Posts filed under “Think Tank”

10 year bond yield/50% retracement

With the sharp drop in the 10 yr bond yield over the past month after touching 4%, the move has retraced almost 50% of the rise from the 2.5% level that occurred right after the FOMC announced a step up of their QE policy on March 18th and said they were going to start buying US Treasuries directly. The exact 50% retracement is 3.24% and to put this level in perspective look at the previous deflation scare (with the Fed in their Halloween masks feeding the scare) in 2002 and 2003 when the 10 yr bond yield dropped to 3.11%. Interestingly, Bernanke gave his ‘helicopter Ben’ speech “Deflation: Making Sure ‘It’ Doesn’t Happen Here” on November 21st 2002 when the CRB index was at 230.30, a touch below where it is today and the 10 yr bond yield was at 4.15% on that day vs 3.30% today.

Category: MacroNotes

Welsh Investment letter – Update July 2009

~~~ STOCKS As expected, the S&P has declined and found initial support between 875 and 885. A number of short term indicators are a bit oversold, and yesterday there were more puts than calls traded. This suggests that a bounce is likely that could extend to 900-910. However, it is unlikely that the correction from…Read More

Category: Think Tank

While you were sleeping

It’s not even the opening yet and the S&P futures have already had a 15 point range from its open last night. Asian stocks got hit hard due to political uncertainty in Japan, word of North Korea’s leader turning ill (no pun intended) and possibly a push out to 2010 an economic agreement between Taiwan…Read More

Category: MacroNotes

Words from the (investment) wise July 12, 2009

Words from the (investment) wise for the week that was (July 6 – 12, 2009)


As I reluctantly start packing my bags after a most enjoyable two weeks of R&R in Europe (see my posts on Slovenia and Switzerland), “Words from the Wise” comes to you a bit more cryptically than usual. However, a full dose of excerpts from interesting news items and quotes from market commentators is included.

Despite having crisscrossed Heidi’s country, I have yet to find the elusive Swiss gnomes to glean what they make of financial markets at this juncture. Meanwhile, the past week has been characterized by a fresh wave of risk aversion, as uncertainty over the global economic outlook took its toll on stock markets, commodities and precious metals, and investors favored safe-haven assets such as government bonds and the Japanese yen.

The S&P 500 Index, Dow Jones Industrial Index and the Reuters/Jeffries CRB Index – all now in corrective mode – closed down for a fourth consecutive week, while US Treasuries recorded gains for a fifth straight week and the Japanese yen for four out of the past five weeks.

The yen is often seen as a global barometer of risk aversion. The graph below demonstrates the strong inverse relationship between the movements of the yen (against the euro, in this case) and those of the Dow Jones World Index. As shown, a falling yen indicates risk tolerance (and a willingness to buy risky assets) and a rising yen shows risk aversion (and an indisposition towards risky assets). A downturn in the yen exchange rate could be a good indicator to keep an eye out for confirmation of better times ahead for stocks and commodities.



Also featuring prominently in investment discussions during the week were the viability of the Public-Private Investment Program (PPIP) and the merits of a second stimulus package – calls for this comes at a time when estimates of trillion-dollar fiscal deficits and unsustainable debt levels are raising inflation expectations and putting upward pressure on long-term yields, thus partly undoing the Fed’s monetary easing.


Source: Eric Allie, July 8, 2009.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates risk aversion is creeping back into financial markets.



A summary of the movements of major stock markets for the past week, as well as various other measurement periods, is given below. As the second-quarter earnings results in the US start rolling in, the American and most other markets closed the week in negative territory, with the Shanghai Composite Index being one of the few major benchmarks to make headway.

With the exception of the Nasdaq Composite Index, the major US indices are all back in the red for the year to date.

Click here or on the table below for a larger image.


Stock market returns for the week ranged from top performers Nepal (+5.3%), Croatia (+3.0%), Uganda (+3.0%), Ecuador (+2.9%) and the Philippines (+2.4%) to India (-9.4%), Egypt (-8.5%), Argentina (-8.2%), Russia (-8.1%) and Kuwait (-7.6%) at the other end of the scale.

Of the 98 stock markets I keep an eye on, a majority of 64% recorded losses, 34% showed gains and 2% were unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included “all things short” such as ProShares Short MidCap 400 (MYY) (+3.5%), ProShares Short SmallCap 600 (SBB) (+3.2%) and ProShares Short S&P 500 (SH) (+2.0%). Among the long ETFs, WisdomTree Dreyfus Japanese Yen (JYF) (+3.7%), CurrencyShares Japanese Yen (FXY) (+3.7%) and iShares MSCI Taiwan (EWT) (+2.9%) performed well.

On the losing side of the ledger, ETFs were centered in the energy sectors, including PowerShares Solar Energy (PBW) (-12.3%), Claymore Solar Index (TAN) (-12.1%) and United States Oil (USO) (-10.1%). Market Vectors Russia (RSX) (-12.6%) also had a rough ride.

The quote du jour this week comes from Richard Russell, 84-year-old doyen of newsletter writers who has been scribing the Dow Theory Letters for the past 50 years. Russell said: “The whole bailout campaign stinks to high heaven. It was created and run by Wall Street – FOR Wall Street. Again, I say, personally, I wouldn’t have lifted a finger to bail Wall Street out. Let all these Wall Street thieves stew in their own toxic juices. Thieves should be out on the street or in jail, not luxuriating in government bailout money.

“In the end, the bailouts will simply extend the bear market in stocks and the economy. The Wall Streeters will be richer, and the nation will be poorer, choking on trillions in debt that will keep future generations struggling to deal with the sins of Wall Street. Too bad Obama didn’t have the courage (or knowledge) to tell the nation what was going on. Obama should have said, ‘sit tight’ and ‘this too shall pass’. Unfortunately, after the trillions spent in bailouts, ‘this too will not pass’.

Next, a quick textual analysis of my week’s reading. No surprises here, with all the usual suspects such as “market”, “banks”, “economy” and “financial” featuring prominently. Although (interest) “rates” had some prominence, other key words such as “dollar” and “China” were relatively quiet.


Back to equities: The key moving-average levels for the major US indices are given in the table below. The S&P 500 Index on Tuesday breached the important 200-day line to the downside (for the third time in 26 trading days), joining the Dow Jones Industrial Average and the Dow Jones Transportation Index in bearish mode. The US indices are also all trading below their respective 50-day moving averages.

I have also added the BRIC countries and South Africa (my home country) to the table. All these markets are above the 200-day averages, having previously broken out of base formations. However, with the exception of China, the emerging markets have all recently broken below their 50-day moving average support lines. Importantly, the 50-day lines are in all instances still above the 200-day lines and therefore not yet threatening the bullish “golden crosses” established when the 50-day averages broke upwards through the 200-day averages.

Click here or on the table below for a larger image.


Additionally, the Dow Industrial Average and S&P 500 Index on Tuesday also broke through the “neckline” of a head-and-shoulders formation – a bearish event. For more on this, key levels and the most likely short-term direction of the S&P 500 Index, Adam Hewison’s ( short technical analysis provides valuable insight. Click here to access the presentation. The analysis was done on Tuesday, but is still as relevant today as it was a few days ago. (Adam also covered the outlook for crude oil and the dollar/yen exchange rate in recent analyses. Click the links to view these.)

The first meaningful pullback since the March 9 low has brought the bears out of the woods. According to Bespoke, the weekly poll of the American Association of Individual Investors (AAII) shows bearish sentiment currently at 54.65% – higher than any other point since March 5.


Source: Bespoke, July 9, 2009.

“The onus is now on bulls to keep stocks buoyant. The technical breakdown of stocks is complete. Unless stocks rally robustly for several days – not just a one-day surge – stocks are likely to test 850 on the S&P 500 and then the very important 825 level …,” added Bill King (The King Report).

Richard Russell, highlighted the latest statistic from Lowry Research, saying: “Turning to the current market, what to me is most significant is that Lowry’s Buying Power Index (demand) is collapsing. As a matter of fact, it’s now below the level that it was on March 9. Meanwhile, the Selling Pressure Index (supply), after moving sideways for months, is now trending higher. This is a bearish combination and calls for a very defensive stance. On top of everything else, total NYSE volume is fading, particularly on days when the broad market is higher. It’s obvious that buyers of stocks are becoming scarce. Despite ‘Green Shoots’ nonsense, the stock market doesn’t like what it sees. And neither do I.”

The last word on stocks goes to Teun Draaisma, highly regarded equity strategist at Morgan Stanley, who argued that there were “plenty of opportunities to make money beyond the market direction call” by pursuing a strategy that he described as “the middle ground”, as reported by the Financial Times.

“Macro and the next big market move have become everyone’s favourite investment topic over the past two years. We suspect it is time to move on to the micro of sectors, stocks and styles,” he said.

Draaisma’s large “middle ground” of investment opportunities includes “the forgotten market” Japan and “sectors that are cheap and under-owned with improving fundamentals” such as utilities, telcos and energy. Also “buying stocks with a management change, financial restructuring or a change of focus can be very lucrative”.

The technicals undoubtedly look ugly, and investors will now focus on the second-quarter earnings reports as a test of whether stock prices have run away from fundamental reality. While investors wait for Mr Market to show his hand, a cautious approach is warranted but that should not preclude one from finding stocks that look cheap.

For more discussion on the direction of stock markets, see my recent posts “Stock markets rolling over“, “How to play a stock market correction“, “Technical talk: S&P 500 – expect retest sequence“, “Rosenberg interview: Cold truth about the economy and markets” and “Video-o-rama: Fresh wave of risk aversion“. (And do make a point of listening to Donald Coxe’s webcast of July 10, which can be accessed from the sidebar of the Investment Postcards site.)

“Global business sentiment continues to improve. At the start of July confidence is as strong as it has been since the start of last October. Expectations regarding the outlook towards the end of this year rose strongly again last week to their highest level since spring 2006,” said the latest Survey of Business Confidence of the World conducted by Moody’s “Business sentiment remains consistent with a global recession, but the downturn is quickly moderating.”

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Category: Think Tank

Buddy, Can You Spare $5 Trillion?

Buddy, Can You Spare $5 Trillion? July 10, 2009
By John Mauldin

  • This Is Outrageous

  • The Land of the Setting Sun

  • Buddy, Can You Spare $5 Trillion?

  • New York and Maine

There is no doubt that the US is in financial trouble. Those talking of a strong recovery are just not dealing with reality. But the US is in better shape than a lot of countries. This week, we begin by looking at Japan. I have written for years about how large their debt-to-GDP ratio is, yet they keep on issuing more debt and seemingly getting away with it. But now, several factors are conspiring to create real problems for the Land of the Rising Sun. They may soon run into a very serious-sized wall. And it is not just Japan. Where will the world find $5 trillion to finance government debt? We look at some very worrisome graphs. Those in the US who think that what happens in the rest of the world doesn’t matter just don’t get it. There is a lot to cover in what will be a very interesting letter. I suggest removing sharp objects or pouring yourself a nice adult beverage.

This Is Outrageous

But first, I want to direct the attention of those in the US finance industry to a white paper written by Themis Trading, called “Toxic Equity Trading Order Flow on Wall Street.” Basically, they outline why

volume and volatility have jumped so much since 2007; and it’s not due to the credit crisis. They estimate that 70% of the volume in today’s markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds. The retail world doesn’t get to play. This is a game only for big boys who can afford to pay for the “arms” needed to fight this war. But the rest of us pay for the game, as that half cent is like a tax on transactions, not to mention the increased daily volatility, which skews pricing. Think it doesn’t affect you? That “tax” is paid by mutual funds, your pension fund, and every large institution.

Frankly, this is outrageous. The more I read the madder I got. And it is going to get worse as computers get faster and software more intelligent. We need rules to level the playing field. Themis suggests one simple one: just make it a rule that all bids have to be good for at least one second. That would cure a lot of problems. One lousy second! In a world of microseconds, that is an eternity. Goldman Sachs went after an employee who stole some of their latest and greatest software this last week. The US assistant attorney general said in the courtroom that the software had the potential to manipulate the market. Imagine that. I am shocked. There is gambling going on in the back room? Gee, commissioner, I had no idea.

All this “algo” (algorithmic) trading also gives a very false impression of volume. If you are a fund and see 10 million shares a day traded, you might feel comfortable that you could hold one million shares and exit your trade easily. But if 80% of the volume is false “algo” trading, that volume isn’t really there. You may have a position that will be a problem if you want to exit, and not know it.

“High-frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don’t even know it.” (Themis Trading)

We are literally talking billions of dollars here. The SEC needs to step in and stop this, and soon. This is a lot more important than the salaries of investment professionals, for which the Obama administration today suggested new rules, which would allow the SEC to oversee salaries at member firms. Seriously? They don’t have enough to do already?

The link to the white paper is
Themis Trading is at

Read the paper. Then, if you like, drop the very nice folks at the SEC your thoughts at

And now, let’s start off with Japan.

The Land of the Setting Sun

One of the real benefits of writing this letter is that I get to see a lot of really interesting information from readers and meet with very savvy investment professionals. This week I had the privilege of sitting with a team of analysts from Hayman Capital here in Dallas. Hayman runs a global macro hedge fund, so they spend a lot of time thinking about how all the different aspects of the global markets fit together.

A one-hour meeting stretched to three hours, as the discussion was quite lively. I learned a lot more than I contributed (which is not unusual). After I made my presentation, they showed me a presentation they had been using. Some of the graphs were quite eye-opening. While I had seen some of the data in different places, there were a lot of new ideas, and having it all in one place was extremely helpful. There was a lot of work (as in months) done here; and Kyle Bass, the founder of the firm, graciously allowed me to share some of it with you (and kudos to Wes Swank, who pulled this together). The graphs are theirs, and my discussion about them is certainly informed by our meeting; but I am using the material as a launching point, so they are not responsible for my conclusions and interpretations.

Over the years, I have written about Japan often. Its economy is very important to the world, and its banks have funded and loaned a great deal to companies outside of Japan. Global growth would have been a lot slower without the Japanese. Up until recently, their population has saved a great deal of its disposable income, and those savings have allowed the Japanese government to run massive deficits.

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Category: Think Tank

Fed Vice Chairman Kohn/It still is someone else’s fault

I know its late Friday and I’m sorry for the rant but a headline across the tape forced my hand. From a speech on June 25th to the BIS that the Fed officially released today, Fed Vice Chairman Kohn said that “the root cause of our problems was the underpricing of risk as the financial…Read More

Category: MacroNotes

July preliminary U of Michigan confidence

The preliminary July U of Michigan confidence # was much less than expected at 64.6 vs the consensus of 70 and it’s down from 70.8 in June. It follows 4 months of gains and it’s the lowest since March when it was at 57.3. The biggest contributor to the decline was the future expectations component…Read More

Category: MacroNotes

King Report: HFT



For the past several years Street operators have assumed that the computer jockeys who were being employed by proprietary trading departments on The Street were developing algorithms that would find other algorithms that represented buyside orders so prop desks could trade against those orders.

Another trading prop that has been occurring for years is certain firms feed their electronic trading systems into prop desks so traders can see in real time money flows into and out of stocks and groups.

However recent revelations are forcing the Street to consider the possibility of automated front-running on an unfathomable scale. The two ‘front-running’ issues are: 1) ‘queuing’ [of orders] – finding orders loaded into a system, particularly limit orders, and trading against them; and 2) ‘latency’ – discovering and then front-running electronic orders or a penny or more by exploding the latency or lag in execution.

HFT (high frequency trading) is being done on every electronically traded item on a global basis. Ergo, firms could be making pennies a few billions times per day…It was imperative for the NYSE and other exchanges to price securities in pennies to disguise ‘HFT’ & to provide ample trading opportunities.

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Category: Markets, Think Tank

Trade Deficit

The May Trade Deficit totaled $26b, $4b less than expected and down from $28.8b which was revised lower by $400mm. The improvement was due to both a rise in exports and a reduction in imports. Imports have now fallen for a 10th straight month and are down 35% from its record high in July ’08….Read More

Category: MacroNotes


China’s June trade surplus data today is another statistic reflecting the impact of their stimulus plan on their economy. The surplus contracted to $8.25b, much better than expectations of $15.53b and down from $13.4b in May. The reason was solely due to a much smaller than expected decline in imports as domestic consumption rose, higher…Read More

Category: MacroNotes