive wealth effect on the pickup in investor class consumer spending has been overhyped: it has briefly extended, but not reaccelerated the stalled out recovery.

The change the size of the chart picture, click on any one of the corners and drag the corresponding circle.

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Below is the Nov update of the Conference Board’s monthly coincident economic indicator index (CEI), especially on per capita basis (red line). See the explanatory Nov 23 email at the bottom here. It tells the same story as the CFNAI with the economic recovery having stalled out in May and broadly flat lining since then. Notice that the modest bounce since Sep is already slowing down and starting to roll over – and below the May high. The speculatively extended stock market and its positive wealth effect on investor class consumer spending has been overhyped: it is not reaccelerating the stalled out recovery.

The grey line is the labor force participation rate, which has both bearish Supercycle and shorter term economic timing is illustrated and explained in our Nov 5 email to you, which is copied in below the chart.

The change the size of the chart picture, click on any one of the corners and drag the corresponding circle.

The Labor Force Participation rate continues to reflect the ongoing Supercycle Winter, the major double-dip recession since late ’07 and the incipient double double-dip business cycle contraction

The Labor Force Participation (LFP rate, or ratio) is a coincident indicator, since both the numerator and denominator are coincident economic indicators themselves. The numerator is the number of employed (from the more comprehensive Household Survey – not just the Establishment Survey (the so-called Payroll Report), which tracks large businesses only, excluding the huge number of self-employed businesses – see their overlay comparison in second chart below). The denominator is the number of people in the labor force (non-institutional civilians age 16 and over).

Note from the first chart below that although the NBER-designated recession ended 17 months ago, the LFP has continued to decline to new lows. This supports my thesis of an ongoing major double-dip recession for the past 36 months since late 2007, at least in employment (also in auto/manufacturing sales and real disposable income. Also this is consistent with the incipient first of after-shock, double double-dip business cycle contractions. Finally, note that the LFP is also a very important coincident Supercycle Period indicator (like corporate profit margins and industrial capacity): see the up-trending arrow ending in Mar ’00 and the down-trending arrow declining since then.

Of course, TV-talking heads don’t discuss this bearish indicator, but serious, unbiased economists do.

These charts are from the Federal Reserve of St. Louis’ November issue of their National Economic Trends publication.

Here are two things the Bureau of Labor Statistics reported this morning that the TV-talking heads didn’t discuss since these important facts do not serve their permabull/new bull agenda and/or their unsophisticated analysis of the employment situation:

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Coincident economic indicators are consistent with our after-shock, double double-dip business cycle expectations

The chart below illustrates how the stock market reflects the stalled out economic recovery as reflected by The Conference Board’s (CB) Coincident Economic Indicator Index (CEI).

The CEI is a composite of four component indicators that are used by the National Bureau of Economic Research (NBER) to track the business cycle covering; employment (the most important); production; income and sales as explained here:

http://www.conference-board.org/pdf_free/economics/bci/earI2.pdf

Since economists, especially by those that specialize in international business economics, know that an economy that is not growing faster than its population or labor force is not growing, it’s very important to that into account even though for “political” reasons the CB, and NBER do not report that consideration, and thus the financial media do not either. It can be well argued that that the collective wisdom of the capital markets understand this.

For example, when the CEI (blue dotted line) is adjusted for growth in population (red dotted line) or the labor force (black dotted line), the stock market’s failure to sustainably break out above its Apr 26 high in the S&P 500 index (SPX) at 1220 is understandable, as it has been predictable by our business cycle model explained our email to you four days ago (copied in below).

The change the size of the chart picture, click on any one of the corners and drag the corresponding circle.

Bloomberg reported yesterday that the Derwent Absolute Return Fund was seeded with an initial 25 million pounds ($39 million) and will begin trading in February.

Its model? Following posts on Twitter, and tracking emotionally significant words to anticipate the market’s next jag up or down. A recent study concluded that short term market moves can be anticipated this way with a high degree of confidence.

I am all in favor of innovative new ways to slice data, and this one looks fascinating. However, before I jump into this with both feet, I do have some reservations. The sample set of a few short months of Twitter vs the Dow is way small — the research measured the public mood by searching Twitter posts from February to December 2008 for synonyms of and language related to six moods: calm, alert, sure, vital, kind and happy.

That period in 2008 incorporating the collapse of Bear Stearns and the September market collapse was not exactly typical. Indeed, the monkeys were unusually agitated during this time. This model will need to prove itself during periods of normal volatility and sentiment.

Still, it would not surprise me if the Twit stream reveals some consensus about the mood of the monkeys. At extremes, that could be an assist in developing a trading thesis about intermediate term highs and lows.

My working assumption is the primate factor — human emotions — is immutable, but the other factor is the changing ways the technology is applied, deployed, etc. may have an impact on the quantified sentiment reads. Already, outfits like StockTwits have a dedicated user base of active traders, and their perspectives may not parallel the public’s mood.

There have been a variety of start up attempts to capitalize on this, but so far, none seem to have found the magic formula. Going straight to Twitter bypasses all of that.

Sentiment is an important part of my model, but only at extremes. I wonder if it can be used to manage day-to-day trades. I am skeptical, but willing to consider this if it can show some trade efficacy.

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Sources:
Twitter mood predicts the stock market
Johan Bollen, Huina Mao, Xiao-Jun Zeng
http://arxiv.org/PS_cache/arxiv/pdf/1010/1010.3003v1.pdf

Hedge Fund Will Track Twitter to Predict Stock Moves
Jack Jordan
Bloomberg, December 22, 2010
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a0HeKpjwajW8

Computers That Trade on the News
GRAHAM BOWLEY
NYT, December 22, 2010
http://www.nytimes.com/2010/12/23/business/23trading.html

Behavioral economics tells us that emotions can profoundly affect individual behavior and decision-making. Does this also apply to societies at large, i.e. can societies experience mood states that affect their collective decision making? By extension is the public mood correlated or even predictive of economic indicators? Here we investigate whether measurements of collective mood states derived from large-scale Twitter feeds are correlated to the value of the Dow Jones Industrial Average (DJIA) over time. We analyze the text content of daily Twitter feeds by two mood tracking tools, namely OpinionFinder that measures positive vs. negative mood and Google-Profile of Mood States (GPOMS) that measures mood in terms of 6 dimensions (Calm, Alert, Sure, Vital, Kind, and Happy). We cross-validate the resulting mood time series by comparing their ability to detect the public’s response to the presidential election and Thanksgiving day in 2008. A Granger causality analysis and a Self-Organizing Fuzzy Neural Network are then used to investigate the hypothesis that public mood states, as measured by the OpinionFinder and GPOMS mood time series, are predictive of changes in DJIA closing values. Our results indicate that the accuracy of DJIA predictions can be significantly improved by the inclusion of specific public mood dimensions but not others.

We find an accuracy of 87.6% in predicting the daily up and down changes in the closing values of the DJIA and a reduction of the Mean Average Percentage Error by more than 6%. sentiment from blogs. In addition, Google search queries have been shown to provide early indicators of disease infection rates and consumer spending [14]. [9] investigates the relations between breaking financial news and stock price changes.

Twitter Mood

The holiday season wouldn’t feel the same without people going out of their way to be offended by nothing.

(08:58)

The city was a madhouse today. The crowds were enormous, traffic a crawl, pedestrians everywhere, tourists underfoot. Why anyone would wait last minute to buy gifts, then fight their way through Manhattan is beyond me. (Goyim — go figure).

Its especially perplexing when the alternative is to sit at home, sipping hot cocoa by the fire,  and take care of all of this. We’ve been suggesting this strategy all month (see this and this and this, plus the audiophile guide).

Which brings me to our very last set of suggestions for you procrastinators. You guys are really running out of time — if you order this stuff tonight or tomorrow (overnight FedEx) maybe you get it by December 24th. Maybe.

For those you who wait for the last minute, here are some final gift ideas:

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• For the oenophile on your list: Wine: The Culinary Institute of America’s Guide to Wines of the World: We have had terrific experiences at the CIA in Hyde Park NY. Their restaurants are wonderful training grounds for future chefs.

I was thumbing through their Wine guide — its encyclopedic, well organized, and looks like fun to read.

“Written by the experts who train today’s leading chefs and sommeliers…” ($35)

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• Clifford Bailey is a California artist who paints a broad variety of subjects, but I am tickled by his Jazz Musician portraits. I picked up The Black Cat (2003) for Missus Big Picture’s  birthday this summer, framed it (72 x 24); It now hangs in our media room (aka the den).

What Say You Now (1998) is the print that first caught my eye; it hangs in a nearby restaurant (Fork and Vine) that features live Jazz (UPDATE: It is SOLD OUT).

Prices vary; inquire of artist

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• For the hard core Jazz fan, check out Will Friedwald’s A Biographical Guide to the Great Jazz and Pop Singers. The author of Sinatra! assembled this encyclopedia of old-school virtuosos of the American songbook.

Over 200-odd performers of jazz and pop standards, from the mid-20th-century titans–Louis Armstrong, Bing Crosby, Ella Fitzgerald, Frank Sinatra–to latter-day acolytes like Diana Krall and Harry Connick Jr., with a raft of unjustly obscure singers in between.

ABGGJPS is about the music, and includes a substantial career retrospective, selected discography and wonderfully pithy interpretive essays. ($30)

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• Royal Jelly Eye Cream We were in Vancouver for the Daily Reckoning conference last summer, and took a trip over to Granville Island Market (the leading tourist destination in British Columbia).

There, we met Joel of Cascadia Soaps. Born on a small farm/vineyard in the South of France, Joel learned old fashioned soap making from his family’s tradition. Rich, long-lasting, and moisturizing goat milk soaps.

Mrs. BP bought the Royal Jelly Eye Cream, a very light, penetrating and rich, moisturizer filled with vitamins and plant extracts.

I sometimes use it as an aftershave moisturizer. Excellent stuff . . . ($28)

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• Lomography Spinner 360° I had no idea these things even existed: This film camera has one heck of a trick up its 35-mm sleeve. Pull the string attached to its base and the lens twirls to capture a full circle of action.

The resulting photos’ exaggerated perspective and exposed sprocket holes look both retro and futuristic.

Lomography.com ($134.99 at Amazon)

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• Speaking of gear: I’ve been very pleased with my Lumix camera; Last week, I mentioned the DMC-LX3 (and LX5) with Leica lenses at $350/$400. (Zoom buffs should check out the DMC-FZ100 shown at right — 24x Optical zoom!)

But you can spend appreciably less and still get excellent electronics and lenses. The Panasonic Lumix DMC-ZS7 (and Zs5) are $249 and $188 respectively — solid electronics, and those terrific Leica lenses.

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• Maui Jim KA’ANAPALI

These have become my favorite sunglasses — the lenses are outstanding. The design itself is very comfortable, extremely lightweight, with a snug fit, the titanium arms stay put on my giant noggin no matter what. The titanium arms are essentially unbreakable, but if they somehow do, Maui Jim will replace the whole thing for $10.

They list for $259, I see them at Amazon for $191.87  — that’s about as cheap as I have seen them from a major retailer (Google shopping turns up a few retailers at $175-80)

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• The Minds Eye: I am a big fan of Neurologist Oliver Sacks, who has made a second career for himself writing about neurological affectations.

In the Mind’s Eye, he examines how vision works, and what happens when it doesn’t. Ironically, Sacks himself suffers from prosopagnosia- the inability to recognize faces. Once assumed to be a purely psychological problem, its nopw understood to be a genetic issue.

Dr. Sacks himself is diagnosed with cancer in his eye, undergoes surgery and radiation, and finds that his vision is changed in strange ways.

I am looking forward to reading this book. ($14)

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• Heritage Kayaks RedFish 14 Kayak ($671) I prefer the sit on top Kayaks to the traditional ones — you can fish, take photos, be more engaged on a more stable water platform.

I live near the LI Sound, so the longer stable boats work better with more boat traffic and bigger waves and tidal action.

Sometimes, you can catch a “free shipping” sale from shops like Back Country.

(PS: Don’t forget the paddles)

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• Coupling (Seasons 1-4):  ($54) I rec’d the BBC version of The Office last week, and apparently, many of you are huge fans already. So let me get a little more obscure: The BBC show Coupling is simply one of the funniest tv shows you will ever see.

The show centers on the sexual misadventures of six friends, often depicting the three women and the three men each talking about the same events, but in entirely different terms.

Far more sophisticated, urbane and witty than Friends, its much closer to a raunchier Seinfeld. (NBC tried to bring it here with disastrous results — BBC America ran the original British versions after the US equivalent episodes on NBC aired, showing how inferior the NBC product was).

The Official BBC site is here; 176 Amazon customer reviews are nearly all 5 star (avg score: 4.9) Yes, its that funny. (Just check out the episode guide to Season One at TV.com)

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• Buckyballs: Don’t ask me why people love these goofy desk toys — they are just fun to play with.

There are lots of YouTube videos showing the fun things people do with these; Official site is here. ($30)

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•  Finally, for that blogger you just don’t know what to get for: Rolex GMT Master II Black Index Dial Oyster Bracelet Stainless Steel Mens Watch.

You should buy this for no other reason than the sole Amazon review:

Good Enough for Che Guevara

“The Rolex Oyster Perpetual Date GMT Master is part of the Rolex Professional Watch Collection. It was launched in 1954. Every good jungle fighter should have one.

This is the same model of watch as was stolen from the body of Che Guevara after his murder and shown off by the CIA snitch Philip R. for years thereafter. Designed for the revolutionary, it allowed Che to have an awareness of the time in the Cuban time-zone. It’s rugged design was a prerequisite for anyone involved in a battle to the death. Every merchant banker should have one on each wrist, if not more.”

Brilliant.

$7995