Capitalsynthesis

Here Gold’s 2011 move. Gold is the best indicator in the markets on the problems with fiat toilet paper currencies. The problems are getting far worse not better. Hyper inflation lies ahead of us. Much civil unrest is to come. This is what the gold chart is telling us loudly and very clearly. Rich

Asia generally bounced overnight following the US equity bounce end of session but in many Asian markets the move was very weak. Given the oversold levels the Asian bounce looks to have more to run.  Technically id point to the analysis here: http://www.stocktiming.com/Shanghai_Daily_Stock_Market_Updates/shanghai-index-update-monday.htm

These sorts of analysis are, as always, probabilities. Government and central bank actions can suspend and extent economic cycles beyond all recognition. Its worth always remembering this point.

US equities. We had all sorts of extremes of oversold, volume, volatility conditions in US equities. The probability is for the bounce here and now to sustain a little but i want to cover the past a little here.

The top was formed in a strangely thin manner, as i’ve said before. Battles were lacking. Why? We can only provide conjecture why this was. Imo it seems most probable that this was about leverage. We have near zero interest rates. We have the exchanges confirming that leverage in all markets had risen to high levels again. They confirmed that paper leveraged trading had massively overtaken the cash instrument trading. These sorts of phenomena makes for a lack of price ‘battles’. It makes for huge volatility and herd conditions. This helps to explain the price action, imo. The patterns were sound.

The purely visual signal was clear but the price action was not, until the move started that is. But even when it started it was not fast. It was an orderly exist with every few seconds stock being sold. At no point was the order book overwhelmed. For every seller there needs to be a buyer simply at a lower rather than higher price. Just as many participants own stock today as yesterday. It is rather that the profile of owner is in the process of changing from leveraged to un-leveraged, most likely.

What is note worthy here is that prices fell close to their dec 2009 levels for dow components within a 2 week move. The nas100 is better but sp500 similar to the dow.

Given the 2 week move and general weakening of the data does this suggest something more ominous as Faber suggests in his latest interview. My view is unchanged here. Without much more money printing we have and will have no sustained recovery in nominal prices. Nothing has changed from march 2009. The nos have improved due to each monetary unit being worth less and so asset prices rise but as leverage in the system never declines any let up in the money creation leads to sharp spikes down ward, and almost equally violent upward moves, note.

Welcome to the world of bubble economics; free money creates this giant casino. In such a world riff with interventions and geopolitical risks you have a choice to either enter the ‘ring’ with the leveraged herd and attempt to participate in twists and turns (with the upside and downside consequences this entails) or use cash to ‘stock pick’, accumulate on ‘sold off’ levels on the basis nominal prices can only, over time, move in one direction. The consequences of this not occurring is a complete systemic collapse.

To maintain your sanity as a capital holder, imo, you have to see this big picture for what it is. That now, more than ever before in fact, short term price swings do not represent the ‘value’ contained in assets due to zero interest rates and the immense leverage this creates. As an example, oil can fall today to 10 usds a barrel. Does or should this mean that the Saudi and Russian state’s balance sheets indicate bankruptcy? Clearly the answer would be no here. It merely shows that paper leveraged trading of assets represents 95% of all financial transactions. So therefore that no short term demand and supply picture on the trading floors reflects clearly the ‘real’ supply demand balance for the underlying asset. Given the explosion in leverage this ‘dislocation’ is more pronounced today that it has ever been. In an auction based pricing system stuffed with leverage prices can and may fall to near zero producing extremes of value and over valuation. I realize we probably all understand these issues but at this juncture it certainly worth restating these sorts of issues.

Fixed Income or rather the US T-bonds.

Prior spikes have been created by the announcement of QE programs by the FED. This time around the spike was created by the market sell off.. Treasuries are approaching breaking out of their all time low yields on the basis of weakness. It is hard for Ben to justify more money printing as a method of lowering yields. Yields are already approaching all time lows at a time when QE programs have been curtailed. How do we rationalize this? It seems that the banks and corporates and consumers are sitting on cash. All are paranoid of risk assets and prefer to sit on negative yielding treasuries than risk losing capital. This is the only conclusion possible. The risk reward at these levels for holding US Tbonds is unimaginably bad. Technically triple tops are rare and given the third spike up is driven by market fear issues rather than government manipulation it looks the best attempt for treasuries to reach new highs and potentially breakout. This is not a trade i chose to take. The risk reward, as above, is a disaster.

(As an aside on metrics of earnings of stock prices vs treasuries and fed funds rates stocks are at historically low valuations. Conversely private investor participation in developed stock markets is at historic lows. This is true New York to Tokyo).

OIL –

The oil price has collapsed from 114 to to 75.5 but world demand is where she was and refinery rates remain at all time highs.. go figure? I wanted to add around 88 but price did not show any hint of an entry. I like oil trading but i must say this is extreme stuff here. The only instrument im adding here on oil are option calls. I strongly believe in the peak oil paradigm as strongly as i believed in the gold paradigm in 2008/2009. I will be entering option calls on oil but i cannot enter futures on oil for the obvious margin issues oil presents. Anyone that tells you where the oil price will be in the next month or so is dreaming. It is impossible to tell you this.. We can say she is very deeply oversold and is due a bounce beyond that impossible as the technicals have been destroyed by the recent move. The longer term fundamentals are unquestionably for much higher oil prices. The energy complex fundamental story remains as she was. Nothing has changed in spite of some issues like the coal miners losing more than 50% of their value in the last few weeks. To repeat the above these short term prices are driven by leverage issues not by fundamental value issues.

Part II to follow.. inc fx, precious metals and some specific stock issues.

Rich

The following is the full text of the statement following the Fed’s August meeting:

“Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period”.

http://www.bbc.co.uk/news/uk-14458424

The UK has one of the highest inflation rates in the g10, one of the lowest first time buyer participation rates, one of highest public deficits yoy and one of the greatest wealth divides between ‘rich’ and ‘poor’.  One in eight is on benefits in the UK with the highest rate of single parents in Europe. One in six children born in to a work less household. And the UK stands on top of the hill with the highest number of households in which no one works. “Mindless violence” or something more ominous?

http://www.youtube.com/watch?v=WgkVSRs8ADM

Rich

A very good technical view from Barcap across many instruments and asset classes released today. Inevitably such a view precludes any references to monetary matters, etc.

This week an important one to this view on many instruments. A disasterous start of course.

Barcap-Technical-Trends–8-8-11

Rich

In an almost direct response to UBS Morgan’s beats the bull drum..

I’m not so sure about that call.. In truth what we need is more money printing, plain and simple. Thats the only thing that will keep asset prices from falling off a cliff. With Bank of America flash crashing down today by nearly 28% earlier and Citi down over 50% for the year i wonder if anyone is listening out there. Fire up those helicopters soon guys or the helicopter may be dismantled for spares by rioters. lol.

MSSB-Market-Correction-Not-Start-of-Cyclical-Bear-Market-8-5-11

Rich

“Why water will eventually become the single most important physical commodity asset class”. Citi.

My only problem with water is that, thus far, its been very difficult to make a return from investing capital into water businesses.. I know some posters on the board have worked in the water business before so perhaps we can pick this up in forum. Its certainly going to become a very important asset class given the population, modernity and agriculture needs over the coming years. Here below CitiGroup Global Markets covering the issues.. Rich

Water-Thirsty-Cities

Confusion continues to reign in the developed markets with inevitable over spill into the EM markets.

Do we buy or sell the USD? Is the USD still a useful correlation for asset prices or not given its mainly composed of the relationship between the USD and the Euro? Both have negative interest rates. Both are highly liquid and lent very freely for financial speculation. It is therefore the least bit useful to use either of these as a judge of financial asset performance? And, more importantly, as the key input to black box algorithms?

Imo, the relationship is not terribly useful any longer. It is only useful, imo, in the very short term as USD strength is an indicator of deleverging or leveraging by financial participants. Ie no one borrows USDs and buys US assets it seems. 90% of participants borrow USDs to buy overseas assets and so even something like the S%P downgrade of US credit drives the deleveraging process of selling overseas assets and paying back usd borrowings by short term financial players. If downward pressure sustains more longer term borrowers of financial assets are forced to sell assets and pay back borrowed USDs. This is the process we are in at present. It is a short term phenomena driven by trading dynamics which over power the fundamentals of the situation. The key for private investors is, as always, not to over leverage. Leverage (money) is limitless and near free with zero interest rates but it is a sword that cuts both ways and must be used by private investors very cautiously.

Equity Indexes – Asia got killed over night in response to the deepening US and Euro issues. Nothing has been fixed in the developed world of course without more money printing participants are starting to realize a double dip will occur. If money printing occurs companies are trading at a significant discount in Asia if money printing doesn’t occur the deflationary collapse scenario occurs and companies are overvalued. We are in a similar position to the 2008 collapse but at a higher nominal level.

Importantly here, seeing the wood for the trees:

The dow is now lower than she was at the 2008 lows, measured in gold. That is correct. She is now a multiple of 6.5 of the gold price. On the 2008 lows she was a multiple of 9.2 or so.  So in spite of the higher nominal low, in gold, the dow is 30% lower than she was at the 2008 lows. As money is debased from waves and waves of money printing monetary units will be worth less and less vs hard assets. This is the theory and this is the practice we can see. We must be clear that cash is losing value vs all assets inc the dow in spite of the lower gold dow ratio and the recent sell off of equity indexes.  F0r silver bugs, silver has spectacularly out performed gold rising from a ratio of dow/silver of 733 to 277 or so in the period. These are the big trends and these, in all probability, will sustain forming higher lows and higher highs, for as long as the process of ‘inflation eroding debts’ sustains. We are still at the start of this process.

Technically, we have indexes at long term supports and at very extended levels. A bounce looks highly likely from a technical stand point. We have swung wildly from very bullish to very bearish in just a few short weeks. Volumes have spiked up last week. Last week’s volume dow cash was literally double the week before. Extreme volume spikes can signify extreme levels being hit and therefore short term turning points. As the long term trends look broken theory suggests the bounce up will be challenged again and a battle will then occur between the longs and shorts in the coming months. Monetary driven V recoveries in asset prices have been common place however and so continue to trade according to big monetary issues rather than near term technical patterns.

Fundamentally we have central bankers and governments scrambling for the monetary levers, again. Its all they know to do but imo it will likely come with fresh trade war type capital controls. The one and only lesson learnt from the last waves of money printing was that that the new money will flow to where government interference, regulation and taxes are low and where entrepreneurial ism is high. This is not the developed world for now. The new money simply flowed into assets and overseas. The next wave of Qes will therefore likely be accompanied by regulation and capital controls. This will make our life’s more complicated as we seek to avoid the expropriators actions.  Interestingly asset participation by developed market consumers is at an all time low. The people are busy selling their houses, stocks and precious metals. This is perfect for the money printers as they liquefy this cash very easily without the side effects of inflation as the ratio of cash and near cash to the ‘new cash being printed will remain at a high level. The Zimbabwe/Mexico scenario will be avoided for as long as this ratio remains high.

More to follow..

All the best Rich

A friend kindly sent me the latest Goldman’s Asian roundup of particular Asian focused stocks. A timely round picking out the unloved conglomerates.  I’ve been mentioning Swire for the last couple of weeks as showing particular value. Goldman’s own analysis showing a 80% discount to net asset value. They don’t mention the stella earnings and extremely lwo debt ratio following the recent sale of Hutchinson Wharf.  I see they have picked out various other conglomerates for us. Requires research before commenting. Swire is a ‘no brainer’ at these circa 100 HK$ levels. ( I say this accepting huge volatility is possible, of course).  The HK$ peg is another issue that is left off the analysis. Singapore will force HKs hand in this respect i suggest.

Goldman-Sachs-Asia-Pacific-Conglomerates

As an aside, conglomerates have been an unloved asset class over the last few decades. The trend has been to break up such enterprises to realize their sum of parts valuation. I understand this but as we march in to difficult waters of government’s meddling in markets and uncertainty of where all the ‘new’ money will flow I specifically like/love conglomerates. Conglomerates are exactly the sort of place i want to store the bulk of my capital especially at 80% discounts to NAV, on pes of 4  and with 10% debt ratios. As always, in my opinion.

All the best Rich