Thursday, July 28, 2005



Tuesday, July 26, 2005

Carry trade again

What we don´t see
So far, the Euro carry trade has mostly benefited the European government bond market. To us, this seems unlikely to continue. And this for a simple reason: either European economic growth starts to accelerate, in which case borrowing Euros to buy European equities (especially exporters) makes sense and owning government bonds does not. Or European economic growth deteriorates, in which case questions will start to be raised on the ability of European government to meet their obligations; if of course, European governments don't decide to abandon the Euro experiment even before the market forces them to!

Gold Inflation

Safe Haven | Protecting Your Savings From Inflation Today, most investors are not concerned about inflation because politicians and central bankers have done an excellent job of persuading us that inflation is under control and represents no threat. The core inflation rate in the US is reported to be 1.1 percent - a 38-year low. It certainly sounds good, but is it true?

Monday, July 25, 2005

Technicals do not move the market

Alchemy Of Trading: Sunday Notes From The Trading Turret: Stock Nazi?
If you haven't guessed, the Futures market has to seduce the maximum number of traders to the wrong side at important decision points. If this cannot be accomplished, risk transfer would not work. There would not be significant people on the other side of the market. Ever wonder why some technical indicators do not always work?

Sunday, July 24, 2005

Housing is Dominating Economic Activity

The Big Picture: Housing is Dominating Economic Activity, part 3.
An estimated 42% of first-time buyers made no down payment on their home purchases last year.

$711 billion in reserves

Safe Haven | Those Clever Chinese.
"The issue of surplus capacity has become very worrying for policy makers in Beijing also, because there is no pricing power and, therefore, there will be an impact on the financial sector. Every company will need a piece of the same pie. Prices will fall even more. Companies will need more loans to survive and so on. The deflation story, so frightening to Greenspan, will grow into a live problem in China. Even with rising demand, prices continue to fall because of this chronic surplus capacity. There is a risk of a large knock-on impact on the financial sector, less on the big banks, but more focused on the local and regional banks and money co-operatives, of which there are about 120 of the former and 30,000 of the latter category.

Friday, July 22, 2005

Rates up, values down

Bill Cara: It’s all about rates, stupid, Thurs., July 21, 2005, 3:25 PM.
The 10-year U.S. Treasury Note is going down because the Chinese no longer have to keep buying it. Maybe the Fed can look to the Saudi Prince Gazillionaire? After all, $60 crude oil should be good for something.

Mr. Dillard

Cafe Hayek: Everyday Low Prices.
When I lived in St. Louis, the big battle between department stores was between Dillard's and Famous-Barr. Famous-Barr had sales every two weeks. You would see their multi-colored circulars in the newspaper offering "specials." At Dillard's, there were basically no sales. Their average prices were lower while the prices at Famous-Barr would be lower on those items that were on sale. Famous-Barr made money on people buying the non-sale items. Or at least that's how I remember it.

I once got to hear Mr. Dillard, the CEO of Dillard's explain why his strategy was better. The basic point was that Famous-Barr would be thronging with customers when their sales were on and relatively deserted when prices were high. But the sales staff couldn't be adjusted to meet those customer flows—it was too expensive to be constantly altering the size of the staff. So basically Famous-Barr always had either too many employees or too few.

Thursday, July 21, 2005

Protect yourself

Bill Cara: Yuan floats, Thur., July 21, 2005, 7:45 AM.
I continue to believe that there is a 50:50 probability of a bear market starting now. And now I think the market has a legitimate driver.

How to lose a war expending too much

The Big Picture: Will the US Economy Become a Victim of the Iraq War?
The wars in Iraq and Afghanistan have already cost taxpayers $314 billion, and the Congressional Budget Office projects additional expenses of perhaps $450 billion over the next 10 years.

That could make the combined campaigns, especially the war in Iraq, the most expensive military effort in the last 60 years, causing even some conservative experts to criticize the open-ended commitment to an elusive goal. The concern is that the soaring costs, given little weight before now, could play a growing role in U.S. strategic decisions because of the fiscal impact.

Wednesday, July 20, 2005


Mish's Global Economic Trend Analysis: China Calls US's Bluff.
China's central bank said Tuesday it will continue to keep the exchange rate of Renminbi, China's currency, basically stable at a reasonable and balanced level in the second half of this year.

Rally History

Hedging Your Bets With Matt Davio: S&P History Lesson.
However, I do wish Uncle Sam would notice the increases my family has seen in energy, real estate, education, and healthcare, all of which have exploded in the past 5 years. How any person could not feel these rising in costs is beyond my reasoning, and with real wages flat to declining, I must admit, my sense of worry is higher than normal. I just call it like I see it, and I don't see a pretty picture for the long term of this fiscal nation.

Tuesday, July 19, 2005

80% for investors

Mish's Global Economic Trend Analysis: Renovators' Nightmare.
These Johnny-Come-Latelies accumulating condos and houses sight unseen will soon be in for a rude awakening. Professional investors are for the most part gone but amateurs are still bidding up properties even with inventories of unsold homes skyrocketing in Boston, California, Las Vegas and other places.

The sure thing

Swing Trading with The Stock Bandit: Your Trading Success Depends on You, Not an Indicator.
No matter how successful your trading becomes, you will not ever have the guarantee of having only winning trades. You must focus your efforts on two things: finding the best setups, and executing your trading plan. Your success will depend on how well you can do these two things rather than how well you can locate the next magic bullet. Take good chart patterns and hit those stocks as they begin to move. Place a stop-loss order in case you are wrong and then let the law of averages work in your favor.

Advice: Reduce your debt

Safe Haven | The Great Debt
I expect that you may be skeptical of this "doomsday scenario", but I assure you, the risks are quite real. In a world of interest-only mortgages, adjustable-rate loans and Wal-Mart Mania, it will not matter if you, personally, do not default on your debts. It will not matter if you, personally, have been fiscally responsible. Just like it only takes one bad driver to cause a 50-car pileup on the highway, the domino effect applies to our economy as well. The government and the vast majority of the United States population have been on a spending binge the likes of which the world has never seen. When the bill comes due, we all will pay. We will pay through higher taxes. We will pay because our neighbors walk away from their mortgages, causing a glut of unwanted real estate on the market leaving us unable to sell our own homes for even close to what we paid for them. We will pay for new social programs to assist the very people who caused this catastrophe when they wind up mired in bankruptcy. We will pay with the blood of our sons and daughters in the wars that always accompany the decline of an empire. We will pay.


Safe Haven | Gambling Craze, Real Estate Mania, Bernie Ebbers, and the "Last Gasp" Top
To paraphrase what a colleague recently told me, "The gambling craze is the last gasp manifestation of the average person's attempt at keeping up his current lifestyle by increasing returns when every other investment vehicle has proven insufficient."


This purgation of the system is nowhere more evident than the recent high-profile trial and conviction of former WorldCom CEO Bernie Ebbers. I recall from my early readings of Wall Street history that whenever corporate scandals and systemic corruption is brought out in the headlines in the form of show trials, etc., it usually coincides with a top. Will this time prove to be any different?


Three thrusts up

Stock Market: CNBC Report by Bill McLaren
There is an intermediate term distribution pattern I have been using for the past few decades that shows up on weekly and monthly charts. I refer to it as a "three thrust pattern" and can also show up on daily charts, but is very powerful on weekly charts. You can see the third thrust I have numbered on the chart. There could still be a short period distribution or even an extension up and marginally higher up to 14 August, but I believe this up trend up is complete or will complete by the August date. And once the "street" realizes that is a valid top, it should be good for stock indexes. And could be the catalyst for the final exhaustion leg up in stock indexes.

The Dragon

The Prudent Investor - seeing too many bubbles: China Will First Invest And Then Revalue
Doubting the solidity of the jobless economic expansion in the US and seeing no solution to Europe's rising unemployment amidst a stagnant economy that now gets additionally burdened by record oil prices to be paid in a higher dollar I do not think China is so naive to gobble up ever bigger parts of the runaway money supply in the west. Their beginning foray into Africa and Russia makes much more sense than to accumulate ever more paper debt as they will have to master a huge energy problem.

Foreign Purchases


Monday, July 18, 2005


ContraHour: Confucius Say: Beware Investment Advice From The Chinese
But it is the performance of the economy that has most foreign investors puzzled. Hong Kong bankers joke that China is the only country in the world where annual gross domestic product growth is announced before December 31, and every province declares a growth rate above the national average.

In fact, many economists are convinced that the growth numbers are deliberately designed to smooth the peaks and troughs in growth.

Last year economic growth was officially 9.5%, against 9.3% in 2003. In the first quarter it allegedly grew by 9.4%; officials expect it to have expanded by between 9.1% and 9.3% in the first half.

Many analysts believe that Chinese growth in the mid-1990s was probably only half the official figures; last year it was almost certainly greater.

Saturday, July 16, 2005

¿Going Long?

Safe Haven | Know When To Hold Em - Are You Listening?
Of course, all good things must come to and end, but the S&P 500 may just be starting its breakout summer rally. Thursday's high of SPX at 1233 took out the March 7 high of 1229 and is a 4 year high. The bears will claim this is either a double top or some other arcane form of wave terminal bifurcation point. For the bulls, they are telling us that this is just a starting point from which the markets move higher as the bears cover their shorts. Technical buying will now move into stocks from bonds and also from the hoards of cash sitting on the sidelines. Volume has not been heavy. We may see volume increase in coming days as the bulls buy everything in sight and the bears sell everything they can to them. Market forces are positioning for a significant struggle as we get some big tech earnings next week.

¿Going short?

Safe Haven | DJIA Timing System Going Short
Out of all the rallies we have been witnessing over the last 18 months, this latest rally from last Thursday seems to be one of the weakest rallies among them. First of all, this rally started from an overbought condition - and second of all, I am now seeing divergences everywhere and very bullish sentiment among retail investors (as an aside, the AAII Survey is now showing 58% bulls and 14% bears - a Bulls-Bears% differential of 44%) thinking that we are already at the "blow off stage" - despite the fact that the market never got too oversold in mid April and despite the fact that we are still seeing very dismal volume on all the exchanges.

Red Flags

Bill Cara: Red flags are warning, Fri., July 15, 2005, 6:58 AM
I think investors who are making such a presumption without further consideration of the negative impact of higher interest rates on a fragile real estate market (amid other concerns) are somewhat delusional.

Friday, July 15, 2005

The new real tax

MSN Money - Extra: Taxes soar along with home prices
They figured they found a good deal in a two-bedroom house in the peaceful, leafy Coconut Grove area near Miami for $440,000 in March 2004. But the shock came when their first property tax bill came a few months later -- more than $9,200 a year, nearly double what they paid on their old home

Thursday, July 14, 2005

Forbidden Fruit

Safe Haven | Forbidden Fruit
Leaving the politics aside for now, as has already been reported upon in a previous Letter, the top 1%, or top 10%, of individuals within the US, is gaining ever more wealth while the lower 60-80% are struggling to keep status quo or, in fact, are not able to maintain a status quo.

Nevertheless, even while the wealth rate seemingly climbs, the infrastructure of the middle class seems to fall further into disrepair. Health, education, social organisations all fall further behind and polarise to the "have more" and the "have less".

Paying less

Cafe Hayek: Why Wal-May Pays Less
Wal-Mart doesn't offer health insurance or pay more than they do because they've found that they can attract enough workers with the pay package they currently offer.


Mish's Global Economic Trend Analysis: The Kondratieff Cycle
Indeed it is the current protectionist talk in Washington threatening 27.5% tariffs against China as well as threats to label China a “currency manipulator” that was the biggest factor in deciding exactly where to place that arrow on the opening chart.

Deficit Shrinks on Temporary Oil Drop

Safe Haven | Deficit Shrinks on Temporary Oil Drop
As the chart shows below, the US deficit deteriorated with China (+7.1% to $15.8 bln), Eurozone (+17.2% to $8.1 bln) and OPEC (+3% to $7.3 bln). But the trade gap eased with Japan (-8% to $6.6 bln) and Canada (-12% to $4.8 bln).

Wednesday, July 13, 2005

House, school and health



Playing With Fire?
We will turn that question around and ask you to put yourself in the shoes of a Chinese policy maker. This is the situation you are facing today: a) you have the world's worst performing stock market which is hitting 8 year lows), b) you have the world's best performing bond market (Chinese 10 years have moved from 5.25% to 3.7% in the past ten weeks), c) you have industrial production rolling over (weak oil consumption, weak iron ore imports, weak Baltic, weak steel prices, weaker industrial production numbers...), d) you have real estate activity rolling over (our friend Simon Hunt reports that an "indicator of the real slowdown in real estate is that a major supplier of chiller tubes (chiller units are the central air conditioning units for all apartment and office blocks, hotels etc.) reports a 25% fall in 2nd quarter orders with no visibility for the 2nd half of the year. After talking with his customers, he was told that other suppliers are faring even worse...", e) inflation has fallen from +5.3% to 1.8% in ten months, f) M1 growth has fallen from +20% to +10% in the past year... In other words, nothing in China's economic data, or market performance points to the need for a RMB revaluation.

Multitude of personal decisions

Cafe Hayek: The Great Job Rain Forest
Job creation in the United States is a function of population growth, the incentives for work and investment built into our tax system, our culture and the demographics of the work force. It has little or nothing to do with the wisdom of the President. I hate it when a President says something like "My administration has created x million jobs." Job creation has little or nothing to do with the wisdom of Alan Greenspan (though he, like the President can muck things up with indecisive or erratic decisions). It has little or nothing to do with the trade deficit or China.

First house

Housing Markets Pricing Out Middle Class
Real estate experts warn that housing prices in many markets are too quickly outpacing the incomes of most workers. The widening gap affects families across the country, from Washington D.C. and Rhode Island to Florida in the South and Nevada and California in the west.

Supply and Demand

Bubble may just be bogus
Housing bulls say home prices are soaring not because of a speculative bubble, but for a simple economic reason: Supply has not kept up with demand.


Meanwhile, the supply of new homes has not kept up with demand because there is less vacant land within reasonable commute distance of job centers, and that's because governments and environmental groups have made it harder to build and developers have not overbuilt like they have in past booms.



Hedge Fund Masters: The Dr. Ari Kiev Interview
Dr. Kiev: There are a number of them, I talk about in my book, but things like Yoga, muscle relaxation, deep breathing, tensing your muscles and relaxing them, focusing on your breathing gradually gets you into that relaxed state. If you practice Yoga or some such discipline, the more you will notice your thoughts and let them pass so you aren’t reacting to the world through the lens of your ever constant conversation of your mind. We are always thinking, and somehow that is interfering with our ability to see how things really are. A master trader is really in a centered state and is able to see the movement of the market, the movement of stocks, without becoming reactive to it. Therefore he has better capacity to see what is really going on and he is not letting his own wishes influence the way he is perceiving things.

Saturday, July 09, 2005

Too many

Safe Haven | Are There Too Many Hedge Funds?
Those of us who lived through the late '80s and early '90s might remember a similar fear that was often written in the popular press. We were told that there were too many mutual funds, and that the explosive growth in mutual funds was a clear sign of a bubble top. In addition to charts showing the growth of mutual funds, we were constantly offered the fact that we were on the verge of having more mutual funds than actual stocks.


The Kirk Report : Two Day Terror Rally
" Still, I don't trade on hope or emotion. In my 11 years of trading, I've never found that to be a profitable strategy. I know times have changed, but that haven't changed that much."

Russell wins


Friday, July 08, 2005


Safe Haven | Goodbye Middle Class; Hello House Poor
If you really own something it means it is paid for and it can't be taken away!

Wednesday, July 06, 2005

Happy money

Money and happiness: How tight the bond? - Jul. 5, 2005
For example, if you make twice what you used to make, your level of satisfaction likely would be somewhat higher, but not twice as high.

What's more, one study shows that setting financial success as a goal can itself make you somewhat less happy.

Pictures of a mania? - US Housing
Frankly I am amazed there is even a debate. All I can see are signs of speculative excess. Let me take you through the key pieces of evidence for the prosecution which, I believe, represent a prima facie case that a bubble exists.


The Prudent Investor - seeing too many bubbles: GDP No Gauge For Living Standards
Per capita gross domestic product, one of the broadest measures of economic output, often measures the wrong thing, some analysts say. It also completely misses the issue of how wealth is distributed, painting a misleading picture of national well-being.

Tuesday, July 05, 2005

Trade the money, not your pride

Safe Haven | Whats next for the Majors...? "Why Asia should be on your list..."
"Country trade balances (the difference between imports and exports) can also affect the profitability of a carry trade. We have shown above that when investors have low risk aversion, capital will flow from the low interest rate paying currency to the high interest rate paying currency. This however, does not always happen. To understand why, think about the situation in the United States. The US currently pays historically low interest rates, yet it attracts investment from other countries, even when investors have low risk aversion (i.e., they should be investing in the high interest rate countries). Why does this occur? The answer is because the US runs a huge trade deficit (its imports are greater than its exports)—a deficit that must be financed by other countries. Regardless of the interest rates it offers, the US attracts capital flows to finance its trade deficit. The point of this example is to show that even when investors have low risk aversion, large trade imbalances can cause a low interest rate currency to appreciate."

Short Ratio

Safe Haven | Our U.S. Dollar Index Revision
Our bullish views on the U.S. Dollar Index is made the more authoritative by the fact that European countries such as Sweden and Poland have either cut or are beginning to further cut their short-term rates. In fact, there is now widespread speculation that the European Central Bank will cut by 50 basis points by the end of this year. The United Kingdom is also probably not far behind. It is usually rare for the U.S. Central Bank to lag the action of the majority of the world's Central Banks, but until the Fed reverses course and start to cut rates, our bullish view will remain intact.

Saturday, July 02, 2005

Spanish lessons

Cafe Hayek: A Lesson from 16th-Century Spain?
Prosperity is goods and services to consume; not money -- not even `resources,`for resources must be transformed into desirable goods and services. And transforming resources into desirable goods and services requires productive creativity and productive effort.

Walking away

Thought on the house bubble
Surprisingly, we were all in the process of either moving or getting a second home, and we all had decided to rent. They both live in the hot Southern California markets and find that renting is far more affordable than buying. In essence, we were all going short housing prices. As it turns out, I found a way to hedge my bet.


"...It's fascinating that the zeal for homeownership has pulled people out of rentals so that rents in many areas are falling as house prices soar. This, however, doesn't bother those who buy extra houses as investments, and 9% of total mortgages in the first four months of this year were taken out by investors, up from 6% in 2001. They, too, figure they'll flip these houses quickly at big profits, so low rental income in the meanwhile is of little concern. Neither does the fact that single-family rental vacancies topped 9% at the end of 2004."


But investors are nothing if not optimistic. The LA Times, in a recent survey, reports that local homeowners expect to see housing prices rise by 22% annually for the next ten years. Now this is a group, while admirably optimistic, that clearly didn't pay attention in math class. Compounding at 22% a year for ten years is an 800% appreciation, doubling every 3.27 years. 22% doesn't sound like much. Let's just project today into the long term future. Not doing the math, they do not realize that means homes would have to go up in value 8 times! But such is the nature of bubbles. That is why it is called "irrational exuberance."


First of all, there are clearly bubbles in some areas of the country. That being said, the average home is still affordable by the average person, according to the housing affordability index. But not in the bubble areas. Only 17% of the US can qualify for a mortgage on a median priced home in California. In certain areas it is much worse. This is not surprising for certain wealthy enclaves, but this is for an entire state!


Friday, July 01, 2005

The new currency

The Prudent Investor - seeing too many bubbles: More News on China's Oil Reserves Plan
At the moment, vehicles consume about a third of China's fuel. Yet as demand for cars doubles to an expected 8 to 9 million a year by the end of the decade, this will rise to 65 per cent of the oil by 2015, the government says.


Safe Haven | Political Economic Reasons Why The Fed Is On The Cusp Of Pausing
The Fed does not want to risk a rapid deflation of the housing bubble at this juncture. If the housing bubble were to burst in the next year, it would have the potential of precipitating a serious recession.

United Kindom two points

Mish's Global Economic Trend Analysis: UK Headed for Recession
Indeed there is a far bigger correlation between consumer spending and home prices than consumer spending and stock market gains.

Mortgage Rates

The Big Picture: Mortgage Rates versus Fed Fund Rates
DESPITE THE FEDERAL RESERVE'S rate raising campaign started June 30, 2004, fixed mortgage rates are lower now than they were a year ago.

The average rate on a 30-year fixed mortgage is 5.66%, down from 6.30% a year ago, according to's national weekly survey of large lenders. As for one-year adjustable-rate mortgages, the rate is 4.69%, up slightly from 4.43% in June 2004.